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 30, 2023 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 30, 2023. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2022 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 30, 2023 December 31, 2022 ASSETS Current Assets Cash and cash equivalents $ 439,661 $ 339,581 Short-term investments 57,099 53,955 Trade accounts receivable, less allowance of $ 12,054 and $ 12,121 810,801 967,793 Other receivables, including advances to independent contractors, less allowance of $ 14,405 and $ 10,579 57,063 56,235 Other current assets 30,918 21,826 Total current assets 1,395,542 1,439,390 Operating property, less accumulated depreciation and amortization of $ 426,984 and $ 393,274 284,081 314,990 Goodwill 41,934 41,220 Other assets 130,970 136,279 Total assets $ 1,852,527 $ 1,931,879 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Cash overdraft $ 48,067 $ 92,953 Accounts payable 464,720 527,372 Current maturities of long-term debt 29,210 36,175 Insurance claims 45,518 50,836 Dividends payable —   71,854 Other current liabilities 82,550 98,945 Total current liabilities 670,065 878,135 Long-term debt, excluding current maturities 46,173 67,225 Insurance claims 56,776 58,268 Deferred income taxes and other noncurrent liabilities 36,359 41,030 Shareholders’ Equity Common stock, $ 0.01 par value, authorized 160,000,000 shares, issued 68,497,324 and 68,382,310 shares 685 684 Additional paid-in capital 254,630 258,487 Retained earnings 2,808,919 2,635,960 Cost of 32,550,980 and 32,455,300 shares of common stock in treasury ( 2,009,351 ) ( 1,992,886 ) Accumulated other comprehensive loss ( 11,729 ) ( 15,024 ) Total shareholders’ equity 1,043,154 887,221 Total liabilities and shareholders’ equity $ 1,852,527 $ 1,931,879 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 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Revenue $ 4,098,877 $ 5,761,795 $ 1,289,345 $ 1,816,132 Investment income 6,874 2,023 3,022 716 Costs and expenses: Purchased transportation 3,141,234 4,512,341 986,743 1,416,323 Commissions to agents 363,397 465,759 115,244 154,125 Other operating costs, net of gains on asset sales/dispositions 40,998 34,878 15,158 13,356 Insurance and claims 86,971 96,265 29,540 31,445 Selling, general and administrative 159,071 165,199 50,975 53,519 Depreciation and amortization 44,498 42,627 14,359 14,582 Total costs and expenses 3,836,169 5,317,069 1,212,019 1,683,350 Operating income 269,582 446,749 80,348 133,498 Interest and debt (income) expense ( 2,079 ) 3,275 ( 1,046 ) 1,047 Income before income taxes 271,661 443,474 81,394 132,451 Income taxes 65,254 105,862 19,741 32,233 Net income $ 206,407 $ 337,612 61,653 $ 100,218 Basic and diluted earnings per share $ 5.74 $ 9.15 $ 1.71 $ 2.76 Average basic and diluted shares outstanding 35,958,000 36,886,000 35,951,000 36,334,000 Dividends per common share $ 0.93 $ 0.80 $ 0.33 $ 0.30 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 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Net income $ 206,407 $ 337,612 $ 61,653 $ 100,218 Other comprehensive income (loss): Unrealized holding gains (losses) on available-for-sale investments, net of tax expense (benefit) of $ 263 , ($ 2,461 ), $ 49 and ($ 436 ) 958 ( 8,987 ) 176 ( 1,596 ) Foreign currency translation gains (losses) 2,337 ( 1,011 ) ( 1,494 ) ( 1,484 ) Other comprehensive income (loss) 3,295 ( 9,998 ) ( 1,318 ) ( 3,080 ) Comprehensive income $ 209,702 $ 327,614 $ 60,335 $ 97,138 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 30, 2023 September 24, 2022 OPERATING ACTIVITIES Net income $ 206,407 $ 337,612 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 44,498 42,627 Non-cash interest charges 198 290 Provisions for losses on trade and other accounts receivable 10,509 8,346 Gains on sales/disposals of operating property ( 3,846 ) ( 1,290 ) Deferred income taxes, net ( 5,595 ) ( 2,597 ) Stock-based compensation 4,270 9,409 Changes in operating assets and liabilities: Decrease in trade and other accounts receivable 145,655 26,170 Increase in other assets ( 13,115 ) ( 17,669 ) (Decrease) increase in accounts payable ( 62,652 ) 39,924 Decrease in other liabilities ( 15,734 ) ( 23,932 ) (Decrease) increase in insurance claims ( 6,810 ) 17,491 NET CASH PROVIDED BY OPERATING ACTIVITIES 303,785 436,381 INVESTING ACTIVITIES Sales and maturities of investments 93,326 27,568 Purchases of investments ( 86,115 ) ( 30,490 ) Purchases of operating property ( 15,394 ) ( 21,096 ) Proceeds from sales of operating property 6,631 2,669 Purchase of non-marketable securities —   ( 4,999 ) NET CASH USED BY INVESTING ACTIVITIES ( 1,552 ) ( 26,348 ) FINANCING ACTIVITIES Decrease in cash overdraft ( 44,886 ) ( 18,792 ) Dividends paid ( 105,302 ) ( 104,893 ) Payment for debt issue costs —   ( 1,080 ) Proceeds from exercises of stock options 28 56 Taxes paid in lieu of shares issued related to stock-based compensation plans ( 9,186 ) ( 10,427 ) Purchases of common stock ( 15,433 ) ( 285,983 ) Principal payments on finance lease obligations ( 28,017 ) ( 29,075 ) NET CASH USED BY FINANCING ACTIVITIES ( 202,796 ) ( 450,194 ) Effect of exchange rate changes on cash and cash equivalents 643 ( 1,614 ) Increase (decrease) in cash, cash equivalents and restricted cash 100,080 ( 41,775 ) Cash, cash equivalents and restricted cash at beginning of period 339,581 219,571 Cash and cash equivalents at end of period $ 439,661 $ 177,796 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 30, 2023 and September 24, 2022 (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 31, 2022 68,382,310 $ 684 $ 258,487 $ 2,635,960 32,455,300 $ ( 1,992,886 ) $ ( 15,024 ) $ 887,221 Net income 78,195 78,195 Dividends ($ 0.30 per share) ( 10,806 ) ( 10,806 ) Purchases of common stock 89,661 ( 15,433 ) ( 15,433 ) Issuance of stock related to stock-based compensation plans 101,653 1 ( 7,201 ) 5,891 ( 1,008 ) ( 8,208 ) Stock-based compensation 1,852 1,852 Other comprehensive income 2,831 2,831 Balance April 1, 2023 68,483,963 $ 685 $ 253,138 $ 2,703,349 32,550,852 $ ( 2,009,327 ) $ ( 12,193 ) $ 935,652 Net income 66,559 66,559 Dividends ($ 0.30 per share) ( 10,780 ) ( 10,780 ) Issuance of stock related to stock-based compensation plans 13,361 ( 926 ) ( 926 ) Stock-based compensation 1,274 1,274 Other comprehensive income 1,782 1,782 Balance July 1, 2023 68,497,324 $ 685 $ 253,486 $ 2,759,128 32,550,852 $ ( 2,009,327 ) $ ( 10,411 ) $ 993,561 Net income 61,653 61,653 Dividends ($ 0.33 per share) ( 11,862 ) ( 11,862 ) Issuance of stock related to stock-based compensation plans 128 ( 24 ) ( 24 ) Stock-based compensation 1,144 1,144 Other comprehensive loss ( 1,318 ) ( 1,318 ) Balance September 30, 2023 68,497,324 $ 685 $ 254,630 $ 2,808,919 32,550,980 $ ( 2,009,351 ) $ ( 11,729 ) $ 1,043,154 8 Table of Contents Common Stock Additional Paid-In Retained Treasury Stock at Cost Accumulated Other Comprehensive Shares Amount Capital Earnings Shares Amount Loss Total Balance December 25, 2021 68,232,975 $ 682 $ 255,148 $ 2,317,184 30,539,235 $ ( 1,705,601 ) $ ( 5,403 ) $ 862,010 Net income 124,839 124,839 Dividends ($ 0.25 per share) ( 9,324 ) ( 9,324 ) Purchases of common stock 693,550 ( 109,332 ) ( 109,332 ) Issuance of stock related to stock-based compensation plans 137,176 2 ( 8,913 ) 10,033 ( 1,216 ) ( 10,127 ) Stock-based compensation 1,995 1,995 Other comprehensive loss ( 3,912 ) ( 3,912 ) Balance March 26, 2022 68,370,151 $ 684 $ 248,230 $ 2,432,699 31,242,818 $ ( 1,816,149 ) $ ( 9,315 ) $ 856,149 Net income 112,555 112,555 Dividends ($ 0.25 per share) ( 9,257 ) ( 9,257 ) Purchases of common stock 703,211 ( 103,300 ) ( 103,300 ) Issuance of stock related to stock-based compensation plans 6,783 —   —   587 ( 86 ) ( 86 ) Stock-based compensation 3,815 3,815 Other comprehensive loss ( 3,006 ) ( 3,006 ) Balance June 25, 2022 68,376,934 $ 684 $ 252,045 $ 2,535,997 31,946,616 $ ( 1,919,535 ) $ ( 12,321 ) $ 856,870 Net income 100,218 100,218 Dividends ($ 0.30 per share) ( 10,925 ) ( 10,925 ) Purchases of common stock 504,065 ( 73,351 ) ( 73,351 ) Issuance of stock related to stock-based compensation plans 3,631 —   ( 158 ) 4,619 — ( 158 ) Stock-based compensation 3,599 3,599 Other comprehensive loss ( 3,080 ) ( 3,080 ) Balance September 24, 2022 68,380,565 $ 684 $ 255,486 $ 2,625,290 32,455,300 $ ( 1,992,886 ) $ ( 15,401 ) $ 873,173 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 thirty-nine-week and thirteen-week periods ended September 30, 2023 and September 24, 2022 (dollars in thousands): Thirty-Nine Weeks Ended Thirteen Weeks Ended Mode September 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Truck – BCO Independent Contractors 38 % 35 % 39 % 35 % Truck – Truck Brokerage Carriers 54 % 53 % 52 % 53 % Rail intermodal 2 % 2 % 2 % 2 % Ocean and air cargo carriers 5 % 8 % 5 % 9 % Truck Equipment Type Van equipment $ 2,123,693 $ 3,022,297 $ 665,569 $ 914,154 Unsided/platform equipment $ 1,150,483 $ 1,336,956 $ 378,147 $ 453,924 Less-than-truckload $ 90,770 $ 105,994 $ 28,097 $ 35,343 Other truck transportation (1) $ 379,471 $ 632,001 $ 101,951 $ 195,345 (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. 10 Table of Contents (2) Share-based Payment Arrangements As of September 30, 2023, 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 2022 Directors Stock Compensation Plan (the “2022 DSCP”), which replaced the Amended and Restated 2013 Directors Stock Compensation Plan (as amended and restated, the “2013 DSCP”). The provisions of the 2022 DSCP are substantially similar to the provisions of the 2013 DSCP. 6,000,000 shares of the Company’s common stock were authorized for issuance under the 2011 EIP and 200,000 shares of the Company’s common stock were authorized for issuance under the 2022 DSCP. The 2011 EIP, 2013 DSCP and 2022 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 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022 Total cost of the Plans during the period $ 4,270 $ 9,409 $ 1,144 $ 3,599 Amount of related income tax benefit recognized during the period ( 3,878 ) ( 5,219 ) ( 286 ) ( 949 ) Net cost of the Plans during the period $ 392 $ 4,190 $ 858 $ 2,650 Included in income tax benefits recognized in the thirty-nine-week periods ended September 30, 2023 and September 24, 2022 were excess tax benefits from stock-based awards of $ 2,830,000 and $ 2,910,000 , respectively. As of September 30, 2023, there were 187,260 shares of the Company’s common stock reserved for issuance under the 2022 DSCP and 3,014,492 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 RSUs Weighted Average Grant Date Fair Value Outstanding at December 31, 2022 151,780 $ 115.80 Granted 41,460 $ 165.04 Shares earned in excess of target (1) 79,176 $ 98.39 Vested shares, including shares earned in excess of target ( 137,861 ) $ 97.97 Forfeited ( 2,011 ) $ 142.67 Outstanding at September 30, 2023 132,544 $ 138.94 (1) Represents additional shares earned under the February 1, 2019 and January 31, 2020 RSU awards as fiscal year 2022 financial results exceeded target performance level and under the April 24, 2018 and July 1, 2019 RSU awards as total shareholder return during the applicable performance period exceeded target performance level under each of those awards. During the thirty-nine-week period ended September 30, 2023, the Company granted RSUs with a performance condition. Outstanding RSUs at both December 31, 2022 and September 30, 2023 include RSUs with a performance condition and RSUs with a market condition, as further described below and in the Company’s 2022 Annual Report on Form 10-K. RSUs with a performance condition granted on February 3, 2023 may vest on January 31 of 2026, 2027 and 2028 based on growth in operating income and pre-tax income per diluted share from continuing operations as compared to the results from the 2022 fiscal year. The Company recognized approximately $ 1,503,000 and $ 7,035,000 of share-based compensation expense related to RSU awards in the thirty-nine-week periods ended September 30, 2023 and September 24, 2022, respectively. As of September 30, 2023, there was a maximum of $ 29.2 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 3.5 years. With respect to RSU awards with a performance condition, the amount of future compensation expense to be recognized will be determined based on future operating results. 11 Table of Contents 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 31, 2022 47,795 $ 138.30 Granted 22,714 $ 179.32 Vested ( 24,161 ) $ 138.35 Non-vested at September 30, 2023 46,348 $ 158.38 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, third or fifth anniversary of the date of the grant. For restricted stock awards granted under the 2022 DSCP, 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 30, 2023, there was $ 4,756,000 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 All 1,900 stock options outstanding and exercisable at December 31, 2022 were exercised at an exercise price of $ 56.40 as of January 31, 2023, following which the Company had no remaining issued and outstanding vested or unvested stock options. The total intrinsic value of stock options exercised during the thirty-nine-week periods ended September 30, 2023 and September 24, 2022 was $ 218,000 and $ 429,000 , respectively. As of September 30, 2023, there was no unrecognized compensation cost related to non-vested stock options granted under the Plans. (3) Income Taxes The provisions for income taxes for the 2023 and 2022 thirty-nine-week periods were based on estimated annual effective income tax rates of 24.4 % and 24.5 %, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The effective income tax rate for the 2023 thirty-nine-week period was 24.0 %. The effective income tax rate was higher than the statutory federal income tax rate of 21 % in the 2023 period primarily attributable to state taxes. The effective income tax rate for the 2022 thirty-nine-week period was 23.9 %. The effective income tax rate was higher than the statutory federal income tax rate of 21 % in the 2022 period primarily attributable to state taxes. (4) Earnings Per Share Basic earnings per common share are based on the weighted average number of common shares outstanding , which includes outstanding non-vested restricted stock and outstanding Deferred Stock Units. Diluted earnings per share are based on the weighted average number of common shares outstanding plus the 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 30, 2023 and September 24, 2022, the weighted-average number of common shares outstanding is the same for purposes of the calculations of both basic and diluted earnings per share, as 12 Table of Contents the impact on earnings per share of future compensation expense related to outstanding, unvested time-based awards is greater than the incremental impact of outstanding dilutive stock options in each period, and would therefore have an anti-dilutive effect on earnings per share if included in the calculation of earnings per share. Accordingly, the Company had no reconciling items between the average number of common shares outstanding used to calculate basic earnings per common share and the average number of common shares and common share equivalents outstanding used to calculate diluted earnings per share during the 2023 and 2022 thirty-nine-week and thirteen-week periods. For each of the thirty- nine -week periods ended September 30 , 2023 and September 24 , 2022 , 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 2023 thirty-nine-week period, Landstar paid income taxes and interest of $ 68,136,000 and $ 2,814,000 , respectively. During the 2022 thirty-nine-week period, Landstar paid income taxes and interest of $ 125,690,000 and $ 3,101,000 , respectively. Landstar did not acquire any operating property by entering into finance leases in the 2023 thirty-nine-week period. Landstar acquired operating property by entering into finance leases in the amount of $ 26,741,000 in the 2022 thirty-nine-week period. (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 30, 2023 and September 24, 2022 (in thousands): Thirty-Nine Weeks Ended September 30, 2023 September 24, 2022 Transportation Logistics Insurance Total Transportation Logistics Insurance Total External revenue $ 4,043,824 $ 55,053 $ 4,098,877 $ 5,702,959 $ 58,836 $ 5,761,795 Internal revenue 64,138 64,138 65,753 65,753 Investment income 6,874 6,874 2,023 2,023 Operating income 222,827 46,755 269,582 412,054 34,695 446,749 Expenditures on long-lived assets 15,394 15,394 21,096 21,096 Goodwill 41,934 41,934 41,004 41,004 Thirteen Weeks Ended September 30, 2023 September 24, 2022 Transportation Logistics Insurance Total Transportation Logistics Insurance Total External revenue $ 1,271,385 $ 17,960 $ 1,289,345 $ 1,796,401 $ 19,731 $ 1,816,132 Internal revenue 11,960 11,960 12,883 12,883 Investment income 3,022 3,022 716 716 Operating income 63,974 16,374 80,348 120,164 13,334 133,498 Expenditures on long-lived assets 2,763 2,763 13,629 13,629 In the thirty-nine-week periods ended September 30, 2023 and September 24, 2022, no single customer accounted for more than 10 % of the Company’s consolidated revenue. 13 Table of Contents (7) Other Comprehensive Income The following table presents the components of and changes in accumulated other comprehensive (loss) income, net of related income taxes, as of and for the thirty-nine-week period ended September 30, 2023 (in thousands): Unrealized Holding (Losses) Gains on Available-for-Sale Securities Foreign Currency Translation Total Balance as of December 31, 2022 $ ( 8,449 ) $ ( 6,575 ) $ ( 15,024 ) Other comprehensive income 958 2,337 3,295 Balance as of September 30, 2023 $ ( 7,491 ) $ ( 4,238 ) $ ( 11,729 ) 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 30, 2023. (8) Investments Investments include primarily investment-grade corporate bonds, U.S. treasury obligations and asset-backed securities 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 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 reco g nized 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 losses, net of unrealized gains, on the investments in the bond portfolio were $ 9,542,000 and $ 10,763,000 at September 30, 2023 and December 31, 2022, respectively. The amortized cost and fair values of available-for-sale investments are as follows at September 30, 2023 and December 31, 2022 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 30, 2023 Money market investments $ 16,032 $ —   $ —   $ 16,032 Asset-backed securities 17,044 —   2,708 14,336 Corporate bonds and direct obligations of government agencies 119,632 —   6,758 112,874 U.S. Treasury obligations 9,203 —   76 9,127 Total $ 161,911 $ — $ 9,542 $ 152,369 December 31, 2022 Money market investments $ 21,910 $ — $ — $ 21,910 Asset-backed securities 18,905 — 2,889 16,016 Corporate bonds and direct obligations of government agencies 126,134 1 7,775 118,360 U.S. Treasury obligations 2,344 —   100 2,244 Total $ 169,293 $ 1 $ 10,764 $ 158,530 14 Table of Contents For those available-for-sale investments with unrealized losses a t September 30, 2023 and December 31, 2022, 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 30, 2023 Asset-backed securities $ —   $ —   $ 14,336 $ 2,708 $ 14,336 $ 2,708 Corporate bonds and direct obligations of government agencies 20,707 507 92,167 6,251 112,874 6,758 U.S. Treasury obligations 6,849 8 2,278 68 9,127 76 Total $ 27,556 $ 515 $ 108,781 $ 9,027 $ 136,337 $ 9,542 December 31, 2022 Asset-backed securities $ —   $ —   $ 16,016 $ 2,889 $ 16,016 $ 2,889 Corporate bonds and direct obligations of government agencies 54,031 1,516 62,390 6,259 116,421 7,775 U.S. Treasury obligations 2,244 100 —   —   2,244 100 Total $ 56,275 $ 1,616 $ 78,406 $ 9,148 $ 134,681 $ 10,764 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. 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 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, the Company applies a portfolio approach for determining the incremental borrowing rate. 15 Table of Contents The components of lease cost for finance leases and operating leases for the thirty - nine weeks ended September 30, 2023 were (in thousands): Finance leases: Amortization of right-of-use assets $ 15,634 Interest on lease liability 2,060 Total finance lease cost 17,694 Operating leases: Lease cost 2,640 Variable lease cost —   Sublease income ( 3,963 ) Total net operating lease income ( 1,323 ) Total net lease cost $ 16,371 A summary of the lease classification on our consolidated balance sheet as of September 30, 2023 is as follows (in thousands): Assets: Operating lease right-of-use assets Other assets $ 1,801 Finance lease assets Operating property, less accumulated depreciation and amortization 112,558 Total lease assets $ 114,359 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 30, 2023 (in thousands): Finance Leases Operating Leases 2023 Remainder $ 8,736 $ 226 2024 28,843 821 2025 22,658 508 2026 14,530 190 2027 4,115 169 Thereafter —   49 Total future minimum lease payments 78,882 1,963 Less amount representing interest ( 1.6 % to 6.0 %) 3,499 162 Present value of minimum lease payments $ 75,383 $ 1,801 Current maturities of long-term debt 29,210 Long-term debt, excluding current maturities 46,173 Other current liabilities 844 Deferred income taxes and other noncurrent liabilities 957 The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of September 30, 2023 were: Finance Leases Operating Leases Weighted average remaining lease term (years) 2.9 2.9 Weighted average discount rate 3.0 % 6.0 % 16 Table of Contents (10) Debt Other than the finance lease obligations as presented on the consolidated balance sheets, the Company had no outstanding debt as of September 30, 2023 and December 31, 2022. On July 1, 2022, Landstar entered into a second amended and restated credit agreement with a bank syndicate led by JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures July 1, 2027, provides for borrowing capacity in the form of a revolving credit facility of $ 300,000,000 , $ 45,000,000 of which may be utilized in the form of letters of credit. The Credit Agreement also includes an “accordion” feature providing for a possible increase of up to an aggregate amount of borrowing capacity of $ 600,000,000 . As of September 30, 2023, the Company had no borrowings outstanding under the Credit Agreement. The revolving credit loans under the Credit Agreement, at the option of Landstar, bear interest at (i) a forward-looking term rate based on the secured overnight financing rate plus 0.10 % and 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 0.20 % to 0.30 %, based on the Company’s Leverage Ratio at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. 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 described 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 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 $ 57,099,000 in current maturities of investments held by the Company’s insurance segment at September 30, 2023. The non-current portion of the bond portfolio of $ 95,270,000 is included in other assets. The short-term investments, together with $ 28,516,000 of non-current investments, provide collateral for the $ 77,054,000 of letters of credit issued to guarantee payment of insurance claims. As of September 30, 2023, Landstar also had $ 33,492,000 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.