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LSTR Landstar System

Filed: 29 Oct 21, 12:53pm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 2021
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________ to ___________
Commission File Number: 0-21238
 
 
 
 
LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
06-1313069
(State or other jurisdiction
of incorporation or organization)
  
(I.R.S. Employer
Identification No.)
13410 Sutton Park Drive South, Jacksonville, Florida
(Address of principal executive offices)
32224
(Zip Code)
(904)
398-9400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock
 
LSTR
 
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):    Yes  
☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2
of the Exchange Act. (Check one):
 
Large accelerated filer   Accelerated filer 
    
Non-accelerated filer   Smaller reporting company 
    
     Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  ☒
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of the close of business on October 18, 2021 was 38,108,586.
 
 
 
 


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 shareholders’ equity for the periods presented. They have been prepared in accordance with Rule
10-01
of Regulation
S-X
and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the thirty nine weeks ended September 25, 2021 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 25, 2021.
These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report on Form
10-K.
 
3

LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
 
   
September 25,

2021
  
December 26,

2020
 
ASSETS         
Current Assets
         
Cash and cash equivalents
  $230,564  $249,354 
Short-term investments
   36,644   41,375 
Trade accounts receivable, less allowance of $6,543 and $8,670
   1,010,538   764,169 
Other receivables, including advances to independent contractors, less allowance of $7,696 and $7,239
   109,007   134,757 
Other current assets
   25,375   18,520 
   
 
 
  
 
 
 
Total current assets
   1,412,128   1,208,175 
   
 
 
  
 
 
 
Operating property, less accumulated depreciation and amortization of $332,785 and $299,407
   301,373   296,996 
Goodwill
   40,980   40,949 
Other assets
   159,561   107,679 
   
 
 
  
 
 
 
Total assets
  $1,914,042  $1,653,799 
   
 
 
  
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY         
Current Liabilities
         
Cash overdraft
  $88,958  $74,748 
Accounts payable
   548,385   380,505 
Current maturities of long-term debt
   34,617   35,415 
Insurance claims
   64,958   149,774 
Dividends payable
   —     76,770 
Other current liabilities
   110,394   88,925 
   
 
 
  
 
 
 
Total current liabilities
   847,312   806,137 
   
 
 
  
 
 
 
Long-term debt, excluding current maturities
   62,724   65,359 
Insurance claims
   46,914   38,867 
Deferred income taxes and other noncurrent liabilities
   57,402   51,601 
Shareholders’ Equity
         
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 68,231,013 and 68,183,702 shares
   682   682 
Additional
paid-in
capital
   246,302   228,875 
Retained earnings
   2,288,754   2,046,238 
Cost of 30,122,427 and 29,797,639 shares of common stock in treasury
   (1,633,109  (1,581,961
Accumulated other comprehensive loss
   (2,939  (1,999
   
 
 
  
 
 
 
Total shareholders’ equity
   899,690   691,835 
   
 
 
  
 
 
 
Total liabilities and shareholders’ equity
  $1,914,042  $1,653,799 
   
 
 
  
 
 
 
See accompanying notes to consolidated financial statements.
 
4

LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
   
Thirty Nine Weeks Ended
   
Thirteen Weeks Ended
 
   
September 25,

2021
   
September 26,

2020
   
September 25,

2021
   
September 26,

2020
 
Revenue
  $4,592,551   $2,836,626   $1,734,299   $1,085,546 
Investment income
   2,138    2,716    706    714 
Costs and expenses:
                    
Purchased transportation
   3,583,197    2,183,143    1,356,671    838,753 
Commissions to agents
   356,997    236,490    135,295    85,848 
Other operating costs, net of gains on asset sales/dispositions
   27,117    23,035    10,572    7,361 
Insurance and claims
   75,198    66,563    29,569    21,855 
Selling, general and administrative
   158,720    124,779    59,198    38,851 
Depreciation and amortization
   36,532    34,212    12,288    11,240 
Impairment of intangible and other assets
   0      2,582    0      0   
   
 
 
   
 
 
   
 
 
   
 
 
 
Total costs and expenses
   4,237,761    2,670,804    1,603,593    1,003,908 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating income
   356,928    168,538    131,412    82,352 
Interest and debt expense
   2,974    2,936    965    1,008 
   
 
 
   
 
 
   
 
 
   
 
 
 
Income before income taxes
   353,954    165,602    130,447    81,344 
Income taxes
   85,745    38,567    31,772    19,458 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income
  $268,209   $127,035   $98,675   $61,886 
   
 
 
   
 
 
   
 
 
   
 
 
 
Diluted earnings per share
  $7.00   $3.28   $2.58   $1.61 
   
 
 
   
 
 
   
 
 
   
 
 
 
Average diluted shares outstanding
   38,342,000    38,673,000    38,218,000    38,386,000 
   
 
 
   
 
 
   
 
 
   
 
 
 
Dividends per common share
  $0.67   $0.58   $0.25   $0.21 
   
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
5

LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
   
Thirty Nine Weeks Ended
  
Thirteen Weeks Ended
 
   
September 25,

2021
  
September 26,

2020
  
September 25,

2021
  
September 26,

2020
 
Net income
  $268,209  $127,035  $98,675  $61,886 
Other comprehensive (loss) income:
                 
Unrealized holding (losses) gains on
available-for-sale
investments, net of tax (benefit) expense of ($347), $413, ($104) and $75
   (1,260  1,510   (377  273 
Foreign currency translation gains (losses)
   320   (5,262  (710  908 
   
 
 
  
 
 
  
 
 
  
 
 
 
Other comprehensive (loss) income
   (940  (3,752  (1,087  1,181 
   
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive income
  $267,269  $123,283  $97,588  $63,067 
   
 
 
  
 
 
  
 
 
  
 
 
 
See accompanying notes to consolidated financial statements.
 
6

LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
   
Thirty Nine Weeks Ended
 
   
September 25,

2021
  
September 26,

2020
 
OPERATING ACTIVITIES
         
Net income
  $268,209  $127,035 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation and amortization of operating property and intangible assets
   36,532   34,212 
Non-cash
interest charges
   336   222 
Provisions for losses on trade and other accounts receivable
   3,884   7,206 
Gains on sales/disposals of operating property
   (1,259  (2,295
Impairment of intangible and other assets
   0     2,582 
Deferred income taxes, net
   4,948   4,758 
Stock-based compensation
   18,717   2,691 
Changes in operating assets and liabilities:
         
Increase in trade and other accounts receivable
   (224,503  (62,492
Increase in other assets
   (3,822  (13,492
Increase in accounts payable
   167,880   66,815 
Increase in other liabilities
   22,837   14,050 
(Decrease) increase in insurance claims
   (76,769  4,256 
   
 
 
  
 
 
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   216,990   185,548 
   
 
 
  
 
 
 
INVESTING ACTIVITIES
         
Net changes in other short-term investments
   0     131 
Sales and maturities of investments
   25,521   18,795 
Purchases of investments
   (77,649  (21,102
Purchases of operating property
   (18,561  (25,426
Proceeds from sales of operating property
   2,047   6,623 
Consideration paid for acquisition
   0     (2,766
   
 
 
  
 
 
 
NET CASH USED BY INVESTING ACTIVITIES
   (68,642  (23,745
   
 
 
  
 
 
 
FINANCING ACTIVITIES
         
Increase (decrease) in cash overdraft
   14,210   (6,419
Dividends paid
   (102,463  (101,442
Payment for debt issue costs
   0     (959
Proceeds from exercises of stock options
   134   676 
Taxes paid in lieu of shares issued related to stock-based compensation plans
   (2,342  (3,326
Purchases of common stock
   (50,230  (115,962
Principal payments on finance lease obligations
   (26,513  (33,036
Payment of deferred consideration
   (168  0   
   
 
 
  
 
 
 
NET CASH USED BY FINANCING ACTIVITIES
   (167,372  (260,468
   
 
 
  
 
 
 
Effect of exchange rate changes on cash and cash equivalents
   234   (2,296
   
 
 
  
 
 
 
Decrease in cash and cash equivalents
   (18,790  (100,961
Cash and cash equivalents at beginning of period
   249,354   319,515 
   
 
 
  
 
 
 
Cash and cash equivalents at end of period
  $230,564  $218,554 
   
 
 
  
 
 
 
See accompanying notes to consolidated financial statements.
 
7

LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Thirty Nine and Thirteen Weeks Ended September 25, 2021 and September 26, 2020
(Dollars in thousands)
(Unaudited)
 
  
Common Stock
  
Additional
Paid-In
  
Retained
  
Treasury Stock at Cost
  
Accumulated
Other
Comprehensive
    
  
Shares
  
Amount
  
Capital
  
Earnings
  
Shares
  
Amount
  
(Loss) Income
  
Total
 
Balance December 26, 2020
  68,183,702  $682  $228,875  $2,046,238   29,797,639  $(1,581,961 $(1,999 $691,835 
Net income
              77,240               77,240 
Dividends ($0.21 per share)
              (8,067              (8,067
Issuance of stock related to stock-based compensation plans
  28,594   —     (307      6,087   (857      (1,164
Stock-based compensation
          4,029                   4,029 
Other comprehensive loss
                          (954  (954
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance March 27, 2021
  68,212,296  $682  $232,597  $2,115,411   29,803,726  $(1,582,818 $(2,953 $762,919 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income
              92,294               92,294 
Dividends ($0.21 per share)
              (8,068              (8,068
Purchases of common stock
                  150,000   (23,837      (23,837
Issuance of stock related to stock-based compensation plans
  17,584   —     (1,039      355   (61      (1,100
Stock-based compensation
          6,864                   6,864 
Other comprehensive income
                          1,101   1,101 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance June 26, 2021
  68,229,880  $682  $238,422  $2,199,637   29,954,081  $(1,606,716 $(1,852 $830,173 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income
              98,675               98,675 
Dividends ($0.25 per share)
              (9,558              (9,558
Purchases of common stock
                  167,046   (26,393      (26,393
Issuance of stock related to stock-based compensation plans
  1,133   —     56       1,300   —         56 
Stock-based compensation
          7,824                   7,824 
Other comprehensive loss
                          (1,087  (1,087
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance September 25, 2021
  68,231,013  $682  $246,302  $2,288,754   30,122,427  $(1,633,109 $(2,939 $899,690 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance December 28, 2019
  68,083,419  $681  $226,123  $1,962,161   28,609,926  $(1,465,284 $(2,212 $721,469 
Adoption of accounting standard
              (702              (702
Net income
              40,895               40,895 
Dividends ($0.185 per share)
              (7,336              (7,336
Purchases of common stock
                  1,178,970   (115,962      (115,962
Issuance of stock related to stock-based compensation plans
  84,063   1   (1,781      8,078   (639      (2,419
Stock-based compensation
          631                   631 
Other comprehensive loss
                          (9,481  (9,481
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance March 28, 2020
  68,167,482  $682  $224,973  $1,995,018   29,796,974  $(1,581,885 $(11,693 $627,095 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income
              24,254               24,254 
Dividends ($0.185 per share)
              (7,099              (7,099
Issuance of stock related to stock-based compensation plans
  9,305   —     (211      354   (36      (247
Stock-based compensation
          570                   570 
Other comprehensive income
                          4,548   4,548 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance June 27, 2020
  68,176,787  $682  $225,332  $2,012,173   29,797,328  $(1,581,921 $(7,145 $649,121 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income
              61,886               61,886 
Dividends ($0.21 per share)
              (8,060              (8,060
Issuance of stock related to stock-based compensation plans
  4,631   —     56       311   (40      16 
Stock-based compensation
          1,490                   1,490 
Other comprehensive income
                          1,181   1,181 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance September 26, 2020
  68,181,418  $682  $226,878  $2,065,999   29,797,639  $(1,581,961 $(5,964 $705,634 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
See accompanying notes to consolidated financial statements.
 
8

LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates. Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Significant intercompany accounts have been eliminated in consolidation.
(1) Significant Accounting Policies
Revenue from Contracts with Customers – Disaggregation of Revenue
The following table summarizes (i) the percentage of consolidated revenue generated by mode of transportation and (ii) the total amount of truck transportation revenue hauled by BCO Independent Contractors and Truck Brokerage Carriers generated by equipment type during the thirty-nine-week and thirteen-week periods ended September 25, 2021 and September 26, 2020 (dollars in thousands):
 
   
Thirty Nine Weeks Ended
  
Thirteen Weeks Ended
 
   
September 25,

2021
  
September 26,

2020
  
September 25,

2021
  
September 26,

2020
 
Mode
                 
Truck – BCO Independent Contractors
   41  46  40  46
Truck – Truck Brokerage Carriers
   50  46  51  46
Rail intermodal
   3  3  3  3
Ocean and air cargo carriers
   4  3  5  3
Truck Equipment Type
                 
Van equipment
  $2,502,025  $1,485,553  $918,115  $578,166 
Unsided/platform equipment
  $1,112,358  $807,966  $422,979  $294,273 
Less-than-truckload
  $85,551  $70,984  $30,819  $25,125 
Other truck transportation (1)
  $518,472  $249,584  $208,817  $108,614 
 
(1)
Includes power-only, expedited, straight truck, cargo van, and miscellaneous other truck transportation revenue generated by the transportation logistics segment. Power-only refers to shipments where the Company furnishes a power unit and an operator but not trailing equipment, which is typically provided by the shipper or consignee.
 
9

(2) Share-based Payment Arrangements
As of September 25, 2021, the Company has an employee equity incentive plan, the 2011 equity incentive plan (the “2011 EIP”). The Company also has a stock compensation plan for members of its Board of Directors, the Amended and Restated 2013 Directors Stock Compensation Plan (as amended and restated as of May 17, 2016, the “2013 DSCP”). 6,000,000 shares of the Company’s common stock were authorized for issuance under the 2011 EIP and 115,000 shares of the Company’s common stock were authorized for issuance under the 2013 DSCP. The 2011 EIP and 2013 DSCP are each referred to herein as a “Plan,” and, collectively, as the “Plans.” Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands):
 
   
Thirty Nine Weeks Ended
   
Thirteen Weeks Ended
 
   
September 25,
   
September 26,
   
September 25,
   
September 26,
 
   
2021
   
2020
   
2021
   
2020
 
Total cost of the Plans during the period
  $18,717   $2,691   $7,824   $1,490 
Amount of related income tax benefit recognized during the period
   (5,636   (1,618   (1,919   (483
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cost of the Plans during the period
  $13,081   $1,073   $5,905   $1,007 
   
 
 
   
 
 
   
 
 
   
 
 
 
Included in income tax benefits recognized in the thirty-nine-week periods ended September 25, 2021 and September 26, 2020 were excess tax benefits from stock-based awards of $1,039,000 and $927,000, respectively.
As of September 25, 2021, there were 56,782 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 3,505,880 shares of the Company’s common stock reserved for issuance under the 2011 EIP.
Restricted Stock Units
The following table summarizes information regarding the Company’s outstanding restricted stock unit (“RSU”) awards with either a performance condition or a market condition under the Plans:
 
   
Number of
   
Weighted Average
Grant Date
 
   
RSUs
   
Fair Value
 
Outstanding at December 26, 2020
   183,213   $93.44 
Granted
   46,103   $128.78 
Shares earned in excess of target
(1)
   7,132   $31.97 
Vested shares
   (24,600  $59.85 
Forfeited
   (2,688  $107.76 
   
 
 
      
Outstanding at September 25, 2021
   209,160   $102.90 
   
 
 
      
 
(1)
Represents shares earned in excess of target under the May 1, 2015 RSU award as total shareholder return exceeded the target under the award.
During the thirty-nine-week period ended September 25, 2021, the Company granted RSUs with a performance condition. Outstanding RSUs at both December 26, 2020 and September 25, 2021 include RSUs with a performance condition and RSUs with a market condition, as further described below and in the Company’s 2020 Annual Report on Form
10-K.
RSUs with a performance condition granted on January 29, 2021 may vest on January 31 of 2024, 2025 and 2026 based on growth in operating income and
pre-tax
income per diluted share from continuing operations as compared to the results from the 2020 fiscal year, adjusted to reflect the add back of
non-cash
impairment charges recorded in the Company’s 2020 fiscal year related to certain assets, primarily customer contract and related customer relationship intangible assets, held by the Company’s Mexican subsidiaries.
The Company recognized
 approximately $
16,223,000
and $
415,000
of share-based compensation expense related to RSU awards in the thirty-nine-week periods ended September 
25
,
2021
and September 
26
,
2020
, respectively. As of September 
25
,
2021
, there was a maximum of $
26.3
 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately
3.2
years. With respect to RSU awards with a performance condition, the amount of future compensation expense to be recognized will
be
determined based on future operating results.
 
10

Non-vested
Restricted Stock and Deferred Stock Units
The following table summarizes information regarding the Company’s outstanding shares of
non-vested
restricted stock and Deferred Stock Units (defined below) under the Plans:
 
   
Number of Shares

and Deferred Stock
Units
   
Weighted Average

Grant Date

Fair Value
 
Non-vested
at December 26, 2020
   60,440   $103.65 
Granted
   26,351   $150.20 
Vested
   (29,055  $104.35 
Forfeited
   (1,300  $97.81 
   
 
 
      
Non-vested
at September 25, 2021
   56,436   $125.16 
   
 
 
      
The fair value of each share of
non-vested
restricted stock issued and Deferred Stock Unit granted under the Plans is based on the fair value of a share of the Company’s common stock on the date of grant. Shares of
non-vested
restricted stock are generally subject to vesting in three equal annual installments either on the first, second and third anniversary of the date of the grant or the third, fourth and fifth anniversary of the date of the grant, or 100% on the first or fifth anniversary of the date of the grant. For restricted stock awards granted under the 2013
DSCP
plan, each recipient may elect to defer receipt of shares and instead receive restricted stock units (“Deferred Stock Units”), which represent contingent rights to receive shares of the Company’s common stock on the date of recipient separation from
service from
the Board of Directors, or, if earlier, upon a change in control event of the Company. Deferred Stock Units become vested 100% on the first anniversary of the date of the grant. Deferred Stock Units do not represent actual ownership in shares of the Company’s common stock and the recipient does not have voting rights or other incidents of ownership until the shares are issued. However, Deferred Stock Units do contain the right to receive dividend equivalent payments prior to settlement into shares.
As of September 
25
,
2021
, there was $
4,726,000
of total unrecognized compensation cost related to
non-vested
shares of restricted stock and Deferred Stock Units granted under the Plans. The unrecognized compensation cost related to these
non-vested
shares of restricted stock and Deferred Stock Units is expected to be recognized over a weighted average period of
2.0
years.
Stock Options
The following table summarizes information regarding the Company’s outstanding stock options under the Plans:
 
   
Number of
Options
   
Weighted 
Average
Exercise Price
 
per
Share
   
Weighted 
Average
Remaining
Contractual
Term 
(years)
   
Aggregate
 Intrinsic
Value (000s)
 
Options outstanding at December 26, 2020
   17,650   $54.16           
Exercised
   (6,480  $52.68           
   
 
 
                
Options outstanding at September 25, 2021
   11,170   $55.02    1.0   $1,224 
   
 
 
                
Options exercisable at September 25, 2021
   11,170   $55.02    1.0   $1,224 
   
 
 
                
The total intrinsic value
of
stock options exercised during the thirty-nine-week periods ended September 
25
,
2021
and September 
26
,
2020
was $
644,000
and $
1,599,000
, respectively.
As of September 
25
,
2021
, there was no unrecognized compensation cost related to stock options granted under the Plans.
(3) Income Taxes
The provisions for income taxes for the 2021 and 2020 thirty-nine-week periods were based on estimated annual effective income tax rates of 24.4% and 24.2%, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The increase in the estimated annual effective income tax rate was primarily attributable to increased anticipated nondeductible executive compensation during the 2021 period. The effective income tax rate for the 2021 thirty-nine-week period was 24.2%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and nondeductible executive compensation, partially offset by excess tax benefits realized on stock-based awards. The effective income tax rate for the 2020 thirty-nine-week period was 23.3%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock-based awards and state tax refunds.
 
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(4) Earnings Per Share
Earnings per common share are based on the weighted average number of shares outstanding, including outstanding
non-vested
restricted stock and outstanding Deferred Stock Units. Diluted earnings per share are based on the weighted average number of common shares and Deferred Stock Units outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. During the 2021 and 2020 thirty-nine-week and thirteen-week periods, in reference to the determination of diluted earnings per share, the future compensation cost attributable to outstanding shares of
non-vested
restricted stock exceeded the impact of incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options.
For each of the thirty-nine-week periods ended September 25, 2021 and September 26, 2020, 0options outstanding to purchase shares of common stock were antidilutive. Outstanding RSUs were excluded from the calculation of diluted earnings per share for all periods because the performance metric requirements or market condition for vesting had not been satisfied.
(5) Additional Cash Flow Information
During the 2021 thirty-nine-week period, Landstar paid income taxes and interest of $71,823,000 and $2,780,000, respectively. During the 2020 thirty-nine-week period, Landstar paid income taxes and interest of $28,761,000 and $3,087,000, respectively. Landstar acquired operating property by entering into finance leases in the amounts of $23,080,000 and $7,485,000 in the 2021 and 2020 thirty-nine-week periods, respectively.
(6) Segment Information
The following table summarizes information about the Company’s reportable business segments as of and for the thirty-nine-week and thirteen-week periods ended September 25, 2021 and September 26, 2020 (in thousands):
 
   
Thirty Nine Weeks Ended
 
   
September 25, 2021
   
September 26, 2020
 
   
Transportation

Logistics
   
Insurance
   
Total
   
Transportation

Logistics
   
Insurance
   
Total
 
External revenue
  $ 4,539,561   $ 52,990   $ 4,592,551   $ 2,795,056   $ 41,570   $ 2,836,626 
Internal revenue
        53,028    53,028         44,912    44,912 
Investment income
        2,138    2,138         2,716    2,716 
Operating income
   323,370    33,558    356,928    148,270    20,268    168,538 
Expenditures on long-lived assets
   18,561         18,561    25,426         25,426 
Goodwill
   40,980         40,980    40,251         40,251 
 
   
Thirteen Weeks Ended
 
   
September 25, 2021
   
September 26, 2020
 
   
Transportation

Logistics
   
Insurance
   
Total
   
Transportation

Logistics
   
Insurance
   
Total
 
External revenue
  $1,716,004   $18,295   $1,734,299   $1,071,374   $14,172   $1,085,546 
Internal revenue
        9,533    9,533         9,078    9,078 
Investment income
        706    706         714    714 
Operating income
   123,410    8,002    131,412    71,752    10,600    82,352 
Expenditures on long-lived assets
   9,561         9,561    7,750         7,750 
In the thirty-nine-week and thirteen-week periods ended September 25, 2021 and September 26, 2020, 0 single customer accounted for more than 10% of the Company’s consolidated revenue.
 
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(7) Other Comprehensive Income
The following table presents the components of and changes in accumulated other comprehensive income (loss), net of related income taxes, as of and for the thirty-nine-week period ended September 25, 2021 (in thousands):
 
   
Unrealized
Holding Gains
(Losses) on
Available-for-Sale

Securities
   
Foreign Currency
Translation
   
Total
 
Balance as of December 26, 2020
  $2,808   $ (4,807  $ (1,999
Other comprehensive (loss) gain
   (1,260   320    (940
   
 
 
   
 
 
   
 
 
 
Balance as of September 25, 2021
  $1,548   $ (4,487  $ (2,939
   
 
 
   
 
 
   
 
 
 
Amounts reclassified from accumulated other comprehensive income to investment income due to the realization of previously unrealized gains and losses in the accompanying consolidated statements of income were not significant for the thirty-nine-week period ended September 25, 2021.
(8) Investments
Investments include primarily investment-grade corporate bonds and U.S. Treasury obligations having maturities of up to five years (the “bond portfolio”) and money market investments. Investments in the bond portfolio are reported as
available-for-sale
and are carried at fair value. Investments maturing less than one year from the balance sheet date are included in short-term investments and investments maturing more than one year from the balance sheet date are included in other assets in the consolidated balance sheets. Management performs an analysis of the nature of the unrealized losses on
available-for-sale
investments to determine whether an allowance for credit loss is necessary. Unrealized losses, representing the excess of the purchase price of an investment over its fair value as of the end of a period, considered to be a result of credit-related factors, are to be included as a charge in the statement of income, while unrealized losses considered to be a result of noncredit-related factors are to be included as a component of shareholders’ equity. Investments whose values are based on quoted market prices in active markets are classified within Level 1. Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, are classified within Level 2. As Level 2 investments include positions that are not traded in active markets, valuations may be adjusted to reflect illiquidity and/or
non-transferability,
which are generally based on available market information. Any transfers between levels are recognized as of the beginning of any reporting period. Fair value of the bond portfolio was determined using Level 1 inputs related to U.S. Treasury obligations and money market investments and Level 2 inputs related to investment-grade corporate bonds, asset-backed securities and direct obligations of government agencies. Unrealized gains, net of unrealized losses, on the investments in the bond portfolio were $1,971,000 at September 25, 2021 and $3,578,000 at December 26, 2020, respectively.
 
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The amortized cost and fair values of
available-for-sale
investments are as follows at September 25, 2021 and December 26, 2020 (in thousands):
 
       
Gross
   
Gross
     
  
Amortized

Cost
   
Unrealized

Gains
   
Unrealized

Losses
   
Fair

Value
 
September 25, 2021
                    
Money market investments
  $12,736   $—     $ —     $12,736 
Asset-backed securities
   18,899    4    63    18,840 
Corporate bonds and direct obligations of government agencies
   136,854    2,209    259    138,804 
U.S. Treasury obligations
   2,341    80    —      2,421 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $ 170,830   $ 2,293   $322   $ 172,801 
   
 
 
   
 
 
   
 
 
   
 
 
 
December 26, 2020
                    
Money market investments
  $17,867   $—     $—     $17,867 
Asset-backed securities
   567    —      26    541 
Corporate bonds and direct obligations of government agencies
   98,241    3,551    72    101,720 
U.S. Treasury obligations
   2,338    125    —      2,463 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $119,013   $3,676   $98   $122,591 
   
 
 
   
 
 
   
 
 
   
 
 
 
For those
available-for-sale
investments with unrealized losses at September 25, 2021 and December 26, 2020, the following table summarizes the duration of the unrealized loss (in thousands):
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair

Value
   
Unrealized

Loss
   
Fair

Value
   
Unrealized

Loss
   
Fair

Value
   
Unrealized

Loss
 
September 25, 2021
                              
Asset-backed securities
  $ 12,714   $63   $ —     $ —     $ 12,714   $63 
Corporate bonds and direct obligations of government agencies
   49,442    259    —      —      49,442    259 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $62,156   $ 322   $—     $—     $62,156   $ 322 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
December 26, 2020
                              
Asset-backed securities
  $541   $26   $—     $—     $541   $26 
Corporate bonds and direct obligations of government agencies
   2,681    72    —      —      2,681    72 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $3,222   $98   $—     $—     $3,222   $98 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The Company believes unrealized losses on investments were primarily caused by rising interest rates rather than changes in credit quality. The Company expects to recover, through collection of all of the contractual cash flows of each security, the amortized cost basis of these securities as it does not intend to sell, and does not anticipate being required to sell, these securities before recovery of the cost basis. For these reasons, no losses have been recognized in the Company’s consolidated statements of income.
(9) Leases
Landstar’s noncancelable leases are primarily comprised of finance leases for the acquisition of new trailing equipment. Each finance lease for the acquisition of trailing equipment is a
five year
lease with a $
1
purchase option for the applicable equipment at lease expiration. Substantially all of Landstar’s operating lease
right-of-use
assets and operating lease liabilities represent leases for facilities maintained in support of the Company’s network of BCO Independent Contractors and office space used to conduct Landstar’s business. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives or other
build-out
clauses.
 
14

Further, the leases do not contain contingent rent provisions. Landstar also leases certain trailing equipment to supplement the Company-owned trailer fleet under
“month-to-month”
lease terms, which are not required to be recorded on the balance sheet due to the less than twelve month lease term exemption. Sublease income is primarily comprised of weekly trailing equipment rentals to our BCO Independent Contractors.
Most of Landstar’s operating leases include one or more options to renew. The exercise of lease renewal options is typically at Landstar’s sole discretion, and, as such, the majority of renewals to extend the lease terms are not included in the
right-of-use
assets and lease liabilities as they are not reasonably certain of exercise. Landstar regularly evaluates the renewal options, and when they are reasonably certain of exercise, Landstar includes the renewal period in the lease term.
As most of Landstar’s operating leases do not provide an implicit rate, Landstar utilized its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. Landstar has a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.
The components of lease cost for finance leases and operating leases for the thirty nine weeks ended September 25, 2021 were (in thousands):
 
Finance leases:
     
Amortization of
right-of-use
assets
  $ 15,967 
Interest on lease liability
   2,023 
   
 
 
 
Total finance lease cost
   17,990 
Operating leases:
     
Lease cost
   2,623 
Variable lease cost
   —   
Sublease income
   (3,720
   
 
 
 
Total net operating lease income
   (1,097
   
 
 
 
Total net lease cost
  $16,893 
   
 
 
 
A summary of the lease classification on our consolidated balance sheet as of September 25, 2021 is as follows (in thousands):
Assets:
 
Operating
 
lease
 
right-of-use
 
assets
  Other assets  $2,198 
Finance lease assets
  Operating property, less accumulated depreciation and amortization   129,242 
      
 
 
 
Total lease assets
     $131,440 
      
 
 
 
Liabilities:
The following table reconciles the undiscounted cash flows for the finance and operating leases to the finance and operating lease liabilities recorded on the balance sheet at September 25, 2021 (in thousands):
 
   
Finance

Leases
   
Operating

Leases
 
2021 Remainder
  $11,454   $192 
2022
   33,585    714 
2023
   26,573    634 
2024
   16,665    535 
2025
   10,418    284 
Thereafter
   2,916    0   
   
 
 
   
 
 
 
Total future minimum lease payments
   101,611    2,359 
Less amount representing interest (1.6% to 4.4%)
   4,270    161 
   
 
 
   
 
 
 
Present value of minimum lease payments
  $97,341   $2,198 
   
 
 
   
 
 
 
Current maturities of long-term debt
   34,617      
Long-term debt, excluding current maturities
   62,724      
Other current liabilities
        713 
Deferred income taxes and other noncurrent liabilities
        1,485 
 
15

The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of September 25, 2021 were:
 
   Finance Leases  Operating Leases 
Weighted average remaining lease term (years)
   3.5   3.5 
Weighted average discount rate
   2.7  4.0
(10) Debt
Other than the finance lease obligations as presented on the consolidated balance sheets, the Company had 0 outstanding debt as of September 25, 2021 and December 26, 2020.
On August 18, 2020, Landstar entered into an amended and restated credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on August 18, 2023, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $35,000,000 of which may be utilized in the form of letters of credit. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing capacity of $400,000,000.
The revolving credit loans under the Credit Agreement, at the option of Landstar, bear interest at (i) the Eurocurrency rate plus an applicable margin ranging from 1.25% to 2.00%, or (ii) an alternate base rate plus an applicable margin ranging from 0.25% to 1.00%, in each case with the applicable margin determined based upon the Company’s Leverage Ratio, as defined in the Credit Agreement, at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. The revolving credit facility bears a commitment fee, payable quarterly in arrears, of 0.25% to 0.35%, based on the Company’s Leverage Ratio at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. As of September 25, 2021 and December 26, 2020, the Company had 0 borrowings outstanding under the Credit Agreement.
The Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness. The Company is required to, among other things, maintain a minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage Ratio, as defined in the Credit Agreement, below a specified maximum. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the amount of such cash dividends and other distributions to stockholders to the extent that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event that, among other things, a person or group acquires 35% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors or the directors cease to consist of a majority of Continuing Directors, as defined in the Credit Agreement. None of these covenants are presently considered by management to be materially restrictive to the Company’s operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Credit Agreement.
The interest rates on borrowings under the revolving credit facility are typically tied to short-term interest rates that adjust monthly and, as such, carrying value approximates fair value. Interest rates on borrowings under finance leases approximate the interest rates that would currently be available to the Company under similar terms and, as such, carrying value approximates fair value.
(11) Commitments and Contingencies
Short-term investments include $36,644,000 in current maturities of investments held by the Company’s insurance segment at September 25, 2021. The
non-current
portion of the bond portfolio of $136,157,000 is included in other assets. The short-term investments, together with $40,505,000 of
non-current
investments, provide collateral for the $69,434,000 of letters of credit issued to guarantee payment of insurance claims. As of September 25, 2021, Landstar also had $33,577,000 of additional letters of credit outstanding under the Company’s Credit Agreement.
 
16

The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
(12) Impairment of Intangible and Other Assets
During the 2020 second fiscal quarter, the Company recorded a
non-cash
impairment charge of $2,582,000 in respect of certain assets, primarily customer contract and related customer relationship intangible assets, acquired on September 20, 2017, along with substantially all of the other assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V. (“Fletes Avella”). As previously disclosed in Item 1A. Risk Factors in the Company’s Form
10-Q
for the 2020 first quarter, negative macroeconomic trends in Mexico during the first half of 2020, including issues in the international oil and gas sector, caused significant disruptions in the Mexican economy. Accordingly, management performed impairment tests of the carrying values of certain assets that primarily related to intra-Mexico business acquired as a part of the Fletes Avella acquisition. The impairment tests resulted in an impairment charge of $2,582,000, as the negative macroeconomic trends in Mexico caused financial projections as of the end of the 2020 second quarter relating to these intangible assets to be substantially below those originally anticipated at the acquisition date. There was 0 corresponding goodwill impairment charge recorded as the fair value of the Company’s Mexico and cross-border reporting unit significantly exceeded its carrying value as of June 27, 2020. The fair value of the Company’s Mexico and cross-border reporting unit continues to significantly exceed its carrying value as of September 25, 2021.
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 26, 2020 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 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 2020 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. (collectively referred to herein with their subsidiaries and other affiliated companies as “Landstar” or the “Company”), is a worldwide technology enabled asset-light provider of integrated transportation management solutions. The Company offers services to its customers across multiple transportation modes, with the ability to arrange for individual shipments of freight to comprehensive third party logistics solutions to meet all of a customer’s transportation needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada and Mexico, and between the
 
17

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 over 94,000 third party capacity providers, primarily truck capacity providers, linked together by a series of digital technologies which are provided and coordinated by the Company. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue.
Landstar markets its integrated transportation management solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. Landstar’s independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under
non-exclusive
contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers and railroads. Through this network of agents and capacity providers linked together by Landstar’s ecosystem of digital technologies, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $4.1 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.
The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services are provided by Landstar’s “Operating Subsidiaries”: Landstar Ranger, Inc., Landstar Inway, Inc., Landstar Ligon, Inc., Landstar Gemini, Inc., Landstar Transportation Logistics, Inc., Landstar Global Logistics, Inc., Landstar Express America, Inc., Landstar Canada, Inc., Landstar Metro, S.A.P.I. de C.V., and as further described below, Landstar Blue. Transportation services offered by the Company include truckload, less-than-truckload and power-only transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, intra-Mexico, intra-Canada, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive parts and assemblies, consumer durables, 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. The independent commission sales agents market 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 weeks ended September 25, 2021, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 41%, 50% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 4% of the Company’s consolidated revenue in the thirty-nine-week period ended September 25, 2021.
On May 6, 2020, the Company formed a new subsidiary that was subsequently renamed Landstar Blue, LLC (“Landstar Blue”). Landstar Blue arranges truckload brokerage services while helping the Company to develop and test digital technologies and processes for the benefit of all Landstar independent commission sales agents. On June 15, 2020, Landstar Blue completed the acquisition of an independent agent of the Company whose business focused on truckload brokerage services. The results of operations from Landstar Blue are presented as part of the Company’s transportation logistics segment. Revenue from Landstar Blue represented less than 1% of the Company’s transportation logistics segment revenue in the thirty-nine-week period ended September 25, 2021.
The insurance segment is comprised of Signature Insurance Company (“Signature”), a wholly owned offshore insurance subsidiary, 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 period ended September 25, 2021.
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.
 
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Revenue
While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s emphasis with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents”). Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents, increasing the revenue opportunities generated by existing independent commission sales agents and providing its independent commission sales agents with digital technologies they may use to grow revenue and increase efficiencies at their businesses. During the 2020 fiscal year, 508 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2020 fiscal year, the average revenue generated by a Million Dollar Agent was $7,489,000 and revenue generated by Million Dollar Agents in the aggregate represented 92% of consolidated revenue.
 
19

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
 
   
September 25,
2021
  
September 26,
2020
  
September 25,
2021
  
September 26,
2020
 
Revenue generated through (in thousands):
     
Truck transportation
     
Truckload:
     
Van equipment
  $ 2,502,025  $ 1,485,553  $918,115  $578,166 
Unsided/platform equipment
   1,112,358   807,966   422,979   294,273 
Less-than-truckload
   85,551   70,984   30,819   25,125 
Other truck transportation (1)
   518,472   249,584   208,817   108,614 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total truck transportation
   4,218,406   2,614,087   1,580,730   1,006,178 
Rail intermodal
   120,540   81,747   44,472   30,432 
Ocean and air cargo carriers
   191,951   89,002   84,111   31,752 
Other (2)
   61,654   51,790   24,986   17,184 
  
 
 
  
 
 
  
 
 
  
 
 
 
  $4,592,551  $2,836,626  $ 1,734,299  $ 1,085,546 
  
 
 
  
 
 
  
 
 
  
 
 
 
Revenue on loads hauled via BCO Independent Contractors included in total truck transportation
  $1,899,313  $1,312,003  $690,257  $502,224 
Number of loads:
     
Truck transportation
     
Truckload:
     
Van equipment
   1,037,516   822,422   359,263   296,427 
Unsided/platform equipment
   381,594   338,696   133,332   118,026 
Less-than-truckload
   135,038   119,533   49,943   41,454 
Other truck transportation (1)
   208,402   141,669   81,242   56,693 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total truck transportation
   1,762,550   1,422,320   623,780   512,600 
Rail intermodal
   40,420   33,410   13,620   11,900 
Ocean and air cargo carriers
   29,650   22,720   10,190   8,290 
  
 
 
  
 
 
  
 
 
  
 
 
 
   1,832,620   1,478,450   647,590   532,790 
  
 
 
  
 
 
  
 
 
  
 
 
 
Loads hauled via BCO Independent Contractors included in total truck transportation
   773,270   693,860   263,120   250,030 
Revenue per load:
     
Truck transportation
     
Truckload:
     
Van equipment
  $2,412  $1,806  $2,556  $1,950 
Unsided/platform equipment
   2,915   2,386   3,172   2,493 
Less-than-truckload
   634   594   617   606 
Other truck transportation (1)
   2,488   1,762   2,570   1,916 
Total truck transportation
   2,393   1,838   2,534   1,963 
Rail intermodal
   2,982   2,447   3,265   2,557 
Ocean and air cargo carriers
   6,474   3,917   8,254   3,830 
Revenue per load on loads hauled via BCO Independent Contractors
  $2,456  $1,891  $2,623  $2,009 
Revenue by capacity type (as a % of total revenue):
     
Truck capacity providers:
     
BCO Independent Contractors
   41  46  40  46
Truck Brokerage Carriers
   50  46  51  46
Rail intermodal
   3  3  3  3
Ocean and air cargo carriers
   4  3  5  3
Other
   1  2  1  2
 
(1)
Includes power-only, expedited, straight truck, cargo van, and miscellaneous other truck transportation revenue generated by the transportation logistics segment. Power-only refers to shipments where the Company furnishes a power unit and an operator but not trailing equipment, which is typically provided by the shipper or consignee.
(2)
Includes primarily reinsurance premium revenue generated by the insurance segment and intra-Mexico transportation services revenue generated by Landstar Metro.
 
20

Expenses
Purchased transportation
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 25, 2021
   
September 26, 2020
 
BCO Independent Contractors
   10,955    9,866 
Truck Brokerage Carriers:
    
Approved and active
(1)
   58,676    41,246 
Other approved
   24,602    22,181 
  
 
 
   
 
 
 
   83,278    63,427 
  
 
 
   
 
 
 
Total available truck capacity providers
   94,233    73,293 
  
 
 
   
 
 
 
Trucks provided by BCO Independent Contractors
   11,746    10,571 
 
(1)
Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal quarter end.
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 contractually agreed-upon fixed rates per load. Purchased transportation as a percentage of revenue for truck brokerage, rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor and air cargo services. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases as a percentage of consolidated revenue in proportion to changes in the percentage of consolidated revenue generated through BCO Independent Contractors and other third party capacity providers and external revenue from the insurance segment, consisting of reinsurance premiums. Purchased transportation as a percent of revenue also increases or decreases in relation to the availability of truck brokerage capacity and with changes in the price of fuel on revenue generated from shipments hauled by Truck Brokerage Carriers. The Company passes 100% of fuel surcharges billed to customers for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. These fuel surcharges are excluded from revenue and the cost of purchased transportation. Purchased transportation costs are recognized over the freight transit period as the performance obligation to the customer is completed.
Commissions to agents
Commissions to agents are based on contractually agreed-upon percentages of (i) revenue, (ii) revenue less the cost of purchased transportation, or (iii) revenue less a contractually agreed upon percentage of revenue retained by Landstar and the cost of purchased transportation (the “retention contracts”). Commissions to agents as a percentage of consolidated revenue vary directly with fluctuations in the percentage of consolidated revenue generated by the various modes of transportation and reinsurance premiums and, in general, vary inversely with changes in the amount of purchased transportation as a percentage of 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.
Other operating costs, net of gains on asset sales/dispositions
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.
 
21

Insurance and claims
With respect to insurance and claims cost, potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable.
Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $5,000,000 and $10,000,000 (the “Initial Excess Policy”) with a third party insurance company. For commercial trucking claims incurred on or after May 1, 2019 through April 30, 2022, the Initial Excess Policy provides for a limit for a single loss of $5,000,000, with an aggregate limit of $15,000,000 for each policy year, an aggregate limit of $20,000,000 for the
thirty-six
month term ended April 30, 2022, and options to increase such aggregate limits for
pre-established
amounts of additional premium. If aggregate losses under the Initial Excess Policy exceed either the annual aggregate limit or the aggregate limit for the three year period ending April 30, 2022, and the Company did not elect to increase such aggregate limits for a
pre-established
amount of additional premium, Landstar would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention for commercial trucking claims during the remainder of the applicable policy year(s). Moreover, as a result of the Company’s aggregate loss experience since it entered into the Initial Excess Policy, the Initial Excess Policy required the Company to pay additional premium relating to its existing coverage up to a
pre-established
maximum amount of $3,500,000, which was provided for in insurance and claims costs for the Company’s 2020 fiscal first quarter.
The Company also maintains third party insurance arrangements providing excess coverage for commercial trucking liabilities in excess of $10,000,000. These third party arrangements provide coverage on a per occurrence or aggregated basis. Due to the increasing cost of commercial auto liability claims throughout the United States in recent years, the availability of such excess coverage has significantly decreased, and the pricing associated with such excess coverage, to the extent available, has significantly increased. Effective May 1, 2021, with respect to the annual policy year ending April 30, 2022, the Company experienced an increase of approximately $3 million, or 19%, in the premiums charged by third party insurance companies to the Company for excess coverage for commercial trucking liabilities in excess of $10,000,000. Moreover, the Company increased the level of its financial exposure to commercial trucking claims in excess of $10,000,000, including through the use of additional self-insurance, deductibles, aggregate loss limits, quota shares and other arrangements with third party insurance companies, based on the availability of coverage within certain excess insurance coverage layers and estimated cost differentials between proposed premiums from third party insurance companies and historical and actuarially projected losses experienced by the Company at various levels of excess insurance coverage. No assurances can be given that the availability of excess coverage for commercial trucking claims will not continue to deteriorate, that the pricing associated with such excess coverage, to the extent available, will not continue to increase, nor that insurance coverage from third party insurers for excess coverage of commercial trucking claims will even be available on commercially reasonable terms at certain levels.
Further, the Company retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. In addition, under reinsurance arrangements by Signature of certain risks of the Company’s BCO Independent Contractors, the Company retains liability of up to $500,000, $1,000,000 or $2,000,000 with respect to certain occupational accident claims and up to $750,000 with respect to certain workers’ compensation claims. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight 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.
Selling, general and administrative
During the thirty-nine-week period ended September 25, 2021, employee compensation and benefits accounted for approximately seventy-five percent of the Company’s selling, general and administrative costs.
Depreciation and amortization
Depreciation and amortization primarily relate to depreciation of trailing equipment and information technology hardware and software.
 
22

Costs of revenue
The Company incurs costs of revenue related to the transportation of freight and, to a much lesser extent, to reinsurance premiums received by Signature. Costs of revenue include variable costs of revenue and other costs of revenue. Variable costs of revenue include purchased transportation and commissions to agents, as these costs are entirely variable on a
shipment-by-shipment
basis. Other costs of revenue include fixed costs of revenue and semi-variable costs of revenue, where such costs may vary over time based on certain economic factors or operational metrics such as the number of Company-controlled trailers, the number of BCO Independent Contractors, the frequency and severity of insurance claims, the number of miles traveled by BCO Independent Contractors, or the number and/or scale of information technology projects in process or
in-service
to support revenue generating activities, rather than on a
shipment-by-shipment
basis. Other costs of revenue associated with the transportation of freight include: (i) other operating costs, primarily consisting of trailer maintenance and BCO Independent Contractor recruiting and qualification costs, as reported in the Company’s Consolidated Statements of Income, (ii) transportation-related insurance premiums paid and claim costs incurred, included as a portion of insurance and claims in the Company’s Consolidated Statements of Income, (iii) costs incurred related to internally developed software including ASC
350-40
amortization, implementation costs, hosting costs and other support costs utilized to support our independent commission sales agents, third party capacity providers, and customers, included as a portion of depreciation and amortization and of selling, general and administrative in the Company’s Consolidated Statements of Income; and (iv) depreciation on Company-owned trailing equipment, included as a portion of depreciation and amortization in the Company’s Consolidated Statements of Income. Other costs of revenue associated with reinsurance premiums received by Signature are comprised of broker commissions and other fees paid related to the administration of insurance programs to BCO Independent Contractors and are included in selling, general and administrative in the Company’s Consolidated Statements of Income. In addition to costs of revenue, the Company incurs various other costs relating to its business, including most selling, general and administrative costs and portions of costs attributable to insurance and claims and depreciation and amortization. Management continually monitors all components of the costs incurred by the Company and establishes annual cost budgets that, in general, are used to benchmark costs incurred on a monthly basis.
Gross Profit, Variable Contribution, Gross Profit Margin and Variable Contribution Margin
The following table sets forth calculations of gross profit, defined as revenue less costs of revenue, and gross profit margin defined as gross profit divided by revenue, for the periods indicated. The Company refers to revenue less variable costs of revenue as “variable contribution” and variable contribution divided by revenue as “variable contribution margin”. Variable contribution and variable contribution margin are each
non-GAAP
financial measures. The closest comparable GAAP financial measures to variable contribution and variable contribution margin are, respectively, gross profit and gross profit margin. The Company believes variable contribution and variable contribution margin are useful measures of the variable costs that we incur at a
shipment-by-shipment
level attributable to our transportation network of third-party capacity providers and independent agents in order to provide services to our customers. The Company believes variable contribution and variable contribution margin are important performance measurements and management considers variable contribution and variable contribution margin in evaluating the Company’s financial performance and in its decision-making, such as budgeting for infrastructure, trailing equipment and selling, general and administrative costs.
 
23

The reconciliations of gross profit to variable contribution and gross profit margin to variable contribution margin are each presented below:
 
   
Thirty Nine Weeks Ended
  
Thirteen Weeks Ended
 
   
September 25,
2021
  
September 26,
2020
  
September 25,
2021
  
September 26,
2020
 
Revenue
  $ 4,592,551  $ 2,836,626  $ 1,734,299  $ 1,085,546 
Costs of revenue:
     
Purchased transportation
   3,583,197   2,183,143   1,356,671   838,753 
Commissions to agents
   356,997   236,490   135,295   85,848 
  
 
 
  
 
 
  
 
 
  
 
 
 
Variable costs of revenue
   3,940,194   2,419,633   1,491,966   924,601 
Trailing equipment depreciation
   26,362   26,342   8,615   8,397 
Information technology costs
   9,534   7,021   3,450   2,722 
Insurance-related costs (1)
   78,175   68,839   30,502   22,657 
Other operating costs
   27,117   23,035   10,572   7,361 
  
 
 
  
 
 
  
 
 
  
 
 
 
Other costs of revenue
   141,188   125,237   53,139   41,137 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total costs of revenue
   4,081,382   2,544,870   1,545,105   965,738 
  
 
 
  
 
 
  
 
 
  
 
 
 
Gross profit
  $511,169  $291,756  $189,194  $119,808 
  
 
 
  
 
 
  
 
 
  
 
 
 
Gross profit margin
   11.1  10.3  10.9  11.0
Plus: other costs of revenue
   141,188   125,237   53,139   41,137 
  
 
 
  
 
 
  
 
 
  
 
 
 
Variable contribution
  $652,357  $416,993  $242,333  $160,945 
  
 
 
  
 
 
  
 
 
  
 
 
 
Variable contribution margin
   14.2  14.7  14.0  14.8
 
(1) 
Insurance-related costs in the table above include (i) other costs of revenue related to the transportation of freight that are included as a portion of insurance and claims in the Company’s Consolidated Statements of Income and (ii) certain other costs of revenue related to reinsurance premiums received by Signature that are included as a portion of selling, general and administrative in the Company’s Consolidated Statements of Income. Insurance and claims costs included in other costs of revenue relating to the transportation of freight primarily consist of insurance premiums paid for commercial auto liability, general liability, cargo and other lines of coverage related to the transportation of freight and the related cost of claims incurred under those programs, and, to a lesser extent, the cost of claims incurred under insurance programs available to BCO Independent Contractors that are reinsured by Signature. Other insurance and claims costs included in costs of revenue that are included in selling, general and administrative in the Company’s Consolidated Statements of Income consist of brokerage commissions and other fees incurred by Signature relating to the administration of insurance programs available to BCO Independent Contractors that are reinsured by Signature.
In general, variable contribution margin on revenue generated by BCO Independent Contractors represents a fixed percentage 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, variable contribution margin may be either a fixed or variable percentage, depending on the contract with each individual independent commission sales agent. Variable contribution margin on revenue generated from shipments hauled by railroads, air cargo carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention contracts, is variable in nature, as the Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of the amount represented by revenue less purchased transportation for these types of shipments. Approximately 46% of the Company’s consolidated revenue in the thirty-nine-week period ended September 25, 2021 was generated under transactions that pay a fixed percentage of revenue to the third party capacity provider and/or agents while 54% was generated under transactions that pay a variable percentage of revenue to the third party capacity provider and/or agents.
Operating income as a percentage of gross profit and operating income as a percentage of variable contribution
The following table presents operating income as a percentage of gross profit and operating income as a percentage of variable contribution. The Company’s operating income as a percentage of variable contribution is a
non-GAAP
financial measure calculated as operating income divided by variable contribution. The Company believes that operating income as a percentage of variable contribution is useful and meaningful to investors for the following principal reasons: (i) the variable costs of revenue for a significant portion of the business are highly influenced by short-term market-based trends in the freight transportation industry, whereas other costs, including other
 
24

costs of revenue, are much less impacted by short-term freight market trends; (ii) disclosure of this measure allows investors to better understand the underlying trends in the Company’s results of operations; (iii) this measure is meaningful to investors’ evaluations of the Company’s management of costs attributable to operations other than the purely variable costs associated with purchased transportation and commissions to agents that the Company incurs to provide services to our customers; and (iv) management considers this financial information in its decision-making, such as budgeting for infrastructure, trailing equipment and selling, general and administrative costs.
 
   
Thirty Nine Weeks Ended
  
Thirteen Weeks Ended
 
   
September 25,
  
September 26,
  
September 25,
  
September 26,
 
   
2021
  
2020
  
2021
  
2020
 
Gross profit
  $511,169  $291,756  $189,194  $119,808 
Operating income
  $356,928  $168,538  $131,412  $82,352 
Operating income as % of gross profit
  
 
69.8
 
 
57.8
 
 
69.4
 
 
68.7
Variable contribution
  $652,357  $416,933  $242,333  $160,945 
Operating income
  $356,928  $168,538  $131,412  $82,352 
Operating income as % of variable contribution
  
 
54.7
 
 
40.4
 
 
54.2
 
 
51.2
The increase in operating income as a percentage of gross profit from the 2020 thirty-nine-week period to the 2021 thirty-nine-week period and from the 2020 thirteen-week period to the 2021 thirteen-week period resulted from operating income increasing at a more rapid percentage rate than the increase in gross profit, as the Company was able to increase operating efficiencies during the period by scaling our fixed cost infrastructure, primarily certain components of selling, general and administrative costs, across a larger gross profit base.
The increase in operating income as a percentage of variable contribution from the 2020 thirty-nine-week period to the 2021 thirty-nine-week period and from the 2020 thirteen-week period to the 2021 thirteen-week period resulted from operating income increasing at a more rapid percentage rate than the increase in variable contribution, as the Company was able to increase operating efficiencies during the period by scaling our fixed cost infrastructure, primarily certain components of selling, general and administrative costs, as well as our other costs of revenue, across a larger variable contribution base.
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 on an annual basis at 2% or less of consolidated revenue and generally corresponds directly with the number of trucks provided by BCO Independent Contractors. The discussion of 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.
THIRTY NINE WEEKS ENDED SEPTEMBER 25, 2021 COMPARED TO THIRTY NINE WEEKS ENDED SEPTEMBER 26, 2020
Revenue for the 2021 thirty-nine-week period was $4,592,551,000, an increase of $1,755,925,000, or 62%, compared to the 2020 thirty-nine-week period. Transportation revenue increased $1,744,505,000, or 62%. The increase in transportation revenue was attributable to increased revenue per load of approximately 31% and an increased number of loads hauled of approximately 24% compared to the 2020 thirty-nine-week period. The significant increase in revenue in 2021 from 2020 was primarily related to two factors: (1) consumer demand for durable goods, building products and
e-commerce
drove revenue during the 2021 period to record levels; and (2) transportation revenue from the 2020 period was significantly adversely impacted by the effect of the
COVID-19
pandemic on the U.S. and global
 
25

economies. In particular, the impact of the
COVID-19
pandemic on demand for the Company’s truck transportation services significantly accelerated during the last week of the Company’s 2020 first fiscal quarter. However, following the demand lows experienced by the Company in April and May 2020, demand for the Company’s truck transportation services sequentially increased throughout the remainder of the thirty-nine-week period. This significant, rapid decrease in demand followed by a similarly significant yet more gradual sequential increase in demand was unprecedented in the history of the Company. Reinsurance premiums were $52,990,000 and $41,570,000 for the 2021 and 2020 thirty-nine-week periods, respectively. The increase in revenue from reinsurance premiums was primarily attributable to increased premiums from a third party insurance company relating to unladen insurance provided to certain BCO Independent Contractors and an increase in the average number of trucks provided by BCO Independent Contractors in the 2021 thirty-nine-week period compared to the 2020 thirty-nine-week period.
Truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers (together, the “third party truck capacity providers”) for the 2021 thirty-nine-week period was $4,218,406,000, representing 92% of total revenue, an increase of $1,604,319,000, or 61%, compared to the 2020 thirty-nine-week period. Revenue per load on loads hauled by third party truck capacity providers increased approximately 30% compared to the 2020 thirty-nine-week period, and the number of loads hauled by third party truck capacity providers increased approximately 24% over the same period. The increase in revenue per load on loads hauled via truck was primarily due to an extremely tight truck capacity environment experienced during the 2021 thirty-nine-week period. During the 2021 thirty-nine-week period, the demand for truck capacity, particularly with respect to van capacity, increased more rapidly than the supply of available truck capacity in the marketplace as the U.S. economy recovered from the impact of the
COVID-19
pandemic. Revenue per load on loads hauled via van equipment increased 34%, revenue per load on loads hauled via unsided/platform equipment increased 22%, revenue per load on less-than-truckload loadings increased 7% and revenue per load on loads hauled via other truck transportation increased 41% as compared to the 2020 thirty-nine-week period. The increase in the number of loads hauled via truck compared to the 2020 thirty-nine-week period was due to a broad-based increase in demand for the Company’s truck transportation services during the 2021 period, particularly those services provided via van equipment and other truck transportation loadings, primarily power-only, compared to the 2020 period, which was adversely impacted by the
COVID-19
pandemic. Loads hauled via van equipment increased 26%, loads hauled via unsided/platform equipment increased 13%, loads hauled via less-than-truckload increased 13% and loads hauled via other truck transportation increased 47% as compared to the 2020 thirty-nine-week period. Fuel surcharges billed to customers on revenue generated by BCO Independent Contractors are excluded from revenue. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $74,195,000 and $43,570,000 in the 2021 and 2020 thirty-nine-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 2021 thirty-nine-week period was $312,491,000, or 7% of total revenue, an increase of $141,742,000, or 83%, compared to the 2020 thirty-nine-week period. Revenue per load on revenue generated by multimode capacity providers increased approximately 47% in the 2021 thirty-nine-week period compared to the 2020 thirty-nine-week period, and the number of loads hauled by multimode capacity providers increased approximately 25% over the same period. Revenue per load on loads hauled by multimode capacity providers increased for all modes, primarily due to strong U.S. and global economic recoveries coupled with the impact of global supply chain disruptions. Revenue per load on loads hauled via ocean, air and rail intermodal increased 62%, 47% and 22%, respectively, during the 2021 thirty-nine-week period as compared to the 2020 thirty-nine-week period. 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 increase in the number of loads hauled by multimode capacity providers was due to a broad-based increase in demand across many customers for the Company’s rail, air and ocean service offerings during the 2021 period as well as the adverse impact of the
COVID-19
pandemic on multimode loadings during the 2020 period.
Purchased transportation was 78.0% and 77.0% of revenue in the 2021 and 2020 thirty-nine-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased percentage of revenue contributed by Truck Brokerage Carriers, which typically has a higher rate of purchased transportation than revenue generated by BCO Independent Contractors, and an increased rate of purchased transportation on revenue generated by Truck Brokerage Carriers, partially offset by a decreased rate of purchased transportation paid on revenue generated by BCO Independent Contractor revenue due to the impact of
COVID-19
pandemic relief incentive payments in the 2020 thirty-nine-week period. Under that program, for each load delivered by a BCO Independent Contractor with a confirmed delivery date from April 1, 2020 through May 30, 2020, the Company paid each of the BCO Independent Contractor who hauled the load and the independent commission sales agent who dispatched the load an extra $50. Commissions to agents were 7.8% and 8.3% of revenue in the 2021 and 2020 thirty-nine-week periods, respectively. The decrease in commissions to agents as a
 
26

percentage of revenue was primarily attributable to an increased cost of purchased transportation as a percentage of revenue on revenue generated by Truck Brokerage Carriers and a decreased commission rate paid on revenue generated by BCO Independent Contractors due to the impact of the
COVID-19
pandemic relief incentive payments to agents included in the 2020 period and the elimination as of the end of the 2020 fiscal year of certain incentive commission arrangements formerly paid to agents relating to a discontinued BCO recruitment and retention program. The Company paid a total of $12,593,000 in
COVID-19
pandemic relief incentive payments during the 2020 thirty-nine-week period.
Investment income was $2,138,000 and $2,716,000 in the 2021 and 2020 thirty-nine-week periods, respectively. The decrease in investment income was primarily attributable to lower average rates of return on investments in the 2021 thirty-nine-week period, partially offset by a higher average investment balance held by the insurance segment in the 2021 thirty-nine-week period.
Other operating costs increased $4,082,000 in the 2021 thirty-nine-week period compared to the 2020 thirty-nine-week period. The increase in other operating costs compared to the prior year was primarily due to increased trailing equipment maintenance costs, decreased gains on sales of used trailing equipment, increased BCO recruiting and qualification costs and increased payments of up to $2,000 made to BCO Independent Contractors who tested positive for
COVID-19
and were placed out of service.
Insurance and claims increased $8,635,000 in the 2021 thirty-nine-week period compared to the 2020 thirty-nine-week period. The increase in insurance and claims expense compared to the prior year was primarily due to an increase in insurance premiums, primarily for commercial trucking liability coverage, in the 2021 thirty-nine-week period, and an increase in BCO miles traveled in the 2021 period, partially offset by a $5,000,000 charge for the Company’s self-insured retention with respect to a tragic vehicular accident involving a fatality during the 2020 period, a $3,500,000 charge relating to additional premium the Company was required to pay under its existing multi-year insurance arrangements in connection with certain aggregated losses incurred during the 2020 period, as well as the impact of decreased net unfavorable development of prior years’ claims in the 2021 thirty-nine-week period. During the 2021 and 2020 thirty-nine-week periods, insurance and claims costs included $4,522,000 and $6,162,000 of net unfavorable adjustments to prior years’ claims estimates, respectively.
Selling, general and administrative costs increased $33,941,000 in the 2021 thirty-nine-week period compared to the 2020 thirty-nine-week period. The increase in selling, general and administrative costs compared to prior year was attributable to increased stock-based compensation expense, an increased provision for incentive compensation and increased wages, partially offset by a decreased provision for customer bad debt. Included in selling, general and administrative costs was stock-based compensation expense of $18,717,000 and $2,691,000 for the 2021 and 2020 thirty-nine-week periods, respectively, and incentive compensation expense of $21,370,000 and $6,190,000 for the 2021 and 2020 thirty-nine-week periods, respectively.
Depreciation and amortization increased $2,320,000 in the 2021 thirty-nine-week period compared to the 2020 thirty-nine-week period. The increase in depreciation and amortization expenses was primarily due to increased depreciation on information technology assets.
During the 2020 second fiscal quarter, the Company recorded a
non-cash
impairment charge of $2,582,000 in respect of certain assets, primarily customer contract and related customer relationship intangible assets, acquired on September 20, 2017, along with substantially all of the other assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V. (“Fletes Avella”).
Interest and debt expense in the 2021 thirty-nine-week period increased $38,000 compared to the 2020 thirty-nine-week period.
The provisions for income taxes for the 2021 and 2020 thirty-nine-week periods were based on estimated annual effective income tax rates of 24.4% and 24.2%, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The increase in the estimated annual effective income tax rate was primarily attributable to an increased provision for nondeductible executive compensation during the 2021 period. The effective income tax rate for the 2021 thirty-nine-week period was 24.2%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and nondeductible executive compensation, partially offset by excess tax benefits realized on stock-based awards. The effective income tax rate for the 2020 thirty-nine-week period was 23.3%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock-based awards and state tax refunds. The effective income tax rate in the 2021 thirty-nine-week period of 24.2% was lower than the 24.4% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2021 thirty-nine-week period. The effective income tax rate in the 2020 thirty-nine-week period of 23.3% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements and state tax refunds in the 2020 thirty-nine-week period.
 
27

Net income was $268,209,000, or $7.00 per diluted share, in the 2021 thirty-nine-week period. Net income was $127,035,000, or $3.28 per diluted share, in the 2020 thirty-nine-week period. Net income was unfavorably impacted by approximately $12,593,000, or $0.25 per diluted share, during the 2020 thirty-nine-week period, related to the impact of the
COVID-19
pandemic relief incentive payments.
THIRTEEN WEEKS ENDED SEPTEMBER 25, 2021 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 26, 2020
Revenue for the 2021 thirteen-week period was $1,734,299,000, an increase of $648,753,000, or 60%, compared to the 2020 thirteen-week period. Transportation revenue increased $644,630,000, or 60%. The increase in transportation revenue was attributable to increased revenue per load of approximately 32% and an increased number of loads hauled of approximately 22% compared to the 2020 thirteen-week period. The increase in revenue in the 2021 period from the 2020 period was primarily attributable to consumer demand for durable goods and
e-commerce,
which drove revenue in the 2021 period to record levels. Reinsurance premiums were $18,295,000 and $14,172,000 for the 2021 and 2020 thirteen-week periods, respectively. The increase in revenue from reinsurance premiums was primarily attributable to increased premiums from a third party insurance company relating to unladen insurance provided to certain BCO Independent Contractors and an increase in the average number of trucks provided by BCO Independent Contractors in the 2021 thirteen-week period compared to the 2020 thirteen-week period.
Truck transportation revenue generated by third party truck capacity providers for the 2021 thirteen-week period was $1,580,730,000, representing 91% of total revenue, an increase of $574,552,000, or 57%, compared to the 2020 thirteen-week period. Revenue per load on loads hauled by third party truck capacity providers increased approximately 29% compared to the 2020 thirteen-week period and the number of loads hauled via truck increased approximately 22% in the 2021 thirteen-week period compared to the 2020 thirteen-week period. The increase in revenue per load on loads hauled by third party truck capacity providers primarily was due to an extremely tight truck capacity environment experienced during the 2021 period. During the 2021 thirteen-week period, the demand for truck capacity, particularly with respect to van capacity, remained at heightened levels and the supply of available truck capacity in the marketplace did not increase sufficiently to balance the heightened demand for truck capacity that has resulted in connection with the recovery of the U.S. economy from the impact of the
COVID-19
pandemic. Revenue per load on loads hauled via van equipment increased 31%, revenue per load on loads hauled via unsided/platform equipment increased 27%, revenue per load on less-than-truckload loadings increased 2% and revenue per load on loads hauled via other truck transportation increased 34% as compared to the 2020 thirteen-week period. The increase in the number of loads hauled via truck compared to the 2020 thirteen-week period was due to a broad-based increase in demand for the Company’s truck transportation services during the 2021 period. Loads hauled via van equipment increased 21%, loads hauled via unsided/platform equipment increased 13%, loads hauled via less-than-truckload increased 20% and loads hauled via other truck transportation increased 43% as compared to the 2020 thirteen-week period. The number of loads hauled via truck increased 25% in July, 22% in August and 19% in September, respectively, as compared to the corresponding periods in 2020, as the comparisons to prior year periods began to normalize due to the strong recovery from the
COVID-19
pandemic experienced during the Company’s 2020 third fiscal quarter. 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 $28,621,000 and $14,268,000 in the 2021 and 2020 thirteen-week periods, respectively.
Transportation revenue generated by multimode capacity providers for the 2021 thirteen-week period was $128,583,000, or 7% of total revenue, an increase of $66,399,000, or 107%, compared to the 2020 thirteen-week period. Revenue per load on revenue generated by multimode capacity providers increased approximately 75% in the 2021 thirteen-week period compared to the 2020 thirteen-week period, and the number of loads hauled by multimode capacity providers increased approximately 18% over the same period. Revenue per load on loads hauled by multimode capacity providers increased for all modes, primarily due to strong U.S. and global economic recoveries coupled with the impact of supply chain disruptions. Revenue per load on loads hauled via ocean, air and rail intermodal increased 98%, 58% and 28%, respectively, during the 2021 thirteen-week period as compared to the 2020 thirteen-week period. 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 increase in the number of loads hauled by multimode capacity providers was due to a broad-based increase in demand across many customers for the Company’s rail and ocean service offerings, partially offset by decreased air loadings, primarily attributable to decreased loadings at one specific customer.
Purchased transportation was 78.2% and 77.3% of revenue in the 2021 and 2020 thirteen-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased percentage of revenue contributed by Truck Brokerage Carriers, which typically has a higher rate of purchased transportation than revenue generated by BCO Independent Contractors. Commissions to agents were 7.8% and 7.9% of revenue in the 2021 and 2020 thirteen-week periods, respectively. The decrease in commissions to agents as a percentage of revenue was primarily attributable to a decreased commission rate paid on revenue generated by BCO Independent Contractors, primarily attributable to the elimination as of the end of the 2020 fiscal year of certain incentive commission arrangements formerly paid to agents relating to a discontinued BCO recruitment and retention program, partially offset by an increased commission amount paid on revenue generated by Truck Brokerage Carriers due to a decreased cost of purchased transportation as a percentage of revenue on revenue generated by Truck Brokerage Carriers.
 
28

Investment income was $706,000 and $714,000 in the 2021 and 2020 thirteen-week periods, respectively.
Other operating costs increased $3,211,000 in the 2021 thirteen-week period compared to the 2020 thirteen-week period. The increase in other operating costs compared to the prior year was primarily due to an increased provision for contractor bad debt, increased trailing equipment maintenance costs and increased BCO recruiting and qualification costs.
Insurance and claims increased $7,714,000 in the 2021 thirteen-week period compared to the 2020 thirteen-week period. The increase in insurance and claims expense compared to the prior year was primarily due to increased severity of current year claims, increased insurance premiums, primarily for commercial trucking liability coverage, and increased net unfavorable development of prior years’ claims in the 2021 thirteen-week period. During the 2021 and 2020 thirteen-week periods, insurance and claims costs included $3,542,000 and $1,123,000 of net unfavorable adjustments to prior years’ claims estimates, respectively.
Selling, general and administrative costs increased $20,347,000 in the 2021 thirteen-week period compared to the 2020 thirteen-week period. The increase in selling, general and administrative costs compared to prior year was attributable to an increased provision for incentive compensation, increased stock-based compensation expense and increased wages and employee benefit costs. Included in selling, general and administrative costs was incentive compensation expense of $8,755,000 and $2,133,000 for the 2021 and 2020 thirteen-week periods, respectively, and stock-based compensation expense of $7,824,000 and $1,490,000 for the 2021 and 2020 thirteen-week periods, respectively.
Depreciation and amortization increased $1,048,000 in the 2021 thirteen-week period compared to the 2020 thirteen-week period. The increase in depreciation and amortization expenses was primarily due to increased depreciation on information technology assets.
Interest and debt expense in the 2021 thirteen-week period decreased $43,000 compared to the 2020 thirteen-week period.
The provisions for income taxes for the 2021 and 2020 thirteen-week periods were based on estimated annual effective income tax rates of 24.4% and 24.2%, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The increase in the estimated annual effective income tax rate was primarily attributable to an increased provision for nondeductible executive compensation during the 2021 period. The effective income tax rate for the 2021 thirteen-week period was 24.4%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and nondeductible executive compensation. The effective income tax rate for the 2020 thirteen-week period was 23.9%, 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 in the 2021 thirteen-week period of 24.4% approximated the 24.4% estimated annual effective income tax rate. The effective income tax rate in the 2020 thirteen-week period of 23.9% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2020 thirteen-week period.
Net income was $98,675,000, or $2.58 per diluted share, in the 2021 thirteen-week period. Net income was $61,886,000, or $1.61 per diluted share, in the 2020 thirteen-week period.
CAPITAL RESOURCES AND LIQUIDITY
Working capital and the ratio of current assets to current liabilities were $564,816,000 and 1.7 to 1, respectively, at September 25, 2021, compared with $402,038,000 and 1.5 to 1, respectively, at December 26, 2020. 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 $216,990,000 in the 2021 thirty-nine-week period compared with $185,548,000 in the 2020 thirty-nine-week period. The increase in cash flow provided by operating activities was primarily attributable to increased net income, partially offset by the 62% increase in revenue year-over-year, which increased net receivables, defined as accounts receivable less accounts payable.
The Company declared and paid $0.67 per share, or $25,693,000 in the aggregate, in cash dividends during the thirty-nine-week period ended September 25, 2021 and, during such period, also paid $76,770,000 of dividends payable which were declared during fiscal year 2020 and included in current liabilities in the consolidated balance sheet at December 26, 2020. The Company declared and paid $0.58 per share, or $22,495,000 in the aggregate, in cash dividends during the thirty-nine-week period ended September 26, 2020 and, during such
 
29

period, also paid $78,947,000 of dividends payable which were declared during fiscal year 2019 and included in current liabilities in the consolidated balance sheet at December 28, 2019. During the thirty-nine-week period ended September 25, 2021, the Company purchased 317,046 shares of its common stock at a total cost of $50,230,000. During the thirty-nine-week period ended September 26, 2020, the Company purchased 1,178,970 shares of its common stock at a total cost of $115,962,000. As of September 25, 2021, the Company may purchase in the aggregate up to 1,503,984 shares of its common stock under its authorized stock purchase program. Long-term debt, including current maturities, was $97,341,000 at September 25, 2021, $3,433,000 lower than at December 26, 2020.
Shareholders’ equity was $899,690,000, or 90% of total capitalization (defined as long-term debt including current maturities plus equity), at September 25, 2021, compared to $691,835,000, or 87% of total capitalization, at December 26, 2020. The increase in shareholders’ equity was primarily the result of net income, partially offset by purchases of shares of the Company’s common stock and dividends declared by the Company in the 2021 thirty-nine-week period.
On August 18, 2020, Landstar entered into an amended and restated credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on August 18, 2023, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $35,000,000 of which may be utilized in the form of letters of credit. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing capacity of $400,000,000.
The 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 25, 2021, the Company had no borrowings outstanding and $33,577,000 of letters of credit outstanding under the Credit Agreement. At September 25, 2021, there was $216,423,000 available for future borrowings under the Credit Agreement. In addition, the Company has $69,434,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments totaling $77,149,000 at September 25, 2021. Investments, all of which are carried at fair value, include primarily investment-grade bonds and asset-backed securities 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 2021 thirty-nine-week period, the Company acquired $23,080,000 of trailing equipment by entering into finance leases. During the 2021 thirty-nine-week period, the Company also purchased $18,561,000 of operating property. Landstar anticipates acquiring either by purchase or lease financing during the remainder of fiscal year 2021 approximately $69,000,000 in operating property, consisting primarily of new trailing equipment to replace older trailing equipment and information technology equipment.
Management believes that cash flow from operations combined with the Company’s borrowing capacity under the Credit Agreement will be adequate to meet Landstar’s debt service requirements, fund continued growth, both internal and through acquisitions, pay dividends, complete the authorized share purchase program and meet working capital needs.
 
30

LEGAL MATTERS
The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Landstar provides for the estimated costs of self-insured claims primarily on an actuarial basis. The amount recorded for the estimated liability for claims incurred is based upon the facts and circumstances known on the applicable balance sheet date. The ultimate resolution of these claims may be for an amount greater or less than the amount estimated by management. The Company continually revises its existing claim estimates as new or revised information becomes available on the status of each claim. Historically, the Company has experienced both favorable and unfavorable development of prior years’ claims estimates. During the 2021 and 2020 thirty-nine-week periods, insurance and claims costs included $4,522,000 and $6,162,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims liability at September 25, 2021.
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.
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, if any, and investing activities with respect to investments held by the insurance segment.
On August 18, 2020, Landstar entered into an amended and restated credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on August 18, 2023, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $35,000,000 of which may be utilized in the form of letters of credit. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing capacity of $400,000,000.
The revolving credit loans under the Credit Agreement, at the option of Landstar, bear interest at (i) the Eurocurrency rate plus an applicable margin ranging from 1.25% to 2.00%, or (ii) an alternate base rate plus an applicable margin ranging from 0.25% to 1.00%, in each case with the applicable margin determined based upon the Company’s Leverage Ratio, as defined in the Credit Agreement, at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. The revolving credit facility bears a commitment fee, payable in arrears, of 0.25% to 0.35%, based on the Company’s Leverage Ratio at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. As of September 25, 2021 and during the entire 2021 third quarter, the Company had no borrowings outstanding under the Credit Agreement.
Long-term investments, all of which are
available-for-sale
and are carried at fair value, include primarily investment-grade bonds and asset-backed securities having maturities of up to five years. Assuming that the long-term portion of investments remains at $136,157,000, the balance at September 25, 2021, 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 asset-backed securities. Accordingly, any future interest rate risk on these short-term investments would not be material to the Company’s operating results.
 
31

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 25, 2021 were collectively, as translated to U.S. dollars, approximately 2% of total consolidated assets. Accordingly, translation gains or losses of 50% 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 the 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 25, 2021 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 changes in the Company’s internal control over financial reporting during the third quarter of 2021, which were identified in connection with management’s evaluation required by paragraph (d) of Rules
13a-15
and
15d-15
under the Securities Exchange Act of 1934, as amended, 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
See Part I, Item 2, “
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legal Matters
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 26, 2020 and Quarterly Report on Form
10-Q
for the fiscal quarter ended June 26, 2021 as filed with the SEC.
Dependence on independent commission sales agents.
The Company markets its services primarily through independent commission sales agents. During fiscal year 2020, 508 agents generated revenue for Landstar of at least $1 million each, or in the aggregate approximately 92% of Landstar’s consolidated revenue. During the thirty-nine-week period ended September 25, 2021, one Landstar independent sales agency, itself with a very diversified customer base, generated approximately $500,000,000, or 10%, of Landstar’s consolidated revenue. Landstar competes with motor carriers and other third parties for the services of these independent commission sales agents. Landstar has historically experienced very limited agent turnover in the number of its Million Dollar Agents. There can be no assurances, however, that Landstar will continue to experience very limited turnover of its Million Dollar Agents in the future. Landstar’s contracts with its agents, including its Million Dollar Agents, are typically terminable without cause upon 10 to 30 days’ notice by either party and generally contain significant but not unqualified
non-compete
provisions limiting the ability of a former agent to compete with Landstar for a specified period of time post-termination, and other restrictive covenants. The loss of some of the Company’s Million Dollar Agents and/or a significant decrease in revenue generated by Million Dollar Agents could have a material adverse effect on Landstar, including its results of operations and revenue.
 
32

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 27, 2021 to September 25, 2021, the Company’s third 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 26, 2021
         1,671,030 
June 27, 2021 – July 24, 2021
   —     $—      —      1,671,030 
July 25, 2021 – August 21, 2021
   91,388    156.67    91,388    1,579,642 
August 22, 2021 – September 25, 2021
   75,658    159.60    75,658    1,503,984 
  
 
 
   
 
 
   
 
 
   
Total
   167,046   $158.00    167,046   
  
 
 
   
 
 
   
 
 
   
On December 9, 2019, the Landstar System, Inc. Board of Directors authorized the Company to purchase up to 1,849,068 shares of the Company’s common stock from time to time in the open market and in privately negotiated transactions. As of September 25, 2021, the Company had authorization to purchase in the aggregate up to 1,503,984 shares of its common stock under this program. No specific expiration date has been assigned to the December 9, 2019 authorization.
Dividends
On August 18, 2020, Landstar entered into an amended and restated credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement 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.
 
33

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*  Chief Executive Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*  Chief Financial Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)  Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1**  Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**  Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*  Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*  Inline XBRL Taxonomy Extension Schema Document
101.CAL*  Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*  Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*  Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*  Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*  Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 
+
management contract or compensatory plan or arrangement    
*
Filed herewith
**
Furnished herewith
 
34

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: October 29, 2021   
/s/ James B. Gattoni
   James B. Gattoni
   
President and
Chief Executive Officer
Date: October 29, 2021   
/s/ Federico L. Pensotti
   Federico L. Pensotti
   Vice President and Chief
   Financial Officer
 
 
35