Index


PART I– Financial Information

~~Item 1.~~ ~~Financial Statements (unaudited)~~			~~Page 3~~

~~Consolidated Balance Sheets as of September 28, 2019 and December 29, 2018~~			~~Page 4~~

~~Consolidated Statements of Income for the Thirty Nine and Thirteen Weeks Ended September 28, 2019 and September 29, 2018~~			~~Page 5~~

~~Consolidated Statements of Comprehensive Income for the Thirty Nine and Thirteen Weeks Ended September 28, 2019 and September 29, 2018~~			~~Page 6~~

~~Consolidated Statements of Cash Flows for the Thirty Nine Weeks Ended September 28, 2019 and September 29, 2018~~			~~Page 7~~

~~Consolidated Statements of Changes in Equity for the Thirty Nine and Thirteen Weeks Ended September 28, 2019 and September 29, 2018~~			~~Page 8~~

~~Notes to Consolidated Financial Statements~~			~~Page 10~~

~~Item 2.~~ ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~			~~Page 19~~

~~Item 3.~~ ~~Quantitative and Qualitative Disclosures About Market Risk~~			~~Page 30~~

~~Item 4.~~ ~~Controls and Procedures~~			~~Page 31~~

~~PART II –~~ ~~Other Information~~



~~Item 1.~~ ~~Legal Proceedings~~			~~Page 31~~

~~Item 1A.~~ ~~Risk Factors~~			~~Page 32~~

~~Item 2.~~ ~~Unregistered Sales of Equity Securities and Use of Proceeds~~			~~Page 33~~

~~Item 6.~~ ~~Exhibits~~			~~Page 34~~

~~Signatures~~			~~Page 36~~

~~EX – 31.1 Section 302 CEO Certification~~

Item 1. Financial Statements (unaudited)			Page 3

EXConsolidated Balance Sheets as of March 28, 2020 and December 28, 2019			Page 4

Consolidated Statements of Income for the Thirteen Weeks Ended March 28, 2020 and March 30, 2019			Page 5

Consolidated Statements of Comprehensive Income for the Thirteen Weeks Ended March 28, 2020 and March 30, 2019			Page 6

Consolidated Statements of Cash Flows for the Thirteen Weeks Ended March 28, 2020 and March 30, 2019			Page 7

Consolidated Statements of Changes in Equity for the Thirteen Weeks Ended March 28, 2020 and March 30, 2019			Page 8

Notes to Consolidated Financial Statements			Page 9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			Page 17

Item 3. Quantitative and Qualitative Disclosures About Market Risk			Page 27

Item 4. Controls and Procedures			Page 28

PART II – ~~31.2 Section 302 CFO Certification~~ Other Information

~~EX – 32.1 Section 906 CEO Certification~~ Item 1. Legal Proceedings			Page 28

Item 1A. Risk Factors			Page 28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			Page 31

Item 6. Exhibits			Page 31

Signatures			Page 33
EX – 31.1 Section 302 CEO Certification
EX – 31.2 Section 302 CFO Certification
EX – 32.1 Section 906 CEO Certification
EX – 32.2 Section 906 CFO Certification

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 ~~thirty nine~~thirteen weeks ended ~~September~~March 28, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December ~~28, 2019.~~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 ~~2018~~2019 Annual Report on Form

10-K.

Table of Contents

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(Unaudited)


	September 28, 2019			December 29, 2018			March 28, 2020			December 28, 2019
ASSETS
Current Assets
Cash and cash equivalents	$	284,434		$	199,736		$	177,224		$	319,515
Short-term investments		31,596			40,058			33,627			32,901
Trade accounts receivable, less allowance of $7,296 and $6,413		598,415			691,604
Other receivables, including advances to independent contractors, less allowance of $8,593 and $6,216		25,384			23,744
Trade accounts receivable, less allowance of $8,536 and $7,284								562,528			588,549
Other receivables, including advances to independent contractors, less allowance of $8,847 and $7,667								35,153			35,553
Other current assets		30,921			16,287			7,624			21,370

Total current assets		970,750			971,429			816,156			997,888

Operating property, less accumulated depreciation and amortization of $274,000 and $250,153		270,430			284,032
Operating property, less accumulated depreciation and amortization of $286,593 and $280,849								276,663			285,855
Goodwill		38,232			38,232			37,182			38,508
Other assets		106,319			86,871			106,432			105,460

Total assets	$	1,385,731		$	1,380,564		$	1,236,433		$	1,427,711

LIABILITIES AND EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Cash overdraft	$	44,625		$	55,339		$	36,002		$	53,878
Accounts payable		285,442			314,134			272,175			271,996
Current maturities of long-term debt		39,375			43,561			39,944			42,632
Insurance claims		51,320			40,176			50,773			44,532
Accrued compensation		10,477			29,489
Dividends payable								—			78,947
Contractor escrow		25,521			25,202			24,517			24,902
Other current liabilities		26,996			27,917			41,420			36,017

Total current liabilities		483,756			535,818			464,831			552,904

Long-term debt, excluding current maturities		61,390			84,864			61,977			70,212
Insurance claims		33,024			30,429			33,456			33,575
Deferred income taxes and other noncurrent liabilities		51,586			40,320			49,074			49,551
Equity
Landstar System, Inc. and subsidiary shareholders’ equity
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 68,072,834 and 67,870,926 shares		681			679
Shareholders’ Equity
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 68,167,482 and 68,083,419 shares								682			681
Additional paid-in capital		225,937			226,852			224,973			226,123
Retained earnings		1,998,362			1,841,279			1,995,018			1,962,161
Cost of 28,609,926 and 27,755,001 shares of common stock in treasury		(1,465,284	)		(1,376,111	)
Cost of 29,796,974 and 28,609,926 shares of common stock in treasury								(1,581,885	)		(1,465,284	)
Accumulated other comprehensive loss		(3,721	)		(5,875	)		(11,693	)		(2,212	)

Total Landstar System, Inc. and subsidiary shareholders’ equity		755,975			686,824
Noncontrolling interest		—			2,309
Total shareholders’ equity								627,095			721,469

Total equity		755,975			689,133
Total liabilities and shareholders’ equity							$	1,236,433		$	1,427,711

Total liabilities and equity	$	1,385,731		$	1,380,564

See accompanying notes to consolidated financial statements.

Table of Contents

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)


	Thirty Nine Weeks Ended						Thirteen Weeks Ended					Thirteen Weeks Ended
	September 28, 2019			September 29, 2018			September 28, 2019		September 29, 2018			March 28, 2020		March 30, 2019
Revenue	$	3,089,698		$	3,432,793		$	1,011,658	$	1,202,081		$	927,566	$	1,033,000
Investment income		3,736			2,754			1,315		1,002			1,167		1,138
Costs and expenses:
Purchased transportation		2,365,646			2,658,710			774,520		931,473			709,257		791,755
Commissions to agents		257,862			275,828			84,568		99,304			75,376		85,671
Other operating costs, net of gains/losses on asset sales/dispositions		28,531			24,176			10,431		8,966
Other operating costs, net of gains on asset sales/dispositions													8,306		8,239
Insurance and claims		55,248			57,718			23,969		18,819			24,957		14,993
Selling, general and administrative		120,717			140,948			38,152		46,699			45,327		41,268
Depreciation and amortization		33,045			32,520			10,695		10,754			11,505		11,316

Total costs and expenses		2,861,049			3,189,900			942,335		1,116,015			874,728		953,242

Operating income		232,385			245,647			70,638		87,068			54,005		80,896
Interest and debt expense		2,278			2,455			764		816			952		805

Income before income taxes		230,107			243,192			69,874		86,252			53,053		80,091
Income taxes		52,452			56,279			16,619		19,304			12,158		16,791

Net income		177,655			186,913			53,255		66,948			40,895		63,300
Less: Net loss attributable to noncontrolling interest		(17	)		(112	)		—		(37	)		—		(17	)

Net income attributable to Landstar System, Inc. and subsidiary	$	177,672		$	187,025		$	53,255	$	66,985		$	40,895	$	63,317

Earnings per common share attributable to Landstar System, Inc. and subsidiary	$	4.45		$	4.50		$	1.35	$	1.63		$	1.04	$	1.58

Diluted earnings per share attributable to Landstar System, Inc. and subsidiary	$	4.45		$	4.50		$	1.35	$	1.63		$	1.04	$	1.58

Average number of shares outstanding:
Earnings per common share		39,891,000			41,530,000			39,566,000		41,101,000			39,254,000		40,161,000

Diluted earnings per share		39,891,000			41,576,000			39,566,000		41,137,000			39,254,000		40,166,000

Dividends per common share	$	0.515		$	0.465		$	0.185	$	0.165		$	0.185	$	0.165

See accompanying notes to consolidated financial statements.

Table of Contents

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

Thirty Nine Weeks Ended

Thirteen Weeks Ended

September 28,
2019

September 29,
2018

September 28,
2019

September 29,
2018

Net income attributable to Landstar System, Inc. and subsidiary
$
177,672
$
187,025
$
53,255
$
66,985

Other comprehensive income (loss):

Unrealized holding gains (losses) on
available-for-sale
investments, net of tax expense (benefit) of $577, ($231), $83 and $2

2,112

(876
)
307

7

Foreign currency translation gains (losses)

42

(531
)
(1,083
)
708

Other comprehensive income (loss)

2,154

(1,407
)
(776
)
715

Comprehensive income attributable to Landstar System, Inc. and subsidiary
$
179,826
$
185,618
$
52,479
$
67,700


	Thirteen Weeks Ended
	March 28, 2020			March 30, 2019
Net income attributable to Landstar System, Inc. and subsidiary	$	40,895		$	63,317
Other comprehensive (loss) income:
Unrealized holding (losses) gains on available-for-sale investments, net of tax (benefit) expense of $(432), and $272		(1,579	)		995
Foreign currency translation (losses) gains		(7,902	)		554

Other comprehensive (loss) income		(9,481	)		1,549

Comprehensive income attributable to Landstar System, Inc. and subsidiary	$	31,414		$	64,866

See accompanying notes to consolidated financial statements.

Table of Contents

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Thirty Nine Weeks Ended						Thirteen Weeks Ended
	September 28, 2019			September 29, 2018			March 28, 2020			March 30, 2019
OPERATING ACTIVITIES
Net income	$	177,655		$	186,913		$	40,895		$	63,300
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of operating property and intangible assets		33,045			32,520			11,505			11,316
Non-cash interest charges		190			190			63			63
Provisions for losses on trade and other accounts receivable		6,942			5,360			4,122			2,150
Gains on sales/disposals of operating property		(1,188	)		(1,025	)		(858	)		(876	)
Deferred income taxes, net		7,151			7,459			797			2,079
Stock-based compensation		4,470			13,003			631			1,938
Changes in operating assets and liabilities:
Decrease (increase) in trade and other accounts receivable		84,607			(60,785	)
Increase in other assets		(21,129	)		(9,779	)
(Decrease) increase in accounts payable		(28,692	)		22,121
(Decrease) increase in other liabilities		(16,076	)		3,245
Increase in insurance claims		13,739			4,983
Decrease in trade and other accounts receivable								21,369			84,505
Decrease in other assets								9,987			2,229
Increase (decrease) in accounts payable								179			(40,953	)
Increase (decrease) in other liabilities								4,404			(3,776	)
Increase (decrease) in insurance claims								6,122			(559	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		260,714			204,205			99,216			121,416

INVESTING ACTIVITIES
Net changes in other short-term investments								131			—
Sales and maturities of investments		56,467			34,259			7,963			25,739
Purchases of investments		(58,829	)		(36,296	)		(8,830	)		(26,707	)
Purchases of operating property		(15,199	)		(7,325	)		(5,799	)		(4,576	)
Proceeds from sales of operating property		3,621			3,542			2,081			2,130

NET CASH USED BY INVESTING ACTIVITIES		(13,940	)		(5,820	)		(4,454	)		(3,414	)

FINANCING ACTIVITIES
Decrease in cash overdraft		(10,714	)		(2,483	)		(17,876	)		(13,820	)
Dividends paid		(20,589	)		(82,261	)		(86,283	)		(6,629	)
Proceeds from exercises of stock options		629			1,397			575			319
Taxes paid in lieu of shares issued related to stock-based compensation plans		(8,449	)		(3,936	)		(2,994	)		(7,923	)
Purchases of common stock		(88,578	)		(105,488	)		(115,962	)		(12,977	)
Principal payments on finance lease obligations		(34,141	)		(32,663	)		(10,923	)		(11,995	)
Purchase of noncontrolling interest		(600	)		—			—			(600	)
Payment of contingent consideration		—			(985	)

NET CASH USED BY FINANCING ACTIVITIES		(162,442	)		(226,419	)		(233,463	)		(53,625	)

Effect of exchange rate changes on cash and cash equivalents		366			(408	)		(3,590	)		512

Increase (decrease) in cash and cash equivalents		84,698			(28,442	)
(Decrease) increase in cash and cash equivalents								(142,291	)		64,889
Cash and cash equivalents at beginning of period		199,736			242,416			319,515			199,736

Cash and cash equivalents at end of period	$	284,434		$	213,974		$	177,224		$	264,625

See accompanying notes to consolidated financial statements.

Table of Contents

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

~~Thirty Nine and~~ Thirteen Weeks Ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018~~March 30, 2019

(Dollars in thousands)

(Unaudited)

Landstar System, Inc. and Subsidiary Shareholders

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
(Loss) Income

Non-controlling
Interests

Common Stock

Treasury Stock at Cost

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

Net income

53,255

53,255

Dividends ($0.185 per share)

(7,332
)

(7,332
)
Purchases of common stock

174,658

(18,849
)

(18,849
)
Issuance of stock related to stock-based compensation plans

7,957

—

285

86

(10
)

275

Stock-based compensation

1,102

1,102

Other comprehensive loss

(776
)

(776
)

Balance September 28, 2019

68,072,834

$
681

$
225,937

$
1,998,362

28,609,926

$
(1,465,284
)

$
(3,721
)

$
—

$
755,975


	Common Stock				Additional Paid-In			Retained			Treasury Stock at Cost					Accumulated Other Comprehensive
	Shares		Amount		Capital			Earnings			Shares		Amount			Loss			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 1 )									(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

~~Table of Contents~~

Landstar System, Inc. and Subsidiary Shareholders

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
(Loss) Income

Non-controlling
Interests

Common Stock

Treasury Stock at Cost

Shares

Amount

Shares

Amount

Total

Balance December 30, 2017

67,740,380
$
677
$
209,599
$
1,611,158

25,749,493
$
(1,167,600
) $
(3,162
) $
3,205

$
653,877

Adoption of accounting standards

773

773

Net income (loss)

57,517

(44
)
57,473

Dividends ($0.15 per share)

(6,308
)
(6,308
)
Purchases of common stock

14,354

(1,508
)
(1,508
)
Issuance of stock related to stock-based compensation plans

95,784

1

(1,376
)
4,822

(350
)
(1,725
)
Stock-based compensation

3,710

3,710

Other comprehensive (loss) income

(389
)
377

(12
)

Balance March 31, 2018

67,836,164
$
678
$
211,933
$
1,663,140

25,768,669
$
(1,169,458
) $
(3,551
) $
3,538
$
706,280

Net income (loss)

62,523

(31
)
62,492

Dividends ($0.15 per share)

(6,188
)
(6,188
)
Purchases of common stock

985,646

(103,980
)
(103,980
)
Issuance of stock related to stock-based compensation plans

11,528

3

495

(51
)
(48
)
Stock-based compensation

4,392

4,392

Other comprehensive loss

(1,733
)
(282
)
(2,015
)

Balance June 30, 2018

67,847,692
$
678
$
216,328
$
1,719,475

26,754,810
$
(1,273,489
) $
(5,284
) $
3,225
$
660,933

Net income (loss)

66,985

(37
)
66,948

Dividends ($0.165 per share)

(6,780
)
(6,780
)
Transaction with noncontrolling interests

1,078

(1,078
)
—

Issuance of stock related to stock-based compensation plans

21,686

1

(744
)
191

(23
)
(766
)
Stock-based compensation

4,901

4,901

Other comprehensive income

715

259

974

Balance September 29, 2018

67,869,378
$
679
$
221,563
$
1,779,680

26,755,001
$
(1,273,512
) $
(4,569
) $
2,369
$
726,210


	Landstar System, Inc. and Subsidiary Shareholders
	Common Stock				Additional Paid-In			Retained			Treasury Stock at Cost					Accumulated Other Comprehensive			Non-controlling
	Shares		Amount		Capital			Earnings			Shares		Amount			(Loss) Income			Interests			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

See accompanying notes to consolidated financial statements.

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 thirty nine weeks ended September 28, 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 thirty-nine-week period ended September 28, 2019. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the thirty-nine-week period ended September 28, 2019 was $1,799,421,000 hauled via van equipment, $980,615,000 hauled via unsided/platform equipment and $73,475,000 of less-than-truckload. During the thirty nine weeks ended September 29, 2018, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 44%, 49% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 2% of the Company’s consolidated revenue in the thirty-nine-week period ended September 29, 2018. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the thirty-nine-week period ended September 29, 2018 was $2,086,523,000 hauled via van equipment, $1,039,784,000 hauled via unsided/platform equipment and $76,448,000 of less-than-truckload.

~~During the~~ thirteen weeks ended ~~September~~March 28, ~~2019,~~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 thirteen-week period ended ~~September~~March 28, ~~2019.~~2020. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the thirteen-week period ended ~~September~~March 28, ~~2019~~2020 was ~~$575,042,000~~$545,307,000 hauled via van equipment, ~~$331,787,000~~$286,328,000 hauled via unsided/platform equipment and ~~$25,367,000~~$22,941,000 of less-than-truckload. During the thirteen weeks ended ~~September 29, 2018,~~March 30, 2019, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 43%, ~~50%~~49% 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 ~~September 29, 2018.~~March 30, 2019. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the thirteen-week period ended ~~September 29, 2018~~March 30, 2019 was ~~$717,047,000~~$619,014,000 hauled via van equipment, ~~$375,739,000~~$310,721,000 hauled via unsided/platform equipment and ~~$25,500,000~~$23,376,000 of less-than-truckload.

~~Table of Contents~~

(2)	Share-based Payment Arrangements

As of ~~September~~March 28, ~~2019,~~2020, the Company had 2 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):


	Thirty Nine Weeks Ended						Thirteen Weeks Ended						Thirteen Weeks Ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018			March 28, 2020			March 30, 2019
Total cost of the Plans during the period	$	4,470		$	13,003		$	1,102		$	4,901		$	631		$	1,938
Amount of related income tax benefit recognized during the period		(4,125	)		(5,305	)		(391	)		(1,837	)		(873	)		(3,062	)

Net cost of the Plans during the period	$	345		$	7,698		$	711		$	3,064		$	(242	)	$	(1,124	)

Included in income tax benefits recognized in the ~~thirty-nine-week~~thirteen-week periods ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018~~March 30, 2019 were excess tax benefits from stock-based awards of ~~$2,968,000~~$706,000 and ~~$2,046,000,~~$2,571,000, respectively. Also included in income tax benefits recognized in the ~~thirty-nine-week~~thirteen-week periods ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018~~March 30, 2019 were income tax benefits of ~~$62,000~~$12,000 and ~~$80,000,~~$16,000, respectively, recognized on disqualifying dispositions of the Company’s common stock by employees who obtained shares of common stock through exercises of incentive stock options.

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As of ~~September~~March 28, ~~2019,~~2020, there were 66,454 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and ~~3,972,592~~3,692,315 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		Number of RSUs			Weighted Average Grant Date Fair Value
Outstanding at December 29, 2018		292,345		$	66.31
Outstanding at December 28, 2019							198,875		$	84.37
Granted		68,543		$	89.37		59,230		$	102.70
Shares earned in excess of target (1)		71,172		$	54.78		11,648		$	77.00
Vested shares, including shares earned in excess of target		(226,981	)	$	53.27		(70,247	)	$	77.00
Forfeited		(6,481	)	$	86.60		(10,237	)	$	100.55

Outstanding at September 28, 2019		198,598		$	84.37
Outstanding at March 28, 2020							189,269		$	91.51

(1)

Represents shares earned in excess of target under the ~~January 27, 2015 and January 29, 2016~~February 2, 2017 RSU awards as actual results exceeded the target under ~~both~~the awards as a result of fiscal year ~~2018 results and under the May 1, 2015 RSU award as total shareholder return exceeded the target under the award.~~2019 results.

During the ~~thirty-nine-week~~thirteen-week period ended ~~September~~March 28, ~~2019,~~2020, the Company granted RSUs with a performance ~~condition and RSUs with a market condition, as further described below.~~condition. Outstanding RSUs at both December ~~29, 2018~~28, 2019 and ~~September~~March 28, ~~2019~~2020 include RSUs with a performance condition and RSUs with a market condition, as further described below and in the Company’s ~~2018~~2019 Annual Report on Form

10-K.

RSUs with a performance condition granted on ~~February 1, 2019~~January 31, 2020 may vest on January 31 of ~~2022,~~ 2023, 2024 and ~~2024~~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 ~~2018~~2019 fiscal ~~year.~~

~~Table of Contents~~

~~During the thirty-nine-week period ended September 28, 2019~~

~~, the Company granted~~

~~9,725~~

RSUs that vest based on a market condition. These RSUs may vest on June 30 of 2023, 2024 and 2025 based on the Company’s total shareholder return (“TSR”) compound annual growth rate over the vesting periods, adjusted to reflect dividends (if any) paid during such periods and capital adjustments as may be necessary. The maximum number of common shares available for issuance under the grant equals

~~150~~

% of the number of RSUs granted. The fair value of this RSU award was determined at the time of grant based on the expected achievement of the market condition at the end of each vesting period. With respect to these RSU awards, the Company reports compensation expense ratably over the life of the award based on an estimated number of units that will vest over the life of the award, multiplied by the fair value of the RSU. Previously recognized compensation cost would be reversed only if the employee terminated employment prior to completing the requisite service period.

year.

The Company recognized

approximately ~~$2,477,000~~($136,000) and ~~$11,303,000~~$1,307,000 of share-based compensation (benefit)/expense related to RSU awards in the ~~thirty-nine-week~~thirteen-week periods ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, respectively. As of ~~September~~March 28, ~~2019,~~2020, there was a maximum of ~~$26.4~~$35.2 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately ~~3.3~~3.6 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.

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 29, 2018

89,114
$
50.44

Exercised

(32,300
) $
49.30

Options outstanding at September 28, 2019

56,814
$
51.08

2.5
$
3,487

Options exercisable at September 28, 2019

56,814
$
51.08

2.5
$
3,487


	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		(15,767	)	$	47.50

Options outstanding at March 28, 2020		28,700		$	53.29		2.3	$	1,128

Options exercisable at March 28, 2020		28,700		$	53.29		2.3	$	1,128

The

total

intrinsic value of stock options exercised during the ~~thirty-nine-week~~thirteen-week periods ended ~~September~~March 28, 2020 and March 30, 2019 was $1,023,000 and ~~September 29, 2018 was $1,877,000 and $6,584,000,~~$944,000, respectively.

of ~~September~~March 28, ~~2019,~~2020, there was no unrecognized compensation cost related to stock options granted under the Plans.

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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 29, 2018

55,987
$
93.66

Granted

30,338
$
102.76

Vested

(21,517
) $
92.70

Non-vested
at September 28, 2019

64,808
$
98.24


	Number of Shares and Deferred Stock Units			Weighted Average Grant Date Fair Value
Non-vested at December 28, 2019		64,808		$	98.24
Granted		20,736		$	111.73
Vested		(19,878	)	$	97.95
Forfeited		(2,351	)	$	106.34

Non-vested at March 28, 2020		63,315		$	102.45

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

~~Table of Contents~~

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.

of ~~September~~March 28, ~~2019,~~2020, there was ~~$4,310,000~~$5,174,000 of total unrecognized compensation cost related to

non-vested

shares of restricted stock and Deferred Stock Units granted under the Plans. The unrecognized compensation cost related to these

non-vested

shares of restricted stock and Deferred Stock Units is expected to be recognized over a weighted average period of ~~2.2~~2.4 years.

(3)	Income Taxes

The provisions for income taxes for the 2020 and 2019 ~~and 2018 thirty-nine-week~~thirteen-week periods were each based on an estimated annual effective income tax ~~rates~~rate of 24.2% ~~and 24.5%~~, ~~respectively,~~ adjusted for discrete events, such as benefits resulting from stock-based awards. The effective income tax rate for the ~~2019 thirty-nine-week~~2020 thirteen-week period was ~~22.8%~~22.9%, 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 ~~2018 thirty-nine-week~~2019 thirteen-week period was ~~23.1%~~21.0%, which ~~was higher than~~approximated the statutory federal income tax rate of 21% primarily attributable to state taxes, the elimination of the performance-based compensation exception under Section 162(m) by the Tax Cuts and Jobs Act (the “Tax Reform Act”) and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock based awards and favorable adjustments recognized during the 2018 period relating to federal domestic production activities deductions and research and development credits

The ~~provisions~~provision for income taxes for the 2019 ~~and 2018 thirty-nine-week periods were~~thirteen-week period was favorably impacted by $

~~2,968,000~~

~~and $~~

~~2,046,000~~

~~, respectively,~~$2,571,000 of excess tax benefits from stock-based ~~award~~

awards, which essentially offset the impact of state taxes and the meals and entertainment exclusion.

(4)	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.

Table of Contents

The following table provides a reconciliation of the average number of common shares outstanding used to calculate earnings per common share attributable to Landstar System, Inc. and subsidiary to the average number of common shares and common share equivalents outstanding used to calculate diluted earnings per share attributable to Landstar System, Inc. and subsidiary (in thousands):

Thirty Nine Weeks Ended

Thirteen Weeks Ended

September 28,
2019

September 29,
2018

September 28,
2019

September 29,
2018

Average number of common shares outstanding

39,891

41,530

39,566

41,101

Incremental shares from assumed exercises of stock options

—

46

—

36

Average number of common shares and common share equivalents outstanding

39,891

41,576

39,566

41,137


	Thirteen Weeks Ended
	March 28, 2020		March 30, 2019
Average number of common shares outstanding		39,254		40,161
Incremental shares from assumed exercises of stock options		—		5

Average number of common shares and common share equivalents outstanding		39,254		40,166

For each of the ~~thirty-nine-week~~thirteen-week periods ended ~~September~~March 28, 2020 and March 30, 2019, ~~and September 29, 2018,~~

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.

(5)	Additional Cash Flow Information

During the ~~2019 thirty-nine-week~~2020 thirteen-week period, Landstar paid income taxes and interest of ~~$54,877,000~~$7,000 and ~~$3,302,000,~~$1,079,000, respectively. During the ~~2018 thirty-nine-week~~2019 thirteen-week period, Landstar ~~paid~~received income ~~taxes~~tax refunds, net of income tax payments, of $3,624,000 and paid interest of ~~$56,083,000 and $2,737,000, respectively.~~$1,198,000. Landstar ~~acquired~~did 0t acquire any operating property by entering into finance leases in either the ~~amounts of $6,481,000 and $21,397,000 in the~~2020 or 2019 ~~and 2018 thirty-nine-week periods, respectively.~~thirteen-week periods. 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.

~~Table of Contents~~

(6)	Segment Information

The following table summarizes information about the Company’s reportable business segments as of and for the ~~thirty-nine-week and~~ thirteen-week periods ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018~~March 30, 2019 (in thousands):

Thirty Nine Weeks Ended

September 28, 2019

September 29, 2018

Transportation
Logistics

Insurance

Total

Transportation
Logistics

Insurance

Total

External revenue
$
3,047,329
$
42,369
$
3,089,698
$
3,394,298
$
38,495
$
3,432,793

Internal revenue

36,978

36,978

30,413

30,413

Investment income

3,736

3,736

2,754

2,754

Operating income

200,767

31,618

232,385

227,176

18,471

245,647

Expenditures on long-lived assets

15,199

15,199

7,325

7,325

Goodwill

38,232

38,232

38,560

38,560

Thirteen Weeks Ended

September 28, 2019

September 29, 2018

Transportation
Logistics

Insurance

Total

Transportation
Logistics

Insurance

Total

External revenue
$
997,552
$
14,106
$
1,011,658
$
1,188,737
$
13,344
$
1,202,081

Internal revenue

9,611

9,611

7,496

7,496

Investment income

1,315

1,315

1,002

1,002

Operating income

64,848

5,790

70,638

80,878

6,190

87,068

Expenditures on long-lived assets

5,975

5,975

3,204

3,204


	Thirteen Weeks Ended
	March 28, 2020							March 30, 2019
	Transportation Logistics		Insurance			Total		Transportation Logistics		Insurance		Total
External revenue	$	913,884	$	13,682		$	927,566	$	1,018,961	$	14,039	$	1,033,000
Internal revenue				9,079			9,079				9,614		9,614
Investment income				1,167			1,167				1,138		1,138
Operating income		55,044		(1,039	)		54,005		67,583		13,313		80,896
Expenditures on long-lived assets		5,799					5,799		4,576				4,576
Goodwill		37,182					37,182		38,343				38,343

In the ~~thirty-nine-week~~thirteen-week periods ended ~~September~~March 28, 2020 and March 30, 2019, ~~and September 29, 2018,~~

single customer accounted for more than 10% of the Company’s consolidated revenue.

Table of Contents

(7)	Other Comprehensive Income

The following table presents the components of and changes in accumulated other comprehensive income ~~attributable to Landstar System, Inc. and subsidiary,~~(loss), net of related income taxes, as of and for the ~~thirty-nine-week~~thirteen-week period ended ~~September~~March 28, ~~2019~~2020 (in thousands):

Unrealized
Holding (Losses)
Gains on
Available-for-Sale

Securities

Foreign Currency
Translation

Total

Balance as of December 29, 2018
$
(930
) $
(4,945
) $
(5,875
)
Other comprehensive income

2,112

42

2,154

Balance as of September 28, 2019
$
1,182
$
(4,903
) $
(3,721
)


	Unrealized Holding Gains (Losses) on Available-for-Sale Securities			Foreign Currency Translation			Total
Balance as of December 28, 2019	$	1,120		$	(3,332	)	$	(2,212	)
Other comprehensive loss		(1,579	)		(7,902	)		(9,481	)

Balance as of March 28, 2020	$	(459	)	$	(11,234	)	$	(11,693	)

Amounts reclassified from accumulated other comprehensive income to investment income due to the realization of previously unrealized gains and losses in the accompanying consolidated statements of income were not significant for the ~~thirty-nine-week~~thirteen-week period ended ~~September~~March 28, ~~2019.~~2020.

(8)	Investments

Investments include primarily investment-grade corporate bonds and U.S. Treasury obligations having maturities of up to

five years

~~(the~~ (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 ~~such losses are other-than-temporary.~~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

~~Table of Contents~~

period, considered to be ~~other-than-temporary,~~a result of credit-related factors, are to be included as a charge in the statement of income, while unrealized losses considered to be ~~temporary~~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 losses, net of unrealized gains, on the investments in the bond portfolio were $584,000 at March 28, 2020, while unrealized gains, net of unrealized losses, on the investments in the bond portfolio were ~~$1,505,000~~$1,427,000 at ~~September~~December 28, 2019, ~~while unrealized losses, net of unrealized gains, on the investments in the bond portfolio were $1,184,000 at December 29, 2018,~~ respectively.

The amortized cost and fair values of

available-for-sale

investments are as follows at ~~September~~March 28, 2020 and December 28, 2019 ~~and December 29, 2018~~ (in thousands):


			Gross		Gross
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
March 28, 2020
Money market investments	$	15,815	$	—	$	—	$	15,815
Asset-backed securities		571		—		48		523
Corporate bonds and direct obligations of government agencies		98,287		1,038		1,710		97,615
U.S. Treasury obligations		2,336		136		—		2,472

Total	$	117,009	$	1,174	$	1,758	$	116,425

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

September 28, 2019

Money market investments
$
14,923
$
—
$
—
$
14,923

Asset-backed securities

590

2

—

592

Corporate bonds and direct obligations of government agencies

97,704

1,513

31

99,186

U.S. Treasury obligations

2,334

21

—

2,355

Total
$
115,551
$
1,536
$
31
$
117,056

December 29, 2018

Money market investments
$
11,714
$
—
$
—
$
11,714

Asset-backed securities

624

—

4

620

Corporate bonds and direct obligations of government agencies

101,021

33

1,213

99,841

Total
$
113,359
$
33
$
1,217
$
112,175

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December 28, 2019
Money market investments	$	15,691	$	—	$	—	$	15,691
Asset-backed securities		572		—		1		571
Corporate bonds and direct obligations of government agencies		97,583		1,465		44		99,004
U.S. Treasury obligations		2,335		12		5		2,342

Total	$	116,181	$	1,477	$	50	$	117,608

For those

available-for-sale

investments with unrealized losses at ~~September~~March 28, ~~2019~~2020 and December ~~29, 2018,~~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

September 28, 2019

Corporate bonds and direct obligations of government agencies
$
3,817
$
15
$
6,953
$
16
$
10,770
$
31

December 29, 2018

Asset-backed securities
$
—
$
—
$
620
$
4
$
620
$
4

Corporate bonds and direct obligations of government agencies

45,960

354

42,803

859

88,763

1,213

Total
$
45,960
$
354
$
43,423
$
863
$
89,383
$
1,217


	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 28, 2020
Asset-backed securities	$	523	$	48	$	—	$	—	$	523	$	48
Corporate bonds and direct obligations of government agencies		49,348		1,710		—		—		49,348		1,710

Total	$	49,871	$	1,758	$	—	$	—	$	49,871	$	1,758

December 28, 2019
Asset-backed securities	$	571	$	1	$	—	$	—	$	571	$	1
Corporate bonds and direct obligations of government agencies		8,728		41		4,260		3		12,988		44
U.S. Treasury obligations		1,226		5		—		—		1,226		5

Total	$	10,525	$	47	$	4,260	$	3	$	14,785	$	50

~~Table~~The Company believes that unrealized losses on investments were primarily due to the widening of ~~Contents~~credit spreads in the fixed income market related to the coronavirus

(“COVID-19”)

worldwide pandemic. 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 does not consider the unrealized losses on these securities to be other-than-temporary at September 28, 2019.~~

Company’s consolidated statements of income.

(9) Leases

~~(9)~~

~~Leases~~

Landstar’s noncancelable leases are primarily comprised of finance leases for the acquisition of new trailing equipment. Each finance lease for the acquisition of trailing equipment is a five year lease with a $1 purchase option for the applicable equipment at lease expiration. Substantially all of Landstar’s operating lease

right-of-use

assets and operating lease liabilities represent leases for 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.

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.

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The components of lease cost for finance leases and operating leases for the ~~thirty nine~~thirteen weeks ended ~~September~~March 28, ~~2019~~2020 were (in thousands):

Finance leases:

Amortization of
right-of-use
assets
$
19,196

Interest on lease liability

2,767

Total finance lease cost

21,963

Operating leases:

Lease cost

3,556

Variable lease cost

—

Sublease income

(3,931
)

Total operating lease (income)/cost

(375
)

Total lease cost
$
21,588


Finance leases:
Amortization of right-of-use assets	$	6,151
Interest on lease liability		889

Total finance lease cost		7,040
Operating leases:
Lease cost		837
Variable lease cost		—
Sublease income		(1,229	)

Total operating lease (income)/cost		(392	)

Total lease cost	$	6,648

A summary of the lease classification on our consolidated balance sheet as of ~~September~~March 28, ~~2019~~2020 is as follows (in thousands):


Assets:
Operating lease right-of-use assets	Other assets	$	2,783	Other assets	$	2,554
Finance lease assets	Operating property, less accumulated depreciation and amortization		142,376	Operating property, less accumulated depreciation and amortization		150,273

Total lease assets		$	145,159		$	152,827

Liabilities:

~~Table of Contents~~

~~Liabilities:~~

The following table reconciles the undiscounted cash flows for the finance and operating leases to the finance and operating lease liabilities recorded on the balance sheet at ~~September~~March 28, ~~2019~~2020 (in thousands):


	Finance Leases		Operating Leases		Finance Leases		Operating Leases
2019 Remainder	$	10,729	$	276
2020		40,863		680
2020 Remainder					$	33,862	$	517
2021		26,453		615		31,278		637
2022		17,290		621		22,123		639
2023		10,262		550		15,100		510
2024						5,156		433
Thereafter		925		299		—		54

Total future minimum lease payments		106,522		3,041		107,519		2,790
Less amount representing interest (2.1% to 4.4%)		5,757		258		5,598		236

Present value of minimum lease payments	$	100,765	$	2,783	$	101,921	$	2,554

Current maturities of long-term debt		39,375				39,944
Long-term debt, excluding current maturities		61,390				61,977
Other current liabilities				680				657
Deferred income taxes and other noncurrent liabilities				2,103				1,897

The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of ~~September~~March 28, ~~2019~~2020 were:


	Finance Leases			Operating Leases			Finance Leases			Operating Leases
Weighted average remaining lease term (years)		3.1			4.3			3.2			4.4
Weighted average discount rate		3.3	%		4.0	%		3.2	%		4.0	%

~~(10)~~

~~Commitments and Contingencies~~

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(10) Commitments and Contingencies

Short-term investments include ~~$31,596,000~~$33,627,000 in current maturities of investments held by the Company’s insurance segment at ~~September~~March 28, ~~2019.~~2020. The

non-current

portion of the bond portfolio of ~~$85,460,000~~$82,798,000 is included in other assets. The short-term investments, together with ~~$36,741,000~~$34,710,000 of

non-current

investments, provide collateral for the $61,503,000 of letters of credit issued to guarantee payment of insurance claims. As of ~~September~~March 28, ~~2019,~~2020, Landstar also had $34,368,000 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 purports 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 asserts claims based on the alleged misclassification of Mr. Tanious as an independent contractor and alleges 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 (i) granting a motion filed by counsel for Mr. Tanious to withdraw from the case, (ii) striking all class allegations from the complaint and (iii) stating that this matter would proceed as an individual action. Mr. Tanious subsequently retained new counsel

Due to a number of factors including the preliminary status of this matter, the Company does not believe it is in a position to conclude whether or not there is a reasonable possibility of an adverse outcome in this case or what damages, if any, the plaintiff would be awarded should he prevail on all or any part of his claims. However, the Company believes it has meritorious defenses and it intends to assert these defenses vigorously.

~~Table of Contents~~

The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.

(11) Recent Accounting Pronouncements

~~(11)~~

~~Change in Accounting Estimate for Self-Insured Claims~~

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 thirty-nine-week and thirteen-week periods ended September 28, 2019 and September 29, 2018 (in thousands, except per share amounts):

Thirty Nine Weeks Ended

Thirteen Weeks Ended

September 28,
2019

September 29,
2018

September 28,
2019

September 29,
2018

Operating income
$
9,497
$
11,596
$
6,597
$
3,352

Net income attributable to Landstar System, Inc. and subsidiary

7,199

8,755

5,001

2,531

Earnings per share attributable to Landstar System, Inc. and subsidiary
$
0.18
$
0.21
$
0.13
$
0.06

Diluted earnings per share attributable to Landstar System, Inc. and subsidiary
$
0.18
$
0.21
$
0.13
$
0.06

The unfavorable development of prior years’ claims in the thirty-nine-week period ended September 28, 2019 was attributable to several claims as well as actuarially determined adjustments to prior year commercial trucking loss estimates. The unfavorable development of prior years’ claims in the thirty-nine-week period ended September 29, 2018 was primarily attributable to five claims.

~~(12)~~

~~Recent Accounting Pronouncements~~

Adoption of New Accounting Standards

In ~~February 2016, the FASB issued Accounting Standards Update~~

~~2016-02~~

–

~~Leases~~

~~(“ASU~~

~~2016-02”),~~

~~amended by ASU~~

~~2018-11,~~

~~Leases~~

~~(Topic 842):~~

~~Targeted Improvements~~

~~. ASU~~

~~2016-02~~

~~requires a company to recognize a~~

~~right-of-use~~

asset and lease liability for the obligation to make lease payments measured as the present value of the lease payments for all leases with terms greater than twelve months. The ASU requires adoption using a modified retrospective transition approach with either (1) periods prior to the adoption date being recast or (2) a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not recast. The Company adopted this standard on December 30, 2018 using the cumulative-effect adjustment approach. No cumulative-effect adjustment was recognized as the amount was not material. The Company recognized $2,783,000 as of September 28, 2019 in

~~right-of-use~~

~~assets and corresponding lease obligations as the result of the adoption of ASU~~

~~2016-02.~~

~~See Note 9 for additional information regarding the impact of adopting ASU~~

~~2016-02~~

~~to Landstar’s consolidated financial statements.~~

~~Accounting Standards Issued But Not Yet Adopted~~

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.

(12) Subsequent Events

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 early April 2020, and has fueled concerns that it will lead to a global recession. These conditions are expected to continue and worsen in the near term. This could have a material adverse impact on the demand for our services and our ability to obtain financing on favorable terms or at all. The situation continues to evolve rapidly and its effects, both short and long-term, remain unknown.

In connection with the impact of the

COVID-19

pandemic, the Company experienced a significant decline in truckload volumes during the last week of its fiscal quarter ended March 28, 2020. The Company believes the

COVID-19

pandemic is ~~effective for annual periods beginning after December 15, 2019, and interim periods therein. ASU~~

~~2016-13~~

~~is not expected~~likely to have a ~~material~~significant adverse impact on truckload volumes in its 2020 second fiscal quarter. Although it does not appear the impact of the

COVID-19

pandemic had a significant impact on truckload pricing in the 2020 first quarter, no assurance can be given regarding the potential impact of the pandemic on truckload pricing in future periods, including the 2020 second quarter. The extent to which the

COVID-19

pandemic impacts the Company’s results in the 2020 second quarter as well as 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 in lifting

stay-at-home

orders and taking other measures that will be needed to help the economy transition back to more normal operating conditions.

In an effort to support BCO Independent Contractors and independent commission sales agents in the Landstar network, the Company announced that for each load delivered by a BCO Independent Contractor with a confirmed delivery date from April 1, 2020 through April 30, 2020, the Company will pay an extra $50 to both the BCO hauling the load and the Landstar agent dispatching the load. The Company subsequently announced the extension of this program through May 15, 2020. The Company estimates that Landstar BCOs will deliver between 60,000 and 70,000 loads in April 2020 and 30,000 to 35,000 from May 1, 2020 through May 15, 2020. In addition, if a Landstar BCO tests positive for

COVID-19

or is placed under a mandatory quarantine by a public health authority, the Company will provide up to $2,000 to the affected BCO. Further, in the event that current market conditions persist, it is possible that Landstar will provide additional financial support to its independent agents and/or BCO Independent Contractors during the 2020 second quarter as part of the Company’s pandemic relief efforts. These pandemic relief efforts will have an impact on the Company’s financial ~~statements.~~results for the 2020 second quarter.

Moreover, the

COVID-19

virus continues to spread in areas where we provide services. While we have implemented risk management and contingency plans and taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the

COVID-19

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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 provides resiliency to 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.

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 ~~29, 2018~~28, 2019 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the ~~2018~~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 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 ~~2018~~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 enterprise-wide solutions to manage 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 ~~68,000~~65,000 third party capacity providers, primarily truck capacity providers, linked together by a series of ~~technological~~mobile and digital applications 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 information technology systems, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of ~~$4.6~~$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.

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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 ~~products,~~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 ~~thirty nine~~thirteen weeks ended ~~September~~March 28, ~~2019,~~2020, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately ~~45%~~46%, ~~47%~~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 ~~thirty-nine-week~~thirteen-week period ended ~~September~~March 28, ~~2019.~~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 ~~thirty-nine-week~~thirteen-week period ended ~~September~~March 28, ~~2019.~~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 1% of the Company’s consolidated revenue for the ~~thirty-nine-week~~thirteen-week period ended ~~September~~March 28, 2020.

Recent Developments

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

In connection with the impact of the

COVID-19

pandemic, the Company experienced a significant decline in truckload volumes during the last week of its fiscal quarter ended March 28, 2020. The Company believes the

COVID-19

pandemic is likely to have a significant adverse impact on truckload volumes in its 2020 second fiscal quarter. Although it does not appear the impact of the

COVID-19

stay-at-home

orders and taking other measures that will be needed to help the economy transition back to more normal operating conditions.

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COVID-19

Moreover, the

COVID-19

pandemic and such measures may not adequately protect our business from the impact of such events. 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 provides resiliency to 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

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 technology-based tools they may use to grow revenue and increase efficiencies at their businesses. During the ~~2018~~2019 fiscal year, ~~608~~555 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the ~~2018~~2019 fiscal year, the average revenue generated by a Million Dollar Agent was ~~$7,150,000~~$6,880,000 and revenue generated by Million Dollar Agents in the aggregate represented ~~94%~~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:


	Thirty Nine Weeks Ended						Thirteen Weeks Ended						Thirteen Weeks Ended
	September 28,			September 29,			September 28,			September 29,			March 28,			March 30,
	2019			2018			2019			2018			2020			2019
Revenue generated through (in thousands):
Truck transportation
Truckload:
Van equipment	$	1,799,421		$	2,086,523		$	575,042		$	717,047		$	545,307		$	619,014
Unsided/platform equipment		980,615			1,039,784			331,787			375,739			286,328			310,721
Less-than-truckload		73,475			76,448			25,367			25,500			22,941			23,376

Total truck transportation		2,853,511			3,202,755			932,196			1,118,286			854,576			953,111
Rail intermodal		87,555			96,026			28,970			34,439			28,129			30,015
Ocean and air cargo carriers		89,258			82,719			30,365			31,213			26,587			30,669
Other (1)		59,374			51,293			20,127			18,143			18,274			19,205

	$	3,089,698		$	3,432,793		$	1,011,658		$	1,202,081		$	927,566		$	1,033,000

Revenue on loads hauled via BCO Independent Contractors included in total truck transportation	$	1,390,135		$	1,519,344		$	466,207		$	520,391		$	431,279		$	449,308
Number of loads:
Truck transportation
Truckload:
Van equipment		1,014,572			1,045,322			327,671			353,456			315,345		��	341,821
Unsided/platform equipment		391,112			388,759			130,192			133,425			120,589			125,170
Less-than-truckload		115,616			106,639			41,067			35,969			38,356			35,309

Total truck transportation		1,521,300			1,540,720			498,930			522,850			474,290			502,300
Rail intermodal		35,370			40,260			11,490			13,420			11,540			12,460
Ocean and air cargo carriers		22,150			21,250			7,340			8,220			7,070			7,510

		1,578,820			1,602,230			517,760			544,490			492,900			522,270

Loads hauled via BCO Independent Contractors included in total truck transportation		722,870			717,470			239,210			236,580			233,400			234,850
Revenue per load:
Truck transportation
Truckload:
Van equipment	$	1,774		$	1,996		$	1,755		$	2,029		$	1,729		$	1,811
Unsided/platform equipment		2,507			2,675			2,548			2,816			2,374			2,482
Less-than-truckload		636			717			618			709			598			662
Total truck transportation		1,876			2,079			1,868			2,139			1,802			1,897
Rail intermodal		2,475			2,385			2,521			2,566			2,438			2,409
Ocean and air cargo carriers		4,030			3,893			4,137			3,797			3,761			4,084
Revenue per load on loads hauled via BCO Independent Contractors	$	1,923		$	2,118		$	1,949		$	2,200		$	1,848		$	1,913
Revenue by capacity type (as a % of total revenue):
Truck capacity providers:
BCO Independent Contractors		45	%		44	%		46	%		43	%		46	%		43	%
Truck Brokerage Carriers		47	%		49	%		46	%		50	%		46	%		49	%
Rail intermodal		3	%		3	%		3	%		3	%		3	%		3	%
Ocean and air cargo carriers		3	%		2	%		3	%		3	%		3	%		3	%
Other		2	%		1	%		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:


	September 28, 2019		September 29, 2018		March 28, 2020		March 30, 2019
BCO Independent Contractors		9,738		9,751		9,444		9,911
Truck Brokerage Carriers:
Approved and active (1)		39,963		40,151		38,879		40,404
Other approved		16,984		16,803		16,657		18,659

		56,947		56,954		55,536		59,063

Total available truck capacity providers		66,685		66,705		64,980		68,974

Trucks provided by BCO Independent Contractors		10,441		10,443		10,112		10,637

(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 ~~rates.~~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 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 by railroads, air cargo carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention contracts, is variable in nature as the Company’s contracts with

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independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these types of loads. Approximately ~~51%~~52% of the Company’s consolidated revenue in the ~~thirty-nine-week~~thirteen-week period ended ~~September~~March 28, ~~2019~~2020 was generated under contracts that have a fixed gross profit margin while ~~49%~~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 ~~Landstar retains liability~~ 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.~~$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 ~~new three year policy provides~~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 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 included in insurance and claims costs for the Company’s 2020 fiscal first quarter. The Company continues to maintain third party insurance arrangements providing excess coverage on a per occurrence basis for commercial trucking liabilities in excess of $10,000,000. In addition, for commercial trucking claims incurred through April 30, 2019 that exceed the Company’s $5,000,000 per occurrence self-insured retention, the Company retains liability up to an additional $700,000 in the aggregate on any claims incurred on or after May 1, 2016 through April 30, 2017, up to an additional $500,000 in the aggregate on any claims incurred on or after May 1, 2017 through April 30, 2018 and up to an additional $350,000 in the aggregate on any claims incurred on or after May 1, 2018 through April 30, 2019.

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.

During the ~~thirty-nine-week~~thirteen-week period ended ~~September~~March 28, ~~2019,~~2020, employee compensation and benefits accounted for approximately ~~sixty-five~~sixty-three 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.

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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:


	Thirty Nine Weeks Ended						Thirteen Weeks Ended						Thirteen Weeks Ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018			March 28, 2020			March 30, 2019
Revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Purchased transportation		76.6			77.5			76.6			77.5			76.5			76.6
Commissions to agents		8.3			8.0			8.4			8.3			8.1			8.3

Gross profit margin		15.1	%		14.5	%		15.1	%		14.3	%		15.4	%		15.1	%

Gross profit		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Investment income		0.8			0.6			0.9			0.6			0.8			0.7
Indirect costs and expenses:
Other operating costs, net of gains/losses on asset sales/dispositions		6.1			4.9			6.8			5.2
Other operating costs, net of gains on asset sales/dispositions														5.8			5.3
Insurance and claims		11.9			11.6			15.7			11.0			17.5			9.6
Selling, general and administrative		25.9			28.3			25.0			27.3			31.7			26.5
Depreciation and amortization		7.1			6.5			7.0			6.3			8.0			7.3

Total costs and expenses		51.0			51.3			54.6			49.8			63.0			48.7

Operating margin		49.8	%		49.3	%		46.3	%		50.8	%		37.8	%		52.0	%

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 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.

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~~THIRTY NINE~~THIRTEEN WEEKS ENDED ~~SEPTEMBER~~MARCH 28, ~~2019~~2020 COMPARED TO ~~THIRTY NINE~~THIRTEEN WEEKS ENDED ~~SEPTEMBER 29, 2018~~MARCH 30, 2019

Revenue for the ~~2019 thirty-nine-week~~2020 thirteen-week period was ~~$3,089,698,000,~~$927,566,000, a decrease of ~~$343,095,000,~~$105,434,000, or 10%, compared to the ~~2018 thirty-nine-week~~2019 thirteen-week period. Transportation revenue decreased ~~$346,969,000,~~$105,077,000, or 10%. The decrease in transportation revenue was attributable to decreased revenue per load of approximately 9%5% and a decreased number of loads hauled of approximately 1%6% compared to the ~~2018 thirty-nine-week~~2019

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thirteen-week period. Reinsurance premiums were ~~$42,369,000~~$13,682,000 and ~~$38,495,000~~$14,039,000 for the 2020 and 2019 ~~and 2018 thirty-nine-week~~thirteen-week periods, respectively. The ~~increase~~decrease in revenue from reinsurance premiums was primarily attributable to the ~~increase~~decrease in the average number of trucks provided by BCO Independent Contractors in the ~~2019 thirty-nine-week~~2020 thirteen-week period compared to the ~~2018 thirty-nine-week~~2019 thirteen-week period.

Truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers (together, the “third party truck capacity providers”) for the ~~2019 thirty-nine-week~~2020 thirteen-week period was ~~$2,853,511,000,~~$854,576,000, representing 92% of total revenue, a decrease of ~~$349,244,000,~~$98,535,000, or ~~11%~~10%, compared to the ~~2018 thirty-nine-week~~2019 thirteen-week period. ~~Revenue~~The number of loads hauled by third party truck capacity providers decreased approximately 6% 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 ~~10% in the 2019 thirty-nine-week period~~5% compared to the ~~2018 thirty-nine-week period, and~~2019 thirteen-week period. The decrease in the number of loads hauled ~~by third party~~via truck ~~capacity providers decreased approximately 1%~~ compared to the ~~2018 thirty-nine-week~~2019 thirteen-week period was due to relative softness in in the U.S. manufacturing sector in the 2020 period compared to the 2019 period and the unfavorable impact of the

COVID-19

pandemic experienced during the last week of the 2020 first fiscal quarter. Loads hauled via van equipment decreased 8% and loads hauled via unsided/platform equipment decreased 4%, while less-than-truckload volumes increased 9% 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 ~~2019 thirty-nine-week~~2020 thirteen-week period, which resulted in more readily available truck capacity as compared to the ~~2018 thirty-nine-week~~2019 thirteen-week period. Revenue per load on loads hauled via van equipment decreased ~~11%~~5%, revenue per load on loads hauled via unsided/platform equipment decreased 6%4% and revenue per load on less-than-truckload loadings decreased ~~11%~~10% as compared to the ~~2018 thirty-nine-week~~2019 thirteen-week period. The decrease in the number of loads hauled via truck compared to the 2018 thirty-nine-week period was entirely attributable to a decrease in demand for the Company’s truckload services provided via van equipment. 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 ~~$60,206,000~~$17,196,000 and ~~$72,282,000~~$20,987,000 in the 2020 and 2019 ~~and 2018 thirty-nine-week~~thirteen-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 ~~2019 thirty-nine-week~~2020 thirteen-week period was ~~$176,813,000,~~$54,716,000, or 6% of total revenue, a decrease of $1,932,000, or 1%, compared to the 2018 thirty-nine-week period. Revenue per load on revenue generated by multimode capacity providers increased approximately 6% in the 2019 thirty-nine-week period compared to the 2018 thirty-nine-week period, while the number of loads hauled by multimode capacity providers decreased approximately 6% over the same period. The increase in revenue per load of 6% on loads hauled by multimode capacity providers was primarily attributable to increased revenue per load on ocean loads and an increase in ocean loads as a percentage of multimode loads, 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. The decrease in the number of loads hauled by multimode capacity providers was primarily due to a 12% decrease in rail intermodal loadings, mostly attributable to decreased loadings at three specific agencies.

Purchased transportation was 76.6% and 77.5% of revenue in the 2019 and 2018 thirty-nine-week periods, respectively. The decrease in purchased transportation as a percentage of revenue was primarily due to a decreased rate of purchased transportation paid on Truck Brokerage Carrier revenue. Commissions to agents were 8.3% and 8.0% of revenue in the 2019 and 2018 thirty-nine-week periods, respectively. The increase in commissions to agents as a percentage of revenue was primarily attributable to an increased net revenue margin on revenue generated by Truck Brokerage Carriers.

Investment income was $3,736,000 and $2,754,000 in the 2019 and 2018 thirty-nine-week periods, respectively. The increase in investment income was primarily attributable to higher average rates of return on investments and a higher average investment balance held by the insurance segment in the 2019 thirty-nine-week period.

Other operating costs increased $4,355,000 in the 2019 thirty-nine-week period compared to the 2018 thirty-nine-week period and represented 6.1% of gross profit in the 2019 period compared to 4.9% of gross profit in the 2018 period. The increase in other operating costs compared to the prior year was primarily due to increased trailing equipment maintenance costs as a result of an increased number of Company-owned trailers and an increased provision for contractor bad debt. The increase in other operating costs as a percentage of gross profit was caused by the increase in other operating costs and the effect of decreased gross profit.

Insurance and claims decreased $2,470,000 in the 2019 thirty-nine-week period compared to the 2018 thirty-nine-week period and represented 11.9% of gross profit in the 2019 period compared to 11.6% of gross profit in the 2018 period. The decrease in insurance and claims expense compared to prior year was primarily due to decreased net unfavorable development of prior years’ claims in the 2019 period. Net unfavorable development of prior years’ claims was $9,497,000 and $11,596,000 in the 2019 and 2018 thirty-nine-week periods, respectively. The increase in insurance and claims as a percent of gross profit was caused by the effect of decreased gross profit, partially offset by the decrease in insurance and claims costs.

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Selling, general and administrative costs decreased $20,231,000 in the 2019 thirty-nine-week period compared to the 2018 thirty-nine-week period and represented 25.9% of gross profit in the 2019 period compared to 28.3% of gross profit in the 2018 period. The decrease in selling, general and administrative costs compared to prior year was attributable to a decreased provision for incentive compensation and decreased stock-based compensation expense, partially offset by increased wages. Included in selling, general and administrative costs was incentive compensation expense of $1,588,000 and $14,643,000 for the 2019 and 2018 thirty-nine-week periods, respectively, and stock-based compensation expense of $4,470,000 and $13,003,000 for the 2019 and 2018 thirty-nine-week periods, respectively. The decrease in selling, general and administrative costs as a percent of gross profit was due to the decrease in selling, general and administrative costs, partially offset by the effect of decreased gross profit.

Depreciation and amortization increased $525,000 in the 2019 thirty-nine-week period compared to the 2018 thirty-nine-week period and represented 7.1% of gross profit in the 2019 period compared to 6.5% of gross profit in the 2018 period. The increase in depreciation and amortization expenses was primarily due to increased depreciation on information technology assets. The increase in depreciation and amortization as a percentage of gross profit was due to the effect of decreased gross profit and increased depreciation.

Interest and debt expense in the 2019 thirty-nine-week period decreased $177,000 compared to the 2018 thirty-nine-week period. The decrease in interest and debt expense was primarily attributable to increased interest income earned on cash balances held by the transportation logistics segment.

The provisions for income taxes for the 2019 and 2018 thirty-nine-week periods were based on estimated annual effective income tax rates of 24.2% and 24.5%, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The effective income tax rate for the 2019 thirty-nine-week period was 22.8%, 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 for the 2018 thirty-nine-week period was 23.1%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes, the Tax Cuts and Jobs Act’s (the “Tax Reform Act”) elimination of the performance-based compensation exception under Section 162(m) and the meals and entertainment exclusion. The effective income tax rate in the 2019 thirty-nine-week period of 22.8% 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 thirty-nine-week period. The effective income tax rate in the 2018 thirty-nine-week period of 23.1% was lower than the 24.5% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2018 period and favorable adjustments recognized during the 2018 thirty-nine-week period relating to federal domestic production activities deductions and research and development credits.

The net loss attributable to noncontrolling interest of $17,000 and $112,000 in the 2019 and 2018 thirty-nine-week periods, respectively, represents the former noncontrolling investors’ share of the net loss incurred by Landstar Metro and Landstar Servicios.

Net income attributable to the Company was $177,672,000, or $4.45 per common share ($4.45 per diluted share), in the 2019 thirty-nine-week period. Net income attributable to the Company was $187,025,000, or $4.50 per common share ($4.50 per diluted share), in the 2018 thirty-nine-week period.

~~THIRTEEN WEEKS ENDED SEPTEMBER 28, 2019 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 29, 2018~~

Revenue for the 2019 thirteen-week period was $1,011,658,000, a decrease of $190,423,000, or 16%, compared to the 2018 thirteen-week period. Transportation revenue decreased $191,185,000, or 16%. The decrease in transportation revenue was attributable to decreased revenue per load of approximately 12%, and a decreased number of loads hauled of approximately 5%. Reinsurance premiums were $14,106,000 and $13,344,000 for the 2019 and 2018 thirteen-week periods, respectively. The increase in revenue from reinsurance premiums was primarily attributable to the increase in the average number of trucks provided by BCO Independent Contractors and an increase in the aggregate value of equipment insured by BCO Independent Contractors under a physical damage program reinsured by Signature in the 2019 thirteen-week period compared to the 2018 thirteen-week period.

Truck transportation revenue generated by third party truck capacity providers for the 2019 thirteen-week period was $932,196,000, representing 92% of total revenue, a decrease of $186,090,000, or 17%, compared to the 2018 thirteen-week period. Revenue per load on loads hauled by third party truck capacity providers decreased approximately 13% in the 2019 thirteen-week period compared to the 2018

~~thirteen-week period, and the number of loads hauled by third party truck capacity providers decreased approximately 5% compared to the~~

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2018 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 2019 thirteen-week period, which resulted in more readily available truck capacity as compared to the 2018 thirteen-week period. Revenue per load on loads hauled via van equipment decreased 14%, revenue per load on loads hauled via unsided/platform equipment decreased 10% and revenue per load on less-than-truckload loadings decreased 13% as compared to the 2018 thirteen-week period. The decrease in the number of loads hauled via truck compared to the 2018 thirteen-week period was primarily attributable to a decrease in demand for the Company’s truckload services provided via van equipment. 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 $18,885,000 and $25,380,000 in the 2019 and 2018 thirteen-week periods, respectively.

~~Transportation revenue generated by multimode capacity providers for the 2019 thirteen-week period was $59,335,000, or 6% of total revenue, a decrease of $6,317,000,~~$5,968,000, or 10%, compared to the ~~2018~~2019 thirteen-week period. The number of loads hauled by multimode capacity providers decreased approximately ~~13%~~7% in the ~~2019~~2020 thirteen-week period compared to the ~~2018~~2019 thirteen-week period, ~~while~~and revenue per load on revenue generated by multimode capacity providers ~~increased~~decreased approximately 4%3% over the same period. The decrease in the number of loads hauled by multimode capacity providers was primarily due to a ~~14%~~7% decrease in rail intermodal loadings, mostly attributable to decreased loadings at two specific ~~agencies.~~customers, and a 13% decrease in ocean loadings, primarily due to decreased shipments originating in China for export to the United States. The ~~increase~~decrease in revenue per load of 4%3% on loads hauled by multimode capacity providers was ~~entirely~~primarily attributable to ~~increased~~decreased revenue per load on ~~ocean~~air cargo ~~carrier loads.~~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 ~~76.6%~~76.5% and ~~77.5%~~76.6% of revenue in the ~~2019~~2020 and ~~2018~~2019 thirteen-week periods, respectively. The decrease in purchased transportation as a percentage of revenue was primarily due to ~~a decreased rate of purchased transportation paid on Truck Brokerage Carrier revenue and~~ an increased percentage of revenue contributed by BCO Independent Contractors, which typically has a lower rate of purchased transportation than revenue generated by Truck Brokerage Carriers. Commissions to agents were ~~8.4%~~8.1% and 8.3% of revenue in the ~~2019~~2020 and ~~2018~~2019 thirteen-week periods, respectively. The ~~increase~~decrease in commissions to agents as a percentage of revenue was primarily attributable to ~~an increased~~a decreased net revenue margin on revenue generated by Truck Brokerage Carriers.

Investment income was ~~$1,315,000~~$1,167,000 and ~~$1,002,000~~$1,138,000 in the ~~2019~~2020 and ~~2018~~2019 thirteen-week periods, respectively. The increase in investment income was attributable to a higher average investment balance held by the insurance segment and higher average rates of return on investments in the 2019 thirteen-week period.

Other operating costs increased ~~$1,465,000~~$67,000 in the ~~2019~~2020 thirteen-week period compared to the ~~2018~~2019 thirteen-week period and represented ~~6.8%~~5.8% of gross profit in the ~~2019~~2020 period compared to ~~5.2%~~5.3% of gross profit in the ~~2018~~2019 period. The increase in other operating costs compared to the prior year was primarily due to an increased provision for contractor bad debt and increased trailing equipment maintenance costs, ~~as a result of an increased number of Company-owned trailers.~~partially offset by decreased trailer rental expense. The increase in other operating costs as a percentage of gross profit was caused by the ~~increase in other operating costs and the~~ effect of decreased gross profit.

Insurance and claims increased ~~$5,150,000~~$9,964,000 in the ~~2019~~2020 thirteen-week period compared to the ~~2018~~2019 thirteen-week period and represented ~~15.7%~~17.5% of gross profit in the ~~2019~~2020 period compared to ~~11.0%~~9.6% of gross profit in the ~~2018~~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

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pay under its existing multi-year insurance arrangements in connection with certain aggregated losses and, to a lesser extent, increased net unfavorable development of prior years’ claims. During the 2020 and 2019 thirteen-week periods, insurance and claims ~~in the 2019 period~~costs included $2,223,000 and ~~increased severity~~$1,407,000 of ~~current year claims in the 2019 period. Net~~net unfavorable ~~development of~~adjustments to prior years’ claims ~~was $6,597,000 and $3,352,000 in the 2019 and 2018 thirteen-week periods,~~estimates, respectively. The increase in severity of current year claims in the 2019 period compared to the 2018 period primarily resulted from the impact of one tragic vehicular accident involving a BCO Independent Contractor with a subsidiary of the Company that occurred during the 2019 period. 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 ~~decreased $8,547,000~~increased $4,059,000 in the ~~2019~~2020 thirteen-week period compared to the ~~2018~~2019 thirteen-week period and represented ~~25.0%~~31.7% of gross profit in the 2020 period compared to 26.5% of gross profit in the 2019 ~~period compared to 27.3% of gross profit in the 2018~~ period. The ~~decrease~~increase in selling, general and administrative costs compared to prior year was attributable to ~~a decreased provision for incentive compensation and decreased stock-based compensation expense, partially offset by~~ an increased provision for customer bad ~~debt.~~debt, an increased provision for incentive compensation and increased wages and employee benefit costs, partially offset by decreased stock-based compensation expense. Included in selling, general and administrative costs ~~for~~in the ~~2019~~2020 thirteen-week period ~~was a reduction~~is approximately $757,000 related to the cancellation due to the COVID-19 pandemic of the Company’s ~~current year accrual for incentive compensation of $323,000.~~annual agent convention previously planned to occur in the Company’s 2020 second quarter. Included in selling, general and administrative costs ~~for the 2018 thirteen-week period~~ was incentive compensation expense of ~~$5,161,000. Stock-based~~$2,031,000 and $1,038,000 for the 2020 and 2019 thirteen-week periods, respectively, and stock-based compensation expense of ~~$1,102,000~~$631,000 and ~~$4,901,000 was included in selling, general and administrative costs~~$1,938,000 for the ~~2019~~2020 and ~~2018~~2019 thirteen-week periods, respectively. The ~~decrease~~increase in selling, general and administrative costs as a percent of gross profit was due ~~primarily~~ to the ~~decrease~~increase in selling, general and administrative costs ~~partially offset by~~and the effect of decreased gross profit.

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Depreciation and amortization ~~decreased $59,000~~increased $189,000 in the ~~2019~~2020 thirteen-week period compared to the ~~2018~~2019 thirteen-week period and represented ~~7.0%~~8.0% of gross profit in the 2020 period compared to 7.3% of gross profit in the 2019 ~~period compared~~period. The increase in depreciation and amortization expenses was primarily due to ~~6.3% of gross profit~~increased depreciation on information technology assets, partially offset by a decrease in ~~the 2018 period.~~trailing equipment depreciation. The increase in depreciation and amortization as a percentage of gross profit was ~~primarily~~ due to the effect of decreased gross ~~profit.~~profit and increased depreciation.

Interest and debt expense in the ~~2019~~2020 thirteen-week period ~~decreased $52,000~~increased $147,000 compared to the ~~2018~~2019 thirteen-week period. The ~~decrease~~increase in interest and debt expense was primarily attributable to ~~increased~~decreased interest income earned on cash balances held by the transportation logistics segment.

The provisions for income taxes for the ~~2019~~2020 and ~~2018~~2019 thirteen-week periods were each based on an estimated annual effective income tax ~~rates~~rate of 24.2% ~~and 24.5%~~, ~~respectively,~~ adjusted for discrete events, such as benefits resulting from stock-based awards. The effective income tax rate for the ~~2019~~2020 thirteen-week period was ~~23.8%~~22.9%, 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 ~~2018~~2019 thirteen-week period was ~~22.4%~~21.0%, which ~~was higher than~~approximated the statutory federal income tax rate. The effective income tax rate in the 2020 thirteen-week period of ~~21%~~22.9% was lower than the 24.2% estimated annual effective income tax rate primarily ~~attributable~~due to ~~state taxes,~~excess tax benefits recognized on stock-based compensation arrangements in the ~~Tax Reform Act’s elimination of the performance-based compensation exception under Section 162(m) and the meals and entertainment exclusion.~~2020 thirteen-week period. The effective income tax rate in the 2019 thirteen-week period of ~~23.8%~~21.0% 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. The effective income tax rate in~~period, which essentially offset the ~~2018 thirteen-week period~~impact of ~~22.4% was lower than~~state taxes and the ~~24.5% estimated annual effective income tax rate primarily due to favorable adjustments recognized during the 2018 period relating to federal domestic production activities deductions~~meals and ~~research and development credits and excess tax benefits recognized on stock-based compensation arrangements in the 2018 thirteen-week period.~~entertainment exclusion.

The net loss attributable to noncontrolling interest of ~~$37,000~~$17,000 in the ~~2018~~2019 thirteen-week period represents the former noncontrolling investors’ share of the net loss incurred by Landstar Metro and Landstar Servicios.

Net income ~~attributable to the Company~~ was ~~$53,255,000,~~$40,895,000, or ~~$1.35~~$1.04 per common share ($~~1.35~~1.04 per diluted share), in the ~~2019~~2020 thirteen-week period. Net income ~~attributable to the Company~~ was ~~$66,985,000,~~$63,317,000, or ~~$1.63~~$1.58 per common share ($~~1.63~~1.58 per diluted share), in the ~~2018~~2019 thirteen-week period.

CAPITAL RESOURCES AND LIQUIDITY

Working capital and the ratio of current assets to current liabilities were ~~$486,994,000~~$351,325,000 and ~~2.0~~1.8 to 1, respectively, at ~~September~~March 28, ~~2019,~~2020, compared with ~~$435,611,000~~$444,984,000 and 1.8 to 1, respectively, at December ~~29, 2018.~~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 ~~$260,714,000~~$99,216,000 in the 2020 thirteen-week period compared with $121,416,000 in the 2019 ~~thirty-nine-week period compared with $204,205,000 in the 2018 thirty-nine-week~~thirteen-week period. The ~~increase~~decrease in cash flow provided by operating activities was primarily attributable to the timing of collections of trade ~~receivables.~~receivables and decreased net income.

The Company declared and paid ~~$0.515~~$0.185 per share, or ~~$20,589,000~~$7,336,000 in the aggregate, in cash dividends during the ~~thirty-nine-week~~thirteen-week period ended ~~September~~March 28, ~~2019. The Company declared and paid $0.465 per share, or $19,276,000 in the aggregate, in cash dividends during the thirty-nine-week period ended September 29, 2018~~2020 and, during such period, also paid ~~$62,985,000~~$78,947,000 of dividends payable which were declared during fiscal year ~~2017~~2019 and included in current liabilities in the consolidated balance sheet at December 28, 2019. The Company declared and paid $0.165 per share, or $6,629,000 in the aggregate, in cash dividends during the thirteen-week period ended March 30, ~~2017.~~2019. During the ~~thirty-nine-week~~ thirteen-week

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period ended ~~September~~March 28, ~~2019,~~2020, the Company purchased ~~849,068~~1,178,970 shares of its common stock at a total cost of ~~$88,578,000.~~$115,962,000. During the ~~thirty-nine-week~~thirteen-week period ended ~~September 29, 2018,~~March 30, 2019, the Company purchased ~~1,000,000~~124,481 shares of its common stock at a total cost of ~~$105,488,000.~~$12,977,000. As of ~~September~~March 28, ~~2019,~~2020, the Company may purchase in the aggregate up to ~~1,150,932~~1,821,030 shares of its common stock under its authorized stock purchase ~~programs.~~program. Long-term debt, including current maturities, was ~~$100,765,000~~$101,921,000 at ~~September~~March 28, ~~2019, $27,660,000~~2020, $10,923,000 lower than at December ~~29, 2018.~~28, 2019.

~~Equity~~Shareholders’ equity was ~~$755,975,000,~~$627,095,000, or ~~88%~~86% of total capitalization (defined as long-term debt including current maturities plus equity), at ~~September~~March 28, ~~2019,~~2020, compared to ~~$689,133,000,~~$721,469,000, or ~~84%~~86% of total capitalization, at December ~~29, 2018.~~28, 2019. The ~~increase~~decrease in equity was primarily athe result of ~~net income, partially offset by~~ purchases of shares of the Company’s common stock and dividends declared by the Company in the ~~2019 thirty-nine-week period.~~2020 thirteen-week period, partially offset by net income.

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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.

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 ~~September~~March 28, ~~2019,~~2020, the Company had no borrowings outstanding and $34,368,000 of letters of credit outstanding under the Credit Agreement. At ~~September~~March 28, ~~2019,~~2020, there was $215,632,000 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 ~~September~~March 28, ~~2019.~~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 ~~2019 thirty-nine-week~~2020 thirteen-week period, the Company purchased ~~$15,199,000~~$5,799,000 of operating property. Landstar anticipates acquiring either by purchase or lease financing during the remainder of fiscal year ~~2019~~2020 approximately ~~$45,000,000~~$48,000,000 in operating property, consisting primarily of new trailing equipment to replace older trailing equipment and information technology equipment.

~~On January 29, 2019, Landstar acquired all of~~Regarding the ~~remaining equity interests~~recent swift and significant decrease in ~~Landstar Metro and Landstar Servicios then held~~the Company’s revenue beginning in late March caused by the ~~minority equityholders. Accordingly, as of such date, Landstar Metro and Landstar Servicios each became wholly owned subsidiaries of the Company. Cash consideration paid in the 2019 first quarter~~COVID-19 pandemic, management continues to ~~purchase these remaining equity interests was $600,000.~~

~~Management believes~~believe 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~~program and meet working capital needs.

~~LEGAL MATTERS~~

~~On January 25, 2019, a purported class action was filed~~ The Company remains committed to returning cash to stockholders over time, primarily through share repurchases, as demonstrated during the thirteen-week period ended March 28, 2020; however, the Company intends to be prudent in its current approach to share repurchases as the ~~Superior Court~~depth and duration of the State of California for the County of San Bernardino against Landstar System, Inc. and Landstar Ranger, Inc. (together, the “Defendants”). The complaint purports 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 asserts claims based on the alleged misclassification of Mr. Tanious as an independent contractor and alleges 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 forCOVID-19 pandemic crisis become clearer.

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the Central District of California. On August 22, 2019, the Court issued an order (i) granting a motion filed by counsel for Mr. Tanious to withdraw from the case, (ii) striking all class allegations from the complaint and (iii) stating that this matter would proceed as an individual action. Mr. Tanious subsequently retained new counsel. Due to a number of factors including the preliminary status of this matter, the Company does not believe it is in a position to conclude whether or not there is a reasonable possibility of an adverse outcome in this case or what damages, if any, the plaintiff would be awarded should he prevail on all or any part of his claims. However, the Company believes it has meritorious defenses and it intends to assert these defenses vigorously.

LEGAL MATTERS

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 ~~and 2018 thirty-nine-week~~thirteen-week periods, insurance and claims costs included ~~$9,497,000~~$2,223,000 and ~~$11,596,000~~$1,407,000 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 ~~reserve~~liability at ~~September~~March 28, ~~2019.~~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 ~~September~~March 28, ~~2019~~2020 and during the entire ~~2019 third~~2020 first quarter, the Company had no borrowings outstanding under the Credit Agreement.

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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 ~~$85,460,000,~~$82,798,000, the balance at ~~September~~March 28, ~~2019,~~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 ~~September~~March 28, ~~2019~~2020 were collectively, as translated to U.S. dollars, less than 5%4% of total consolidated assets. Accordingly, ~~any~~ translation ~~gain~~gains or ~~loss~~losses of 10% 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 ~~September~~March 28, ~~2019~~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 ~~September~~March 28, ~~2019~~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

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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 ~~29, 2018~~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

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In connection with the impact of the

COVID-19

pandemic, the Company experienced a significant decline in truckload volumes during the last week of its fiscal quarter ended March 28, 2020. The Company believes the

COVID-19

pandemic is likely to have a significant adverse impact on truckload volumes in its 2020 second fiscal quarter. Although it does not appear the impact of the

COVID-19

stay-at-home

orders and taking other measures 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.

COVID-19

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

In addition, the

COVID-19

pandemic along with other factors such as issues in the international oil and gas sector have caused significant disruptions in the Mexican economy. These conditions also are expected to continue and worsen in the near term. During the Company’s 2020 fiscal first quarter, 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 as well as the value of the tangible and intangible assets associated with their operations. Moreover, we annually perform impairment tests of the carrying values of our goodwill, other indefinite-lived intangible assets and other long-lived assets. We may also perform an evaluation whenever events may indicate an impairment has occurred. In assessing whether an impairment has occurred, we consider whether the performance of our reporting units may be below projections, negative macroeconomic trends or negative industry and company-specific trends. If we conclude that the carrying values of assets associated with our Mexican operations exceed their fair value, we may be required to record an impairment.

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

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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 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.

Increased severity or frequency of accidents and other claims or a material unfavorable development of existing claims.

~~As noted in~~

~~Item~~ For periods prior to May 1, ~~of the Company’s Annual Report on Form~~

~~10-K~~

~~for the fiscal year ended December 29, 2018, “Business — Factors Significant to the Company’s Operations — Self-Insured Claims,” potential~~2019, Landstar retains liability ~~associated with accidents in the trucking industry is severe and occurrences are unpredictable. For~~for commercial trucking claims ~~Landstar retains liability~~ 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.~~$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 ~~new three year policy provides~~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

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.

thirty-six

pre-established

~~Status of independent contractors.~~

In recent years, the topic of the classification of individuals as employees or independent contractors has gained increased attention among federal and state regulators as well as the plaintiffs’ bar. Various legislative or regulatory proposals have been introduced at the federal and state levels that may affect the classification status of individuals as independent contractors or employees for either employment tax purposes (e.g., withholding, social security, Medicare and unemployment taxes) or other benefits available to employees (most notably, workers’ compensation benefits). Recently, certain states (most prominently, California) have seen significant increased activity by tax and other regulators and numerous class action lawsuits filed against transportation companies that engage independent contractors. For example, 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 by Hany Tanious, as an individual and on behalf of all others similarly situated, against Landstar System, Inc. and Landstar Ranger, Inc. (together, the “Defendants”). Mr. Tanious is a truck owner-operator and formerly an independent contractor who was a party to an independent contractor operating agreement with Landstar Ranger, Inc. The complaint asserts claims based on the alleged misclassification of Mr. Tanious as an independent contractor and alleges 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. See Part II, Item 1, “Legal Proceedings”, for further information.

There are many different tests and standards that may apply to the determination of whether a relationship is that of an independent contractor or one of employment. For example, different standards may be applied by the Internal Revenue Service, the U.S. Department of Labor, the National Labor Relations Board, state unemployment agencies, state departments of labor, state taxing authorities, the Equal Employment Opportunity Commission, state discrimination or disability benefit administrators and state workers compensation boards, among others. For federal tax purposes, most individuals are classified as employees or independent contractors based on a multi-factor

~~“common-law”~~

analysis rather than any definition found in the Internal Revenue Code or Internal Revenue Service regulations. In addition, under Section 530 of the Revenue Act of 1978, a taxpayer that meets certain criteria may treat an individual as an independent contractor for employment tax purposes if the taxpayer has been audited without being told to treat similarly situated workers as employees, if the taxpayer has received a ruling from the Internal Revenue Service or a court decision affirming the taxpayer’s treatment of the individual as an independent contractor, or if the taxpayer is following a long-standing recognized practice.

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The Company classifies its BCO Independent Contractors and independent commission sales agents as independent contractors for all purposes, including employment tax and employee benefits. There can be no assurance that legislative, judicial, administrative or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the employee/independent contractor classification of BCO Independent Contractors or independent commission sales agents doing business with the Company. On September 18, 2019, California enacted Assembly Bill (AB) 5 into law, codifying the strict “ABC” test for purposes of determining a worker’s status as an independent contractor or employee under California law. While new in California, versions of the ABC test have existed in a number of other states over the years and have been challenged in various courts as violating the federal government’s exclusive right to regulate trucking in certain areas of law and interstate commerce. The Company is monitoring and analyzing the impact of the new law, which becomes effective as of January 1, 2020, including what steps may be necessary or advisable to adapt to a changing legal and regulatory environment in California. The Company has BCO Independent Contractors, Truck Brokerage Carriers and independent commission sales agents who reside in and/or principally operate their business in California that could be impacted by AB 5, which could eventually affect our relationship with them. Additionally, the new law may have a significant impact on our Truck Brokerage Carriers based in California who utilize owner-operators to provide various types of transportation services such as drayage, regional or local delivery. Since the Company is neither incorporated nor headquartered in California and the vast majority of BCO Independent Contractors, Truck Brokerage Carriers and independent commission sales agents currently doing business with the Company reside and principally operate outside of California, we do not expect AB 5 to have a material impact on Landstar’s overall network of BCO Independent Contractors, Truck Brokerage Carriers and independent commission sales agents. Nevertheless, there remains significant uncertainty regarding many aspects of the new law, including how the law will be interpreted and enforced by state and local governments as well as by courts.

Potential changes, if any, that could impact the legal classification of the independent contractor relationship between the Company and BCO Independent Contractors or independent commission sales agents could have a material adverse effect on Landstar’s operating model. Further, the costs associated with any such potential changes could have a material adverse effect on the Company’s results of operations and financial condition if Landstar were unable to pass through to its customers an increase in price corresponding to such increased costs. Moreover, class action litigation in this area against other transportation companies has resulted in significant damage awards and/or monetary settlements for workers who have been allegedly misclassified as independent contractors and the legal and other related expenses associated with litigating these cases can be substantial.

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 ~~29, 2018~~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.

Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Company

The following table provides information regarding the Company’s purchase of its common stock during the period from ~~June 30,~~December 29, 2019 to ~~September~~March 28, ~~2019,~~2020, the Company’s ~~third~~first fiscal quarter:

Fiscal Period

Total Number of
Shares Purchased

Average Price
Paid Per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Programs

Maximum Number of
Shares That May Yet Be
Purchased Under the
Programs

June 29, 2019

1,325,590

June 30, 2019 – July 27, 2019

—
$
—

—

1,325,590

July 28, 2019 – August 24, 2019

99,905

108.81

99,905

1,225,685

August 25, 2019 – September 28, 2019

74,753

106.73

74,753

1,150,932

Total

174,658
$
107.92

174,658


Fiscal Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Number of Shares That May Yet Be Purchased Under the Programs
December 28, 2019								3,000,000
December 29, 2019 – January 25, 2020		—	$	—		—		3,000,000
January 26, 2020 – February 22, 2020		27,206		109.39		27,206		2,972,794
February 23, 2020 – March 28, 2020		1,151,764		98.10		1,151,764		1,821,030

Total		1,178,970	$	98.36		1,178,970

~~Table of Contents~~

On December ~~11, 2017,~~9, 2019, the Landstar System, Inc. Board of Directors authorized the Company to purchase up to ~~1,963,875~~1,849,068 shares of the Company’s common stock from time to time in the open market and in privately negotiated transactions. On January 23, 2019, the Landstar System, Inc. Board of Directors authorized the Company to purchase up to 1,000,000 additional shares of the Company’s Common Stock from time to time in the open market and in privately negotiated transactions. As of ~~September~~March 28, ~~2019,~~2020, the Company had authorization to purchase in the aggregate up to ~~1,150,932~~1,821,030 shares of its common stock under ~~these programs.~~this program. No specific expiration date has been assigned to ~~either~~ the December ~~11, 2017 or January 23,~~9, 2019 ~~authorizations.~~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.

Table of Contents

EXHIBIT INDEX

Registrant’s Commission File No.:

0-21238


Exhibit No.		Description

	(31)	Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.1 31.1	Chief Executive Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2 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 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 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~~104*	Cover Page Interactive Data File (formatted as ~~inline~~Inline XBRL and contained in Exhibit 101)

*	Filed herewith

**	Furnished herewith

Table of Contents

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: ~~November~~May 1, ~~2019~~2020		/s/ James B. Gattoni
		James B. Gattoni
	President and
	~~President and~~ Chief Executive Officer

Date: ~~November~~May 1, ~~2019~~2020		/s/ L. Kevin Stout
		L. Kevin Stout
		Vice President and Chief
	Financial Officer


Delaware		06-1313069
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	LSTR	NASDAQ


	Landstar System, Inc. and Subsidiary Shareholders
					Additional Paid-In Capital			Retained Earnings								Accumulated Other Comprehensive (Loss) Income			Non-controlling Interests
	Common Stock										Treasury Stock at Cost
	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

Net income									53,255														53,255
Dividends ($0.185 per share)									(7,332	)													(7,332	)
Purchases of common stock												174,658		(18,849	)								(18,849	)
Issuance of stock related to stock-based compensation plans		7,957		—		285						86		(10	)								275
Stock-based compensation						1,102																	1,102
Other comprehensive loss																	(776	)					(776	)

Balance September 28, 2019		68,072,834	$	681	$	225,937		$	1,998,362			28,609,926	$	(1,465,284	)	$	(3,721	)	$	—		$	755,975


	Number of Options			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (000s)
Options outstanding at December 29, 2018		89,114		$	50.44
Exercised		(32,300	)	$	49.30

Options outstanding at September 28, 2019		56,814		$	51.08		2.5	$	3,487

Options exercisable at September 28, 2019		56,814		$	51.08		2.5	$	3,487


	Number of Shares and Deferred Stock Units			Weighted Average Grant Date Fair Value
Non-vested at December 29, 2018		55,987		$	93.66
Granted		30,338		$	102.76
Vested		(21,517	)	$	92.70

Non-vested at September 28, 2019		64,808		$	98.24


	Unrealized Holding (Losses) Gains on Available-for-Sale Securities			Foreign Currency Translation			Total
Balance as of December 29, 2018	$	(930	)	$	(4,945	)	$	(5,875	)
Other comprehensive income		2,112			42			2,154

Balance as of September 28, 2019	$	1,182		$	(4,903	)	$	(3,721	)


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 28, 2019
Money market investments	$	14,923	$	—	$	—	$	14,923
Asset-backed securities		590		2		—		592
Corporate bonds and direct obligations of government agencies		97,704		1,513		31		99,186
U.S. Treasury obligations		2,334		21		—		2,355

Total	$	115,551	$	1,536	$	31	$	117,056

December 29, 2018
Money market investments	$	11,714	$	—	$	—	$	11,714
Asset-backed securities		624		—		4		620
Corporate bonds and direct obligations of government agencies		101,021		33		1,213		99,841

Total	$	113,359	$	33	$	1,217	$	112,175


Finance leases:
Amortization of right-of-use assets	$	19,196
Interest on lease liability		2,767

Total finance lease cost		21,963
Operating leases:
Lease cost		3,556
Variable lease cost		—
Sublease income		(3,931	)

Total operating lease (income)/cost		(375	)

Total lease cost	$	21,588

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