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 thirty nine weeks ended September 25, 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) September 25, 2021 December 26, 2020 ASSETS Current Assets Cash and cash equivalents $ 230,564 $ 249,354 Short-term investments 36,644 41,375 Trade accounts receivable, less allowance of $ 6,543 and $ 8,670 1,010,538 764,169 Other receivables, including advances to independent contractors, less allowance of $ 7,696 and $ 7,239 109,007 134,757 Other current assets 25,375 18,520 Total current assets 1,412,128 1,208,175 Operating property, less accumulated depreciation and amortization of $ 332,785 and $ 299,407 301,373 296,996 Goodwill 40,980 40,949 Other assets 159,561 107,679 Total assets $ 1,914,042 $ 1,653,799 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Cash overdraft $ 88,958 $ 74,748 Accounts payable 548,385 380,505 Current maturities of long-term debt 34,617 35,415 Insurance claims 64,958 149,774 Dividends payable — 76,770 Other current liabilities 110,394 88,925 Total current liabilities 847,312 806,137 Long-term debt, excluding current maturities 62,724 65,359 Insurance claims 46,914 38,867 Deferred income taxes and other noncurrent liabilities 57,402 51,601 Shareholders’ Equity Common stock, $ 0.01 par value, authorized 160,000,000 shares, issued 68,231,013 and 68,183,702 shares 682 682 Additional paid-in capital 246,302 228,875 Retained earnings 2,288,754 2,046,238 Cost of 30,122,427 and 29,797,639 shares of common stock in treasury ( 1,633,109 ) ( 1,581,961 ) Accumulated other comprehensive loss ( 2,939 ) ( 1,999 ) Total shareholders’ equity 899,690 691,835 Total liabilities and shareholders’ equity $ 1,914,042 $ 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) Thirty Nine Weeks Ended Thirteen Weeks Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Revenue $ 4,592,551 $ 2,836,626 $ 1,734,299 $ 1,085,546 Investment income 2,138 2,716 706 714 Costs and expenses: Purchased transportation 3,583,197 2,183,143 1,356,671 838,753 Commissions to agents 356,997 236,490 135,295 85,848 Other operating costs, net of gains on asset sales/dispositions 27,117 23,035 10,572 7,361 Insurance and claims 75,198 66,563 29,569 21,855 Selling, general and administrative 158,720 124,779 59,198 38,851 Depreciation and amortization 36,532 34,212 12,288 11,240 Impairment of intangible and other assets — 2,582 — — Total costs and expenses 4,237,761 2,670,804 1,603,593 1,003,908 Operating income 356,928 168,538 131,412 82,352 Interest and debt expense 2,974 2,936 965 1,008 Income before income taxes 353,954 165,602 130,447 81,344 Income taxes 85,745 38,567 31,772 19,458 Net income $ 268,209 $ 127,035 $ 98,675 $ 61,886 Diluted earnings per share $ 7.00 $ 3.28 $ 2.58 $ 1.61 Average diluted shares outstanding 38,342,000 38,673,000 38,218,000 38,386,000 Dividends per common share $ 0.67 $ 0.58 $ 0.25 $ 0.21 See accompanying notes to consolidated financial statements. 5 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (Unaudited) Thirty Nine Weeks Ended Thirteen Weeks Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Net income $ 268,209 $ 127,035 $ 98,675 $ 61,886 Other comprehensive (loss) income: Unrealized holding (losses) gains on available-for-sale investments, net of tax (benefit) expense of ($ 347 ), $ 413 , ($ 104 ) and $ 75 ( 1,260 ) 1,510 ( 377 ) 273 Foreign currency translation gains (losses) 320 ( 5,262 ) ( 710 ) 908 Other comprehensive (loss) income ( 940 ) ( 3,752 ) ( 1,087 ) 1,181 Comprehensive income $ 267,269 $ 123,283 $ 97,588 $ 63,067 See accompanying notes to consolidated financial statements. 6 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Thirty Nine Weeks Ended September 25, 2021 September 26, 2020 OPERATING ACTIVITIES Net income $ 268,209 $ 127,035 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of operating property and intangible assets 36,532 34,212 Non-cash interest charges 336 222 Provisions for losses on trade and other accounts receivable 3,884 7,206 Gains on sales/disposals of operating property ( 1,259 ) ( 2,295 ) Impairment of intangible and other assets — 2,582 Deferred income taxes, net 4,948 4,758 Stock-based compensation 18,717 2,691 Changes in operating assets and liabilities: Increase in trade and other accounts receivable ( 224,503 ) ( 62,492 ) Increase in other assets ( 3,822 ) ( 13,492 ) Increase in accounts payable 167,880 66,815 Increase in other liabilities 22,837 14,050 (Decrease) increase in insurance claims ( 76,769 ) 4,256 NET CASH PROVIDED BY OPERATING ACTIVITIES 216,990 185,548 INVESTING ACTIVITIES Net changes in other short-term investments — 131 Sales and maturities of investments 25,521 18,795 Purchases of investments ( 77,649 ) ( 21,102 ) Purchases of operating property ( 18,561 ) ( 25,426 ) Proceeds from sales of operating property 2,047 6,623 Consideration paid for acquisition — ( 2,766 ) NET CASH USED BY INVESTING ACTIVITIES ( 68,642 ) ( 23,745 ) FINANCING ACTIVITIES Increase (decrease) in cash overdraft 14,210 ( 6,419 ) Dividends paid ( 102,463 ) ( 101,442 ) Payment for debt issue costs — ( 959 ) Proceeds from exercises of stock options 134 676 Taxes paid in lieu of shares issued related to stock-based compensation plans ( 2,342 ) ( 3,326 ) Purchases of common stock ( 50,230 ) ( 115,962 ) Principal payments on finance lease obligations ( 26,513 ) ( 33,036 ) Payment of deferred consideration ( 168 ) — NET CASH USED BY FINANCING ACTIVITIES ( 167,372 ) ( 260,468 ) Effect of exchange rate changes on cash and cash equivalents 234 ( 2,296 ) Decrease in cash and cash equivalents ( 18,790 ) ( 100,961 ) Cash and cash equivalents at beginning of period 249,354 319,515 Cash and cash equivalents at end of period $ 230,564 $ 218,554 See accompanying notes to consolidated financial statements. 7 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Thirty Nine and Thirteen Weeks Ended September 25, 2021 and September 26, 2020 (Dollars in thousands) (Unaudited) Common Stock Additional Paid-In Retained Treasury Stock at Cost Accumulated Other Comprehensive Shares Amount Capital Earnings Shares Amount (Loss) Income Total Balance December 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-based 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 Net income 98,675 98,675 Dividends ($ 0.25 per share) ( 9,558 ) ( 9,558 ) Purchases of common stock 167,046 ( 26,393 ) ( 26,393 ) Issuance of stock related to stock-based compensation plans 1,133 — 56 1,300 — 56 Stock-based compensation 7,824 7,824 Other comprehensive loss ( 1,087 ) ( 1,087 ) Balance September 25, 2021 68,231,013 $ 682 $ 246,302 $ 2,288,754 30,122,427 $ ( 1,633,109 ) $ ( 2,939 ) $ 899,690 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 Net income 61,886 61,886 Dividends ($ 0.21 per share) ( 8,060 ) ( 8,060 ) Issuance of stock related to stock-based compensation plans 4,631 — 56 311 ( 40 ) 16 Stock-based compensation 1,490 1,490 Other comprehensive income 1,181 1,181 Balance September 26, 2020 68,181,418 $ 682 $ 226,878 $ 2,065,999 29,797,639 $ ( 1,581,961 ) $ ( 5,964 ) $ 705,634 See accompanying notes to consolidated financial statements. 8 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 thirty-nine-week and thirteen-week periods ended September 25, 2021 and September 26, 2020 (dollars in thousands): Thirty Nine Weeks Ended Thirteen Weeks Ended September 25, 2021 September 26, 2020 September 25, 2021 September 26, 2020 Mode Truck – BCO Independent Contractors 41 % 46 % 40 % 46 % Truck – Truck Brokerage Carriers 50 % 46 % 51 % 46 % Rail intermodal 3 % 3 % 3 % 3 % Ocean and air cargo carriers 4 % 3 % 5 % 3 % Truck Equipment Type Van equipment $ 2,502,025 $ 1,485,553 $ 918,115 $ 578,166 Unsided/platform equipment $ 1,112,358 $ 807,966 $ 422,979 $ 294,273 Less-than-truckload $ 85,551 $ 70,984 $ 30,819 $ 25,125 Other truck transportation (1) $ 518,472 $ 249,584 $ 208,817 $ 108,614 (1) Includes power-only, expedited, straight truck, cargo van, and miscellaneous other truck transportation revenue generated by the transportation logistics segment. Power-only refers to shipments where the Company furnishes a power unit and an operator but not trailing equipment, which is typically provided by the shipper or consignee. 9 Table of Contents (2) Share-based Payment Arrangements As of September 25, 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): Thirty Nine Weeks Ended Thirteen Weeks Ended September 25, September 26, September 25, September 26, 2021 2020 2021 2020 Total cost of the Plans during the period $ 18,717 $ 2,691 $ 7,824 $ 1,490 Amount of related income tax benefit recognized during the period ( 5,636 ) ( 1,618 ) ( 1,919 ) ( 483 ) Net cost of the Plans during the period $ 13,081 $ 1,073 $ 5,905 $ 1,007 Included in income tax benefits recognized in the thirty-nine-week periods ended September 25, 2021 and September 26, 2020 were excess tax benefits from stock-based awards of $ 1,039,000 and $ 927,000 , respectively. As of September 25, 2021, there were 56,782 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 3,505,880 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 46,103 $ 128.78 Shares earned in excess of target (1) 7,132 $ 31.97 Vested shares ( 24,600 ) $ 59.85 Forfeited ( 2,688 ) $ 107.76 Outstanding at September 25, 2021 209,160 $ 102.90 (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 thirty-nine-week period ended September 25, 2021, the Company granted RSUs with a performance condition. Outstanding RSUs at both December 26, 2020 and September 25, 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 $ 16,223,000 and $ 415,000 of share-based compensation expense related to RSU awards in the thirty-nine-week periods ended September 25 , 2021 and September 26 , 2020 , respectively. As of September 25 , 2021 , there was a maximum of $ 26.3 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 3.2 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. 10 Table of Contents 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 Forfeited ( 1,300 ) $ 97.81 Non-vested at September 25, 2021 56,436 $ 125.16 The fair value of each share of non-vested restricted stock issued and Deferred Stock Unit granted under the Plans is based on the fair value of a share of the Company’s common stock on the date of grant. Shares of non-vested restricted stock are generally subject to vesting in three equal annual installments either on the first, second and third anniversary of the date of the grant or the third, fourth and fifth anniversary of the date of the grant, or 100 % on the first or fifth anniversary of the date of the grant. For restricted stock awards granted under the 2013 DSCP plan, each recipient may elect to defer receipt of shares and instead receive restricted stock units (“Deferred Stock Units”), which represent contingent rights to receive shares of the Company’s common stock on the date of recipient separation from service from the Board of Directors, or, if earlier, upon a change in control event of the Company. Deferred Stock Units become vested 100 % on the first anniversary of the date of the grant. Deferred Stock Units do not represent actual ownership in shares of the Company’s common stock and the recipient does not have voting rights or other incidents of ownership until the shares are issued. However, Deferred Stock Units do contain the right to receive dividend equivalent payments prior to settlement into shares. As of September 25 , 2021 , there was $ 4,726,000 of total unrecognized compensation cost related to non-vested shares of restricted stock and Deferred Stock Units granted under the Plans. The unrecognized compensation cost related to these non-vested shares of restricted stock and Deferred Stock Units is expected to be recognized over a weighted average period of 2.0 years. 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 ( 6,480 ) $ 52.68 Options outstanding at September 25, 2021 11,170 $ 55.02 1.0 $ 1,224 Options exercisable at September 25, 2021 11,170 $ 55.02 1.0 $ 1,224 The total intrinsic value of stock options exercised during the thirty-nine-week periods ended September 25 , 2021 and September 26 , 2020 was $ 644,000 and $ 1,599,000 , respectively. As of September 25 , 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 thirty-nine-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 thirty-nine-week period was 24.2 %, 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 thirty-nine-week period was 23.3 %, which was higher than the statutory federal income tax rate of 21 % primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock-based awards and state tax refunds. 11 Table of Contents (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 thirty-nine-week and thirteen-week periods, in reference to the determination of diluted earnings per share, the future compensation cost attributable to outstanding shares of non-vested restricted stock exceeded the impact of incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. For each of the thirty-nine-week periods ended September 25, 2021 and September 26, 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 thirty-nine-week period, Landstar paid income taxes and interest of $ 71,823,000 and $ 2,780,000 , respectively. During the 2020 thirty-nine-week period, Landstar paid income taxes and interest of $ 28,761,000 and $ 3,087,000 , respectively. Landstar acquired operating property by entering into finance leases in the amounts of $ 23,080,000 and $ 7,485,000 in the 2021 and 2020 thirty-nine-week periods, respectively. (6) Segment Information The following table summarizes information about the Company’s reportable business segments as of and for the thirty-nine-week and thirteen-week periods ended September 25, 2021 and September 26, 2020 (in thousands): Thirty Nine Weeks Ended September 25, 2021 September 26, 2020 Transportation Logistics Insurance Total Transportation Logistics Insurance Total External revenue $ 4,539,561 $ 52,990 $ 4,592,551 $ 2,795,056 $ 41,570 $ 2,836,626 Internal revenue 53,028 53,028 44,912 44,912 Investment income 2,138 2,138 2,716 2,716 Operating income 323,370 33,558 356,928 148,270 20,268 168,538 Expenditures on long-lived assets 18,561 18,561 25,426 25,426 Goodwill 40,980 40,980 40,251 40,251 Thirteen Weeks Ended September 25, 2021 September 26, 2020 Transportation Logistics Insurance Total Transportation Logistics Insurance Total External revenue $ 1,716,004 $ 18,295 $ 1,734,299 $ 1,071,374 $ 14,172 $ 1,085,546 Internal revenue 9,533 9,533 9,078 9,078 Investment income 706 706 714 714 Operating income 123,410 8,002 131,412 71,752 10,600 82,352 Expenditures on long-lived assets 9,561 9,561 7,750 7,750 In the thirty-nine-week and thirteen-week periods ended September 25, 2021 and September 26, 2020, no single customer accounted for more than 10 % of the Company’s consolidated revenue. 12 Table of Contents (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 thirty-nine-week period ended September 25, 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 ( 1,260 ) 320 ( 940 ) Balance as of September 25, 2021 $ 1,548 $ ( 4,487 ) $ ( 2,939 ) Amounts reclassified from accumulated other comprehensive income to investment income due to the realization of previously unrealized gains and losses in the accompanying consolidated statements of income were not significant for the thirty-nine-week period ended September 25, 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 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 $ 1,971,000 at September 25, 2021 and $ 3,578,000 at December 26, 2020, respectively. 13 Table of Contents The amortized cost and fair values of available-for-sale investments are as follows at September 25, 2021 and December 26, 2020 (in thousands): Gross Gross Amortized Cost Unrealized Gains Unrealized Losses Fair Value September 25, 2021 Money market investments $ 12,736 $ — $ — $ 12,736 Asset-backed securities 18,899 4 63 18,840 Corporate bonds and direct obligations of government agencies 136,854 2,209 259 138,804 U.S. Treasury obligations 2,341 80 — 2,421 Total $ 170,830 $ 2,293 $ 322 $ 172,801 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 September 25, 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 September 25, 2021 Asset-backed securities $ 12,714 $ 63 $ — $ — $ 12,714 $ 63 Corporate bonds and direct obligations of government agencies 49,442 259 — — 49,442 259 Total $ 62,156 $ 322 $ — $ — $ 62,156 $ 322 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. (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. 14 Table of Contents 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 thirty nine weeks ended September 25, 2021 were (in thousands): Finance leases: Amortization of right-of-use assets $ 15,967 Interest on lease liability 2,023 Total finance lease cost 17,990 Operating leases: Lease cost 2,623 Variable lease cost — Sublease income ( 3,720 ) Total net operating lease income ( 1,097 ) Total net lease cost $ 16,893 A summary of the lease classification on our consolidated balance sheet as of September 25, 2021 is as follows (in thousands): Assets: Operating lease right-of-use assets Other assets $ 2,198 Finance lease assets Operating property, less accumulated depreciation and amortization 129,242 Total lease assets $ 131,440 Liabilities: The following table reconciles the undiscounted cash flows for the finance and operating leases to the finance and operating lease liabilities recorded on the balance sheet at September 25, 2021 (in thousands): Finance Leases Operating Leases 2021 Remainder $ 11,454 $ 192 2022 33,585 714 2023 26,573 634 2024 16,665 535 2025 10,418 284 Thereafter 2,916 — Total future minimum lease payments 101,611 2,359 Less amount representing interest ( 1.6 % to 4.4 %) 4,270 161 Present value of minimum lease payments $ 97,341 $ 2,198 Current maturities of long-term debt 34,617 Long-term debt, excluding current maturities 62,724 Other current liabilities 713 Deferred income taxes and other noncurrent liabilities 1,485 15 Table of Contents The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of September 25, 2021 were: Finance Leases Operating Leases Weighted average remaining lease term (years) 3.5 3.5 Weighted average discount rate 2.7 % 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 September 25, 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 September 25, 2021 and December 26, 2020, 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. (11) Commitments and Contingencies Short-term investments include $ 36,644,000 in current maturities of investments held by the Company’s insurance segment at September 25, 2021. The non-current portion of the bond portfolio of $ 136,157,000 is included in other assets. The short-term investments, together with $ 40,505,000 of non-current investments, provide collateral for the $ 69,434,000 of letters of credit issued to guarantee payment of insurance claims. As of September 25, 2021, Landstar also had $ 33,577,000 of additional letters of credit outstanding under the Company’s Credit Agreement. 16 Table of Contents The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year. (12) 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 September 25, 2021.