SEC Filing | Landstar System, Inc.

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Form 10-Q

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 30, 2017

☐	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

LOGO

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)

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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):

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 23, 2017 was 41,965,797.

Index


PART I – Financial Information

Item 1. Financial Statements (unaudited)

Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016			Page 4

Consolidated Statements of Income for the Thirty Nine and Thirteen Weeks Ended September 30, 2017 and September 24, 2016			Page 5

Consolidated Statements of Comprehensive Income for the Thirty Nine and Thirteen Weeks Ended September 30, 2017 and September 24, 2016			Page 6

Consolidated Statements of Cash Flows for the Thirty Nine Weeks Ended September 30, 2017 and September 24, 2016			Page 7

Consolidated Statement of Changes in Equity for the Thirty Nine Weeks Ended September 30, 2017			Page 8

Notes to Consolidated Financial Statements			Page 9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			Page 16

Item 3. Quantitative and Qualitative Disclosures About Market Risk			Page 28

Item 4. Controls and Procedures			Page 28

PART II – Other Information

Item 1. Legal Proceedings			Page 29

Item 1A. Risk Factors			Page 29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			Page 29

Item 6. Exhibits			Page 30

Signatures			Page 32

EX – 31.1 Section 302 CEO Certification

EX – 31.2 Section 302 CFO Certification

EX – 32.1 Section 906 CEO Certification

EX – 32.2 Section 906 CFO Certification

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The interim consolidated financial statements contained herein reflect all adjustments (all of a normal, recurring nature) which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations, cash flows and changes in equity for the periods presented. They have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the thirty-nine weeks ended September 30, 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 30, 2017.

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2016 Annual Report on Form 10-K.

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(Unaudited)


	September 30, 2017			December 31, 2016
ASSETS
Current Assets
Cash and cash equivalents	$	249,741		$	178,897
Short-term investments		45,687			66,560
Trade accounts receivable, less allowance of $6,163 and $5,161		546,826			463,102
Other receivables, including advances to independent contractors, less allowance of $6,306 and $5,523		18,704			18,567
Other current assets		16,925			10,281

Total current assets		877,883			737,407

Operating property, less accumulated depreciation and amortization of $210,018 and $190,374		261,465			272,843
Goodwill		39,914			31,134
Other assets		84,077			55,207

Total assets	$	1,263,339		$	1,096,591

LIABILITIES AND EQUITY
Current Liabilities
Cash overdraft	$	33,853		$	36,251
Accounts payable		269,389			219,409
Current maturities of long-term debt		40,610			45,047
Insurance claims		34,211			26,121
Other current liabilities		68,854			53,483

Total current liabilities		446,917			380,311

Long-term debt, excluding current maturities		76,792			93,257
Insurance claims		32,804			26,883
Deferred income taxes and other noncurrent liabilities		52,853			53,583
Equity
Landstar System, Inc. and subsidiary shareholders’ equity
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 67,715,290 and 67,585,675 shares		677			676
Additional paid-in capital		205,396			199,414
Retained earnings		1,613,590			1,512,993
Cost of 25,749,493 and 25,747,541 shares of common stock in treasury		(1,167,600	)		(1,167,437	)
Accumulated other comprehensive loss		(1,708	)		(3,089	)

Total Landstar System, Inc. and subsidiary shareholders’ equity		650,355			542,557
Noncontrolling interest		3,618			—

Total equity		653,973			542,557

Total liabilities and equity	$	1,263,339		$	1,096,591

See accompanying notes to consolidated financial statements.

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)


	Thirty Nine Weeks Ended					Thirteen Weeks Ended
	September 30, 2017			September 24, 2016		September 30, 2017			September 24, 2016
Revenue	$	2,594,772		$	2,274,805	$	943,430		$	787,938
Investment income		1,733			1,100		711			357
Costs and expenses:
Purchased transportation		1,989,938			1,730,745		726,827			601,002
Commissions to agents		210,678			189,075		76,598			65,144
Other operating costs, net of gains on asset sales/dispositions		22,497			21,484		8,097			7,492
Insurance and claims		46,333			42,795		17,927			12,488
Selling, general and administrative		123,179			106,211		43,995			34,692
Depreciation and amortization		29,961			26,109		10,130			9,016

Total costs and expenses		2,422,586			2,116,419		883,574			729,834

Operating income		173,919			159,486		60,567			58,461
Interest and debt expense		2,559			2,725		657			948

Income before income taxes		171,360			156,761		59,910			57,513
Income taxes		59,047			58,985		17,490			21,235

Net income		112,313			97,776		42,420			36,278
Less: Net loss attributable to noncontrolling interest		(23	)		—		(23	)		—

Net income attributable to Landstar System, Inc. and subsidiary	$	112,336		$	97,776	$	42,443		$	36,278

Earnings per common share attributable to Landstar System, Inc. and subsidiary	$	2.68		$	2.32	$	1.01		$	0.86

Diluted earnings per share attributable to Landstar System, Inc. and subsidiary	$	2.67		$	2.31	$	1.01		$	0.86

Average number of shares outstanding:
Earnings per common share		41,924,000			42,223,000		41,957,000			42,039,000

Diluted earnings per share		42,013,000			42,341,000		42,028,000			42,170,000

Dividends per common share	$	0.28		$	0.25	$	0.10		$	0.09

See accompanying notes to consolidated financial statements.

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)


	Thirty Nine Weeks Ended				Thirteen Weeks Ended
	September 30, 2017		September 24, 2016		September 30, 2017		September 24, 2016
Net income attributable to Landstar System, Inc. and subsidiary	$	112,336	$	97,776	$	42,443	$	36,278
Other comprehensive income:
Unrealized holding gains (losses) on available-for-sale investments, net of tax expense (benefit) of $136, $198, $47 and ($19)		251		363		86		(34	)
Foreign currency translation gains (losses)		1,130		656		545		(181	)

Other comprehensive income (loss)		1,381		1,019		631		(215	)

Comprehensive income attributable to Landstar System, Inc. and subsidiary	$	113,717	$	98,795	$	43,074	$	36,063

See accompanying notes to consolidated financial statements.

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Thirty Nine Weeks Ended
	September 30, 2017			September 24, 2016
OPERATING ACTIVITIES
Net income	$	112,313		$	97,776
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of operating property and intangible assets		29,961			26,109
Non-cash interest charges		189			175
Provisions for losses on trade and other accounts receivable		5,643			4,076
Gains on sales/disposals of operating property		(900	)		(3,221	)
Deferred income taxes, net		(708	)		8,925
Stock-based compensation		3,660			2,718
Changes in operating assets and liabilities:
(Increase) decrease in trade and other accounts receivable		(89,504	)		50,957
(Increase) decrease in other assets		(8,671	)		3,820
Increase (decrease) in accounts payable		53,290			(25,074	)
Increase (decrease) in other liabilities		12,980			(5,436	)
Increase in insurance claims		14,011			10,472

NET CASH PROVIDED BY OPERATING ACTIVITIES		132,264			171,297

INVESTING ACTIVITIES
Sales and maturities of investments		42,917			30,580
Purchases of investments		(44,423	)		(31,938	)
Purchases of operating property		(8,800	)		(17,833	)
Proceeds from sales of operating property		3,594			8,622
Consideration paid for acquisitions		(8,199	)		—

NET CASH USED BY INVESTING ACTIVITIES		(14,911	)		(10,569	)

FINANCING ACTIVITIES
Decrease in cash overdraft		(2,398	)		(7,884	)
Dividends paid		(11,739	)		(10,572	)
Payment for debt issue costs		—			(1,048	)
Proceeds from exercises of stock options		2,531			1,440
Taxes paid in lieu of shares issued related to stock-based compensation plans		(371	)		(1,715	)
Excess tax benefits from stock-based awards		—			343
Purchases of common stock		—			(50,516	)
Principal payments on capital lease obligations		(35,662	)		(35,147	)

NET CASH USED BY FINANCING ACTIVITIES		(47,639	)		(105,099	)

Effect of exchange rate changes on cash and cash equivalents		1,130			656

Increase in cash and cash equivalents		70,844			56,285
Cash and cash equivalents at beginning of period		178,897			114,520

Cash and cash equivalents at end of period	$	249,741		$	170,805

See accompanying notes to consolidated financial statements.

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Thirty Nine Weeks Ended September 30, 2017

(Dollars in thousands)

(Unaudited)


	Landstar System, Inc. and Subsidiary Shareholders
	Common Stock				Additional Paid-In		Retained			Treasury Stock at Cost					Accumulated Other Comprehensive			Non- controlling
	Shares		Amount		Capital		Earnings			Shares		Amount			(Loss) Income			Interests			Total
Balance December 31, 2016		67,585,675	$	676	$	199,414	$	1,512,993			25,747,541	$	(1,167,437	)	$	(3,089	)		—		$	542,557
Net income (loss)								112,336											(23	)		112,313
Dividends ($0.28 per share)								(11,739	)													(11,739	)
Issuance of stock related to stock-based compensation plans		129,615		1		2,322					1,952		(163	)								2,160
Stock-based compensation						3,660																3,660
Other comprehensive income																1,381						1,381
Acquired business and noncontrolling interests																			3,641			3,641

Balance September 30, 2017		67,715,290	$	677	$	205,396	$	1,613,590			25,749,493	$	(1,167,600	)	$	(1,708	)	$	3,618		$	653,973

See accompanying notes to consolidated financial statements.

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.

Landstar owns, through various subsidiaries, a controlling interest in Landstar Metro, S.A.P.I. de C.V., a transportation logistics company (“Landstar Metro”), and Landstar Metro Servicios S.A.P.I. de C.V., a services company (“Landstar Servicios”), each based in Mexico City, Mexico. Given Landstar’s controlling interest in each of Landstar Metro and Landstar Servicios, the accounts of Landstar Metro and Landstar Servicios have been consolidated herein and a noncontrolling interest has been recorded for the noncontrolling investors’ interests in the net assets and operations of Landstar Metro and Landstar Servicios.

(1) Acquired Business and Noncontrolling Interests

During 2017, the Company incorporated each of Landstar Metro and Landstar Servicios. On September 20, 2017, Landstar Metro acquired substantially all of the assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V., a Mexican transportation logistics company. Cash consideration paid in the quarter for the acquisition was approximately $8,199,000. In addition, the Company assumed approximately $2,200,000 in liabilities consisting of additional contingent purchase price and associated indirect taxes. In connection with the acquisition, individuals affiliated with the seller subscribed in the aggregate for a 30% equity interest in each of Landstar Metro and Landstar Servicios. The asset acquisition by Landstar Metro was accounted for as a business combination in accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”). The resulting goodwill arising from the acquisition was approximately $8,800,000. With respect to this goodwill, 70% is expected to be deductible by the Company for U.S. income tax purposes, and following the purchase of the noncontrolling interests by the Company, up to 100% of this goodwill would be expected to be deductible by the Company. Pro forma financial information for prior periods is not presented as the Company does not believe the acquisition to be material to our consolidated results. The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportations logistics segment. It is not anticipated that Landstar Metro and Landstar Servicios will have a material effect on the revenue and earnings of the Company for the remainder of fiscal year 2017. During the thirty-nine-week period ended September 30, 2017, the Company incurred approximately $1,000,000, or $0.01 per common share ($0.01 per diluted share), in one-time costs related to the completion of the acquisition and subscription of the non-controlling interests.

As it relates to the noncontrolling interests of Landstar Metro and Landstar Servicios, the Company has the option to purchase, and the minority equityholders have the option to sell, during the period commencing on the third anniversary of September 20, 2017, the closing date of the subscription by the minority equityholders (the “Closing Date”), and at any time after the fourth anniversary of the Closing Date, at fair value all but not less than all of the noncontrolling interests in Landstar Metro and Landstar Servicios. The noncontrolling interests are also subject to customary restrictions on transfer, including a right of first refusal in favor of the Company.

(2) Share-based Payment Arrangements

As of September 30, 2017, the Company had two employee equity incentive plans, the 2002 employee stock option and stock incentive plan (the “ESOSIP”) and the 2011 equity incentive plan (the “2011 EIP”). No further grants can be made under the ESOSIP. The Company also has a stock compensation plan for members of its Board of Directors, the Amended and Restated 2013 Directors Stock Compensation Plan (as amended and restated as of May 17, 2016, the “2013 DSCP”). 6,000,000 shares of the Company’s common stock were authorized for issuance under the 2011 EIP and 115,000 shares of the Company’s common stock were authorized for issuance under the 2013 DSCP. The ESOSIP, 2011 EIP and 2013 DSCP are each referred to herein as a “Plan,” and, collectively, as the “Plans.” Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands):


	Thirty Nine Weeks Ended						Thirteen Weeks Ended
	September 30, 2017			September 24, 2016			September 30, 2017			September 24, 2016
Total cost of the Plans during the period	$	3,660		$	2,718		$	1,423		$	652
Amount of related income tax benefit recognized during the period		(2,492	)		(1,128	)		(678	)		(292	)

Net cost of the Plans during the period	$	1,168		$	1,590		$	745		$	360

Included in income tax benefits recognized in the thirty-nine-week periods ended September 30, 2017 and September 24, 2016 were income tax benefits of $310,000 and $261,000, respectively, recognized on disqualifying dispositions of the Company’s common stock by employees who obtained shares of common stock through exercises of incentive stock options. Also included in income tax benefits recognized in the thirty-nine-week period ended September 30, 2017 were excess tax benefits from stock-based awards of $868,000, as required by the Company’s adoption of Accounting Standards Update 2016-09 during the first fiscal quarter of 2017. See Note 11, Recent Accounting Pronouncements, for further information.

As of September 30, 2017, there were 78,682 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 4,725,200 shares of the Company’s common stock reserved for issuance in the aggregate under the ESOSIP and 2011 EIP.

Restricted Stock Units

The following table summarizes information regarding the Company’s outstanding restricted stock unit (“RSU”) awards with either a performance condition or a market condition under the Plans:


	Number of RSUs			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016		378,238		$	50.46
Granted		67,769		$	76.85
Forfeited		(58,779	)	$	46.00

Outstanding at September 30, 2017		387,228		$	55.75

During the thirty-nine-week period ended September 30, 2017, the Company granted RSUs with a performance condition. RSUs with a performance condition granted on February 2, 2017 may vest on January 31 of 2020, 2021 and 2022 based on growth in operating income and diluted earnings per share from continuing operations attributable to Landstar System, Inc. and subsidiary as compared to the results from the 2016 fiscal year. Outstanding RSUs at both December 31, 2016 and September 30, 2017 include RSUs with a performance condition and RSUs with a market condition, as further described in the Company’s 2016 Annual Report on Form 10-K.

The Company recognized approximately $2,254,000 and $1,322,000 of share-based compensation expense related to RSU awards in the thirty-nine-week periods ended September 30, 2017 and September 24, 2016, respectively. As of September 30, 2017, there was a maximum of $32.1 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 2.8 years. With respect to RSU awards with a performance condition, the amount of future compensation expense to be recognized will be determined based on future operating results.

Stock Options

The following table summarizes information regarding the Company’s outstanding stock options under the Plans:


	Number of Options			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (000s)
Options outstanding at December 31, 2016		372,561		$	48.24
Exercised		(134,461	)	$	46.38
Forfeited		(1,200	)	$	55.67

Options outstanding at September 30, 2017		236,900		$	49.25		4.0	$	11,940

Options exercisable at September 30, 2017		217,000		$	48.59		3.9	$	11,081

The total intrinsic value of stock options exercised during the thirty-nine-week periods ended September 30, 2017 and September 24, 2016 was $5,303,000 and $1,938,000, respectively.

As of September 30, 2017, there was $91,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The unrecognized compensation cost related to these non-vested options is expected to be recognized during 2017.

Non-vested Restricted Stock and Deferred Stock Units

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


	Number of Shares and Deferred Stock Units			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2016		28,409		$	58.91
Granted		42,123		$	84.26
Vested		(16,227	)	$	61.50

Non-vested at September 30, 2017		54,305		$	77.80

The fair value of each share of non-vested restricted stock issued and Deferred Stock Unit granted under the Plans are 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 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 will not have voting rights or other incidents of ownership until the shares are issued. However, Deferred Stock Units do contain the right to receive dividend equivalent payments prior to settlement into shares.

As of September 30, 2017, there was $3,353,000 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 3.0 years.

(3) Income Taxes

The provisions for income taxes for both the 2017 and 2016 thirty-nine-week periods were based on estimated annual effective income tax rates of 37.8% and 38.1%, respectively, adjusted for discrete events, such as benefits resulting from disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options. The effective income tax rates for the 2017 and 2016 thirty-nine-week periods were 34.5% and 37.6%, respectively. The effective income tax rate for the 2017 thirty-nine week period was lower than the statutory federal income tax rate primarily as a result of federal domestic production activities deductions and research and development credits recognized as discrete items during the thirteen-week period ended September 30, 2017, partially offset by the effect of state taxes and the meals and entertainment exclusion. The effective income tax rate for the 2016 thirty-nine-week period was higher than the statutory federal income tax rate primarily as a result of state taxes and the meals and entertainment exclusion.

During the first fiscal quarter of 2017, the Company adopted ASU 2016-09, as further described in footnote 11. As required by ASU 2016-09, the Company recognized $868,000 of excess tax benefits on stock-based awards in its provision for income taxes in the thirty-nine-week period ended September 30, 2017.

(4) Earnings Per Share

Earnings per common share attributable to Landstar System, Inc. and subsidiary are based on the weighted average number of shares outstanding, including outstanding non-vested restricted stock and outstanding Deferred Stock Units. Diluted earnings per share attributable to Landstar System, Inc. and subsidiary are based on the weighted average number of common shares and Deferred Stock Units outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options.

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


	Thirty Nine Weeks Ended				Thirteen Weeks Ended
	September 30, 2017		September 24, 2016		September 30, 2017		September 24, 2016
Average number of common shares outstanding		41,924		42,223		41,957		42,039
Incremental shares from assumed exercises of stock options		89		118		71		131

Average number of common shares and common share equivalents outstanding		42,013		42,341		42,028		42,170

For each of the thirty-nine-week periods ended September 30, 2017 and September 24, 2016, no options outstanding to purchase shares of common stock were antidilutive. Outstanding RSUs were excluded from the calculation of diluted earnings per share attributable to Landstar System, Inc. and subsidiary for all periods because the performance metric requirements or market condition for vesting had not been satisfied.

(5) Additional Cash Flow Information

During the 2017 thirty-nine-week period, Landstar paid income taxes and interest of $65,688,000 and $2,981,000, respectively. During the 2016 thirty-nine-week period, Landstar paid income taxes and interest of $48,615,000 and $2,730,000, respectively. Landstar acquired operating property by entering into capital leases in the amounts of $14,760,000 and $46,456,000 in the 2017 and 2016 thirty-nine-week periods, respectively. In addition, during the 2017 thirty-nine-week period Landstar acquired $945,000 of operating property for which the Company accrued a corresponding liability in accounts payable as of September 30, 2017 related to the completion of a new freight staging and transload facility in Laredo, TX. The Company had unpaid capital expenditure purchases included in accounts payable of $1,988,000 and $5,298,000 at September 30, 2017 and December 31, 2016, respectively. Capital expenditure purchases are recorded as cash outflows from investing activities in the consolidated statement of cash flows in the period in which they are paid.

(6) Segment Information

The following table summarizes information about the Company’s reportable business segments as of and for the thirty-nine-week and thirteen-week periods ended September 30, 2017 and September 24, 2016 (in thousands):


	Thirty Nine Weeks Ended
	September 30, 2017						September 24, 2016
	Transportation Logistics		Insurance		Total		Transportation Logistics		Insurance		Total
External revenue	$	2,559,847	$	34,925	$	2,594,772	$	2,240,169	$	34,636	$	2,274,805
Internal revenue				29,773		29,773				28,890		28,890
Investment income				1,733		1,733				1,100		1,100
Operating income		148,693		25,226		173,919		133,342		26,144		159,486
Expenditures on long-lived assets		8,800				8,800		17,833				17,833
Goodwill		39,914				39,914		31,134				31,134


	Thirteen Weeks Ended
	September 30, 2017						September 24, 2016
	Transportation Logistics		Insurance		Total		Transportation Logistics		Insurance		Total
External revenue	$	931,692	$	11,738	$	943,430	$	776,397	$	11,541	$	787,938
Internal revenue				7,335		7,335				7,229		7,229
Investment income				711		711				357		357
Operating income		54,181		6,386		60,567		47,541		10,920		58,461
Expenditures on long-lived assets		2,172				2,172		8,878				8,878

In the thirty-nine and thirteen-week periods ended September 30, 2017 and September 24, 2016, no single customer accounted for more than 10% of the Company’s consolidated revenue.

(7) Other Comprehensive Income

The following table presents the components of and changes in accumulated other comprehensive income attributable to Landstar System, Inc. and subsidiary, net of related income taxes, as of and for the thirty-nine-week period ended September 30, 2017 (in thousands):


	Unrealized Holding (Losses) Gains on Available-for-Sale Securities			Foreign Currency Translation			Total
Balance as of December 31, 2016	$	(71	)	$	(3,018	)	$	(3,089	)
Other comprehensive income		251			1,130			1,381

Balance as of September 30, 2017	$	180		$	(1,888	)	$	(1,708	)

Amounts reclassified from accumulated other comprehensive income to investment income due to the realization of previously unrealized gains and losses in the accompanying consolidated statements of income were not significant for the thirty-nine-week period ended September 30, 2017.

(8) Investments

Investments include primarily investment-grade corporate bonds and U.S. Treasury obligations having maturities of up to five years (the “bond portfolio”). Investments in the bond portfolio are reported as available-for-sale and are carried at fair value. Investments maturing less than one year from the balance sheet date are included in short-term investments and investments maturing more than one year from the balance sheet date are included in other assets in the consolidated balance sheets. Management performs an analysis of the nature of the unrealized losses on available-for-sale investments to determine whether such losses are other-than-temporary. 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 other-than-temporary, are to be included as a charge in the statement of income, while unrealized losses considered to be temporary are to be included as a component of 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 $278,000 at September 30, 2017, while unrealized losses, net of unrealized gains, on the investments in the bond portfolio were $109,000 at December 31, 2016, respectively.

The amortized cost and fair values of available-for-sale investments are as follows at September 30, 2017 and December 31, 2016 (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2017
Money market investments	$	16,823	$	—	$	—	$	16,823
Asset-backed securities		3,497		2		5		3,494
Corporate bonds and direct obligations of government agencies		84,885		373		91		85,167
U.S. Treasury obligations		5,496		—		1		5,495

Total	$	110,701	$	375	$	97	$	110,979


December 31, 2016
Money market investments	$	12,395	$	—	$	—	$	12,395
Asset-backed securities		4,027		3		19		4,011
Corporate bonds and direct obligations of government agencies		70,069		150		239		69,980
U.S. Treasury obligations		23,037		2		6		23,033

Total	$	109,528	$	155	$	264	$	109,419

For those available-for-sale investments with unrealized losses at September 30, 2017 and December 31, 2016, the following table summarizes the duration of the unrealized loss (in thousands):


	Less than 12 months				12 months or longer						Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
September 30, 2017
Asset-backed securities	$	—	$	—	$	2,311	$	5	$	2,311	$	5
Corporate bonds and direct obligations of government agencies		15,429		21		13,215		70		28,644		91
U.S. Treasury obligations		5,495		1		—		—		5,495		1

Total	$	20,924	$	22	$	15,526	$	75	$	36,450	$	97


December 31, 2016
Asset-backed securities	$	1,363	$	6	$	2,314	$	13	$	3,677	$	19
Corporate bonds and direct obligations of government agencies		28,809		195		1,367		44		30,176		239
U.S. Treasury obligations		12,734		6		—		—		12,734		6

Total	$	42,906	$	207	$	3,681	$	57	$	46,587	$	264

The Company expects to recover 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, the Company does not consider the unrealized losses on these securities to be other-than-temporary at September 30, 2017.

(9) Commitments and Contingencies

Short-term investments include $45,687,000 in current maturities of investments held by the Company’s insurance segment at September 30, 2017. The non-current portion of the bond portfolio of $65,292,000 is included in other assets. The short-term investments, together with $20,979,000 of non-current investments, provide collateral for the $59,999,000 of letters of credit issued to guarantee payment of insurance claims. As of September 30, 2017, Landstar also had $33,127,000 of additional letters of credit outstanding under the Company’s Credit Agreement.

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

(10) Change in Accounting Estimate for Self-Insured Claims

The following table summarizes the effect of the increase (decrease) in the cost of insurance claims resulting from unfavorable (favorable) development of prior year self-insured claims estimates on operating income, net income attributable to Landstar System, Inc. and subsidiary and earnings per share attributable to Landstar System, Inc. and subsidiary amounts in the consolidated statements of income for the thirty-nine-week and thirteen-week periods ended September 30, 2017 and September 24, 2016 (in thousands, except per share amounts):


	Thirty Nine Weeks Ended				Thirteen Weeks Ended
	September 30, 2017		September 24, 2016		September 30, 2017		September 24, 2016
Operating income	$	1,327	$	698	$	1,124	$	(2,118	)
Net income attributable to Landstar System, Inc. and subsidiary		825		431		699		(1,309	)
Earnings per share attributable to Landstar System, Inc. and subsidiary	$	0.02	$	0.01	$	0.02	$	(0.03	)
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary	$	0.02	$	0.01	$	0.02	$	(0.03	)

(11) Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09-Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. The standard requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 becomes effective for us January 1, 2018 and permits either a full retrospective or a modified retrospective transition approach. We plan to adopt this new standard on January 1, 2018 under the modified retrospective transition method with a cumulative adjustment to retained earnings instead of retrospectively adjusting prior periods. We anticipate the adoption of this standard will change the timing of revenue recognition for most of our transportation business from at delivery to over the transit period as our performance obligation is completed. Due to our average length of haul for our truckload movements as well as our corresponding direct costs of revenue, purchased transportation and commissions to agents, we do not expect this change to have a material impact on our results of operations, financial position or cash flows once implemented.

In February 2016, the FASB issued Accounting Standards Update 2016-02 – Leases (“ASU 2016-02”). ASU 2016-02 requires a company to recognize a right-of-use asset and lease liability for the obligation to make lease payments measured at the present value of the lease payments for all leases with terms greater than twelve months. Companies are required to use a modified retrospective transition approach to recognize leases at the beginning of the earliest period presented. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods therein, and early adoption is permitted. ASU 2016-02 is not expected to have a material impact on the Company’s financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-09 – Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods therein. As such, the Company adopted ASU 2016-09 during the first quarter of 2017 with an effective date of January 1, 2017. As a result of the adoption, the Company recognized excess tax benefits in the consolidated statement of income of $868,000 for the thirty-nine-week period ended September 30, 2017. Prior period amounts have not been reclassified.

In June 2016, the FASB issued Accounting Standards Update 2016-13– Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected versus incurred credit losses for financial assets held. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods therein. The Company is currently evaluating the impact of ASU 2016-13 on its financial statements.

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 31, 2016 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2016 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: 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; acquired businesses; and other operational, financial or legal risks or uncertainties detailed in Landstar’s Form 10-K for the 2016 fiscal year,

described in Item 1A “Risk Factors”, in this report or in Landstar’s other Securities and Exchange Commission filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements and the Company undertakes no obligation to publicly update or revise any forward-looking statements.

Introduction

Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred to herein as “Landstar” or the “Company”), is a worldwide asset-light provider of integrated transportation management solutions. The Company offers services to its customers across multiple transportation modes, with the ability to arrange for individual shipments of freight to enterprise-wide solutions to manage all of a customer’s transportation needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada and Mexico, and between the United States and Canada, Mexico and other countries around the world. The Company’s services emphasize safety, information coordination and customer service and are delivered through a network of independent commission sales agents and third party capacity providers linked together by a series of technological applications which are provided and coordinated by the Company. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue.

Landstar markets its integrated transportation management solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. Landstar’s independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under non-exclusive contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers and railroads. Through this network of agents and capacity providers linked together by Landstar’s information technology systems, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $3.2 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.

The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive products, building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military equipment. In addition, the transportation logistics segment provides transportation services to other transportation companies, including third party logistics and less-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Billings for freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight and are referred to as transportation revenue. During the thirty-nine weeks ended September 30, 2017, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 47%, 47% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3% of the Company’s consolidated revenue in the thirty-nine-week period ended September 30, 2017.

During 2017, the Company incorporated Landstar Metro, S.A.P.I. de C.V., a transportation logistics company (“Landstar Metro”), and Landstar Metro Servicios S.A.P.I. de C.V., a services company (“Landstar Servicios”), each based in Mexico City, Mexico. On September 20, 2017, Landstar Metro acquired substantially all of the assets of the asset-light transportation logistics business of a Mexican transportation logistics company. In connection with the acquisition, individuals affiliated with the seller subscribed in the aggregate for a 30% equity interest in each of Landstar Metro and Landstar Servicios. Landstar Metro provides freight and logistics services within the country of Mexico and in conjunction with Landstar’s U.S./Mexico cross-border services. Landstar Servicios provides various administrative, financial, operational, safety and compliance services to Landstar Metro. The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportation logistics segment. The Company expects that Landstar Metro and Landstar Servicios will not have a material effect on its revenues and earnings for the remainder of fiscal year 2017. Revenue from Landstar Metro and Landstar Servicios represented less than 1% of the Company’s transportation logistics segment revenue in the 2017 thirty-nine-week period.

The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore insurance subsidiary (“Signature”), and Risk Management Claim Services, Inc. This 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 30, 2017.

Changes in Financial Condition and Results of Operations

Management believes the Company’s success principally depends on its ability to generate freight through its network of independent commission sales agents and to safely and efficiently deliver that freight utilizing third party capacity providers. Management believes the most significant factors to the Company’s success include increasing revenue, sourcing capacity and controlling costs, including insurance and claims.

While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s emphasis with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents”). Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents and increasing the revenue opportunities generated by existing independent commission sales agents. During the 2016 fiscal year, 502 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2016 fiscal year, the average revenue generated by a Million Dollar Agent was $5,831,000 and revenue generated by Million Dollar Agents in the aggregate represented 92% of consolidated revenue.

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 30, 2017		September 24, 2016		September 30, 2017		September 24, 2016
Revenue generated through (in thousands):
Truck transportation
Truckload:
Van equipment	$	1,529,402	$	1,351,980	$	550,484	$	465,785
Unsided/platform equipment		825,194		700,369		304,536		248,939
Less-than-truckload		65,397		54,066		22,598		18,139

Total truck transportation		2,419,993		2,106,415		877,618		732,863
Rail intermodal		68,570		76,987		24,213		24,650
Ocean and air cargo carriers		70,708		56,500		29,523		18,790
Other (1)		35,501		34,903		12,076		11,635

	$	2,594,772	$	2,274,805	$	943,430	$	787,938

Revenue on loads hauled via BCO Independent Contractors included in total truck transportation	$	1,211,564	$	1,086,848	$	435,479	$	379,196

Number of loads:
Truck transportation
Truckload:
Van equipment		942,894		847,208		329,329		291,089
Unsided/platform equipment		362,936		331,226		126,509		112,192
Less-than-truckload		98,740		84,316		34,232		28,589

Total truck transportation		1,404,570		1,262,750		490,070		431,870
Rail intermodal		32,040		36,120		11,080		11,940
Ocean and air cargo carriers		18,150		14,910		6,210		5,130

		1,454,760		1,313,780		507,360		448,940


Loads hauled via BCO Independent Contractors included in total truck transportation		686,830		630,880		232,970		216,220

Revenue per load:
Truck transportation
Truckload:
Van equipment	$	1,622	$	1,596	$	1,672	$	1,600
Unsided/platform equipment		2,274		2,114		2,407		2,219
Less-than-truckload		662		641		660		634
Total truck transportation		1,723		1,668		1,791		1,697
Rail intermodal		2,140		2,131		2,185		2,064
Ocean and air cargo carriers		3,896		3,789		4,754		3,663
Revenue per load on loads hauled via BCO Independent Contractors	$	1,764	$	1,723	$	1,869	$	1,754


Revenue by capacity type (as a % of total revenue):
Truck capacity providers:
BCO Independent Contractors	47	%	48	%	46	%	48	%
Truck Brokerage Carriers	47	%	45	%	47	%	45	%
Rail intermodal	3	%	3	%	3	%	3	%
Ocean and air cargo carriers	3	%	2	%	3	%	2	%
Other	1	%	2	%	1	%	1	%

⁽¹⁾	Includes primarily reinsurance premium revenue generated by the insurance segment.

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 30, 2017		September 24, 2016
BCO Independent Contractors		8,939		8,889
Truck Brokerage Carriers:
Approved and active ⁽¹⁾		32,925		30,860
Other approved		15,138		15,691

		48,063		46,551

Total available truck capacity providers		57,002		55,440

Trucks provided by BCO Independent Contractors		9,548		9,510

⁽¹⁾	Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal quarter end.

The Company incurs costs that are directly related to the transportation of freight that include purchased transportation and commissions to agents. The Company incurs indirect costs associated with the transportation of freight that include other operating costs and insurance and claims. In addition, the Company incurs selling, general and administrative costs essential to administering its business operations. Management continually monitors all components of the costs incurred by the Company and establishes annual cost budgets which, in general, are used to benchmark costs incurred on a monthly basis.

Purchased transportation represents the amount a BCO Independent Contractor or other third party capacity provider is paid to haul freight. The amount of purchased transportation paid to a BCO Independent Contractor is primarily based on a contractually agreed-upon percentage of revenue generated by loads hauled by the BCO Independent Contractor. Purchased transportation paid to a Truck Brokerage Carrier is based on either a negotiated rate for each load hauled or, to a lesser extent, a contractually agreed-upon fixed rate per load. Purchased transportation paid to railroads is based on either a negotiated rate for each load hauled or a contractually agreed-upon fixed rate per load. Purchased transportation paid to air cargo carriers is generally based on a negotiated rate for each load hauled and purchased transportation paid to ocean cargo carriers is generally based on contractually agreed-upon fixed rates. Purchased transportation as a percentage of revenue for truck brokerage, rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor and air cargo services. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases as a percentage of consolidated revenue in proportion to changes in the percentage of consolidated revenue generated through BCO Independent Contractors and other third party capacity providers and external revenue from the insurance segment, consisting of reinsurance premiums. Purchased transportation as a percent

of revenue also increases or decreases in relation to the availability of truck brokerage capacity and with changes in the price of fuel on revenue generated by Truck Brokerage Carriers. The Company passes 100% of fuel surcharges billed to customers for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. These fuel surcharges are excluded from revenue and the cost of purchased transportation. Purchased transportation costs are recognized upon the completion of freight delivery.

Commissions to agents are based on contractually agreed-upon percentages of revenue or net revenue, defined as revenue less the cost of purchased transportation, or net revenue less a contractually agreed upon percentage of revenue retained by Landstar. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the various modes of transportation and reinsurance premiums and with changes in net revenue margin, defined as net revenue divided by revenue, on services provided by Truck Brokerage Carriers, railroads, air cargo carriers and ocean cargo carriers. Commissions to agents are recognized upon the completion of freight delivery.

The Company defines gross profit as revenue less the cost of purchased transportation and commissions to agents. Gross profit divided by revenue is referred to as gross profit margin. The Company’s operating margin is defined as operating income divided by gross profit.

In general, gross profit margin on revenue generated by BCO Independent Contractors represents a fixed percentage of revenue due to the nature of the contracts that pay a fixed percentage of revenue to both the BCO Independent Contractors and independent commission sales agents. For revenue generated by Truck Brokerage Carriers, gross profit margin is either fixed or variable as a percent of revenue, depending on the contract with each individual independent commission sales agent. Under certain contracts with independent commission sales agents, the Company retains a fixed percentage of revenue and the agent retains the amount remaining less the cost of purchased transportation (the “retention contracts”). Gross profit margin on revenue generated by railroads, air cargo carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention contracts, is variable in nature as the Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these type of loads. Approximately 54% of the Company’s consolidated revenue in the thirty-nine-week period ended September 30, 2017 was generated under contracts that have a fixed gross profit margin while 46% was under contracts that have a variable gross profit margin.

Maintenance costs for Company-provided trailing equipment and BCO Independent Contractor recruiting and qualification costs are the largest components of other operating costs. Also included in other operating costs are trailer rental costs, the provision for uncollectible advances and other receivables due from BCO Independent Contractors and independent commission sales agents and gains/losses, if any, on sales of Company-owned trailing equipment.

With respect to insurance and claims cost, potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. For commercial trucking claims, Landstar retains liability up to $5,000,000 per occurrence. In addition, for commercial trucking claims exceeding its $5,000,000 per occurrence self-insured retention, the Company retains liability up to an additional $700,000 in the aggregate on any claims incurred on or after May 1, 2016 through April 30, 2017, and up to an additional $500,000 in the aggregate on any claims incurred on or after May 1, 2017 through April 30, 2018. The Company also retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on Landstar’s cost of insurance and claims and its results of operations.

During the thirty-nine-week period ended September 30, 2017, employee compensation and benefits accounted for approximately seventy percent of the Company’s selling, general and administrative costs.

Depreciation and amortization primarily relate to depreciation of trailing equipment and information technology hardware and software.

The following table sets forth the percentage relationship of purchased transportation and commissions to agents, both being direct costs, to revenue and indirect costs as a percentage of gross profit for the periods indicated:


	Thirty Nine Weeks Ended						Thirteen Weeks Ended
	September 30, 2017			September 24, 2016			September 30, 2017			September 24, 2016
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Purchased transportation		76.7			76.1			77.0			76.3
Commissions to agents		8.1			8.3			8.1			8.3

Gross profit margin		15.2	%		15.6	%		14.8	%		15.5	%


Gross profit		100.0	%		100.0	%		100.0	%		100.0	%
Investment income		0.4			0.3			0.5			0.3
Indirect costs and expenses:
Other operating costs, net of gains on asset sales/dispositions		5.7			6.1			5.8			6.2
Insurance and claims		11.8			12.1			12.8			10.3
Selling, general and administrative		31.3			29.9			31.4			28.5
Depreciation and amortization		7.6			7.4			7.2			7.4

Total costs and expenses		56.3			55.4			57.2			52.3

Operating margin		44.1	%		44.9	%		43.3	%		48.0	%

Management believes that a discussion of indirect costs as a percentage of gross profit is useful and meaningful to potential investors for the following principal reasons: (1) disclosure of these relative measures (i.e., each indirect operating cost line item as a percentage of gross profit) allows investors to better understand the underlying trends in the Company’s results of operations; (2) due to the generally fixed nature of these indirect costs (other than insurance and claims costs), these relative measures are meaningful to investors’ evaluations of the Company’s management of its indirect costs attributable to operations; (3) management considers this financial information in its decision-making, such as budgeting for infrastructure, trailing equipment and selling, general and administrative costs; and (4) this information facilitates comparisons by investors of the Company’s results to the results of other non-asset or asset-light companies in the transportation and logistics services industry who report “net revenue” in Management Discussion and Analysis, which represents revenue less the cost of purchased transportation. The difference between the Company’s use of the term “gross profit” and use of the term “net revenue” by other companies in the transportation and logistics services industry is due to the direct cost of commissions to agents under the Landstar business model, whereas other companies in this industry generally have no commissions to agents.

Also, as previously mentioned, the Company reports two operating segments: the transportation logistics segment and the insurance segment. External revenue at the insurance segment, representing reinsurance premiums, has historically been relatively consistent on a year-over-year 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 indirect cost line items in Management’s Discussion and Analysis of Financial Condition and Results of Operations considers the Company’s costs on a consolidated basis rather than on a segment basis. Management believes this presentation format is the most appropriate to assist users of the financial statements in understanding the Company’s business for the following reasons: (1) the insurance segment has no other operating costs; (2) discussion of insurance and claims at either segment without reference to the other may create confusion amongst investors and potential investors due to intercompany arrangements and specific deductible programs that affect comparability of financial results by segment between various fiscal periods but that have no effect on the Company from a consolidated reporting perspective; (3) selling, general and administrative costs of the insurance segment comprise less than 10% of consolidated selling, general and administrative costs and have historically been relatively consistent on a year-over-year basis; and (4) the insurance segment has no depreciation and amortization.

THIRTY NINE WEEKS ENDED SEPTEMBER 30, 2017 COMPARED TO THIRTY NINE WEEKS ENDED SEPTEMBER 24, 2016

Revenue for the 2017 thirty-nine-week period was $2,594,772,000, an increase of $319,967,000, or 14%, compared to the 2016 thirty-nine-week period. Transportation revenue increased $319,678,000, or 14%. The increase in transportation revenue was attributable to an increased number of loads hauled of approximately 11% and increased revenue per load of approximately 3%. Reinsurance premiums were $34,925,000 and $34,636,000 for the 2017 and 2016 thirty-nine-week periods, respectively.

Truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers (together, the “third party truck capacity providers”) for the 2017 thirty-nine-week period was $2,419,993,000, representing 93% of total revenue, an increase of $313,578,000, or 15%, compared to the 2016 thirty-nine-week period. The number of loads hauled by third party truck capacity providers increased approximately 11% in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period, and revenue per load increased approximately 3% compared to the 2016 thirty-nine-week period. The increase in the number of loads hauled via truck compared to the 2016 thirty-nine-week period was due to a broad-based increase in demand across many customers and industries for Landstar’s various truck service offerings. The increase in revenue per load on loads hauled via truck of 3% was primarily due to an 8% increase in revenue per load on loads hauled via unsided/platform equipment, inclusive of a 10% increase in heavy/specialized revenue per load, and the impact of higher diesel fuel costs on loads hauled via Truck Brokerage Carriers. 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 $46,479,000 and $37,723,000 in the 2017 and 2016 thirty-nine-week periods, respectively. It should be noted that many customers of truck brokerage services require a single all-in rate that does not separately identify fuel surcharges. 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 2017 thirty-nine-week period was $139,278,000, or 5% of total revenue, an increase of $5,791,000, or 4%, compared to the 2016 thirty-nine-week period. Revenue per load on revenue generated by multimode capacity providers increased approximately 6% in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period, while the number of loads hauled by multimode capacity providers decreased approximately 2% over the same period. The increase in revenue per load of 6% was primarily driven by an increase in revenue per load generated by air cargo carriers, entirely attributable to the impact of air loadings provided in support of disaster relief efforts during the 2017 thirty-nine-week period. Also, revenue per load on revenue generated by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity. The decrease in loads hauled by multimode capacity providers was due to an 11% decrease in rail intermodal loads, entirely attributable to decreased loadings at two specific agencies, partially offset by a 22% increase in loads hauled by air and ocean cargo carriers. The 22% increase in loads hauled by air and ocean cargo carriers was broad-based across many customers.

Purchased transportation was 76.7% and 76.1% of revenue in the 2017 and 2016 thirty-nine-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased rate of purchased transportation paid to Truck Brokerage Carriers and a decrease in the percentage of revenue contributed by BCO Independent Contractors, which typically has a lower rate of purchased transportation than revenue generated by Truck Brokerage Carriers. Commissions to agents were 8.1% and 8.3% of revenue in the 2017 and 2016 thirty-nine-week periods, respectively. The decrease in commissions to agents as a percentage of revenue was primarily attributable to a decreased net revenue margin on revenue generated by Truck Brokerage Carriers.

Investment income was $1,733,000 and $1,100,000 in the 2017 and 2016 thirty-nine-week periods, respectively. The increase in investment income was primarily due to higher average rates of return on investments during the 2017 period and a higher average investment balance held by the insurance segment in the 2017 period.

Other operating costs increased $1,013,000 in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period and represented 5.7% of gross profit in the 2017 period compared to 6.1% of gross profit in the 2016 period. The increase in other operating costs compared to the prior year was primarily due to decreased gains on sales of used trailing equipment and an increased provision for contractor bad debt, partially offset by decreased trailing equipment maintenance costs due to a lower average age of the Company-owned trailer fleet. The decrease in other operating costs as a percentage of gross profit was caused by the effect of increased gross profit, partially offset by the increase in other operating costs.

Insurance and claims increased $3,538,000 in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period and represented 11.8% of gross profit in the 2017 period compared to 12.1% of gross profit in the 2016 period. The increase in insurance and claims expense compared to prior year was due to increased severity of current year claims in the 2017 period, increased net unfavorable development of prior years’ claims in the 2017 period and increased insurance premiums on the Company’s commercial trucking liability coverage. Unfavorable development of prior years’ claims was $1,327,000 and $698,000 in the 2017 and 2016 thirty-nine-week periods, respectively. The decrease in insurance and claims as a percent of gross profit was caused by the effect of increased gross profit, partially offset by the increase in insurance and claims costs.

Selling, general and administrative costs increased $16,968,000 in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period and represented 31.3% of gross profit in the 2017 period compared to 29.9% of gross profit in the 2016 period. The increase in selling, general and administrative costs compared to prior year was attributable to a $13,634,000 provision for incentive compensation in the 2017 thirty-nine-week period compared to an $875,000 provision in the 2016 thirty-nine-week period and increased wages. The increase in selling, general and administrative costs as a percent of gross profit was due primarily to the increase in selling, general and administrative costs, partially offset by the effect of increased gross profit.

Depreciation and amortization increased $3,852,000 in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period and represented 7.6% of gross profit in the 2017 period compared to 7.4% of gross profit in the 2016 period. The increase in depreciation and amortization expenses was due to an increased number of owned trailers in response to increased customer demand for the Company’s drop and hook services and a lower average age of the trailer fleet during the 2017 thirty-nine-week period as compared to the 2016 thirty-nine-week period. The increase in depreciation and amortization as a percentage of gross profit was primarily due to the increased depreciation costs, partially offset by the effect of increased gross profit.

Interest and debt expense in the 2017 thirty-nine-week period decreased $166,000 compared to the 2016 thirty-nine-week period.

The provisions for income taxes for the 2017 and 2016 thirty-nine-week periods were based on estimated annual effective income tax rates of 37.8% and 38.1%, respectively, adjusted for discrete events, such as benefits resulting from disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options. The effective income tax rates for the 2017 and 2016 thirty-nine-week periods were 34.5% and 37.6%, respectively. The effective income tax rate for the 2017 thirty-nine week period was lower than the 35% statutory federal income tax rate primarily as a result of federal domestic production activities deductions and research and development credits recognized as discrete items during the thirteen-week period ended September 30, 2017, partially offset by the effect of state taxes and the meals and entertainment exclusion. The effective income tax rate for the 2016 thirty-nine-week period was higher than the statutory federal income tax rate primarily as a result of state taxes and the meals and entertainment exclusion. The effective income tax rate in the 2017 thirty-nine-week period of 34.5% was less than the 37.8% estimated annual effective income tax rate primarily as a result of federal domestic production activities deductions and research and development credits recognized during 2017 of approximately $5,200,000, excess tax benefits recognized on stock-based compensation arrangements resulting from the Company’s adoption of ASU 2016-09 during 2017 and disqualifying dispositions of the Company’s common stock by employees who obtained the stock through the exercises of incentive stock options in the 2017 period. The effective income tax rate in the 2016 thirty-nine-week period of 37.6% was less than the 38.1% estimated annual effective income tax rate primarily due to certain federal income tax credits realized in the 2016 period and disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options in the 2016 period.

The net loss attributable to noncontrolling interest of $23,000 in the 2017 thirty-nine-week period represents the noncontrolling investors’ 30% share of the net loss incurred by Landstar Metro and Landstar Servicios.

Net income attributable to the Company was $112,336,000, or $2.68 per common share ($2.67 per diluted share), in the 2017 thirty-nine-week period. Net income attributable to the Company was $97,776,000, or $2.32 per common share ($2.31 per diluted share), in the 2016 thirty-nine-week period.

THIRTEEN WEEKS ENDED SEPTEMBER 30, 2017 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 24, 2016

Revenue for the 2017 thirteen-week period was $943,430,000, an increase of $155,492,000, or 20%, compared to the 2016 thirteen-week period. Transportation revenue increased $155,295,000, or 20%. The increase in transportation revenue was attributable to an increased number of loads hauled of approximately 13% and increased revenue per load of approximately 6%. The Company recognized approximately $23,000,000 in revenue, on approximately 16,000 loads, in the 2017 third quarter in support of local, state and federal relief efforts related to recent hurricanes that impacted Texas, the southeastern United States and Puerto Rico. Reinsurance premiums were $11,738,000 and $11,541,000 for the 2017 and 2016 thirteen-week periods, respectively.

Truck transportation revenue generated by third party capacity providers for the 2017 thirteen-week period was $877,618,000, representing 93% of total revenue, an increase of $144,755,000, or 20%, compared to the 2016 thirteen-week period. The number of loads hauled by third party truck capacity providers increased approximately 13% in the 2017 thirteen-week period compared to the 2016 thirteen-week period, and revenue per load increased approximately 6% compared to the 2016 thirteen-week period. The

increase in the number of loads hauled via truck compared to the 2016 thirteen-week period was due to a broad-based increase in demand across many customers and industries for Landstar’s various truck service offerings and the impact of approximately 16,000 loads hauled in support of disaster relief efforts. The increase in revenue per load on loads hauled via truck of 6% was due to a tighter freight environment experienced during the 2017 thirteen-week period, which resulted in less readily available truck capacity as compared to the 2016 thirteen-week period, and the impact of higher diesel fuel costs on loads hauled via Truck Brokerage Carriers. The freight environment during the 2017 thirteen-week period was also impacted by the hurricanes experienced in Texas and the southeastern United States, which further tightened capacity in the latter part of the quarter. Revenue per load on loads hauled via unsided/platform equipment increased 8%, revenue per load on loads hauled via van equipment increased 5% and revenue per load on less-than-truckload loadings increased 4% as compared to the 2016 thirteen-week period. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $16,171,000 and $14,016,000 in the 2017 and 2016 thirteen-week periods, respectively.

Transportation revenue generated by multimode capacity providers for the thirteen-week period ended September 30, 2017 was $53,736,000, or 6% of total revenue, an increase of $10,296,000, or 24%, compared to the 2016 thirteen-week period, primarily attributable to approximately $9,000,000 of revenue generated in support of disaster relief efforts. Revenue per load on revenue generated by multimode capacity providers increased approximately 22% compared to the prior year period and the number of loads hauled by multimode capacity providers in the 2017 thirteen-week period increased approximately 1% compared to the 2016 thirteen-week period. The increase in revenue per load of 22% was primarily attributable to the impact of air loadings provided in support of disaster relief efforts during the 2017 thirteen-week period. The increase in loads hauled by multimode capacity providers was primarily due to a 21% increase in loads hauled by air and ocean cargo carriers, where the demand was broad-based across many customers, partially offset by a 7% decrease in loads hauled by rail intermodal loads, entirely attributable to decreased loadings at one specific agency.

Purchased transportation was 77.0% and 76.3% of revenue in the 2017 and 2016 thirteen-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased rate of purchased transportation paid to Truck Brokerage Carriers and a decrease in the percentage of revenue contributed by BCO Independent Contractors, which typically has a lower rate of purchased transportation than revenue generated by Truck Brokerage Carriers. Commissions to agents were 8.1% and 8.3% of revenue in the 2017 and 2016 thirteen-week periods, respectively. The decrease in commissions to agents as a percentage of revenue was primarily attributable to a decreased net revenue margin on revenue generated by Truck Brokerage Carriers.

Investment income was $711,000 and $357,000 in the 2017 and 2016 thirteen-week periods, respectively. The increase in investment income was due to higher average rates of return on investments during the 2017 period and a higher average investment balance held by the insurance segment in the 2017 period.

Other operating costs increased $605,000 in the 2017 thirteen-week period compared to the 2016 thirteen-week period and represented 5.8% of gross profit in the 2017 period compared to 6.2% of gross profit in the 2016 period. The increase in other operating costs compared to the prior year was primarily due to decreased gains on sales of used trailing equipment, partially offset by decreased trailing equipment maintenance costs. The decrease in other operating costs as a percentage of gross profit was caused by the effect of increased gross profit, partially offset by the increase in other operating costs.

Insurance and claims increased $5,439,000 in the 2017 thirteen-week period compared to the 2016 thirteen-week period and represented 12.8% of gross profit in the 2017 period compared to 10.3% of gross profit in the 2016 period. The increase in insurance and claims expense compared to prior year was due to increased net unfavorable development of prior years’ claims in the 2017 period and increased severity of current year claims, in particular, related to a single severe accident in the 2017 period. Unfavorable development of prior years’ claims was $1,124,000 in the 2017 thirteen-week period whereas favorable development of prior year’s claims was $2,118,000 in the 2016 thirteen-week period. The increase in insurance and claims as a percent of gross profit was caused by the increase in insurance and claims costs, partially offset by the effect of increased gross profit.

Selling, general and administrative costs increased $9,303,000 in the 2017 thirteen-week period compared to the 2016 thirteen-week period and represented 31.4% of gross profit in the 2017 period compared to 28.5% of gross profit in the 2016 period. The increase in selling, general and administrative costs compared to prior year was primarily attributable to a $6,848,000 provision for incentive compensation in the 2017 thirteen-week period compared to a $427,000 provision in the 2016 thirteen-week period as the Company is significantly exceeding earnings targets during the 2017 period, an increased provision for customer bad debt, increased stock-based compensation expense and increased wages. The increase in selling, general and administrative costs as a percent of gross profit was due primarily to the increase in selling, general and administrative costs, partially offset by the effect of increased gross profit.

Depreciation and amortization increased $1,114,000 in the 2017 thirteen-week period compared to the 2016 thirteen-week period and represented 7.2% of gross profit in the 2017 period compared to 7.4% of gross profit in the 2016 period. The increase in depreciation and amortization expenses was primarily due to an increased number of owned trailers in response to increased customer demand for the Company’s drop and hook services. The decrease in depreciation and amortization as a percentage of gross profit was primarily due to the effect of increased gross profit, partially offset by increased depreciation and amortization expense.

Interest and debt expense in the 2017 thirteen-week period decreased $291,000 compared to the 2016 thirteen-week period. The decrease in interest and debt expense was primarily attributable to increased interest income earned on deposits held at the transportation logistics segment.

The provisions for income taxes for the 2017 and 2016 thirteen-week periods were based on estimated annual effective income tax rates of 37.8% and 38.1%, respectively, adjusted for discrete events, such as benefits resulting from disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options. The effective income tax rates for the 2017 and 2016 thirteen-week periods were 29.2% and 36.9%, respectively. The effective income tax rate for the 2017 thirteen-week period was lower than the statutory federal income tax rate primarily as a result of federal domestic production activities deductions and research and development credits recognized as discrete items during the thirteen-week period ended September 30, 2017, partially offset by the effect of state taxes and the meals and entertainment exclusion. The effective income tax rate for the 2016 thirteen-week period was higher than the 35% statutory federal income tax rate primarily as a result of state taxes and the meals and entertainment exclusion. The effective income tax rate in the 2017 thirteen-week period of 29.2% was less than the 37.8% estimated annual effective income tax rate primarily as a result of federal domestic production activities deductions and research and development credits recognized as discrete items during the thirteen-week period ended September 30, 2017, excess tax benefits recognized on stock-based compensation arrangements resulting from the Company’s adoption of ASU 2016-09 during 2017 and disqualifying dispositions of the Company’s common stock by employees who obtained the stock through the exercises of incentive stock options in the 2017 period. The effective income tax rate in the 2016 thirteen-week period of 36.9% was less than the 38.1% estimated annual effective income tax rate primarily due to certain federal income tax credits realized in the 2016 period and disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options in the 2016 period.

The net loss attributable to noncontrolling interest of $23,000 in the 2017 thirteen-week period represents the noncontrolling investors’ 30% share of the net loss incurred by Landstar Metro and Landstar Servicios.

Net income attributable to the Company was $42,443,000, or $1.01 per common share ($1.01 per diluted share), in the 2017 thirteen-week period. Net income attributable to the Company was $36,278,000, or $0.86 per common share ($0.86 per diluted share), in the 2016 thirteen-week period.

CAPITAL RESOURCES AND LIQUIDITY

Working capital and the ratio of current assets to current liabilities were $430,966,000 and 2.0 to 1, respectively, at September 30, 2017, compared with $357,096,000 and 1.9 to 1, respectively, at December 31, 2016. 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 $132,264,000 in the 2017 thirty-nine-week period compared with $171,297,000 in the 2016 thirty-nine-week period. The decrease in cash flow provided by operating activities was primarily attributable to the timing of collections of trade receivables.

The Company declared and paid $0.28 per share, or $11,739,000 in the aggregate, in cash dividends during the thirty-nine-week period ended September 30, 2017. The Company declared and paid $0.25 per share, or $10,572,000 in the aggregate, in cash dividends during the thirty-nine-week period ended September 24, 2016. During the thirty-nine-week period ended September 30, 2017, the Company did not purchase any shares of its common stock. As of September 30, 2017, the Company may purchase up to 1,036,125 shares of its common stock under its authorized stock purchase program. Long-term debt, including current maturities, was $117,402,000 at September 30, 2017, $20,902,000 lower than at December 31, 2016.

Equity was $653,973,000, or 85% of total capitalization (defined as long-term debt including current maturities plus equity), at September 30, 2017, compared to $542,557,000, or 80% of total capitalization, at December 31, 2016. The increase in equity was primarily a result of net income, partially offset by dividends declared by the Company in the 2017 thirty-nine-week period.

On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on June 2, 2021, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing amount of $400,000,000. The Company’s prior credit agreement was terminated on June 2, 2016.

The Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness. The Company is required to, among other things, maintain a minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage Ratio, as defined in the Credit Agreement, below a specified maximum. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the amount of such cash dividends and other distributions to stockholders to the extent that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event that, among other things, a person or group acquires 35% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors or the directors cease to consist of a majority of Continuing Directors, as defined in the Credit Agreement. None of these covenants are presently considered by management to be materially restrictive to the Company’s operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Credit Agreement.

At September 30, 2017, the Company had no borrowings outstanding and $33,127,000 of letters of credit outstanding under the Credit Agreement. At September 30, 2017, there was $216,873,000 available for future borrowings under the Credit Agreement. In addition, the Company has $59,999,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments totaling $66,666,000 at September 30, 2017. Investments, all of which are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Fair value of investments is based primarily on quoted market prices. See Notes to Consolidated Financial Statements included herein for further discussion on measurement of fair value of investments.

Historically, the Company has generated sufficient operating cash flow to meet its debt service requirements, fund continued growth, both organic and through acquisitions, complete or execute share purchases of its common stock under authorized share purchase programs, pay dividends and meet working capital needs. As an asset-light provider of integrated transportation management solutions, the Company’s annual capital requirements for operating property are generally for trailing equipment and information technology hardware and software. In addition, a significant portion of the trailing equipment used by the Company is provided by third party capacity providers, thereby reducing the Company’s capital requirements. During the 2017 thirty-nine-week period, the Company purchased $8,800,000 of operating property. Included in the $8,800,000 of purchases of operating property during the 2017 thirty-nine-week period is $4,255,000 related to a freight staging and transload facility in Laredo, Texas for which the Company accrued a corresponding liability in accounts payable as of December 31, 2016. Landstar also acquired $945,000 of operating property relating to the completion of the Laredo property for which the Company accrued a corresponding liability in accounts payable as of September 30, 2017. Landstar anticipates acquiring either by purchase or lease financing during the remainder of fiscal year 2017 approximately $36,000,000 in operating property, consisting primarily of new trailing equipment to replace older trailing equipment and information technology equipment. On September 20, 2017 the Company completed the Landstar Metro acquisition, as described in footnote 1 to our unaudited consolidated financial statements. Cash consideration paid in the quarter for the acquisition was approximately $8,199,000. In addition, the Company assumed approximately $2,200,000 in liabilities consisting of additional contingent purchase price and associated indirect taxes.

As it relates to the non-controlling interests of Landstar Metro and Landstar Servicios, the Company has the option to purchase, and the minority equityholders have the option to sell, during the period commencing on the third anniversary of September 20, 2017, the closing date of the subscription by the minority equityholders (the “Closing Date”), and at any time after the fourth anniversary of the Closing Date, at fair value all but not less than all of the noncontrolling interests in Landstar Metro and Landstar Servicios. The noncontrolling interests are also subject to customary restrictions on transfer, including a right of first refusal in favor of the Company.

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.

LEGAL MATTERS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The allowance for doubtful accounts for both trade and other receivables represents management’s estimate of the amount of outstanding receivables that will not be collected. Historically, management’s estimates for uncollectible receivables have been materially correct. Although management believes the amount of the allowance for both trade and other receivables at September 30, 2017 is appropriate, a prolonged period of low or no economic growth may adversely affect the collection of these receivables. In addition, liquidity concerns and/or unanticipated bankruptcy proceedings at any of the Company’s larger customers in which the Company is carrying a significant receivable could result in an increase in the provision for uncollectible receivables and have a significant impact on the Company’s results of operations in a given quarter or year. However, it is not expected that an uncollectible accounts receivable resulting from an individual customer would have a significant impact on the Company’s financial condition. Conversely, a more robust economic environment or the recovery of a previously provided for uncollectible receivable from an individual customer may result in the realization of some portion of the estimated uncollectible receivables.

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 2017 and 2016 thirty-nine-week periods, insurance and claims costs included $1,327,000 and $698,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims reserve at September 30, 2017.

The Company utilizes certain income tax planning strategies to reduce its overall cost of income taxes. If the Company were to be subject to an audit, it is possible that certain strategies might be disallowed resulting in an increased liability for income taxes. Certain of these tax planning strategies result in a level of uncertainty as to whether the related tax positions taken by the Company would result in a recognizable benefit. The Company has provided for its estimated exposure attributable to such tax positions due to the corresponding level of uncertainty with respect to the amount of income tax benefit that may ultimately be realized. Management believes that the provision for liabilities resulting from the uncertainty in certain income tax positions is appropriate. To date, the Company has not experienced an examination by governmental revenue authorities that would lead management to believe that the Company’s past provisions for exposures related to the uncertainty of such income tax positions are not appropriate.

Significant variances from management’s estimates for the amount of uncollectible receivables, the ultimate resolution of self-insured claims and the provision for uncertainty in income tax positions could each be expected to positively or negatively affect Landstar’s earnings in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations.

EFFECTS OF INFLATION

Management does not believe inflation has had a material impact on the results of operations or financial condition of Landstar in the past five years. However, inflation in excess of historic trends might have an adverse effect on the Company’s results of operations in the future.

SEASONALITY

Landstar’s operations are subject to seasonal trends common to the trucking industry. Results of operations for the quarter ending in March are typically lower than for the quarters ending June, September and December.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to changes in interest rates as a result of its financing activities, primarily its borrowings on its revolving credit facility, and investing activities with respect to investments held by the insurance segment.

Depending upon the specific type of borrowing, borrowings under the Credit Agreement bear interest based on either (a) the prime rate, (b) the Federal Reserve Bank of New York rate plus 0.5% or (c) the London Interbank Offered Rate, plus 1.25%. As of September 30, 2017 and during the entire 2017 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 U.S. Treasury obligations having maturities of up to five years. Assuming that the long-term portion of investments remains at $65,292,000, the balance at September 30, 2017, a hypothetical increase or decrease in interest rates of 100 basis points would not have a material impact on future earnings on an annualized basis. Short-term investments consist of short-term investment-grade instruments and the current maturities of investment-grade corporate bonds and U.S. Treasury obligations. Accordingly, any future interest rate risk on these short-term investments would not be material to the Company’s operating results.

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 30, 2017 were, as translated to U.S. dollars, approximately 3% of total consolidated assets. Accordingly, any translation gain or loss related to the Canadian and Mexican operations would not be material.

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017 to provide reasonable assurance that information required to be disclosed by the Company in reports that it filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There were no significant changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In designing and evaluating 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

Item 1A. Risk Factors

Acquired business and noncontrolling interests. During 2017, Landstar Metro, a recently formed subsidiary of the Company, acquired substantially all of the assets of the asset-light transportation logistics business of a Mexican transportation logistics company. In connection with the acquisition, individuals affiliated with the seller subscribed in the aggregate for a 30% equity interest in each of Landstar Metro and its sister company, Landstar Servicios. As it relates to the noncontrolling interests of Landstar Metro and Landstar Servicios, the Company has the option to purchase, and the minority equityholders have the option to sell, during the period commencing on the third anniversary of September 20, 2017, the closing date of the subscription by the minority equityholders (the “Closing Date”), and at any time after the fourth anniversary of the Closing Date, at fair value all but not less than all of the noncontrolling interests in Landstar Metro and Landstar Servicios. No assurances can be provided regarding the exercise of the option to purchase by the Company or the option to sell by the minority equityholders, or the amount that may be required to be paid to purchase the minority interests should either option be exercised.

For a discussion identifying additional risk factors and other important factors that could cause actual results to differ materially from those anticipated, see the discussions under Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” in this Quarterly Report on Form 10-Q.

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

Purchases of Equity Securities by the Company

The Company did not purchase any shares of its common stock during the period from July 2, 2017 to September 30, 2017, the Company’s third fiscal quarter.

On May 19, 2015, the Landstar System, Inc. Board of Directors authorized the Company to increase the number of shares of the Company’s common stock that the Company is authorized to purchase from time to time in the open market and in privately negotiated transactions under a previously announced purchase program to 3,000,000 shares. As of September 30, 2017, the Company has authorization to purchase 1,036,125 shares of its common stock under this program. No specific expiration date has been assigned to the May 19, 2015 authorization.

Dividends

During the thirty-nine-week period ended September 30, 2017, Landstar paid dividends as follows:


Dividend Amount per Share	Declaration Date	Record Date	Payment Date
$0.09	January 30, 2017	February 20, 2017	March 17, 2017
$0.09	April 25, 2017	May 11, 2017	June 2, 2017
$0.10	July 25, 2017	August 14, 2017	September 1, 2017

On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock in the event there is a default under the Credit Agreement. In addition, the Credit Agreement, under certain circumstances, limits the amount of such cash dividends and other distributions to stockholders to

the extent that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio, as defined in the Credit Agreement, would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed on the Exhibit Index are furnished as part of this quarterly report on Form 10-Q.

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*		XBRL Instance Document

101.SCH*		XBRL Schema Document

101.CAL*		XBRL Calculation Linkbase Document

101.DEF*		XBRL Definition Linkbase Document

101.LAB*		XBRL Labels Linkbase Document

101.PRE*		XBRL Presentation Linkbase Document

* Filed herewith

** Furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


								LANDSTAR SYSTEM, INC.

Date: November 3, 2017								/s/ James B. Gattoni
								James B. Gattoni
								President and Chief Executive Officer



Date: November 3, 2017								/s/ L. Kevin Stout
								L. Kevin Stout
								Vice President and Chief Financial Officer

EX-31.1

EXHIBIT 31.1

SECTION 302 CERTIFICATION

I, James B. Gattoni, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Landstar System, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2017




		/s/ James B. Gattoni
		James B. Gattoni President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

SECTION 302 CERTIFICATION

I, L. Kevin Stout, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Landstar System, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2017




		/s/ L. Kevin Stout
		L. Kevin Stout Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Landstar System, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James B. Gattoni, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 3, 2017




		/s/ James B. Gattoni
		James B. Gattoni President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Landstar System, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, L. Kevin Stout, Vice President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 3, 2017




		/s/ L. Kevin Stout
		L. Kevin Stout Vice President and Chief Financial Officer

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