LANDSTAR SYSTEM INC 10-Q

Item 1. Financial Statements The interim consolidated financial statements contained herein reflect all adjustments (all of a normal, recurring nature) which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations, cash flows and changes in shareholders’ equity for the periods presented. They have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the twenty six weeks ended June 26, 2021 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 25, 2021. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report on Form 10-K. 3 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) June 26, 2021 December 26, 2020 ASSETS Current Assets Cash and cash equivalents $ 186,404 $ 249,354 Short-term investments 52,560 41,375 Trade accounts receivable, less allowance of $ 6,199 and $ 8,670 902,950 764,169 Other receivables, including advances to independent contractors, less allowance of $ 6,843 and $ 7,239 49,819 134,757 Other current assets 41,533 18,520 Total current assets 1,233,266 1,208,175 Operating property, less accumulated depreciation and amortization of $ 321,181 and $ 299,407 281,016 296,996 Goodwill 40,973 40,949 Other assets 147,958 107,679 Total assets $ 1,703,213 $ 1,653,799 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Cash overdraft $ 70,554 $ 74,748 Accounts payable 481,711 380,505 Current maturities of long-term debt 30,450 35,415 Insurance claims 41,854 149,774 Dividends payable — 76,770 Other current liabilities 95,646 88,925 Total current liabilities 720,215 806,137 Long-term debt, excluding current maturities 51,181 65,359 Insurance claims 43,053 38,867 Deferred income taxes and other noncurrent liabilities 58,591 51,601 Shareholders’ Equity Common stock, $ 0.01 par value, authorized 160,000,000 shares, issued 68,229,880 and 68,183,702 shares 682 682 Additional paid-in capital 238,422 228,875 Retained earnings 2,199,637 2,046,238 Cost of 29,954,081 and 29,797,639 shares of common stock in treasury ( 1,606,716 ) ( 1,581,961 ) Accumulated other comprehensive loss ( 1,852 ) ( 1,999 ) Total shareholders’ equity 830,173 691,835 Total liabilities and shareholders’ equity $ 1,703,213 $ 1,653,799 See accompanying notes to consolidated financial statements. 4 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Twenty Six Weeks Ended Thirteen Weeks Ended June 26, 2021 June 27, 2020 June 26, 2021 June 27, 2020 Revenue $ 2,858,252 $ 1,751,080 $ 1,570,718 $ 823,514 Investment income 1,432 2,002 748 835 Costs and expenses: Purchased transportation 2,226,526 1,344,390 1,228,241 635,133 Commissions to agents 221,702 150,642 121,693 75,266 Other operating costs, net of gains on asset sales/dispositions 16,545 15,674 8,903 7,368 Insurance and claims 45,629 44,708 24,124 19,751 Selling, general and administrative 99,522 85,928 54,114 40,601 Depreciation and amortization 24,244 22,972 12,143 11,467 Impairment of intangible and other assets — 2,582 — 2,582 Total costs and expenses 2,634,168 1,666,896 1,449,218 792,168 Operating income 225,516 86,186 122,248 32,181 Interest and debt expense 2,009 1,928 967 976 Income before income taxes 223,507 84,258 121,281 31,205 Income taxes 53,973 19,109 28,987 6,951 Net income $ 169,534 $ 65,149 $ 92,294 $ 24,254 Diluted earnings per share $ 4.41 $ 1.68 $ 2.40 $ 0.63 Average diluted shares outstanding 38,403,000 38,816,000 38,402,000 38,379,000 Dividends per common share $ 0.420 $ 0.370 $ 0.210 $ 0.185 See accompanying notes to consolidated financial statements. 5 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (Unaudited) Twenty Six Weeks Ended Thirteen Weeks Ended June 26, 2021 June 27, 2020 June 26, 2021 June 27, 2020 Net income $ 169,534 $ 65,149 $ 92,294 $ 24,254 Other comprehensive income (loss): Unrealized holding (losses) gains on available-for-sale investments, net of tax (benefit) expense of ($ 243 ), $ 338 , ($ 96 ) and $ 770 ( 883 ) 1,237 ( 349 ) 2,816 Foreign currency translation gains (losses) 1,030 ( 6,170 ) 1,450 1,732 Other comprehensive income (loss) 147 ( 4,933 ) 1,101 4,548 Comprehensive income $ 169,681 $ 60,216 $ 93,395 $ 28,802 See accompanying notes to consolidated financial statements. 6 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Twenty Six Weeks Ended June 26, 2021 June 27, 2020 OPERATING ACTIVITIES Net income $ 169,534 $ 65,149 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of operating property and intangible assets 24,244 22,972 Non-cash interest charges 224 126 Provisions for losses on trade and other accounts receivable 1,393 6,528 Gains on sales/disposals of operating property ( 766 ) ( 1,812 ) Impairment of intangible and other assets — 2,582 Deferred income taxes, net 6,240 6,228 Stock-based compensation 10,893 1,201 Changes in operating assets and liabilities: (Increase) decrease in trade and other accounts receivable ( 55,236 ) 99,601 Increase in other assets ( 24,704 ) ( 24,809 ) Increase (decrease) in accounts payable 101,206 ( 31 ) Increase in other liabilities 7,882 10,231 (Decrease) increase in insurance claims ( 103,734 ) 10,419 NET CASH PROVIDED BY OPERATING ACTIVITIES 137,176 198,385 INVESTING ACTIVITIES Net changes in other short-term investments — 131 Sales and maturities of investments 17,242 14,897 Purchases of investments ( 68,366 ) ( 16,382 ) Purchases of operating property ( 9,000 ) ( 17,676 ) Proceeds from sales of operating property 1,438 4,465 Consideration paid for acquisition — ( 2,701 ) NET CASH USED BY INVESTING ACTIVITIES ( 58,686 ) ( 17,266 ) FINANCING ACTIVITIES Decrease in cash overdraft ( 4,194 ) ( 18,344 ) Dividends paid ( 92,905 ) ( 93,382 ) Proceeds from exercises of stock options 77 614 Taxes paid in lieu of shares issued related to stock-based compensation plans ( 2,341 ) ( 3,280 ) Purchases of common stock ( 23,837 ) ( 115,962 ) Principal payments on finance lease obligations ( 19,143 ) ( 21,958 ) Payment of deferred consideration ( 168 ) — NET CASH USED BY FINANCING ACTIVITIES ( 142,511 ) ( 252,312 ) Effect of exchange rate changes on cash and cash equivalents 1,071 ( 2,851 ) Decrease in cash and cash equivalents ( 62,950 ) ( 74,044 ) Cash and cash equivalents at beginning of period 249,354 319,515 Cash and cash equivalents at end of period $ 186,404 $ 245,471 See accompanying notes to consolidated financial statements. 7 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Twenty Six and Thirteen Weeks Ended June 26, 2021 and June 27, 2020 (Dollars in thousands) (Unaudited) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock at Cost Accumulated Other Comprehensive (Loss) Income Shares Amount Shares Amount Total Balance December 26, 2020 68,183,702 $ 682 $ 228,875 $ 2,046,238 29,797,639 $ ( 1,581,961 ) $ ( 1,999 ) $ 691,835 Net income 77,240 77,240 Dividends ($ 0.21 per share) ( 8,067 ) ( 8,067 ) Issuance of stock related to stock- b ased compensation plans 28,594 — ( 307 ) 6,087 ( 857 ) ( 1,164 ) Stock-based compensation 4,029 4,029 Other comprehensive loss ( 954 ) ( 954 ) Balance March 27, 2021 68,212,296 $ 682 $ 232,597 $ 2,115,411 29,803,726 $ ( 1,582,818 ) $ ( 2,953 ) $ 762,919 Net income 92,294 92,294 Dividends ($ 0.21 per share) ( 8,068 ) ( 8,068 ) Purchases of common stock 150,000 ( 23,837 ) ( 23,837 ) Issuance of stock related to stock-based compensation plans 17,584 — ( 1,039 ) 355 ( 61 ) ( 1,100 ) Stock-based compensation 6,864 6,864 Other comprehensive income 1,101 1,101 Balance June 26, 2021 68,229,880 $ 682 $ 238,422 $ 2,199,637 29,954,081 $ ( 1,606,716 ) $ ( 1,852 ) $ 830,173 8 Table of Contents Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock at Cost Accumulated Other Comprehensive (Loss) Income Shares Amount Shares Amount Total Balance December 28, 2019 68,083,419 $ 681 $ 226,123 $ 1,962,161 28,609,926 $ ( 1,465,284 ) $ ( 2,212 ) $ 721,469 Adoption of accounting standard ( 702 ) ( 702 ) Net income 40,895 40,895 Dividends ($ 0.185 per share) ( 7,336 ) ( 7,336 ) Purchases of common stock 1,178,970 ( 115,962 ) ( 115,962 ) Issuance of stock related to stock- based compensation plans 84,063 1 ( 1,781 ) 8,078 ( 639 ) ( 2,419 ) Stock-based compensation 631 631 Other comprehensive loss ( 9,481 ) ( 9,481 ) Balance March 28, 2020 68,167,482 $ 682 $ 224,973 $ 1,995,018 29,796,974 $ ( 1,581,885 ) $ ( 11,693 ) $ 627,095 Net income 24,254 24,254 Dividends ($ 0.185 per share) ( 7,099 ) ( 7,099 ) Issuance of stock related to stock- based compensation plans 9,305 — ( 211 ) 354 ( 36 ) ( 247 ) Stock-based compensation 570 570 Other comprehensive income 4,548 4,548 Balance June 27, 2020 68,176,787 $ 682 $ 225,332 $ 2,012,173 29,797,328 $ ( 1,581,921 ) $ ( 7,145 ) $ 649,121 See accompanying notes to consolidated financial statements. 9 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates. Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Significant intercompany accounts have been eliminated in consolidation. (1) Significant Accounting Policies Revenue from Contracts with Customers – Disaggregation of Revenue The following table summarizes (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 twenty-six-week and thirteen-week periods ended June 26, 2021 and June 27, 2020 (dollars in thousands): Twenty Six Weeks Ended Thirteen Weeks Ended Mode June 26, 2021 June 27, 2020 June 26, 2021 June 27, 2020 Truck – BCO Independent Contractors 42 % 46 % 41 % 46 % Truck – Truck Brokerage Carriers 50 % 46 % 51 % 46 % Rail intermodal 3 % 3 % 3 % 3 % Ocean and air cargo carriers 4 % 3 % 4 % 4 % Truck Equipment Type Van equipment $ 1,798,061 $ 1,028,334 $ 970,874 $ 483,027 Unsided/platform equipment $ 784,883 $ 533,716 $ 444,251 $ 247,388 Less-than-truckload $ 54,732 $ 45,859 $ 29,062 $ 22,918 (2) Share-based Payment Arrangements As of June 26, 2021, the Company has an employee equity incentive plan, the 2011 equity incentive plan (the “2011 EIP”). 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 2011 EIP and 2013 DSCP are each referred to herein as a “Plan,” and, collectively, as the “Plans.” Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands): Twenty Six Weeks Ended Thirteen Weeks Ended June 26, 2021 June 27, 2020 June 26, 2021 June 27, 2020 Total cost of the Plans during the period $ 10,893 $ 1,201 $ 6,864 $ 570 Amount of related income tax benefit recognized during the period ( 3,717 ) ( 1,135 ) ( 2,376 ) ( 262 ) Net cost of the Plans during the period $ 7,176 $ 66 $ 4,488 $ 308 Included in income tax benefits recognized in the twenty-six-week periods ended June 26, 2021 and June 27, 2020 were excess tax benefits from stock-based awards of $ 1,038,000 and $ 829,000 , respectively. 10 Table of Contents As of June 26, 2021, there were 56,782 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 3,499,568 shares of the Company’s common stock reserved for issuance under the 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 Weighted Average Grant Date RSUs Fair Value Outstanding at December 26, 2020 183,213 $ 93.44 Granted 45,864 $ 128.93 Shares earned in excess of target (1) 7,132 $ 31.97 Vested shares ( 24,600 ) $ 59.85 Outstanding at June 26, 2021 211,609 $ 102.97 (1) Represents shares earned in excess of target under the May 1, 2015 RSU award as total shareholder return exceeded the target under the award. During the twenty-six-week period ended June 26, 2021, the Company granted RSUs with a performance condition. Outstanding RSUs at both December 26, 2020 and June 26, 2021 include RSUs with a performance condition and RSUs with a market condition, as further described below and in the Company’s 2020 Annual Report on Form 10-K. RSUs with a performance condition granted on January 29, 2021 may vest on January 31 of 2024, 2025 and 2026 based on growth in operating income and pre-tax income per diluted share from continuing operations as compared to the results from the 2020 fiscal year, adjusted to reflect the add back of non-cash impairment charges recorded in the Company’s 2020 fiscal year related to certain assets, primarily customer contract and related customer relationship intangible assets, held by the Company’s Mexican subsidiaries. The Company recognized approximately $ 9,249,000 and ($ 308,000 ) of share-based compensation expense/(benefit) related to RSU awards in the twenty-six-week periods ended June 26, 2021 and June 27, 2020, respectively. As of June 26, 2021, there was a maximum of $ 33.8 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 3.3 years. With respect to RSU awards with a performance condition, the amount of future compensation expense to be recognized will be determined based on future operating results. Non-vested Restricted Stock and Deferred Stock Units The following table summarizes information regarding the Company’s outstanding shares of non-vested restricted stock and Deferred Stock Units (defined below) under the Plans: Number of Shares and Deferred Stock Units Weighted Average Grant Date Fair Value Non-vested at December 26, 2020 60,440 $ 103.65 Granted 26,351 $ 150.20 Vested ( 29,055 ) $ 104.35 Non-vested at June 26, 2021 57,736 $ 124.55 The fair value of each share of non-vested restricted stock issued and Deferred Stock Unit granted under the Plans is based on the fair value of a share of the Company’s common stock on the date of grant. Shares of non-vested restricted stock are generally subject to vesting in three equal annual installments either on the first, second and third anniversary of the date of the grant or the third, fourth and fifth anniversary of the date of the grant, or 100 % on the first or fifth anniversary of the date of the grant. For restricted stock awards granted under the 2013 DSCP plan, each recipient may elect to defer receipt of shares and instead receive restricted stock units (“Deferred Stock Units”), which represent contingent rights to receive shares of the Company’s common stock on the date of recipient separation from service from the Board of Directors, or, if earlier, upon a change in control event of the Company. Deferred Stock Units become vested 100 % on the first anniversary of the date of the grant. Deferred Stock Units do not represent actual ownership in shares of the Company’s common stock and the recipient does not have voting rights or other incidents of ownership until the shares are issued. However, Deferred Stock Units do contain the right to receive dividend equivalent payments prior to settlement into shares. 11 Table of Contents As of June 26, 2021, there was $ 5,626,000 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 2.2 years. Stock Options The following table summarizes information regarding the Company’s outstanding stock options under the Plans: Number of Options Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (000s) Options outstanding at December 26, 2020 17,650 $ 54.16 Exercised ( 5,280 ) $ 51.83 Options outstanding at June 26, 2021 12,370 $ 55.15 1.3 $ 1,304 Options exercisable at June 26, 2021 12,370 $ 55.15 1.3 $ 1,304 The total intrinsic value of stock options exercised during the twenty-six-week periods ended June 26, 2021 and June 27, 2020 was $ 521,000 and $ 1,071,000 , respectively. As of June 26, 2021, there was no unrecognized compensation cost related to stock options granted under the Plans. (3) Income Taxes The provisions for income taxes for the 2021 and 2020 twenty-six-week periods were based on estimated annual effective income tax rates of 24.4 % and 24.2 %, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The increase in the estimated annual effective income tax rate was primarily attributable to increased anticipated nondeductible executive compensation during the 2021 period. The effective income tax rate for the 2021 twenty-six-week period was 24.1 %, which was higher than the statutory federal income tax rate of 21 % primarily attributable to state taxes and nondeductible executive compensation, partially offset by excess tax benefits realized on stock-based awards. The effective income tax rate for the 2020 twenty-six-week period was 22.7 %, which was higher than the statutory federal income tax rate of 21 % primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by state tax refunds and excess tax benefits realized on stock-based awards. (4) Earnings Per Share Earnings per common share 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 are based on the weighted average number of common shares and Deferred Stock Units outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. During the 2021 and 2020 twenty-six-week and thirteen-week periods, in reference to the determination of diluted earnings per share, the future compensation cost attributable to outstanding shares of non-vested restricted stock exceeded the impact of incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. For each of the twenty-six-week periods ended June 26, 2021 and June 27, 2020, no options outstanding to purchase shares of common stock were antidilutive. Outstanding RSUs were excluded from the calculation of diluted earnings per share for all periods because the performance metric requirements or market condition for vesting had not been satisfied. (5) Additional Cash Flow Information During the 2021 twenty-six-week period, Landstar paid income taxes and interest of $ 51,679,000 and $ 1,883,000 , respectively. During the 2020 twenty-six-week period, Landstar paid income taxes and interest of $ 16,198,000 and $ 2,057,000 , respectively. Landstar did no t acquire any operating property by entering into finance leases in the 2021 twenty-six-week period. Landstar acquired operating property by entering into finance leases in the amount of $ 7,485,000 in the 2020 twenty-six-week period. 12 Table of Contents (6) Segment Information The following table summarizes information about the Company’s reportable business segments as of and for the twenty-six-week and thirteen-week periods ended June 26, 2021 and June 27, 2020 (in thousands): Twenty Six Weeks Ended June 26, 2021 June 27, 2020 Transportation Logistics Insurance Total Transportation Logistics Insurance Total External revenue $ 2,823,557 $ 34,695 $ 2,858,252 $ 1,723,682 $ 27,398 $ 1,751,080 Internal revenue 43,495 43,495 35,834 35,834 Investment income 1,432 1,432 2,002 2,002 Operating income 199,960 25,556 225,516 76,518 9,668 86,186 Expenditures on long-lived assets 9,000 9,000 17,676 17,676 Goodwill 40,973 40,973 40,071 40,071 Thirteen Weeks Ended June 26, 2021 June 27, 2020 Transportation Logistics Insurance Total Transportation Logistics Insurance Total External revenue $ 1,553,058 $ 17,660 $ 1,570,718 $ 809,798 $ 13,716 $ 823,514 Internal revenue 33,961 33,961 26,755 26,755 Investment income 748 748 835 835 Operating income 110,228 12,020 122,248 21,474 10,707 32,181 Expenditures on long-lived assets 4,924 4,924 11,877 11,877 In the twenty-six-week periods ended June 26, 2021 and June 27, 2020, no single customer accounted for more than 10 % of the Company’s consolidated revenue. (7) Other Comprehensive Income The following table presents the components of and changes in accumulated other comprehensive income (loss), net of related income taxes, as of and for the twenty-six-week period ended June 26, 2021 (in thousands): Unrealized Holding Gains (Losses) on Available-for-Sale Securities Foreign Currency Translation Total Balance as of December 26, 2020 $ 2,808 $ ( 4,807 ) $ ( 1,999 ) Other comprehensive (loss) gain ( 883 ) 1,030 147 Balance as of June 26, 2021 $ 1,925 $ ( 3,777 ) $ ( 1,852 ) Amounts reclassified from accumulated other comprehensive income to investment income due to the realization of previously unrealized gains and losses in the accompanying consolidated statements of income were not significant for the twenty-six-week period ended June 26, 2021. (8) Investments Investments include primarily investment-grade corporate bonds and U.S. Treasury obligations having maturities of up to five years (the “bond portfolio”) and money market investments. Investments in the bond portfolio are reported as available-for-sale and are carried at fair value. Investments maturing less than one year from the balance sheet date are included in short-term investments and investments maturing more than one year from the balance sheet date are included in other assets in the consolidated balance sheets. Management performs an analysis of the nature of the unrealized losses on available-for-sale investments to determine whether an allowance for credit loss is necessary. Unrealized losses, representing the excess of the purchase price of an investment over its fair value as of the end of a period, considered to be a result of credit-related factors, are to be included as a charge in the statement of income, while unrealized losses considered to be a result of noncredit-related factors are to be included as a component of shareholders’ equity. Investments whose values are based on quoted market prices in active markets are classified within Level 1. Investments that trade in markets that are not considered 13 Table of Contents 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 $ 2,452,000 at June 26, 2021 and $ 3,578,000 at December 26, 2020, respectively. The amortized cost and fair values of available-for-sale investments are as follows at June 26, 2021 and December 26, 2020 (in thousands): Gross Gross Amortized Cost Unrealized Gains Unrealized Losses Fair Value June 26, 2021 Money market investments $ 24,649 $ — $ — $ 24,649 Asset-backed securities 564 — — 564 Corporate bonds and direct obligations of government agencies 142,542 2,602 238 144,906 U.S. Treasury obligations 2,340 88 — 2,428 Total $ 170,095 $ 2,690 $ 238 $ 172,547 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 For those available-for-sale investments with unrealized losses at June 26, 2021 and December 26, 2020, the following table summarizes the duration of the unrealized loss (in thousands): Less than 12 months 12 months or longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss June 26, 2021 Corporate bonds and direct obligations of government agencies $ 52,720 $ 238 $ — $ — $ 52,720 $ 238 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 The Company believes unrealized losses on investments were primarily caused by rising interest rates rather than changes in credit quality. 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. 14 Table of Contents (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 leases certain trailing equipment to supplement the Company-owned trailer fleet under “month-to-month” lease terms, which are not required to be recorded on the balance sheet due to the less than twelve month lease term exemption. Sublease income is primarily comprised of weekly trailing equipment rentals to our BCO Independent Contractors. Most of Landstar’s operating leases include one or more options to renew. The exercise of lease renewal options is typically at Landstar’s sole discretion, and, as such, the majority of renewals to extend the lease terms are not included in the right-of-use assets and lease liabilities as they are not reasonably certain of exercise. Landstar regularly evaluates the renewal options, and when they are reasonably certain of exercise, Landstar includes the renewal period in the lease term. As most of Landstar’s operating leases do not provide an implicit rate, Landstar utilized its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. Landstar has a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate. The components of lease cost for finance leases and operating leases for the twenty six weeks ended June 26, 2021 were (in thousands): Finance leases: Amortization of right-of-use assets $ 10,714 Interest on lease liability 1,379 Total finance lease cost 12,093 Operating leases: Lease cost 1,740 Variable lease cost — Sublease income ( 2,476 ) Total net operating lease income ( 736 ) Total net lease cost $ 11,357 15 Table of Contents A summary of the lease classification on our consolidated balance sheet as of June 26, 2021 is as follows (in thousands): Assets: Operating lease right-of-use assets Other assets $ 2,332 Finance lease assets Operating property, less accumulated depreciation and amortization 123,613 Total lease assets $ 125,945 Liabilities: The following table reconciles the undiscounted cash flows for the finance and operating leases to the finance and operating lease liabilities recorded on the balance sheet at June 26, 2021 (in thousands): Finance Leases Operating Leases 2021 Remainder $ 17,399 $ 384 2022 28,746 702 2023 21,735 615 2024 11,827 529 2025 5,580 284 Thereafter — — Total future minimum lease payments 85,287 2,514 Less amount representing interest ( 1.9 % to 4.4 %) 3,656 182 Present value of minimum lease payments $ 81,631 $ 2,332 Current maturities of long-term debt 30,450 Long-term debt, excluding current maturities 51,181 Other current liabilities 724 Deferred income taxes and other noncurrent liabilities 1,608 The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of June 26, 2021 were: Finance Leases Operating Leases Weighted average remaining lease term (years) 3.1 3.7 Weighted average discount rate 3.0 % 4.0 % (10) Debt Other than the finance lease obligations as presented on the consolidated balance sheets, the Company had no outstanding debt as of June 26, 2021 and December 26, 2020. 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 June 26, 2021 and December 26, 2020, the Company had no borrowings outstanding under the Credit Agreement. 16 Table of Contents The Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness. The Company is required to, among other things, maintain a minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage Ratio, as defined in the Credit Agreement, below a specified maximum. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the amount of such cash dividends and other distributions to stockholders to the extent that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event that, among other things, a person or group acquires 35 % or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors or the directors cease to consist of a majority of Continuing Directors, as defined in the Credit Agreement. None of these covenants are presently considered by management to be materially restrictive to the Company’s operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Credit Agreement. The interest rates on borrowings under the revolving credit facility are typically tied to short-term interest rates that adjust monthly and, as such, carrying value approximates fair value. Interest rates on borrowings under finance leases approximate the interest rates that would currently be available to the Company under similar terms and, as such, carrying value approximates fair value. (11) Commitments and Contingencies Short-term investments include $ 52,560,000 in current maturities of investments held by the Company’s insurance segment at June 26, 2021. The non-current portion of the bond portfolio of $ 119,987,000 is included in other assets. The short-term investments, together with $ 20,144,000 of non-current investments, provide collateral for the $ 65,434,000 of letters of credit issued to guarantee payment of insurance claims. As of June 26, 2021, Landstar also had $ 33,579,000 of additional letters of credit outstanding under the Company’s Credit Agreement. The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year. (12) Change in Accounting Estimate for Self-Insured Claims Landstar provides for the estimated costs of self-insured claims primarily on an actuarial basis. The amount recorded for the estimated liability for claims incurred is based upon the facts and circumstances known on the applicable balance sheet date. The ultimate resolution of these claims may be for an amount greater or less than the amount estimated by management. The Company continually revises its existing claim estimates as new or revised information becomes available on the status of each claim. Historically, the Company has experienced both favorable and unfavorable development of prior years’ claims estimates. 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 and earnings per share set forth in the consolidated statements of income for the twenty-six-week and thirteen-week periods ended June 26, 2021 and June 27, 2020 (in thousands, except per share amounts): Twenty Six Weeks Ended Thirteen Weeks Ended June 26, 2021 June 27, 2020 June 26, 2021 June 27, 2020 Operating income $ 980 $ 5,039 $ 1,272 $ 2,816 Net income $ 741 $ 3,820 $ 962 $ 2,135 Diluted earnings per share $ 0.02 $ 0.10 $ 0.03 $ 0.06 17 Table of Contents (13) Impairment of Intangible and Other Assets During the 2020 second fiscal quarter, the Company recorded a non-cash impairment charge of $ 2,582 ,000 in respect of certain assets, primarily customer contract and related customer relationship intangible assets, acquired on September 20, 2017, along with substantially all of the other assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V. (“Fletes Avella”). As previously disclosed in Item 1A. Risk Factors in the Company’s Form 10-Q for the 2020 first quarter, negative macroeconomic trends in Mexico during the first half of 2020, including issues in the international oil and gas sector, caused significant disruptions in the Mexican economy. Accordingly, management performed impairment tests of the carrying values of certain assets that primarily related 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 financial projections as of the end of the 2020 second quarter 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 significantly exceeded its carrying value as of June 27, 2020. The fair value of the Company’s Mexico and cross-border reporting unit continues to significantly exceed its carrying value as of June 26, 2021.