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LANDSTAR SYSTEM INC - Quarter Report: 2020 June (Form 10-Q)

Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June
27, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission File Number:
0-21238
 
 
 
LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
06-1313069
(State or other jurisdiction
of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
13410 Sutton Park Drive South, Jacksonville, Florida
(Address of principal executive offices)
32224
(Zip Code)
(904)
398-9400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock
 
LSTR
 
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
    Yes  ☑    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):
    Yes  ☑    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one):
 
Large accelerated filer
 
 
Accelerated filer
 
             
Non-accelerated
filer
 
 
Smaller reporting company
 
             
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).
    Yes  ☐    No  ☑
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of the close of business on July 20, 2020 was 38,379,459.
 
 
 

Table of Contents
Index
 
 
   
  
     
   
  
 
Page 4
 
   
  
 
Page 5
 
   
  
 
Page 6
 
   
  
 
Page 7
 
   
  
 
Page 8
 
   
  
 
Page 10
 
   
  
 
Page 18
 
   
  
 
Page 31
 
   
  
 
Page 32
 
 
 
   
  
 
Page 32
 
   
  
 
Page 33
 
   
  
 
Page 35
 
   
  
 
Page 35
 
   
  
 
Page 37
 
   
  
     
   
  
     
   
  
     
   
  
     
 
2

Table of Contents
PART I - FINANCIAL INFORMATION
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 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 27, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 26, 2020.
These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2019 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 27,

2020
   
December 28,

2019
 
ASSETS
            
Current Assets
   
     
 
Cash and cash equivalents
  $
245,471
    $
319,515
 
Short-term investments
   
36,274
     
32,901
 
Trade accounts receivable, less allowance of $8,580 and $7,284
   
489,182
     
588,549
 
Other receivables, including advances to independent contractors, less allowance of $9,241 and $7,667
   
27,861
     
35,553
 
Other current assets
   
41,564
     
21,370
 
                 
Total current assets
   
840,352
     
997,888
 
                 
Operating property, less accumulated depreciation and amortization of $288,055 and $280,849
   
284,794
     
285,855
 
Goodwill
   
40,071
     
38,508
 
Other assets
   
106,893
     
105,460
 
                 
Total assets
  $
1,272,110
    $
1,427,711
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
            
Current Liabilities
   
     
 
Cash overdraft
  $
35,534
    $
53,878
 
Accounts payable
   
273,324
     
271,996
 
Current maturities of long-term debt
   
38,219
     
42,632
 
Insurance claims
   
53,764
     
44,532
 
Dividends payable
   
—  
     
78,947
 
Contractor escrow
   
25,774
     
24,902
 
Other current liabilities
   
46,845
     
36,017
 
                 
Total current liabilities
   
473,460
     
552,904
 
                 
Long-term debt, excluding current maturities
   
60,152
     
70,212
 
Insurance claims
   
34,762
     
33,575
 
Deferred income taxes and other noncurrent liabilities
   
54,615
     
49,551
 
Shareholders’ Equity
   
     
 
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 68,176,787 and 68,083,419 shares
   
682
     
681
 
Additional
paid-in
capital
   
225,332
     
226,123
 
Retained earnings
   
2,012,173
     
1,962,161
 
Cost of 29,797,328 and 28,609,926 shares of common stock in treasury
   
(1,581,921
)    
(1,465,284
)
Accumulated other comprehensive loss
   
(7,145
)    
(2,212
)
                 
Total shareholders’ equity
   
649,121
     
721,469
 
                 
Total liabilities and shareholders’ equity
  $
1,272,110
    $
1,427,711
 
                 
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 27,
2020
 
 
June 29,
2019
 
 
June 27,
2020
 
 
June 29,
2019
 
Revenue
  $
1,751,080
    $
2,078,040
    $
823,514
    $
1,045,040
 
Investment income
   
2,002
     
2,421
     
835
     
1,283
 
Costs and expenses:
   
     
     
     
 
Purchased transportation
   
1,344,390
     
1,591,126
     
635,133
     
799,371
 
Commissions to agents
   
150,642
     
173,294
     
75,266
     
87,623
 
Other operating costs, net of gains on asset sales/dispositions
   
15,674
     
18,100
     
7,368
     
9,861
 
Insurance and claims
   
44,708
     
31,279
     
19,751
     
16,286
 
Selling, general and administrative
   
85,928
     
82,565
     
40,601
     
41,297
 
Depreciation and amortization
   
22,972
     
22,350
     
11,467
     
11,034
 
Impairment of intangible and other assets
   
2,582
     
—  
     
2,582
     
—  
 
                                 
Total costs and expenses
   
1,666,896
     
1,918,714
     
792,168
     
965,472
 
                                 
Operating income
   
86,186
     
161,747
     
32,181
     
80,851
 
Interest and debt expense
   
1,928
     
1,514
     
976
     
709
 
                                 
Income before income taxes
   
84,258
     
160,233
     
31,205
     
80,142
 
Income taxes
   
19,109
     
35,833
     
6,951
     
19,042
 
                                 
Net income
   
65,149
     
124,400
     
24,254
     
61,100
 
Less: Net loss attributable to noncontrolling interest
   
     
(17
)    
     
 
                                 
Net income attributable to Landstar System, Inc. and subsidiary
  $
65,149
    $
124,417
    $
24,254
    $
61,100
 
                                 
Earnings per common share attributable to Landstar System, Inc. and subsidiary
  $
1.68
    $
3.11
    $
0.63
    $
1.53
 
                                 
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary
  $
1.68
    $
3.11
    $
0.63
    $
1.53
 
                                 
Average number of shares outstanding:
   
     
     
     
 
Earnings per common share
   
38,816,000
     
40,053,000
     
38,379,000
     
39,945,000
 
                                 
Diluted earnings per share
   
38,816,000
     
40,053,000
     
38,379,000
     
39,945,000
 
                                 
Dividends per common share
  $
0.370
    $
0.330
    $
0.185
    $
0.165
 
                                 
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 27,

2020
   
June 29,

2019
    
June 27,

2020
    
June 29,

2019
 
Net income attributable to Landstar System, Inc. and subsidiary
  $
65,149
    $
124,417
    $
24,254
    $
61,100
 
Other comprehensive (loss) income:
   
     
     
     
 
Unrealized holding gains on
available-for-sale
investments, net of
          
tax expense of $338, $494, $770 and $222
   
1,237
     
1,805
     
2,816
     
810
 
Foreign currency translation (losses) gains
   
(6,170
)    
1,125
     
1,732
     
571
 
                                 
Other comprehensive (loss) income
   
(4,933
)    
2,930
     
4,548
     
1,381
 
                                 
Comprehensive income attributable to Landstar System, Inc. and subsidiary
  $
60,216
    $
127,347
    $
28,802
    $
62,481
 
  
 
 
   
 
 
    
 
 
    
 
 
 
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 27,

2020
   
June 29,

2019
 
OPERATING ACTIVITIES
   
     
 
Net income
  $
65,149
    $
124,400
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
 
Depreciation and amortization of operating property and intangible assets
   
22,972
     
22,350
 
Non-cash
interest charges
   
126
     
126
 
Provisions for losses on trade and other accounts receivable
   
6,528
     
4,194
 
Gains on sales/disposals of operating property
   
(1,812
)    
(1,219
)
Impairment of intangible and other assets
   
2,582
     
—  
 
Deferred income taxes, net
   
6,228
     
5,060
 
Stock-based compensation
   
1,201
     
3,368
 
Changes in operating assets and liabilities:
   
     
 
Decrease in trade and other accounts receivable
   
99,601
     
89,820
 
Increase in other assets
   
(24,809
)    
(22,808
)
Decrease in accounts payable
   
(31
)    
(28,565
)
Increase (decrease) in other liabilities
   
10,231
     
(14,315
)
Increase in insurance claims
   
10,419
     
1,665
 
                 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
198,385
     
184,076
 
                 
INVESTING ACTIVITIES
   
     
 
Net changes in other short-term investments
   
131
     
—  
 
Sales and maturities of investments
   
14,897
     
41,345
 
Purchases of investments
   
(16,382
)    
(42,812
)
Purchases of operating property
   
(17,676
)    
(9,224
)
Proceeds from sales of operating property
   
4,465
     
3,219
 
Consideration paid for acquisition
   
(2,701
)    
—  
 
                 
NET CASH USED BY INVESTING ACTIVITIES
   
(17,266
)    
(7,472
)
                 
FINANCING ACTIVITIES
   
     
 
Decrease in cash overdraft
   
(18,344
)    
(11,719
)
Dividends paid
   
(93,382
)    
(13,257
)
Proceeds from exercises of stock options
   
614
     
343
 
Taxes paid in lieu of shares issued related to stock-based compensation plans
   
(3,280
)    
(8,438
)
Purchases of common stock
   
(115,962
)    
(69,729
)
Principal payments on finance lease obligations
   
(21,958
)    
(23,658
)
Purchase of noncontrolling interest
   
—  
     
(600
)
                 
NET CASH USED BY FINANCING ACTIVITIES
   
(252,312
)    
(127,058
)
                 
Effect of exchange rate changes on cash and cash equivalents
   
(2,851
)    
930
 
                 
(Decrease) increase in cash and cash equivalents
   
(74,044
)    
50,476
 
Cash and cash equivalents at beginning of period
   
319,515
     
199,736
 
                 
Cash and cash equivalents at end of period
  $
245,471
    $
250,212
 
                 
See accompanying notes to consolidated financial statements.
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Table of Contents
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Twenty Six and Thirteen Weeks Ended June 27, 2020 and June 29, 2019
(In thousands, except share and per share amounts)
(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 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 (Note 1
4
)
 
 
 
 
 
 
 
 
 
 
 
(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
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
    
 
 
 
8

Table of Contents
 
Landstar System, Inc. and Subsidiary Shareholders
   
                            
 
 
 
 
 
Common Stock
   
Additional
Paid-In
Capital
 
 
Retained
Earnings
 
 
 
Treasury Stock at Cost
   
Accumulated
Other
Comprehensive
(Loss) Income
 
 
Non-controlling
Interests
 
 
 
 
Shares
 
 
Amount
 
Shares
 
 
Amount
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 29, 2018
 
 
67,870,962
 
 
 
$
679
 
 
$
226,852
 
 
$
1,841,279
 
 
 
27,755,001
 
 
$
(1,376,111
)
 
$
(5,875
)
 
$
2,309
 
 
$
689,133
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
 
 
 
 
63,317
 
 
 
 
 
 
 
 
 
 
 
 
(17
)
 
 
63,300
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends ($0.165
per share)
 
 
 
 
 
 
 
 
 
 
 
(6,629
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(6,629
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
124,481
 
 
 
(12,977
)
 
 
 
 
 
 
 
 
(12,977
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of noncontrolling interests
 
 
 
 
 
 
 
 
1,842
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,442
)
 
 
(600
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of stock related to stock-based compensation plans
 
 
176,079
 
 
 
1
 
 
 
(7,081
)
 
 
 
 
 
5,199
 
 
 
(524
)
 
 
 
 
 
 
 
 
(7,604
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
 
 
 
 
 
 
1,938
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,938
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,549
 
 
 
150
 
 
 
1,699
 
                                                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 30, 2019
 
 
68,047,041
 
 
$
680
 
 
$
223,551
 
 
$
1,897,967
 
 
 
27,884,681
 
 
$
(1,389,612
)
 
$
(4,326
)
 
$
  
 
 
$
728,260
 
                                                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
61,100
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
61,100
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends ($0.165
per share)
 
 
 
 
 
 
 
 
 
 
 
(6,628
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(6,628
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
549,929
 
 
 
(56,752
)
 
 
 
 
 
 
 
 
(56,752
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of stock related to stock-based compensation plans
 
 
17,836
 
 
 
1
 
 
 
(431
)
 
 
 
 
 
572
 
 
 
(61
)
 
 
 
 
 
 
 
 
(491
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
 
 
 
 
 
 
1,430
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,430
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,381
 
 
 
 
 
 
1,381
 
                                                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance June 29, 2019
 
 
68,064,877
 
 
$
681
 
 
$
224,550
 
 
$
1,952,439
 
 
 
28,435,182
 
 
$
(1,446,425
)
 
$
(2,945
)
 
$
  
 
 
$
728,300
 
                                                                         
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
During the twenty six weeks ended June 27, 2020, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 46%, 46% and 3% respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3% of the Company’s consolidated revenue in the
twenty-six-week
period ended June 27, 2020. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the
twenty-six-week
period ended June 27, 2020 was $1,028,334,000 hauled via van equipment, $533,716,000 hauled via unsided/platform equipment and $45,859,000 of less-than-truckload. During the twenty six weeks ended June 29, 2019, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 44%, 48% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3% of the Company’s consolidated revenue in the
twenty-six-week
period ended June 29, 2019. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the
twenty-six-week
period ended June 29, 2019 was $1,224,379,000 hauled via van equipment, $648,828,000 hauled via unsided/platform equipment and $48,108,000 of less-than-truckload.
During the thirteen weeks ended June 27, 2020, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 46%, 46% and 3% respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 4% of the Company’s consolidated revenue in the thirteen-week period ended June 27, 2020. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the thirteen-week period ended June 27, 2020 was $483,027,000 hauled via van equipment, $247,388,000 hauled via unsided/platform equipment and $22,918,000 of less-than-truckload. During the thirteen weeks ended June 29, 2019, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 45%, 47% and 3% respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3% of the Company’s consolidated revenue in the thirteen-week period ended June 29, 2019. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the thirteen-week period ended June 29, 2019 was $605,365,000 hauled via van equipment, $338,107,000 hauled via unsided/platform equipment and $24,732,000 of less-than-truckload.
(2)
Acquired Business
On May 6, 2020, Landstar System Holdings, Inc. formed a new subsidiary that was subsequently renamed Landstar Blue, LLC (“Landstar Blue”). Landstar Blue arranges truckload brokerage services while helping the Company to develop and test digital technologies and processes for the benefit of all Landstar independent commission sales agents. On June 15, 2020, Landstar Blue completed the acquisition of an independent agent of the Company whose business focused on truckload brokerage services. Cash consideration paid for the acquisition was approximately
 
$
2,701
,
000
.
 
In addition, the Company assumed approximately $200,000 in liabilities consisting of additional contingent purchase price. The resulting goodwill arising from the acquisition was approximately
 
$
2,807,000
.
With respect to this goodwill, 100% is expected to be deductible by the Company for U.S. income tax purposes. Pro fo
r
ma financial information for prior periods is not presented as the Company does not believe the acquisition to be material to the Company’s consolidated results. The results of operations for Landstar Blue are presented as part of the Company’s transportations logistics segment. Transaction costs for the acquisition were insignificant. 
 
10

Table of Contents
(3)
Share-based Payment Arrangements
As of June 27, 2020, the Company had two employee equity incentive plans, the 2002 employee stock option and stock incentive plan (the “ESOSIP”) and the 2011 equity incentive plan (the “2011 EIP”). No further grants can be made under the ESOSIP. The Company also has a stock compensation plan for members of its Board of Directors, the Amended and Restated 2013 Directors Stock Compensation Plan (as amended and restated as of May 17, 2016, the “2013 DSCP”). 6,000,000 shares of the Company’s common stock were authorized for issuance under the 2011 EIP and 115,000 shares of the Company’s common stock were authorized for issuance under the 2013 DSCP. The ESOSIP, 2011 EIP and 2013 DSCP are each referred to herein as a “Plan,” and, collectively, as the “Plans.” Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands):
 
Twenty Six Weeks Ended
   
Thirteen Weeks Ended
 
 
June 27,
2020
 
 
June 29,
2019
 
 
June 27,
2020
 
 
June 29,
2019
 
Total cost of the Plans during the period
  $
1,201
    $
3,368
    $
570
    $
1,430
 
Amount of related income tax benefit recognized during the period
   
(1,135
)
 
   
(3,734
)
 
   
(262
)
 
   
(672
)
 
                                 
Net cost of the Plans during the period
  $
66
    $
(366
)   $
308
    $
758
 
                                 
Included in income tax benefits recognized in the
twenty-six-week
periods ended June 27, 2020 and June 29, 2019 were excess tax benefits from stock-based awards of $829,000 and $2,871,000, respectively. 
As of June 27, 2020, there were 60,586 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 3,683,524 shares of the Company’s common stock reserved for issuance in the aggregate under the ESOSIP and 2011 EIP.
Restricted Stock Units
The following table summarizes information regarding the Company’s outstanding restricted stock unit (“RSU”) awards with either a performance condition or a market condition under the Plans:
 
Number of
RSUs
 
 
Weighted Average
Grant Date
Fair Value
 
Outstanding at December 28, 2019
   
198,875
    $
84.37
 
Granted
   
59,478
    $
102.66
 
Shares earned in excess of target
(1)
   
11,648
    $
77.00
 
Vested shares, including shares earned in excess of target
   
(76,290
)   $
73.44
 
Forfeited
   
(10,987
)   $
100.55
 
                 
Outstanding at June 27, 2020
   
182,724
    $
93.44
 
                 
 
(1)
Represents shares earned in excess of target under the February 2, 2017 RSU awards as actual results exceeded the target under the awards as a result of fiscal year 2019 results.
During the
twenty-six-week
period ended June 27, 2020, the Company granted RSUs with a performance condition. Outstanding RSUs at both December 28, 2019 and June 27, 2020 include RSUs with a performance condition and RSUs with a market condition, as further described below and in the Company’s 2019 Annual Report on Form
10-K.
RSUs with a performance condition granted on January 31, 2020 may vest on
January
31 of 2023, 2024 and 2025 based on growth in operating income and
pre-tax
income per diluted share from continuing operations attributable to Landstar System, Inc. and subsidiary as compared to the results from the 2019 fiscal year.
The Company recognized approximately ($308,000) and $2,062,000 of share-based compensation (benefit)/expense related to RSU awards in the
twenty-six-week
periods ended June 27, 2020 and June 29, 2019, respectively. As of June 27, 2020, there was a maximum of $35.3 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.
11

Table of Contents
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 28, 2019
   
44,467
    $
51.24
     
     
 
Exercised
   
(16,517
)   $
47.70
     
     
 
                                 
Options outstanding at June 27, 2020
   
27,950
    $
53.33
     
2.1
    $
1,514
 
Options exercisable at June 27, 2020
   
27,950
    $
53.33
     
2.1
    $
1,514
 
                                 
The total intrinsic value of stock options exercised during the
twenty-six-week
periods ended June 27, 2020 and June 29, 2019 was $1,071,000 and $1,269,000, respectively.
As of June 27, 2020, there was no unrecognized compensation cost related to stock options granted under the Plans.
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 28, 2019
   
64,808
    $
98.24
 
Granted
   
26,604
    $
111.88
 
Vested
   
(27,619
)   $
98.91
 
Forfeited
   
(2,351
)   $
106.34
 
                 
Non-vested
at June 27, 2020
   
61,442
    $
103.54
 
                 
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 June 27, 2020, there was $4,841,000 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 2.1 years.
(4)
Income Taxes
The provisions for income taxes for the 2020 and 2019
twenty-six-week
periods were each based on an estimated annual effective income tax rate of 24.2%, adjusted for discrete events, such as benefits resulting from 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
-
 
12

Table of Contents
based awards. The effective income tax rate for the 2019
twenty-six-week
period was 22.4%, 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
. The provision for income taxes for the 2019
twenty-six-week
period was favorably impacted by $2,871,000 of excess tax benefits from stock-based awards.
(5)
Earnings Per Share
Earnings per common share attributable to Landstar System, Inc. and subsidiary are based on the weighted average number of shares outstanding, including outstanding non-vested restricted stock and outstanding Deferred Stock Units. Diluted earnings per share attributable to Landstar System, Inc. and subsidiary are based on the weighted average number of common shares and Deferred Stock Units outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. During the 2020 and 2019 twenty-six-week and thirteen-week periods
,
the future compensation cost attributable to
shares of
non-vested restricted stock
exceeded
the 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 27, 2020 and June 29, 2019, no options outstanding to purchase shares of common stock were antidilutive. Outstanding RSUs were excluded from the calculation of diluted earnings per share attributable to Landstar System, Inc. and subsidiary for all periods because the performance metric requirements or market condition for vesting had not been satisfied.
(6)
Additional Cash Flow Information
During the 2020
twenty-six-week
period, Landstar paid income taxes and interest of $16,198,000 and $2,057,000, respectively. During the 2019
twenty-six-week
period, Landstar paid income taxes and interest of $39,180,000 and $2,286,000, respectively. Landstar acquired operating property by entering into finance leases in the amount of $7,485,000 in the 2020
twenty-six-week
period. Landstar did not acquire any operating property by entering into finance leases in the 2019
twenty-six-week
periods. In addition, during the 2020
twenty-six-week
period, Landstar acquired
 $
1,440,000 of operating property for which the Comp
a
ny accrued a corresponding liability in accounts payable as of June 27, 2020. Capital expenditures are recorded as cash outflows from investing activities in the consolidated statement of cash flows in the period in which they are paid.
(7)
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 27, 2020 and June 29, 2019 (in thousands):
 
Twenty Six Weeks Ended
 
 
June 27, 2020
   
June 29, 2019
 
 
Transportation
Logistics
 
 
Insurance
 
 
Total
 
 
Transportation
Logistics
 
 
Insurance
 
 
Total
 
External revenue
  $
1,723,682
    $
27,398
    $
 
1,751,080
    $
2,049,777
    $
28,263
    $
 
2,078,040
 
Internal revenue
   
     
35,834
     
35,834
     
     
27,367
     
27,367
 
Investment income
   
     
2,002
     
2,002
     
     
2,421
     
2,421
 
Operating income
   
76,518
     
9,668
     
86,186
     
135,919
     
25,828
     
161,747
 
Expenditures on long-lived assets
   
17,676
     
     
17,676
     
9,224
     
     
9,224
 
Goodwill
   
40,071
     
     
40,071
     
38,407
     
     
38,407
 
       
 
Thirteen Weeks Ended
 
 
June 27, 2020
   
June 29, 2019
 
 
Transportation
Logistics
 
 
Insurance
 
 
Total
 
 
Transportation
Logistics
 
 
Insurance
 
 
Total
 
External revenue
  $
809,798
    $
13,716
    $
823,514
    $
1,030,816
    $
14,224
    $
1,045,040
 
Internal revenue
   
     
26,755
     
26,755
     
     
17,753
     
17,753
 
Investment income
   
     
835
     
835
     
     
1,283
     
1,283
 
Operating income
   
21,474
     
10,707
     
32,181
     
68,336
     
12,515
     
80,851
 
Expenditures on long-lived assets
   
11,877
     
     
11,877
     
4,648
     
     
4,648
 
In the
twenty-six-week
periods ended June 27, 2020 and June 29, 2019, no single customer accounted for more than 10% of the Company’s consolidated revenue.
13

Table of Contents
(8)
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 27, 2020 (in thousands):
 
Unrealized
Holding Gains on
Available-for-Sale

Securities
 
 
Foreign
 
Currency
Translation
 
 
Total
 
Balance as of December 28, 2019
  $
1,120
    $
(3,332
)   $
 
(2,212
)
Other comprehensive gain (loss)
   
1,237
     
(6,170
)    
(4,933
)
                         
Balance as of June 27, 2020
  $
2,357
    $
(9,502
)   $
(7,145
)
 
                         
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 27, 2020.
(9)
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 $3,002,000 and $1,427,000 at June 27, 2020 and December 28, 2019, respectively.
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Table of Contents
The amortized cost and fair values of
available-for-sale
investments are as follows at June 27, 2020 and December 28, 2019 (in thousands):
 
 
Amortized
Cost
 
 
Gross
Unrealized
Gains
 
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
June 27, 2020
                           
Money market investments
  $
14,038
    $
—  
    $
 —  
    $
14,038
 
Asset-backed securities
   
569
     
—  
     
84
     
485
 
Corporate bonds and direct obligations of
                                   
government agencies
   
100,722
     
3,261
     
316
     
103,667
 
U.S. Treasury obligations
   
2,337
     
141
     
—  
     
2,478
 
                                 
Total
  $
 
117,666
    $
3,402
    $
400
    $
120,668
 
                                 
December 28, 2019
                           
Money market investments
  $
15,691
    $
—  
    $
 —  
    $
15,691
 
Asset-backed securities
   
572
     
—  
     
1
     
571
 
Corporate bonds and direct obligations of
                                   
government agencies
   
97,583
     
1,465
     
44
     
99,004
 
U.S. Treasury obligation
s
   
2,335
     
12
     
5
     
2,342
 
                                 
Total
  $
116,181
    $
1,477
    $
50
    $
 
117,608
 
                                 
For those
available-for-sale
investments with unrealized losses at June 27, 2020 and December 28, 2019, the following table summarizes the duration of the unrealized loss (in thousands):
 
 
Less than 12 months
   
12 months or longer
   
Total
 
 
Fair
Value
 
 
Unrealized
Loss
 
 
Fair
Value
 
 
Unrealized
Loss
 
 
Fair
Value
 
 
Unrealized
Loss
 
June 27, 2020
                                         
Asset-backed securities
  $
485
    $
84
    $
—  
    $
 —  
    $
485
    $
84
 
Corporate bonds and direct obligations of
government agencies
   
4,937
     
316
     
—  
     
—  
     
4,937
     
316
 
                                                 
Total
  $
5,422
    $
400
    $
—  
    $
 —  
    $
5,422
    $
400
 
                                                 
December 28, 2019
                                         
Asset-backed securities
  $
571
    $
1
    $
—  
    $
 —  
    $
571
    $
1
 
Corporate bonds and direct obligations of
government agencies
   
8,728
     
41
     
4,260
     
3
     
12,988
     
44
 
U.S. Treasury obligation
s
   
1,226
     
5
     
—  
     
—  
     
1,226
     
5
 
                                                 
Total
  $
 
10,525
    $
47
    $
 
4,260
    $
3
    $
 
14,785
    $
50
 
                                                 
The Company expects to recover, through collection of all of the contractual cash flows of each security, the amortized cost basis of these securities as it does not intend to sell, and does not anticipate being required to sell, these securities before recovery of the cost basis. For these reasons, no losses have been recognized in the Company’s consolidated statements of income.
(10) 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 orientation centers for 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.
 
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Table of Contents
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 27, 2020 were (in thousands):
 
Finance leases:
   
 
Amortization of
right-of-use
assets
  $
 
12,372
 
Interest on lease liability
   
1,689
 
         
Total finance lease cost
   
14,061
 
Operating leases:
   
 
Lease cost
   
1,518
 
Variable lease cost
   
—  
 
Sublease income
   
(2,413
)
         
Total operating lease (income)/cost
   
(895
)
         
Total lease cost
  $
 
13,166
 
         
A summary of the lease classification on our consolidated balance sheet as of June 27, 2020 is as follows (in thousands):
Assets:
 
Operating lease
right-of-use
assets
 
Other assets
  $
2,462
 
Finance lease asset
s
 
Operating property, less accumulated depreciation and amortization
   
151,518
 
             
Total lease assets
 
  $
153,980
 
             
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 27, 2020 (in thousands):
 
 
Finance
Leases
 
 
Operating
Leases
 
2020 Remainder
  $
22,849
    $
340
 
2021
   
32,858
     
643
 
2022
   
23,709
     
645
 
2023
   
16,686
     
515
 
2024
   
6,742
     
448
 
Thereafter
   
793
     
92
 
                 
Total future minimum lease payments
   
103,637
     
2,683
 
Less amount representing interest (2.1% to 4.4%)
   
5,266
     
221
 
                 
Present value of minimum lease payments
  $
98,371
    $
2,462
 
                 
Current maturities of long-term debt
   
38,219
     
 
Long-term debt, excluding current maturities
   
60,152
     
 
Other current liabilitie
s
   
     
648
 
Deferred income taxes and other noncurrent liabilities
   
     
1,814
 
 
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The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of June 27, 2020 were:
 
 
Finance
 
Leases
 
 
Operating
 
Leases
 
Weighted average remaining lease term (years)
   
3.2
     
4.3
 
Weighted average discount rate
   
3.2
%    
4.0
%
(11)
Commitments and Contingencies
Short-term investments include $36,274,000 in current maturities of investments held by the Company’s insurance segment at June 27, 2020. The
non-current
portion of the bond portfolio of $84,394,000 is included in other assets. The short-term investments, together with $32,063,000 of
non-current
investments, provide collateral for the $61,503,000 of letters of credit issued to guarantee payment of insurance claims. As of June 27, 2020, Landstar also had $34,156,000 of additional letters of credit outstanding under the Company’s Credit Agreement.
On January 25, 2019, a purported class action was filed in the Superior Court of the State of California for the County of San Bernardino against Landstar System, Inc. and Landstar Ranger, Inc. (together, the “Defendants”). The complaint purported to bring this action on behalf of Hany Tanious, as an individual, and “all owner operators who performed work for the Defendants, and who were classified as independent contractors, during the four years preceding the filing of this action through the present.” The complaint asserted claims based on the alleged misclassification of Mr. Tanious as an independent contractor and alleged violations under California law relating to overtime, minimum wage, meal and rest breaks, failure to reimburse certain expenses, wage statements, waiting time and unfair competition. Mr. Tanious was a truck owner-operator and formerly an independent contractor who was a party to an independent contractor operating agreement with Landstar Ranger, Inc. On June 11, 2019, the Defendants filed a Notice of Removal that resulted in the removal of the case from state court to federal court, where it was assigned to Judge Dale S. Fischer of the United State District Court for the Central District of California. On August 22, 2019, the Court issued an order, among other things, striking all class allegations from the complaint and stating that this matter would proceed as an individual action. On June 15, 2020, the Court issued an order granting the Defendants’ motion to transfer venue to the United States District Court for the Middle District of Florida, where the matter was assigned to Judge Marcia Morales Howard. On June 24, 2020, the Court,
sua sponte
, issued an order striking the first amended complaint that was deemed by the Court to have been filed by the plaintiff on March 23, 2020. On July 6, 2020, the plaintiff filed a voluntary dismissal without prejudice of all remaining claims relating to this action. On July 15, 2020, the Court issued an order granting the voluntary dismissal of this action in full.
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.
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The following table summarizes the effect of the increase in the cost of insurance claims resulting from unfavorable development of prior year self-insured claims estimates on operating income, net income attributable to Landstar System, Inc. and subsidiary and earnings per share attributable to Landstar System, Inc. and subsidiary set forth in the consolidated statements of income for the
twenty-six-week
and thirteen-week periods ended June 27, 2020 and June 29, 2019 (in thousands, except per share amounts):
 
 
  
Twenty Six Weeks Ended
 
  
Thirteen Weeks Ended
 
 
  
June 27,

2020
 
  
June 29,

2019
 
  
June 27,

2020
 
  
June 29,

2019
 
Operating income
  
$
 5,039
 
  
$
 2,900
 
  
$
 2,816
 
  
$
 1,493
 
Net income attributable to Landstar System, Inc. and subsidiary
  
$
 3,820
 
  
$
 2,198
 
  
$
 2,135
 
  
$
 1,131
 
Earnings per share attributable to Landstar System, Inc. and subsidiary
  
$
0.10
 
  
$
0.05
 
  
$
0.06
 
  
$
0.03
 
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary
  
$
0.10
 
  
$
0.05
 
  
$
0.06
 
  
$
0.03
 
 
(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, including issues in the international oil and gas sector, have caused significant disruptions in the M
e
xican economy. Accordingly, management performed impairment tests of the carrying values of certain assets that primarily relate to intra-Mexico business acquired as a part of the Fletes Avella acquisition. The impairment tests resulted in an impairment charge of
 
$
2,582,000
, as the negative macroeconomic trends in Mexico have caused current financial projections relating to these intangible assets to be substantially below those originally anticipat
e
d at the acquisition date. There was no corresponding goodwill impairment charge recorded as the fair value of the Company’s Mexico and cross-border reporting unit continues to significantly exceed its carrying value as of June 27, 2020.
 
(1
4
)
Recent Accounting Pronouncements
Adoption of New Accounting Standards
In June 2016, the FASB issued Accounting Standards Update
2016-13–
Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU
2016-13”),
which requires measurement and recognition of expected versus incurred credit losses for financial assets held. The Company adopted ASU
2016-13
on December 29, 2019, under the modified retrospective transition method resulting in a $702,000 cumulative adjustment to retained earnings.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the interim consolidated financial statements and notes thereto included herein, and with the Company’s audited financial statements and notes thereto for the fiscal year ended December 28, 2019 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2019 Annual Report on Form
10-K.
FORWARD-LOOKING STATEMENTS
The following is a “safe harbor” statement under the Private Securities Litigation Reform Act of 1995. Statements contained in this document that are not based on historical facts are “forward-looking statements.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form
10-Q
contain forward-looking statements, such as statements which relate to Landstar’s business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “intention,” “expects,” “plans,” “predicts,” “may,” “should,” “could,” “will,” the negative thereof and similar expressions are intended to identify forward-looking statements. Such statements are by nature subject to uncertainties and risks, including but not limited to: the impact of the coronavirus
(COVID-19)
pandemic; an increase in the frequency or severity of accidents or other claims; unfavorable
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development of existing accident claims; dependence on third party insurance companies; dependence on independent commission sales agents; dependence on third party capacity providers; decreased demand for transportation services; U.S. foreign trade relationships; substantial industry competition; disruptions or failures in the Company’s computer systems; cyber and other information security incidents; dependence on key vendors; changes in fuel taxes; status of independent contractors; regulatory and legislative changes; regulations focused on diesel emissions and other air quality matters; catastrophic loss of a Company facility; intellectual property; unclaimed property; and other operational, financial or legal risks or uncertainties detailed in Landstar’s Form
10-K
for the 2019 fiscal year, described in Item 1A “Risk Factors”, in this report or in Landstar’s other Securities and Exchange Commission filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements and the Company undertakes no obligation to publicly update or revise any forward-looking statements.
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred to herein as “Landstar” or the “Company”), is a worldwide asset-light provider of integrated transportation management solutions. The Company offers services to its customers across multiple transportation modes, with the ability to arrange for individual shipments of freight to comprehensive third party logistics solutions to meet all of a customer’s transportation needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada and Mexico, and between the United States and Canada, Mexico and other countries around the world. The Company’s services emphasize safety, information coordination and customer service and are delivered through a network of over 1,200 independent commission sales agents and approximately 64,000 third party capacity providers, primarily truck capacity providers, linked together by a series of digital technologies which are provided and coordinated by the Company. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue.
Landstar markets its integrated transportation management solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. Landstar’s independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under
non-exclusive
contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers and railroads. Through this network of agents and capacity providers linked together by Landstar’s series of digital technologies, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $4.1 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.
The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, intra-Mexico, intra-Canada, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive parts and assemblies, building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics and military equipment. In addition, the transportation logistics segment provides transportation services to other transportation companies, including third party logistics and less-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Billings for freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight and are referred to as transportation revenue. During the twenty six weeks ended June 27, 2020, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 46%, 46% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3% of the Company’s consolidated revenue in the
twenty-six-week
period ended June 27, 2020.
Landstar Metro, S.A.P.I. de C.V. (“Landstar Metro”) provides freight and logistics services within the country of Mexico and in conjunction with Landstar’s U.S./Mexico cross-border services. Landstar Metro Servicios S.A.P.I. de C.V. (“Landstar Servicios”) provides various administrative, financial, operational, safety and compliance services to Landstar Metro. The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportation logistics segment. On January 29, 2019, Landstar acquired all of the remaining equity interests in Landstar Metro and Landstar Servicios held by their former minority equityholders. Accordingly, as of such date, Landstar Metro and Landstar Servicios each became wholly owned subsidiaries of the Company. Revenue from Landstar Metro represented less than 1% of the Company’s transportation logistics segment revenue in the
twenty-six-week
period ended June 27, 2020.
 
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On May 6, 2020, Landstar System Holdings, Inc. formed a new subsidiary that was subsequently renamed Landstar Blue, LLC (“Landstar Blue”). Landstar Blue arranges truckload brokerage services while helping the Company to develop and test digital technologies and processes for the benefit of all Landstar independent commission sales agents. The results of operations from Landstar Blue are presented as part of the Company’s transportations logistics segment. The Company expects that Landstar Blue will not have a material effect on its revenues and earnings for the remainder of fiscal year 2020. Revenue from Landstar Blue represented less than 1% of the Company’s transportation logistics segment revenue in the
twenty-six-week
period ended June 27, 2020.
The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore insurance subsidiary (“Signature”), and Risk Management Claim Services, Inc. The insurance segment provides risk and claims management services to certain of Landstar’s operating subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to certain of Landstar’s operating subsidiaries. Revenue at the insurance segment represents reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk is ultimately borne by Signature. Revenue at the insurance segment represented approximately 2% of the Company’s consolidated revenue for the
twenty-six-week
period ended June 27, 2020.
Changes in Financial Condition and Results of Operations
Management believes the Company’s success principally depends on its ability to generate freight revenue through its network of independent commission sales agents and to safely and efficiently deliver freight utilizing third party capacity providers. Management believes the most significant factors to the Company’s success include increasing revenue, sourcing capacity and controlling costs, including insurance and claims.
While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s emphasis with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents”). Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents, increasing the revenue opportunities generated by existing independent commission sales agents and providing its independent commission sales agents with digital technologies they may use to grow revenue and increase efficiencies at their businesses. During the 2019 fiscal year, 555 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2019 fiscal year, the average revenue generated by a Million Dollar Agent was $6,880,000 and revenue generated by Million Dollar Agents in the aggregate represented 93% of consolidated revenue.
 
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Management monitors business activity by tracking the number of loads (volume) and revenue per load by mode of transportation. Revenue per load can be influenced by many factors other than a change in price. Those factors include the average length of haul, freight type, special handling and equipment requirements, fuel costs and delivery time requirements. For shipments involving two or more modes of transportation, revenue is generally classified by the mode of transportation having the highest cost for the load. The following table summarizes this information by trailer type for truck transportation and by mode for all others:
 
    
Twenty Six Weeks Ended
   
Thirteen Weeks Ended
 
    
June 27,

2020
   
June 29,

2019
   
June 27,
2020
   
June 29,

2019
 
Revenue generated through (in thousands):
        
Truck transportation
        
Truckload:
        
Van equipment
   $  1,028,334     $  1,224,379     $  483,027     $  605,365  
Unsided/platform equipment
     533,716       648,828       247,388       338,107  
Less-than-truckload
     45,859       48,108       22,918       24,732  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total truck transportation
     1,607,909       1,921,315       753,333       968,204  
Rail intermodal
     51,315       58,585       23,186       28,570  
Ocean and air cargo carriers
     57,250       58,893       30,663       28,224  
Other (1)
     34,606       39,247       16,332       20,042  
  
 
 
   
 
 
   
 
 
   
 
 
 
    
$ 1,751,080
   
$ 2,078,040
   
$ 823,514
   
$ 1,045,040
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Revenue on loads hauled via BCO Independent Contractors included in total truck transportation
   $ 809,779     $ 923,928     $  378,500     $  474,620  
Number of loads:
        
Truck transportation
        
Truckload:
        
Van equipment
     600,519       686,901       285,174       345,080  
Unsided/platform equipment
     231,122       260,920       110,533       135,750  
Less-than-truckload
     78,079       74,549       39,723       39,240  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total truck transportation
     909,720       1,022,370       435,430       520,070  
Rail intermodal
     21,510       23,880       9,970       11,420  
Ocean and air cargo carriers
     14,430       14,810       7,360       7,300  
  
 
 
   
 
 
   
 
 
   
 
 
 
  
 
945,660
 
 
 
1,061,060
 
 
 
452,760
 
 
 
538,790
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Loads hauled via BCO Independent Contractors included in total truck transportation
     443,830       483,660       210,430       248,810  
Revenue per load:
        
Truck transportation
        
Truckload:
        
Van equipment
   $ 1,712     $ 1,782     $ 1,694     $ 1,754  
Unsided/platform equipment
     2,309       2,487       2,238       2,491  
Less-than-truckload
     587       645       577       630  
Total truck transportation
     1,767       1,879       1,730       1,862  
Rail intermodal
     2,386       2,453       2,326       2,502  
Ocean and air cargo carriers
     3,967       3,977       4,166       3,866  
Revenue per load on loads hauled via BCO Independent Contractors
   $ 1,825     $ 1,910     $ 1,799     $ 1,908  
Revenue by capacity type (as a % of total revenue):
        
Truck capacity providers:
        
BCO Independent Contractors
     46     44     46     45
Truck Brokerage Carriers
     46     48     46     47
Rail intermodal
     3     3     3     3
Ocean and air cargo carriers
     3     3     4     3
Other
     2     2     2     2
 
(1)
Includes primarily reinsurance premium revenue generated by the insurance segment and intra-Mexico transportation services revenue generated by Landstar Metro.
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Also critical to the Company’s success is its ability to secure capacity, particularly truck capacity, at rates that allow the Company to profitably transport customers’ freight. The following table summarizes the number of available truck capacity providers on the dates indicated:
 
    
June 27, 2020
    
June 29, 2019
 
BCO Independent Contractors
     9,632        9,879  
Truck Brokerage Carriers:
     
Approved and active
(1)
     37,600        40,097  
Other approved
     16,365        17,790  
  
 
 
    
 
 
 
    
53,965
    
57,887
 
  
 
 
    
 
 
 
Total available truck capacity providers
     63,597        67,766  
  
 
 
    
 
 
 
Trucks provided by BCO Independent Contractors
     10,299        10,587  
 
(1)
Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal quarter end.
The Company incurs costs that are directly related to the transportation of freight that include purchased transportation and commissions to agents. The Company incurs indirect costs associated with the transportation of freight that include other operating costs and insurance and claims. In addition, the Company incurs selling, general and administrative costs essential to administering its business operations. Management continually monitors all components of the costs incurred by the Company and establishes annual cost budgets which, in general, are used to benchmark costs incurred on a monthly basis.
Purchased transportation represents the amount a BCO Independent Contractor or other third party capacity provider is paid to haul freight. The amount of purchased transportation paid to a BCO Independent Contractor is primarily based on a contractually agreed-upon percentage of revenue generated by loads hauled by the BCO Independent Contractor. Purchased transportation paid to a Truck Brokerage Carrier is based on either a negotiated rate for each load hauled or, to a lesser extent, a contractually agreed-upon fixed rate per load. Purchased transportation paid to railroads is based on either a negotiated rate for each load hauled or a contractually agreed-upon fixed rate per load. Purchased transportation paid to air cargo carriers is generally based on a negotiated rate for each load hauled and purchased transportation paid to ocean cargo carriers is generally based on a contractually agreed-upon fixed rate per load. Purchased transportation as a percentage of revenue for truck brokerage, rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor and air cargo services. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases as a percentage of consolidated revenue in proportion to changes in the percentage of consolidated revenue generated through BCO Independent Contractors and other third party capacity providers and external revenue from the insurance segment, consisting of reinsurance premiums. Purchased transportation as a percent of revenue also increases or decreases in relation to the availability of truck brokerage capacity and with changes in the price of fuel on revenue generated from shipments hauled by Truck Brokerage Carriers. The Company passes 100% of fuel surcharges billed to customers for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. These fuel surcharges are excluded from revenue and the cost of purchased transportation. Purchased transportation costs are recognized over the freight transit period as the performance obligation to the customer is completed.
Commissions to agents are based on contractually agreed-upon percentages of revenue or net revenue, defined as revenue less the cost of purchased transportation, or net revenue less a contractually agreed upon percentage of revenue retained by Landstar. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the various modes of transportation and reinsurance premiums and with changes in net revenue margin, defined as net revenue divided by revenue, on services provided by Truck Brokerage Carriers, railroads, air cargo carriers and ocean cargo carriers. Commissions to agents are recognized over the freight transit period as the performance obligation to the customer is completed.
The Company defines gross profit as revenue less the cost of purchased transportation and commissions to agents. Gross profit divided by revenue is referred to as gross profit margin. The Company’s operating margin is defined as operating income divided by gross profit.
In general, gross profit margin on revenue generated by BCO Independent Contractors represents a fixed percentage of revenue due to the nature of the contracts that pay a fixed percentage of revenue to both the BCO Independent Contractors and independent commission sales agents. For revenue generated by Truck Brokerage Carriers, gross profit margin is either fixed or variable as a percent of revenue, depending on the contract with each individual independent commission sales agent. Under certain contracts with independent commission sales agents, the Company retains a fixed percentage of revenue and the agent retains the amount remaining less the cost of purchased transportation (the “retention contracts”). Gross profit margin on revenue generated from shipments hauled by railroads, air cargo carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention contracts, is variable in nature as the
 
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Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these types of shipments. Approximately 52% of the Company’s consolidated revenue in the
twenty-six-week
period ended June 27, 2020 was generated under contracts that have a fixed gross profit margin while 48% was under contracts that have a variable gross profit margin.
Maintenance costs for Company-provided trailing equipment and BCO Independent Contractor recruiting and qualification costs are the largest components of other operating costs. Also included in other operating costs are trailer rental costs, the provision for uncollectible advances and other receivables due from BCO Independent Contractors and independent commission sales agents and gains/losses, if any, on sales of Company-owned trailing equipment.
With respect to insurance and claims cost, potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable.
For periods prior to May 1, 2019, Landstar retains liability for commercial trucking claims up to $5,000,000 per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $5,000,000 self-insured retention.
Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $5,000,000 and $10,000,000 (the “Initial Excess Policy”) with a third party insurance company. For commercial trucking claims incurred on or after May 1, 2019 through April 30, 2022, the Initial Excess Policy initially provided for a limit for a single loss of $5,000,000, with an aggregate limit of $10,000,000 for each policy year, an aggregate limit of $15,000,000 for the
thirty-six
month term ended April 30, 2022, and options to increase such aggregate limits for
pre-established
amounts of additional premium. In the event paid aggregate losses under the Initial Excess Policy during any policy year (May 1 to April 30) exceeded $10,000,000, the Company would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention, for the remainder of such policy year. Moreover, in the event paid aggregate losses under the Initial Excess Policy during the three year period ending April 30, 2022 exceeded a
pre-determined
threshold amount, the Initial Excess Policy would require the Company to pay additional premium up to a maximum amount of $3,500,000.
As previously disclosed, BCO Independent Contractors with a subsidiary of the Company were involved in two tragic accidents during the policy year ending April 30, 2020, the first of which occurred in the 2019 third quarter and the second of which occurred in the 2020 first quarter. Following these two tragic accidents, the Company exercised its option under the Initial Excess Policy to increase its aggregate limits to $15,000,000 for each policy year and $20,000,000 for the
thirty-six
month term ended April 30, 2022. If aggregate losses under the Initial Excess Policy exceed either the new annual aggregate limit or the new aggregate limit for the three year period ending April 30, 2022, and the Company declined the option to increase such aggregate limits for a
pre-established
amount of additional premium, Landstar would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention for commercial trucking claims during the remainder of the applicable policy year(s). In addition, as a result of the Company’s aggregate loss experience since it entered into the Initial Excess Policy, it believes it is probable it will be required to pay additional premium under the Initial Excess Policy, which amount of additional premium was provided for in insurance and claims costs for the Company’s 2020 fiscal first quarter.
The Company also maintains third party insurance arrangements providing excess coverage for commercial trucking liabilities in excess of $10,000,000. These third party arrangements provide coverage on a per occurrence or aggregated basis. Due to the increasing cost of commercial auto liability claims throughout the United States in recent years, the availability of such excess coverage has significantly decreased and the pricing associated with such excess coverage, to the extent available, has significantly increased. Effective May 1, 2020 with respect to the annual policy year ending April 30, 2021, the Company experienced an increase of approximately $14 million, or over 170%, in the premiums charged by third party insurance companies to the Company for excess coverage for commercial trucking liabilities in excess of $10,000,000. No assurances can be given that the availability of excess coverage for commercial trucking claims will not continue to deteriorate, that the pricing associated with such excess coverage, to the extent available, will not continue to increase, nor that insurance coverage from third party insurers for excess coverage of commercial trucking claims will even be available on commercially reasonable terms at certain levels.
Further, the Company retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. In addition, under reinsurance arrangements by Signature of certain risks of the Company’s BCO Independent Contractors, the Company retains liability of up to $500,000, $1,000,000 or $2,000,000 with respect to certain occupational accident claims and up to $750,000 with respect to certain workers’ compensation claims. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight
 
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on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on Landstar’s cost of insurance and claims and its results of operations.
During the
twenty-six-week
period ended June 27, 2020, employee compensation and benefits accounted for approximately sixty-four percent of the Company’s selling, general and administrative costs.
Depreciation and amortization primarily relate to depreciation of trailing equipment and information technology hardware and software.
The following table sets forth the percentage relationship of purchased transportation and commissions to agents, both being direct costs, to revenue and indirect costs as a percentage of gross profit for the periods indicated:
 
    
Twenty Six Weeks Ended
   
Thirteen Weeks Ended
 
    
June 27,

2020
   
June 29,

2019
   
June 27,

2020
   
June 29,

2019
 
Revenue
     100.0     100.0     100.0     100.0
Purchased transportation
     76.8       76.6       77.1       76.5  
Commissions to agents
     8.6       8.3       9.1       8.4  
  
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit margin
     14.6     15.1     13.7     15.1
  
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     100.0     100.0     100.0     100.0
Investment income
     0.8       0.8       0.7       0.8  
Indirect costs and expenses:
        
Other operating costs, net of gains on asset sales/dispositions
     6.1       5.8       6.6       6.2  
Insurance and claims
     17.5       10.0       17.5       10.3  
Selling, general and administrative
     33.6       26.3       35.9       26.1  
Depreciation and amortization
     9.0       7.1       10.1       7.0  
Impairment of intangible and other assets
     1.0             2.3        
  
 
 
   
 
 
   
 
 
   
 
 
 
Total costs and expenses
     67.1       49.2       72.3       49.7  
  
 
 
   
 
 
   
 
 
   
 
 
 
Operating margin
     33.7     51.6     28.4     51.2
  
 
 
   
 
 
   
 
 
   
 
 
 
Management believes that a discussion of indirect costs as a percentage of gross profit is useful and meaningful to investors for the following principal reasons: (1) disclosure of these relative measures (i.e., each indirect operating cost line item as a percentage of gross profit) allows investors to better understand the underlying trends in the Company’s results of operations; (2) due to the generally fixed nature of these indirect costs (other than insurance and claims costs), these relative measures are meaningful to investors’ evaluations of the Company’s management of its indirect costs attributable to operations; (3) management considers this financial information in its decision-making, such as budgeting for infrastructure, trailing equipment and selling, general and administrative costs; and (4) this information facilitates comparisons by investors of the Company’s results to the results of other
non-asset
or asset-light companies in the transportation and logistics services industry who report “net revenue” in Management Discussion and Analysis, which represents revenue less the cost of purchased transportation. The difference between the Company’s use of the term “gross profit” and use of the term “net revenue” by other companies in the transportation and logistics services industry is due to the direct cost of commissions to agents under the Landstar business model, whereas other companies in this industry generally have no commissions to agents.
Also, as previously mentioned, the Company reports two operating segments: the transportation logistics segment and the insurance segment. External revenue at the insurance segment, representing reinsurance premiums, has historically been relatively consistent at 2% or less of consolidated revenue and generally corresponds directly with the number of trucks provided by BCO Independent Contractors. The discussion of indirect cost line items in Management’s Discussion and Analysis of Financial Condition and Results of Operations considers the Company’s costs on a consolidated basis rather than on a segment basis. Management believes this presentation format is the most appropriate to assist users of the financial statements in understanding the Company’s business for the following reasons: (1) the insurance segment has no other operating costs; (2) discussion of insurance and claims at either segment without reference to the other may create confusion amongst investors and potential investors due to intercompany arrangements and specific deductible programs that
 
24

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affect comparability of financial results by segment between various fiscal periods but that have no effect on the Company from a consolidated reporting perspective; (3) selling, general and administrative costs of the insurance segment comprise less than 10% of consolidated selling, general and administrative costs and have historically been relatively consistent on a year-over-year basis; and (4) the insurance segment has no depreciation and amortization.
TWENTY SIX WEEKS ENDED JUNE 27, 2020 COMPARED TO TWENTY SIX WEEKS ENDED JUNE 29, 2019
Revenue for the 2020
twenty-six-week
period was $1,751,080,000, a decrease of $326,960,000, or 16%, compared to the 2019
twenty-six-week
period. Transportation revenue decreased $326,095,000, or 16%. The decrease in transportation revenue was attributable to a decreased number of loads hauled of approximately 11% and decreased revenue per load of approximately 6% compared to the 2019
twenty-six-week
period. Reinsurance premiums were $27,398,000 and $28,263,000 for the 2020 and 2019
twenty-six-week
periods, respectively. The decrease in revenue from reinsurance premiums was primarily attributable to the decrease in the average number of trucks provided by BCO Independent Contractors in the 2020
twenty-six-week
period compared to the 2019
twenty-six-week
period.
Truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers (together, the “third party truck capacity providers”) for the 2020
twenty-six-week
period was $1,607,909,000, representing 92% of total revenue, a decrease of $313,406,000, or 16%, compared to the 2019
twenty-six-week
period. The number of loads hauled by third party truck capacity providers decreased approximately 11% in the 2020
twenty-six-week
period compared to the 2019
twenty-six-week
period, and revenue per load on loads hauled by third party truck capacity providers decreased approximately 6% compared to the 2019
twenty-six-week
period. The decrease in the number of loads hauled via truck compared to the 2019
twenty-six-week
period was due to relative softness in the U.S. manufacturing sector in the 2020 period compared to the 2019 period and the unfavorable impact of the
COVID-19
pandemic, which began during the last week of the Company’s first fiscal quarter and persisted throughout the second fiscal quarter. Loads hauled via van equipment decreased 13% and loads hauled via unsided/platform equipment decreased 11%, while less-than-truckload volumes increased 5% as compared to the 2019
twenty-six-week
period. The decrease in revenue per load on loads hauled via truck was primarily due to a softer freight demand environment experienced during the 2020
twenty-six-week
period, which resulted in more readily available truck capacity as compared to the 2019
twenty-six-week
period. Revenue per load on loads hauled via van equipment decreased 4%, revenue per load on loads hauled via unsided/platform equipment decreased 7% and revenue per load on less-than-truckload loadings decreased 9% as compared to the 2019
twenty-six-week
period. Fuel surcharges billed to customers on revenue generated by BCO Independent Contractors are excluded from revenue. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $29,302,000 and $41,321,000 in the 2020 and 2019
twenty-six-week
periods, respectively. It should be noted that billings to many customers of the Company’s truck brokerage services include a single
all-in
rate that does not separately identify fuel surcharges on loads hauled via Truck Brokerage Carriers. Accordingly, the overall impact of changes in fuel prices on revenue and revenue per load on loads hauled via truck is likely to be greater than that indicated.
Transportation revenue generated by rail intermodal, air cargo and ocean cargo carriers (collectively, the “multimode capacity providers”) for the 2020
twenty-six-week
period was $108,565,000, or 6% of total revenue, a decrease of $8,913,000, or 8%, compared to the 2019
twenty-six-week
period. The number of loads hauled by multimode capacity providers decreased approximately 7% in the 2020
twenty-six-week
period compared to the 2019
twenty-six-week
period, and revenue per load on revenue generated by multimode capacity providers decreased approximately 1% over the same period. The decrease in the number of loads hauled by multimode capacity providers was primarily due to a 10% decrease in rail intermodal loadings, mostly attributable to decreased loadings at two specific customers, and a 7% decrease in ocean loadings, primarily due to decreased shipments originating in China for export to the United States. The decrease in revenue per load of 1% on loads hauled by multimode capacity providers was entirely attributable to decreased revenue per load on rail intermodal shipments. Also, revenue per load on revenue generated by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.
Purchased transportation was 76.8% and 76.6% of revenue in the 2020 and 2019
twenty-six-week
periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased rate of purchased transportation paid on BCO Independent Contractor revenue due to the impact of
COVID-19
pandemic relief incentive payments. Under that program, for each load delivered by a BCO Independent Contractor with a confirmed delivery date from April 1, 2020 through May 30, 2020, the Company paid each of the BCO Independent Contractor who hauled the load and the independent commission sales agent who dispatched the load an extra $50. Commissions to agents were 8.6% and 8.3% of revenue in the 2020 and 2019
twenty-six-week
periods, respectively. The increase in commissions to agents as a percentage of revenue was primarily attributable to the impact of
COVID-19
pandemic relief incentive payments to agents. The Company paid a total of $12,593,000 in
COVID-19
pandemic relief incentive payments during the 2020
twenty-six
week period.
 
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Table of Contents
Investment income was $2,002,000 and $2,421,000 in the 2020 and 2019
twenty-six-week
periods, respectively. The decrease in investment income was primarily attributable to lower average rates of return on investments in the 2020
twenty-six-week period,
partially offset by a higher average investment balance held by the insurance segment in the 2020
twenty-six
week period.
Other operating costs decreased $2,426,000 in the 2020
twenty-six-week
period compared to the 2019
twenty-six-week
period and represented 6.1% of gross profit in the 2020 period compared to 5.8% of gross profit in the 2019 period. The decrease in other operating costs compared to the prior year was primarily due to decreased BCO Independent Contractor recruiting costs, increased gains on the sales of used trailing equipment and decreased trailer rental expense. The increase in other operating costs as a percentage of gross profit was caused by the effect of decreased gross profit, partially offset by the decrease in other operating costs.
Insurance and claims increased $13,429,000 in the 2020
twenty-six-week
period compared to the 2019
twenty-six-week
period and represented 17.5% of gross profit in the 2020 period compared to 10.0% of gross profit in the 2019 period. The increase in insurance and claims expense compared to the prior year was primarily due to a $5,000,000 charge for the Company’s self-insured retention with respect to a tragic vehicular accident involving a fatality, a $3,500,000 charge relating to anticipated additional premium the Company expects to pay under its existing multi-year insurance arrangements in connection with certain aggregated losses, increased insurance premiums incurred in May and June for commercial trucking liability coverage following the Company’s May 1, 2020 insurance renewal, increased net unfavorable development of prior years’ claims and increased severity of current year claims in the 2020 period. During the 2020 and 2019
twenty-six-week
periods, insurance and claims costs included $5,039,000 and $2,900,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. The increase in insurance and claims as a percent of gross profit was caused by the increase in insurance and claims costs and the effect of decreased gross profit.
Selling, general and administrative costs increased $3,363,000 in the 2020
twenty-six-week
period compared to the 2019
twenty-six-week
period and represented 33.6% of gross profit in the 2020 period compared to 26.3% of gross profit in the 2019 period. The increase in selling, general and administrative costs compared to prior year was attributable to an increased provision for customer bad debt, an increased provision for incentive compensation and increased information technology costs, partially offset by decreased stock-based compensation expense, decreased agent convention costs and decreased travel and entertainment costs related to the impact of the
COVID-19
pandemic. Included in selling, general and administrative costs was incentive compensation expense of $4,057,000 and $1,911,000 for the 2020 and 2019
twenty-six-week
periods, respectively, and stock-based compensation expense of $1,201,000 and $3,368,000 for the 2020 and 2019
twenty-six-week
periods, respectively. The increase in selling, general and administrative costs as a percent of gross profit was due to the effect of decreased gross profit and the increase in selling, general and administrative costs.
Depreciation and amortization increased $622,000 in the 2020
twenty-six-week
period compared to the 2019
twenty-six-week
period and represented 9.0% of gross profit in the 2020 period compared to 7.1% of gross profit in the 2019 period. The increase in depreciation and amortization expenses was primarily due to increased depreciation on information technology assets, partially offset by a decrease in trailing equipment depreciation. The increase in depreciation and amortization as a percentage of gross profit was due to the effect of decreased gross profit and increased depreciation.
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, including issues in the international oil and gas sector, have caused significant disruptions in the Mexican economy. Accordingly, management performed impairment tests of the carrying values of certain assets that primarily relate to intra-Mexico business acquired as a part of the Fletes Avella acquisition. The impairment tests resulted in an impairment charge of $2,582,000, as the negative macroeconomic trends in Mexico have caused current financial projections relating to these intangible assets to be substantially below those originally anticipated at the acquisition date. There was no corresponding goodwill impairment charge recorded as the fair value of the Company’s Mexico and cross-border reporting unit continues to significantly exceed its carrying value as of June 27, 2020.
Interest and debt expense in the 2020
twenty-six-week
period increased $414,000 compared to the 2019
twenty-six-week
period. The increase in interest and debt expense was primarily attributable to decreased interest income earned on cash balances held by the transportation logistics segment.
The provisions for income taxes for the 2020 and 2019
twenty-six-week
periods were each based on an estimated annual effective income tax rate of 24.2%, adjusted for discrete events, such as benefits resulting from stock-based awards. The effective income tax rate
 
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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 excess tax benefits realized on stock-based awards. The effective income tax rate for the 2019
twenty-six-week
period was 22.4%, 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. The effective income tax rate in the 2020
twenty-six-week
period of 22.7% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2020
twenty-six-week
period. The effective income tax rate in the 2019
twenty-six-week
period of 22.4% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2019
twenty-six-week
period.
The net loss attributable to noncontrolling interest of $17,000 in the 2019
twenty-six-week
period represents the former noncontrolling investors’ share of the net loss incurred by Landstar Metro and Landstar Servicios.
Net income was $65,149,000, or $1.68 per common share ($1.68 per diluted share), in the 2020
twenty-six-week
period. Net income attributable to the Company was $124,417,000, or $3.11 per common share ($3.11 per diluted share), in the 2019
twenty-six-week
period. Net income was unfavorably impacted by approximately $12,593,000, or $0.24 per common share ($0.24 per diluted share), during the 2020
twenty-six-week
period, related to the impact of the
COVID-19
pandemic relief incentive payments.
THIRTEEN WEEKS ENDED JUNE 27, 2020 COMPARED TO THIRTEEN WEEKS ENDED JUNE 29, 2019
Revenue for the 2020 thirteen-week period was $823,514,000, a decrease of $221,526,000, or 21%, compared to the 2019 thirteen-week period. Transportation revenue decreased $221,018,000, or 21%. The decrease in transportation revenue was attributable to a decreased number of loads hauled of approximately 16% and decreased revenue per load of approximately 6% compared to the 2019 thirteen-week period. Reinsurance premiums were $13,716,000 and $14,224,000 for the 2020 and 2019 thirteen-week periods, respectively. The decrease in revenue from reinsurance premiums was primarily attributable to the decrease in the average number of trucks provided by BCO Independent Contractors in the 2020 thirteen-week period compared to the 2019 thirteen-week period.
Truck transportation revenue generated by third party truck capacity providers for the 2020 thirteen-week period was $753,333,000, representing 91% of total revenue, a decrease of $214,871,000, or 22%, compared to the 2019 thirteen-week period. The number of loads hauled by third party truck capacity providers decreased approximately 16% in the 2020 thirteen-week period compared to the 2019 thirteen-week period, and revenue per load on loads hauled by third party truck capacity providers decreased approximately 7% compared to the 2019 thirteen-week period. The decrease in the number of loads hauled via truck compared to the 2019 thirteen-week period was due to the unfavorable impact of the
COVID-19
pandemic experienced during the 2020 thirteen-week period as the result of actions taken by governmental authorities and businesses to reduce the further spread of
COVID-19.
The number of loads hauled via truck was below the prior year comparable period by 21
%
, 21
%
and 9
%
for April, May and June, respectively. Loads hauled via van equipment decreased 17% and loads hauled via unsided/platform equipment decreased 19%, while less-than-truckload volumes increased 1% as compared to the 2019 thirteen-week period. The decrease in revenue per load on loads hauled via truck was primarily due to a softer freight demand environment experienced during the 2020 thirteen-week period, which resulted in more readily available truck capacity as compared to the 2019 thirteen-week period. Revenue per load on loads hauled via van equipment decreased 3%, revenue per load on loads hauled via unsided/platform equipment decreased 10% and revenue per load on less-than-truckload loadings decreased 8% as compared to the 2019 thirteen-week period. Fuel surcharges billed to customers on revenue generated by BCO Independent Contractors are excluded from revenue. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $12,106,000 and $20,334,000 in the 2020 and 2019 thirteen-week periods, respectively.
Transportation revenue generated by multimode capacity providers for the 2020 thirteen-week period was $53,849,000, or 7% of total revenue, a decrease of $2,945,000, or 5%, compared to the 2019 thirteen-week period. The number of loads hauled by multimode capacity providers decreased approximately 7% in the 2020 thirteen-week period compared to the 2019 thirteen-week period, while revenue per load on revenue generated by multimode capacity providers increased approximately 2% over the same period. The decrease in the number of loads hauled by multimode capacity providers was primarily due to a 13% decrease in rail intermodal loadings, mostly attributable to decreased loadings at three specific customers. The increase in revenue per load of 2% on loads hauled by multimode capacity providers was primarily attributable to increased revenue per load on air cargo shipments and an increase in ocean loads as a percentage of loads hauled by multimode capacity providers, as ocean loads typically generate a higher revenue per load compared to loads hauled by rail or air cargo carriers. Also, revenue per load on revenue generated by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.
 
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Purchased transportation was 77.1% and 76.5% of revenue in the 2020 and 2019 thirteen-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased rate of purchased transportation paid on BCO Independent Contractor revenue due to the impact of
COVID-19
pandemic relief incentive payments. Under that program, for each load delivered by a BCO Independent Contractor with a confirmed delivery date from April 1, 2020 through May 30, 2020, the Company paid each of the BCO Independent Contractor who hauled the load and the independent commission sales agent who dispatched the load an extra $50. Commissions to agents were 9.1% and 8.4% of revenue in the 2020 and 2019 thirteen-week periods, respectively. The increase in commissions to agents as a percentage of revenue was primarily attributable to the impact of
COVID-19
pandemic relief incentive payments to agents. The Company paid a total of $12,593,000 in
COVID-19
pandemic relief incentive payments during the 2020 thirteen-week period.
Investment income was $835,000 and $1,283,000 in the 2020 and 2019 thirteen-week periods, respectively. The decrease in investment income was primarily attributable to lower average rates of return on investments in the 2020 thirteen-week period and a lower average investment balance held by the insurance segment in the 2020 thirteen-week period.
Other operating costs decreased $2,493,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 6.6% of gross profit in the 2020 period compared to 6.2% of gross profit in the 2019 period. The decrease in other operating costs compared to the prior year was primarily due to a decreased provision for contractor bad debt, decreased BCO Independent Contractor recruiting costs, increased gains on the sales of used trailing equipment and decreased trailer rental expense. The increase in other operating costs as a percentage of gross profit was caused by the effect of decreased gross profit, partially offset by the decrease in other operating costs.
Insurance and claims increased $3,465,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 17.5% of gross profit in the 2020 period compared to 10.3% of gross profit in the 2019 period. The increase in insurance and claims expense compared to the prior year was primarily due to increased net unfavorable development of prior years’ claims, increased insurance premiums incurred in May and June for commercial trucking liability coverage following the Company’s May 1, 2020 insurance renewal and increased severity of current year claims in the 2020 period, partially offset by reduced frequency of claims in the 2020 period. During the 2020 and 2019 thirteen-week periods, insurance and claims costs included $2,816,000 and $1,493,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. The increase in insurance and claims as a percent of gross profit was caused by the effect of decreased gross profit and the increase in insurance and claims costs.
Selling, general and administrative costs decreased $696,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 35.9% of gross profit in the 2020 period compared to 26.1% of gross profit in the 2019 period. The decrease in selling, general and administrative costs compared to prior year was attributable to decreased agent convention costs and decreased travel and entertainment costs related to the impact of the
COVID-19
pandemic and decreased stock-based compensation expense, partially offset by an increased provision for incentive compensation, an increased provision for customer bad debt, and increased information technology costs. Included in selling, general and administrative costs was incentive compensation expense of $2,026,000 and $873,000 for the 2020 and 2019 thirteen-week periods, respectively, and stock-based compensation expense of $570,000 and $1,430,000 for the 2020 and 2019 thirteen-week periods, respectively. The increase in selling, general and administrative costs as a percent of gross profit was due to the effect of decreased gross profit, partially offset by the decrease in selling, general and administrative costs.
Depreciation and amortization increased $433,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 10.1% of gross profit in the 2020 period compared to 7.0% of gross profit in the 2019 period. The increase in depreciation and amortization expenses was primarily due to increased depreciation on information technology assets, partially offset by a decrease in trailing equipment depreciation. The increase in depreciation and amortization as a percentage of gross profit was due to the effect of decreased gross profit and increased depreciation.
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. 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, including issues in the international oil and gas sector, have caused significant disruptions in the Mexican economy. Accordingly, management performed impairment tests of the carrying values of certain assets that primarily relate to intra-Mexico business acquired as a part of the Fletes Avella acquisition. The
 
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impairment tests resulted in an impairment charge of $2,582,000, as the negative macroeconomic trends in Mexico have caused current financial projections relating to these intangible assets to be substantially below those originally anticipated at the acquisition date. There was no corresponding goodwill impairment charge recorded as the fair value of the Company’s Mexico and cross-border reporting unit continues to significantly exceed its carrying value as of June 27, 2020.
Interest and debt expense in the 2020 thirteen-week period increased $267,000 compared to the 2019 thirteen-week period. The increase in interest and debt expense was primarily attributable to decreased interest income earned on cash balances held by the transportation logistics segment.
The provisions for income taxes for the 2020 and 2019 thirteen-week periods were each based on an estimated annual effective income tax rate of 24.2%, adjusted for discrete events, such as benefits resulting from stock-based awards. The effective income tax rate for the 2020 thirteen-week period was 22.3%, 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 state tax refunds received during the 2020 thirteen-week period and excess tax benefits realized on stock
-
based awards. The effective income tax rate for the 2019 thirteen-week period was 23.8%, 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. The effective income tax rate in the 2020 thirteen-week period of 22.3% was lower than the 24.2% estimated annual effective income tax rate primarily due to the impact of the state tax refund and excess tax benefits recognized on stock-based compensation arrangements in the 2020 thirteen-week period. The effective income tax rate in the 2019 thirteen-week period of 23.8% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2019 thirteen-week period.
Net income was $24,254,000, or $0.63 per common share ($0.63 per diluted share), in the 2020 thirteen-week period. Net income attributable to the Company was $61,100,000 or $1.53 per common share ($1.53 per diluted share), in the 2019 thirteen-week period. Net income was unfavorably impacted by approximately $12,593,000,
or
$0.25 per common share ($0.25 per diluted share), during the 2020 thirteen-week period, related to the impact of the COVID-19 pandemic relief
incentive
payments.
CAPITAL RESOURCES AND LIQUIDITY
Working capital and the ratio of current assets to current liabilities were $366,892,000 and 1.8 to 1, respectively, at June 27, 2020, compared with $444,984,000 and 1.8 to 1, respectively, at December 28, 2019. Landstar has historically operated with current ratios within the range of 1.5 to 1 to 2.0 to 1. Cash provided by operating activities was $198,385,000 in the 2020
twenty-six-week
period compared with $184,076,000 in the 2019
twenty-six-week
period. The increase in cash flow provided by operating activities was primarily attributable to favorable working capital adjustments including timing of collections of receivables and payments of accounts payable, partially offset by decreased net income.
The Company declared and paid $0.37 per share, or $14,435,000 in the aggregate, in cash dividends during the
twenty-six-week
period ended June 27, 2020 and, during such period, also paid $78,947,000 of dividends payable which were declared during fiscal year 2019 and included in current liabilities in the consolidated balance sheet at December 28, 2019. The Company declared and paid $0.33 per share, or $13,257,000 in the aggregate, in cash dividends during the
twenty-six-week
period ended June 29, 2019. During the
twenty-six-week
period ended June 27, 2020, the Company purchased 1,178,970 shares of its common stock at a total cost of $115,962,000. During the
twenty-six-week
period ended June 29, 2019, the Company purchased 674,410 shares of its common stock at a total cost of $69,729,000. As of June 27, 2020, the Company may purchase in the aggregate up to 1,821,030 shares of its common stock under its authorized stock purchase program. Long-term debt, including current maturities, was $98,371,000 at June 27, 2020, $14,473,000 lower than at December 28, 2019.
Shareholders’ equity was $649,121,000, or 87% of total capitalization (defined as long-term debt including current maturities plus equity), at June 27, 2020, compared to $721,469,000, or 86% of total capitalization, at December 28, 2019. The decrease in equity was primarily the result of purchases of shares of the Company’s common stock and dividends declared by the Company in the 2020
twenty-six-week
period, partially offset by net income.
On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on June 2, 2021, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing amount of $400,000,000. The Company’s prior credit agreement was terminated on June 2, 2016.
 
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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.
At June 27, 2020, the Company had no borrowings outstanding and $34,156,000 of letters of credit outstanding under the Credit Agreement. At June 27, 2020, there was $215,844,000 available for future borrowings under the Credit Agreement. In addition, the Company has $61,503,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments totaling $68,337,000 at June 27, 2020. Investments, all of which are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Fair value of investments is based primarily on quoted market prices. See “Notes to Consolidated Financial Statements” included herein for further discussion on measurement of fair value of investments.
Historically, the Company has generated sufficient operating cash flow to meet its debt service requirements, fund continued growth, both organic and through acquisitions, complete or execute share purchases of its common stock under authorized share purchase programs, pay dividends and meet working capital needs. As an asset-light provider of integrated transportation management solutions, the Company’s annual capital requirements for operating property are generally for trailing equipment and information technology hardware and software. In addition, a significant portion of the trailing equipment used by the Company is provided by third party capacity providers, thereby reducing the Company’s capital requirements. During the 2020
twenty-six-week
period, the Company purchased $17,676,000 of operating property. In addition, during the 2020
twenty-six
week period Landstar acquired $1,440,000 of operating property for which the Company accrued a corresponding liability in accounts payable as of June 27, 2020. In addition, on June 15, 2020, Landstar Blue completed the acquisition of an independent agent of the Company. Cash consideration paid for the acquisition was approximately $2,701,000. Landstar anticipates acquiring either by purchase or lease financing during the remainder of fiscal year 2020 approximately $51,000,000 in operating property, consisting primarily of new trailing equipment to replace older trailing equipment and information technology equipment.
Management believes that cash flow from operations combined with the Company’s borrowing capacity under the Credit Agreement will be adequate to meet Landstar’s debt service requirements, fund continued growth, both internal and through acquisitions, pay dividends, complete the authorized share purchase programs and meet working capital needs.
LEGAL MATTERS
On January 25, 2019, a purported class action was filed in the Superior Court of the State of California for the County of San Bernardino against Landstar System, Inc. and Landstar Ranger, Inc. (together, the “Defendants”). The complaint purported to bring this action on behalf of Hany Tanious, as an individual, and “all owner operators who performed work for the Defendants, and who were classified as independent contractors, during the four years preceding the filing of this action through the present.” The complaint asserted claims based on the alleged misclassification of Mr. Tanious as an independent contractor and alleged violations under California law relating to overtime, minimum wage, meal and rest breaks, failure to reimburse certain expenses, wage statements, waiting time and unfair competition. Mr. Tanious was a truck owner-operator and formerly an independent contractor who was a party to an independent contractor operating agreement with Landstar Ranger, Inc. On June 11, 2019, the Defendants filed a Notice of Removal that resulted in the removal of the case from state court to federal court, where it was assigned to Judge Dale S. Fischer of the United State District Court for the Central District of California. On August 22, 2019, the Court issued an order, among other things, striking all class allegations from the complaint and stating that this matter would proceed as an individual action. On June 15, 2020, the Court issued an order granting the Defendants’ motion to transfer venue to the United States District Court for the Middle District of Florida, where the matter was assigned to Judge Marcia Morales Howard. On June 24, 2020, the Court,
sua sponte
, issued an order striking the first amended complaint that was deemed by the Court to have been filed by the plaintiff on March 23, 2020. On July 6, 2020, the plaintiff filed a voluntary dismissal without prejudice of all remaining claims relating to this action. On July 15, the Court issued an order granting the voluntary dismissal of this action in full.
 
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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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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. During the 2020 and 2019
twenty-six-week
periods, insurance and claims costs included $5,039,000 and $2,900,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims liability at June 27, 2020.
Significant variances from management’s estimates for the ultimate resolution of self-insured claims could be expected to positively or negatively affect Landstar’s earnings in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations.
EFFECTS OF INFLATION
Management does not believe inflation has had a material impact on the results of operations or financial condition of Landstar in the past five years. However, inflation in excess of historic trends might have an adverse effect on the Company’s results of operations in the future.
SEASONALITY
Landstar’s operations are subject to seasonal trends common to the trucking industry. Truckload shipments for the quarter ending in March are typically lower than for the quarters ending June, September and December.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates as a result of its financing activities, primarily its borrowings on its revolving credit facility, and investing activities with respect to investments held by the insurance segment.
On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on June 2, 2021, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing amount of $400,000,000.
Depending upon the specific type of borrowing, borrowings under the Credit Agreement bear interest based on either (a) the prime rate, (b) the Federal Reserve Bank of New York rate plus 0.5% or (c) the London Interbank Offered Rate, plus 1.25%. As of June 27, 2020 and during the entire 2020 second quarter, the Company had no borrowings outstanding under the Credit Agreement.
Long-term investments, all of which are
available-for-sale
and are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Assuming that the long-term portion of investments remains at $84,394,000, the balance at June 27, 2020, a hypothetical increase or decrease in interest rates of 100 basis points would not have a material impact on future earnings on an annualized basis. Short-term investments consist of short-term investment-grade instruments and the current maturities of investment-grade corporate bonds and U.S. Treasury obligations. Accordingly, any future interest rate risk on these short-term investments would not be material to the Company’s operating results.
 
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Assets and liabilities of the Company’s Canadian and Mexican operations are translated from their functional currency to U.S. dollars using exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average monthly exchange rates during the period. Adjustments resulting from the translation process are included in accumulated other comprehensive income. Transactional gains and losses arising from receivable and payable balances, including intercompany balances, in the normal course of business that are denominated in a currency other than the functional currency of the operation are recorded in the statements of income when they occur. The assets held at the Company’s Canadian and Mexican subsidiaries at June 27, 2020 were collectively, as translated to U.S. dollars, approximately 3% of total consolidated assets. Accordingly, translation gains or losses of 25% or less related to the Canadian and Mexican operations would not be material.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on Form
10-Q,
an evaluation was carried out, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule
13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 27, 2020 to provide reasonable assurance that information required to be disclosed by the Company in reports that it filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended June 27, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
In designing and evaluating disclosure controls and procedures, Company management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitation in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On January 25, 2019, a purported class action was filed in the Superior Court of the State of California for the County of San Bernardino against Landstar System, Inc. and Landstar Ranger, Inc. (together, the “Defendants”). The complaint purported to bring this action on behalf of Hany Tanious, as an individual, and “all owner operators who performed work for the Defendants, and who were classified as independent contractors, during the four years preceding the filing of this action through the present.” The complaint asserted claims based on the alleged misclassification of Mr. Tanious as an independent contractor and alleged violations under California law relating to overtime, minimum wage, meal and rest breaks, failure to reimburse certain expenses, wage statements, waiting time and unfair competition. Mr. Tanious was a truck owner-operator and formerly an independent contractor who was a party to an independent contractor operating agreement with Landstar Ranger, Inc. On June 11, 2019, the Defendants filed a Notice of Removal that resulted in the removal of the case from state court to federal court, where it was assigned to Judge Dale S. Fischer of the United State District Court for the Central District of California. On August 22, 2019, the Court issued an order, among other things, striking all class allegations from the complaint and stating that this matter would proceed as an individual action. On June 15, 2020, the Court issued an order granting the Defendants’ motion to transfer venue to the United States District Court for the Middle District of Florida, where the matter was assigned to Judge Marcia Morales Howard. On June 24, 2020, the Court,
sua sponte
, issued an order striking the first amended complaint that was deemed by the Court to have been filed by the plaintiff on March 23, 2020. On July 6, 2020, the plaintiff filed a voluntary dismissal without prejudice of all remaining claims relating to this action. On July 15, 2020 the Court issued an order granting the voluntary dismissal of this action in full.
 
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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.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes to the Risk Factors described in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 28, 2019 as filed with the SEC.
The coronavirus
(“COVID-19”)
pandemic has had a significant adverse impact on our business.
COVID-19
was first identified in Wuhan, China in December 2019. The
COVID-19
outbreak was subsequently declared a pandemic by the World Health Organization on March 11, 2020. The
COVID-19
pandemic has caused significant disruptions in the global economy, which significantly intensified in the United States in late March and continued into the summer months.
The situation with respect to the COVID-19 pandemic continues to evolve rapidly and its effects, both short and long-term, remain unknown. Economic disruptions and other effects on the global or domestic economies caused by the COVID-19 pandemic
could have a material adverse impact on the demand for our services and our ability to obtain financing on favorable terms or at all.
In connection with the impact of the
COVID-19
pandemic, the Company experienced a significant decline in truckload volumes during its fiscal quarter ended June 27, 2020. The number of loads hauled via truck was below the prior year comparable period by 21
%
, 21
%
 and 9
%
 for April, May and June, respectively. The extent to which the
COVID-19
pandemic impacts the Company’s results in future quarters will depend on future developments that are highly uncertain and cannot be predicted, including the duration of the pandemic, new information that may emerge concerning the severity of the pandemic, the actions taken to contain its impact and the role of federal, state and local governments that will be needed to help the economy transition back to more normal operating conditions. These and other factors could have a material adverse impact on our business, financial position, results of operations and cash flows.
Moreover, the
COVID-19
virus continues to spread in areas where we provide services. The Landstar network includes over 1,200 independent agent locations throughout North America where such independent agents provide shipment coordination and dispatch services, freight tracking, trailer management and numerous other operational functions. Similarly, the Landstar network includes tens of thousands of truck capacity providers who operate throughout North America without any Landstar truck terminals. Management believes the decentralized nature of our model should insulate Landstar’s freight operations in an environment where social distancing can disrupt centralized business structures. A significant impact to our independent agent network and/or a significant decrease in available truck capacity providers due to illness or government restrictions related to the
COVID-19
pandemic could have a material adverse effect on our ability to source capacity to service our customers and could have a significant impact on Landstar, including our results of operations, revenue and cash flows.
In addition, the
COVID-19
pandemic has caused significant disruptions in the Mexican economy. During the first half of the Company’s 2020 fiscal year, the value of the Mexican peso to the U.S. dollar significantly depreciated and may continue to depreciate further. No assurances can be given regarding the potential impact of the
COVID-19
pandemic and other factors on the Mexican economy and the value of the Mexican peso relative to the U.S. dollar and could have a significant adverse impact on the financial condition and results of operations of our Mexican subsidiaries.
Increased severity or frequency of accidents and other claims or a material unfavorable development of existing claims.
 For periods prior to May 1, 2019, Landstar retains liability for commercial trucking claims up to $5,000,000 per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $5,000,000 self-insured retention. Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $5,000,000 and $10,000,000 (the “Initial Excess Policy”) with a third party insurance company. For commercial trucking claims incurred on or after May 1, 2019 through April 30, 2022, the Initial Excess Policy initially provided for a limit for a single loss of $5,000,000, with an aggregate limit of $10,000,000 for each policy year, an aggregate limit of $15,000,000 for the
thirty-six
month term ended April 30, 2022, and options to increase such aggregate limits for
pre-established
amounts of additional premium. In the event paid aggregate losses under the Initial Excess Policy during any policy year (May 1 to April 30) exceeded $10,000,000, the Company would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention, for the remainder of such policy year. Moreover, in the event paid aggregate losses under the Initial Excess Policy during the three year period ending April 30, 2022 exceeded a
pre-determined
threshold amount, the Initial Excess Policy would require the Company to pay additional premium up to a maximum amount of $3,500,000.
 
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As previously disclosed, BCO Independent Contractors with a subsidiary of the Company have been involved in two tragic accidents during the policy year ending April 30, 2020, the first of which occurred in the 2019 third quarter and the second of which occurred in the 2020 first quarter. Following these two tragic accidents, the Company exercised its option under the Initial Excess Policy to increase its aggregate limits to $15,000,000 for each policy year and $20,000,000 for the
thirty-six
month term ended April 30, 2022. If aggregate losses under the Initial Excess Policy exceed either the new annual aggregate limit or the new aggregate limit for the three year period ending April 30, 2022, and the Company declined the option to increase such aggregate limits for a
pre-established
amount of additional premium, Landstar would retain liability of up to $10,000,000 per occurrence, inclusive of its self-insured retention for commercial trucking claims during the remainder of the applicable policy year(s). In addition, as a result of the Company’s aggregate loss experience since it entered into the Initial Excess Policy, it believes it is probable it will be required to pay additional premium under the Initial Excess Policy, which amount of additional premium was provided for and included in insurance and claims costs for the Company’s 2020 fiscal first quarter.
The Company also maintains third party insurance arrangements providing excess coverage for commercial trucking liabilities in excess of $10,000,000. These third party arrangements provide coverage on a per occurrence or aggregated basis. Due to the increasing cost of commercial auto liability claims throughout the United States in recent years, the availability of such excess coverage has significantly worsened and the pricing associated with such excess coverage, to the extent available, has significantly increased. Effective May 1, 2020 with respect to the annual policy year ending April 30, 2021, the Company experienced an increase of approximately $14 million, or over 170%, in the premiums charged by third party insurance companies to the Company for excess coverage for commercial trucking liabilities in excess of $10,000,000. No assurances can be given that the availability of excess coverage for commercial trucking claims will not continue to deteriorate, that the pricing associated with such excess coverage, to the extent available, will not continue to increase, nor that insurance coverage from third party insurers for excess coverage of commercial trucking claims will even be available on commercially reasonable terms at certain levels.
Further, the Company also retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. In addition, under reinsurance arrangements by Signature of certain risks of the Company’s BCO Independent Contractors, the Company retains liability of up to $500,000, $1,000,000 or $2,000,000 with respect to certain occupational accident claims and up to $750,000 with respect to certain workers’ compensation claims. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on Landstar’s cost of insurance and claims and its results of operations. For a discussion identifying additional risk factors and other important factors that could cause actual results to differ materially from those anticipated, see the discussions under Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 28, 2019 and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” in this Quarterly Report on Form
10-Q.
Disruptions or failures in the Company’s computer systems; cyber and other information security incidents.
 The Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and to a lesser extent in Rockford, Illinois. In addition, the Company utilizes several third party data centers throughout the U.S. Landstar relies, in the regular course of its business, on the proper operation of its information technology systems to link its extensive network of customers, employees, agents and third party capacity providers, including its BCO Independent Contractors. Moreover, in connection with the
COVID-19
pandemic, the Company has temporarily transitioned the vast majority of its office-based employees to
work-at-home
arrangements. Although the Company has redundant systems for its critical operations, any significant disruption or failure of its technology systems or those of third party data centers on which it relies could significantly disrupt the Company’s operations and impose significant costs on the Company. Moreover, it is critical that the data processed by or stored in the Company’s information technology systems or otherwise in the Company’s possession remain confidential, as it often includes confidential, proprietary and/or competitively sensitive information regarding our customers, employees, agents and third party capacity providers, key financial and operational results and statistics, and our strategic plans, including technology innovations, developments and enhancements. Cyber incidents that impact the security, availability, reliability, speed, accuracy or other proper functioning of these systems and data, including outages, computer viruses,
break-ins
and similar disruptions, could have a significant impact on our operations. Accordingly, information security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. Although we believe that we have robust security procedures and other safeguards in place, as threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any security vulnerabilities. For example, in the first quarter of 2016, we were subject to “spear-phishing” attacks through which third parties were able to obtain personal employee data. We
 
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have undertaken a number of remedial measures in response, including enhancing our security systems and additional training for our employees. Additional incidents may occur in the future and may have a material adverse effect on our business and operations. A significant incident, including system failure, security breach, disruption by malware, or other damage, could interrupt or delay our operations, damage our reputation, cause a loss of customers, agents and/or third party capacity providers, expose us to a risk of loss or litigation, and/or cause us to incur significant time and expense to remedy such an event, any of which could have a material adverse impact on our results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Company
The Company did not purchase any shares of its common stock during the period from March 29, 2020 to June 27, 2020, the Company’s second fiscal quarter.
On December 9, 2019, the Landstar System, Inc. Board of Directors authorized the Company to purchase up to 1,849,068 shares of the Company’s common stock from time to time in the open market and in privately negotiated transactions. As of June 27, 2020, the Company had authorization to purchase in the aggregate up to 1,821,030 shares of its common stock under this program. No specific expiration date has been assigned to the December 9, 2019 authorization.
Dividends
On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock in the event 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, as defined in the Credit Agreement, would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits listed on the Exhibit Index are furnished as part of this quarterly report on Form
10-Q.
 
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EXHIBIT INDEX
Registrant’s Commission File No.:
0-21238
 
Exhibit
No.
  
Description
(10)    Material Contracts.
10.1+    Landstar System, Inc. 2011 Equity Incentive Plan, as amended through March 12, 2020 (Incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement filed on April 6, 2020 (Commission File No. 0-21238))
(31)    Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1 *    Chief Executive Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *    Chief Financial Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)    Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1 **    Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 **    Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*    Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*    Inline XBRL Taxonomy Extension Schema Document
101.CAL*    Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*    Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 
+
Management contract or compensatory plan or arrangement
*
Filed herewith
**
Furnished herewith
 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  LANDSTAR SYSTEM, INC.
Date: July 31, 2020   /s/ James B. Gattoni
  James B. Gattoni
  President and
  Chief Executive Officer
Date: July 31, 2020   /s/ L. Kevin Stout
  L. Kevin Stout
  Vice President and Chief
  Financial Officer
 
 
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