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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission File Number:     
0-21238
 
 
 
 
LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
06-1313069
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
13410 Sutton Park Drive South, Jacksonville, Florida
(Address of principal executive offices)
32224
(Zip Code)
(904)
398-9400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock
 
LSTR
 
NASDAQ
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one):
 
Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of the close of business on October 19, 2020 was
38,383,779
.
 
 
 

Table of Contents
Index
 
PART I – Financial Information
 
  Page 4
  Page 5
  Page 6
  Page 7
  Page 8
  Page 10
  Page 19
  Page 32
  Page 32
PART II – Other Information
  Page 33
  Page 33
  Page 34
  Page 34
  Page 36
 
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
 
2

Table of Contents
PART I -
FINANCIAL INFORMATION
Item 1. Financial Statements
The interim consolidated financial statements contained herein reflect all adjustments (all of a normal, recurring nature) which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations, cash flows and changes in equity for the periods presented. They have been prepared in accordance with Rule
10-01
of Regulation
S-X
and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the thirty nine weeks ended September 26, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 26, 2020.
These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2019 Annual Report on Form
10-K.
 
3

Table of Contents
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
 
    
September 26,

2020
   
December 28,

2019
 
ASSETS             
Current Assets
    
Cash and cash equivalents
   $ 218,554     $ 319,515  
Short-term investments
     39,068       32,901  
Trade accounts receivable, less allowance of $8,120 and $7,284
     637,908       588,549  
Other receivables, including advances to independent contractors, less allowance of $8,827 and $7,667
     40,550       35,553  
Other current assets
     27,989       21,370  
  
 
 
   
 
 
 
Total current assets
     964,069       997,888  
  
 
 
   
 
 
 
Operating property, less accumulated depreciation and amortization of $291,159 and $280,849
     279,495       285,855  
Goodwill
     40,251       38,508  
Other assets
     108,390       105,460  
  
 
 
   
 
 
 
Total assets
   $ 1,392,205     $ 1,427,711  
  
 
 
   
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY             
Current Liabilities
    
Cash overdraft
   $ 47,459     $ 53,878  
Accounts payable
     339,798       271,996  
Current maturities of long-term debt
     34,723       42,632  
Insurance claims
     46,019       44,532  
Dividends payable
     —         78,947  
Contractor escrow
     28,345       24,902  
Other current liabilities
     47,206       36,017  
  
 
 
   
 
 
 
Total current liabilities
     543,550       552,904  
  
 
 
   
 
 
 
Long-term debt, excluding current maturities
     52,570       70,212  
Insurance claims
     36,344       33,575  
Deferred income taxes and other noncurrent liabilities
     54,107       49,551  
Shareholders’ Equity
    
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 68,181,418 and 68,083,419 shares
     682       681  
Additional
paid-in
capital
     226,878       226,123  
Retained earnings
     2,065,999       1,962,161  
Cost of 29,797,639 and 28,609,926 shares of common stock in treasury
     (1,581,961     (1,465,284
Accumulated other comprehensive loss
     (5,964     (2,212
  
 
 
   
 
 
 
Total shareholders’ equity
     705,634       721,469  
  
 
 
   
 
 
 
Total liabilities and shareholders’ equity
   $ 1,392,205     $ 1,427,711  
  
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
4

LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
    
Thirty Nine Weeks Ended
   
Thirteen Weeks Ended
 
    
September 26,

2020
    
September 28,

2019
   
September 26,

2020
    
September 28,

2019
 
Revenue
   $ 2,836,626      $ 3,089,698     $ 1,085,546      $ 1,011,658  
Investment income
     2,716        3,736       714        1,315  
Costs and expenses:
          
Purchased transportation
     2,183,143        2,365,646       838,753        774,520  
Commissions to agents
     236,490        257,862       85,848        84,568  
Other operating costs, net of gains/losses on asset sales/dispositions
     23,035        28,531       7,361        10,431  
Insurance and claims
     66,563        55,248       21,855        23,969  
Selling, general and administrative
     124,779        120,717       38,851        38,152  
Depreciation and amortization
     34,212        33,045       11,240        10,695  
Impairment of intangible and other assets
     2,582        —         —          —    
  
 
 
    
 
 
   
 
 
    
 
 
 
Total costs and expenses
     2,670,804        2,861,049       1,003,908        942,335  
  
 
 
    
 
 
   
 
 
    
 
 
 
Operating income
     168,538        232,385       82,352        70,638  
Interest and debt expense
     2,936        2,278       1,008        764  
  
 
 
    
 
 
   
 
 
    
 
 
 
Income before income taxes
     165,602        230,107       81,344        69,874  
Income taxes
     38,567        52,452       19,458        16,619  
  
 
 
    
 
 
   
 
 
    
 
 
 
Net income
     127,035        177,655       61,886        53,255  
Less: Net loss attributable to noncontrolling interest
     —          (17     —          —    
  
 
 
    
 
 
   
 
 
    
 
 
 
Net income attributable to Landstar System, Inc. and subsidiary
   $ 127,035      $ 177,672     $ 61,886      $ 53,255  
  
 
 
    
 
 
   
 
 
    
 
 
 
Earnings per common share attributable to Landstar System, Inc. and subsidiary
   $ 3.28      $ 4.45     $ 1.61      $ 1.35  
  
 
 
    
 
 
   
 
 
    
 
 
 
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary
   $ 3.28      $ 4.45     $ 1.61      $ 1.35  
  
 
 
    
 
 
   
 
 
    
 
 
 
Average number of shares outstanding:
          
Earnings per common share
     38,673,000        39,891,000       38,386,000        39,566,000  
  
 
 
    
 
 
   
 
 
    
 
 
 
Diluted earnings per share
     38,673,000        39,891,000       38,386,000        39,566,000  
  
 
 
    
 
 
   
 
 
    
 
 
 
Dividends per common share
   $ 0.580      $ 0.515     $ 0.210      $ 0.185  
  
 
 
    
 
 
   
 
 
    
 
 
 
See accompanying notes to consolidated financial statements.
 
5

Table of Contents
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
    
Thirty Nine Weeks Ended
    
Thirteen Weeks Ended
 
    
September 26,

2020
   
September 28,

2019
    
September 26,

2020
    
September 28,

2019
 
N
et income attributable to Landstar System, Inc. and subsidiary
  $ 127,035     $ 177,672     $ 61,886     $ 53,255  
Other comprehensive (loss) income:
          
Unrealized holding gains on
available-for-sale
investments, net of tax expense of $413, $577, $75 and $83
     1,510       2,112        273        307  
Foreign currency translation (losses) gains
     (5,262     42        908        (1,083
  
 
 
   
 
 
    
 
 
    
 
 
 
Other comprehensive (loss) income
     (3,752     2,154        1,181        (776
  
 
 
   
 
 
    
 
 
    
 
 
 
Comprehensive income attributable to Landstar System, Inc. and subsidiary
   $ 123,283     $ 179,826      $ 63,067      $ 52,479  
  
 
 
   
 
 
    
 
 
    
 
 
 
See accompanying notes to consolidated financial statements.
 
6

 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
    
Thirty Nine Weeks Ended
 
    
September 26,

2020
   
September 28,

2019
 
OPERATING ACTIVITIES
    
Net income
   $ 127,035     $ 177,655  
Adjustments to reconcile net income to net cash provided by operating activities:
    
Depreciation and amortization of operating property and intangible assets
     34,212       33,045  
Non-cash
interest charges
     222       190  
Provisions for losses on trade and other accounts receivable
     7,206       6,942  
Gains on sales/disposals of operating property
     (2,295     (1,188
Impairment of intangible and other assets
     2,582       —    
Deferred income taxes, net
     4,758       7,151  
Stock-based compensation
     2,691       4,470  
Changes in operating assets and liabilities:
    
(Increase) decrease in trade and other accounts receivable
     (62,492     84,607  
Increase in other assets
     (13,492     (21,129
Increase (decrease) in accounts payable
     66,815       (28,692
Increase (decrease) in other liabilities
     14,050       (16,076
Increase in insurance claims
     4,256       13,739  
  
 
 
   
 
 
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
     185,548       260,714  
  
 
 
   
 
 
 
INVESTING ACTIVITIES
    
Net changes in other short-term investments
     131       —    
Sales and maturities of investments
     18,795       56,467  
Purchases of investments
     (21,102     (58,829
Purchases of operating property
     (25,426     (15,199
Proceeds from sales of operating property
     6,623       3,621  
Consideration paid for acquisition
     (2,766     —    
  
 
 
   
 
 
 
NET CASH USED BY INVESTING ACTIVITIES
     (23,745     (13,940
  
 
 
   
 
 
 
FINANCING ACTIVITIES
    
Decrease in cash overdraft
     (6,419     (10,714
Dividends paid
     (101,442     (20,589
Payment for debt issue costs
     (959     —    
Proceeds from exercises of stock options
     676       629  
Taxes paid in lieu of shares issued related to stock-based compensation plans
     (3,326     (8,449
Purchases of common stock
     (115,962     (88,578
Principal payments on finance lease obligations
     (33,036     (34,141
Purchase of noncontrolling interest
     —         (600
  
 
 
   
 
 
 
NET CASH USED BY FINANCING ACTIVITIES
     (260,468     (162,442
  
 
 
   
 
 
 
Effect of exchange rate changes on cash and cash equivalents
     (2,296     366  
  
 
 
   
 
 
 
(Decrease) increase in cash and cash equivalents
     (100,961     84,698  
Cash and cash equivalents at beginning of period
     319,515       199,736  
  
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 218,554     $ 284,434  
  
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
7

Table of Contents
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Thirty Nine and Thirteen Weeks Ended September 26, 2020 and
September 
28, 2019
(In thousands, except share and per share amounts)
(Unaudited)
 
    
Common Stock
    
Additional
Paid-In
   
Retained
   
Treasury Stock at Cost
   
Accumulated
Other
Comprehensive
       
    
Shares
    
Amount
    
Capital
   
Earnings
   
Shares
    
Amount
   
(Loss) Income
   
Total
 
Balance December 28, 2019
     68,083,419      $ 681      $ 226,123     $ 1,962,161       28,609,926      $ (1,465,284    
$
 (2,212
)
 
  $  721,469  
Adoption of accounting standard
(Note
15
)
             (702)              (702
Net income
             40,895              40,895  
Dividends ($0.185 per share)
             (7,336            (7,336
Purchases of common stock
               1,178,970        (115,962       (115,962
Issuance of stock related to stock-based compensation plans
     84,063        1        (1,781       8,078        (639       (2,419
Stock-based compensation
           631                631  
Other comprehensive loss
                    (9,481     (9,481
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Balance March 28, 2020
     68,167,482      $ 682      $ 224,973     $ 1,995,018       29,796,974      $ (1,581,885
$
 (11,693
)
 
  $ 627,095  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Net income
             24,254              24,254  
Dividends ($0.185 per share)
             (7,099            (7,099
Issuance of stock related to stock-based compensation plans
     9,305        —          (211       354        (36       (247
Stock-based compensation
           570                570  
Other comprehensive income
                    4,548       4,548  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Balance June 27, 2020
     68,176,787      $ 682      $ 225,332     $ 2,012,173       29,797,328      $ (1,581,921  
$
 (7,145
)
 
  $ 649,121  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Net income
             61,886              61,886  
Dividends ($0.21 per share)
             (8,060            (8,060
Issuance of stock related to stock-based compensation plans
     4,631        —          56         311        (40       16  
Stock-based compensation
           1,490                1,490  
Other comprehensive income
                    1,181       1,181  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Balance September 26, 2020
     68,181,418      $ 682      $ 226,878       2,065,999       29,797,639      $ (1,581,961
$
 (5,964)     $ 705,634  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
 
8

    
Landstar System, Inc. and Subsidiary Shareholders
             
    
Common Stock
    
Additional
Paid-In
   
Retained
   
Treasury Stock at Cost
   
Accumulated
Other
Comprehensive
   
Non-controlling
       
    
Shares
    
Amount
    
Capital
   
Earnings
   
Shares
    
Amount
   
(Loss) Income
   
Interests
   
Total
 
Balance December 29,
2018
     67,870,962      $ 679      $ 226,852     $ 1,841,279       27,755,001      $ (1,376,111
$
(5,875
)
 
  $ 2,309     $  689,133  
Net income (loss)
             63,317              (17     63,300  
Dividends ($0.165 per
share)
             (6,629              (6,629
Purchases of common
stock
               124,481        (12,977         (12,977
Purchase of
noncontrolling
interests
           1,842                (2,442     (600
Issuance of stock related
to stock-based
compensation plans
     176,079        1        (7,081       5,199        (524         (7,604
Stock-based
compensation
           1,938                  1,938  
Other comprehensive
income
                    1,549       150       1,699  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance March 30, 2019
     68,047,041      $ 680      $ 223,551     $  1,897,967       27,884,681      $ (1,389,612  
$
(4,326
)
 
  $        $ 728,260  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income
             61,100                61,100  
Dividends ($0.165 per
share)
             (6,628              (6,628
Purchases of common
stock
               549,929        (56,752         (56,752
Issuance of stock related
to stock-based
compensation plans
     17,836        1        (431       572        (61         (491
Stock-based
compensation
           1,430                  1,430  
Other comprehensive
income
                    1,381         1,381  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance June 29, 2019
     68,064,877      $ 681      $ 224,550     $ 1,952,439       28,435,182      $ (1,446,425  
$
(2,945
)
  $        $ 728,300  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income
             53,255                53,255  
Dividends ($0.185 per
share)
             (7,332              (7,332
Purchases of common
stock
               174,658        (18,849         (18,849
Issuance of stock related
to stock-based
compensation plans
     7,957        —          285         86        (10         275  
Stock-based
compensation
           1,102                  1,102  
Other comprehensive
loss
                    (776       (776
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance September 28,
2019
     68,072,834      $ 681      $ 225,937     $ 1,998,362       28,609,926      $ (1,465,284  
$
 (3,721
)
  $        $ 755,975  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
9

Table of Contents
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates. Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Significant intercompany accounts have been eliminated in consolidation.
 
(1)
Significant Accounting Policies
Revenue from Contracts with Customers – Disaggregation of Revenue
The following table summarizes the percentage of consolidated revenue generated by 
mode of transportation
 and the dollar amount included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers hauled via equipment type during the thirty-nine-week and thirteen-week periods ended September 26, 2020 and September 28, 2019 (
dollars
 
in thousands):
 
    
Thirty Nine Weeks Ended
   
Thirteen Weeks Ended
 
Mode
  
September 26,

2020
   
September 28,

2019
   
September 26,

2020
   
September 28,

2019
 
BCO Independent Contractors
 –
 
Truck
     46     45     46     46
Brokerage Carriers
 
-
 
Truck
     46     47     46     46
Rail intermodal
     3     3     3     3
Ocean and air cargo carriers
     3     3     3     3
Equipment Type - Truck
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Van equipment
   $  1,694,916     $  1,799,421     $  666,582     $  575,042  
Unsided/platform equipment
   $ 848,187     $ 980,615     $ 314,471     $ 331,787  
Less-than-truckload
   $ 70,984     $ 73,475     $ 25,125     $ 25,367  
 
(2)
Acquired Business
On May 6, 2020, Landstar System Holdings, Inc. formed a new subsidiary that was subsequently renamed Landstar Blue, LLC (“Landstar Blue”). Landstar Blue arranges truckload brokerage services while helping the Company to develop and test digital technologies and processes for the benefit of all Landstar independent commission sales agents. On June 15, 2020, Landstar Blue completed the acquisition of an independent agent of the Company whose business focused on truckload brokerage services. Cash consideration paid for the acquisition was approximately $2,766,000. In addition, the Company assumed approximately $200,000 in liabilities consisting of additional contingent purchase price. The resulting goodwill arising from the acquisition was approximately $2,871,000. With respect to this goodwill, 100% is expected to be deductible by the Company for U.S. income tax purposes. Pro forma financial information for prior periods is not presented as the Company does not believe the acquisition to be material to the Company’s consolidated results. The results of operations for Landstar Blue are presented as part of the Company’s transportations logistics segment. Transaction costs for the acquisition were insignificant.
 
(3)
Share-based Payment Arrangements
As of September 26, 2020, the Company had two employee equity incentive plans, the 2002 employee stock option and stock incentive plan (the “ESOSIP”) and the 2011 equity incentive plan (the “2011 EIP”). No further grants can be made under the ESOSIP. The Company also has a stock compensation plan for members of its Board of Directors, the Amended and Restated 2013 Directors Stock
 
10
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 26,

2020
    
September 28,

2019
    
September 26,

2020
    
September 28,

2019
 
Total cost of the Plans during the period
   $ 2,691      $ 4,470      $  1,490      $  1,102  
Amount of related income tax benefit recognized during the period
     (1,618      (4,125      (483      (391
  
 
 
    
 
 
    
 
 
    
 
 
 
Net cost of the Plans during the period
     1,073      $ 345      $ 1,007      $ 711  
  
 
 
    
 
 
    
 
 
    
 
 
 
Included in income tax benefits recognized in the thirty-nine-week periods ended September 26, 2020 and September 28, 2019 were excess tax benefits from stock-based awards of $927,000 and $2,968,000, respectively.
As of September 26, 2020, there were 60,586 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 3,675,862 shares of the Company’s common stock reserved for issuance in the aggregate under the ESOSIP and 2011 EIP.
Restricted Stock Units
The following table summarizes information regarding the Company’s outstanding restricted stock unit (“RSU”) awards with either a performance condition or a market condition under the Plans:
 
    
Number of
RSUs
    
Weighted Average

Grant Date
Fair Value
 
Outstanding at December 28, 2019
     198,875      $ 84.37  
Granted
     59,719      $  102.62  
Shares earned in excess of target
(1)
     11,648      $ 77.00  
Vested shares, including shares earned in excess of target
     (76,290    $ 73.44  
Forfeited
     (10,987    $ 100.55  
  
 
 
    
Outstanding at September 26, 2020
     182,965      $ 93.44  
  
 
 
    
 
(1)
Represents additional shares earned under the February 2, 2017 RSU awards as 2019 financial results exceeded target performance level.
During the thirty-nine-week period ended September 26, 2020, the Company granted RSUs with a performance condition. Outstanding RSUs at both December 28, 2019 and September 26, 2020 include RSUs with a performance condition and RSUs with a market condition, as further described below and in the Company’s 2019 Annual Report on Form
10-K.
RSUs with a performance condition granted on January 31, 2020 may vest on January 31 of 2023, 2024 and 2025 based on growth in operating income and
pre-tax
income per diluted share from continuing operations attributable to Landstar System, Inc. and subsidiary as compared to the results from the 2019 fiscal year.
The Company recognized approximately $415,000 and $2,477,000 of share-based compensation expense related to RSU awards in the thirty-nine-week periods ended September 26, 2020 and September 28, 2019, respectively. As of September 26, 2020, there was a maximum of $34.6 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 3.1 years. With respect to RSU awards with a performance condition, the amount of future compensation expense to be recognized will be determined based on future operating results.
 
 
11

Table of Contents
Stock Options
The following table summarizes information regarding the Company’s outstanding stock options under the Plans:
 
    
Number of

Options
    
Weighted Average
Exercise Price

per Share
    
Weighted Average

Remaining
Contractual

Term (years)
    
Aggregate Intrinsic

Value (000s)
 
Options outstanding at December 28, 2019
     44,467      $  51.24        
Exercised
     (23,717    $ 49.31        
  
 
 
          
Options outstanding at September 26, 2020
     20,750      $ 53.44        1.9      $  1,499  
  
 
 
          
Options exercisable at September 26, 2020
     20,750      $ 53.44        1.9      $ 1,499  
  
 
 
          
The total intrinsic value of stock options exercised during the thirty-nine-week periods ended September 26, 2020 and September 28, 2019 was $1,599,000 and $1,877,000, respectively.
As of September 26, 2020, there was no unrecognized compensation cost related to stock options granted under the Plans.
Non-vested
Restricted Stock and Deferred Stock Units
The following table summarizes information regarding the Company’s outstanding shares of
non-vested
restricted stock and Deferred Stock Units (defined below) under the Plans:
 
    
Number of Shares

and Deferred Stock
Units
    
Weighted Average

Grant Date

Fair Value
 
Non-vested
at December 28, 2019
     64,808      $ 98.24  
Granted
     26,604      $ 111.88  
Vested
     (28,621    $ 98.83  
Forfeited
     (2,351    $ 106.34  
  
 
 
    
Non-vested
at September 26, 2020
     60,440      $ 103.65  
  
 
 
    
The fair value of each share of
non-vested
restricted stock issued and Deferred Stock Unit granted under the Plans is based on the fair value of a share of the Company’s common stock on the date of grant. Shares of non-vested restricted stock are generally subject to vesting in three equal annual installments either on the first, second and third anniversary of the date of the grant or the third, fourth and fifth anniversary of the date of the grant, or 100% on the first or fifth anniversary of the date of the grant. For restricted stock awards granted under the 2013 DSCP plan, each recipient may elect to defer receipt of shares and instead receive restricted stock units (“Deferred Stock Units”), which represent contingent rights to receive shares of the Company’s common stock on the date of recipient separation from service from the Board of Directors, or, if earlier, upon a change in control event of the Company. Deferred Stock Units become vested 100% on the first anniversary of the date of the grant. Deferred Stock Units do not represent actual ownership in shares of the Company’s common stock and the recipient does not have voting rights or other incidents of ownership until the shares are issued. However, Deferred Stock Units do contain the right to receive dividend equivalent payments prior to settlement into shares.
As of September 26, 2020, there was $4,074,000 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 1.9 years.
 
(4)
Income Taxes
The provisions for income taxes for the 2020 and 2019 thirty-nine-week periods were each based on an estimated annual effective income tax rate of 24.2%, adjusted for discrete events, such as benefits resulting from stock-based awards. The effective income tax rate for the 2020 thirty-nine-week period was 23.3%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock-based awards and state
 
 
12
tax
refunds. The provision for income taxes for the 2020 thirty-nine-week period was favorably impacted by $927,000 of excess tax benefits from stock-based awards. The effective income tax rate for the 2019 thirty-nine-week period was 22.8%, which was higher than the statutory
federal
 in
come
tax rate of 21% primarily attributable to state taxes and the meals and
entertainment
exclusion, partially offset by excess tax benefits realized on stock-based awards. The provision for income taxes for the 2019 thirty-nine-week period was favorably impacted by $2,968,000 of excess tax benefits from stock-based awards.
(5)
Earnings Per Share
Earnings per common share attributable to Landstar System, Inc. and subsidiary are based on the weighted average number of shares outstanding, including outstanding
non-vested
restricted stock and outstanding Deferred Stock Units. Diluted earnings per share attributable to Landstar System, Inc. and subsidiary are based on the weighted average number of common shares and Deferred Stock Units outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. During the 2020 and 2019 thirty-nine-week and thirteen-week periods,
 
in reference to the determination of diluted earnings per share, 
the future compensation cost attributable to
outstanding
 
shares of
non-vested
restricted stock exceeded the
 
impact
of 
incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options.
For each of the thirty-nine-week periods ended September 26, 2020 and September 28, 2019, no options outstanding to purchase shares of common stock were antidilutive. Outstanding RSUs were excluded from the calculation of diluted earnings per share attributable to Landstar System, Inc. and subsidiary for all periods because the performance metric requirements or market condition for vesting had not been satisfied.
(6)
Additional Cash Flow Information
During the 2020 thirty-nine-week period, Landstar paid income taxes and interest of $28,761,000 and $3,087,000, respectively. During the 2019 thirty-nine-week period, Landstar paid income taxes and interest of $54,877,000 and $3,302,000, respectively. Landstar acquired operating property by entering into finance leases in the amounts of $7,485,000 and $6,481,000 in the 2020 and 2019 thirty-nine-week periods, respectively. In addition, during the 2020 thirty-nine-week period, Landstar acquired $1,068,000 of operating property for which the Company accrued a corresponding liability in accounts payable as of September 26, 2020. Capital expenditures are recorded as cash outflows from investing activities in the consolidated statement of cash flows in the period in which they are paid.
(7)
Segment Information
The following table summarizes information about the Company’s reportable business segments as of and for the thirty-nine-week and thirteen week periods ended September 26, 2020 and September 28, 2019 (in thousands):
 
    
Thirty Nine Weeks Ended
 
    
September 26, 2020
    
September 28, 2019
 
    
Transportation

Logistics
    
Insurance
    
Total
    
Transportation

Logistics
    
Insurance
    
Total
 
External revenue
   $  2,795,056      $  41,570      $  2,836,626      $  3,047,329      $  42,369      $  3,089,698  
Internal revenue
        44,912        44,912           36,978        36,978  
Investment income
        2,716        2,716           3,736        3,736  
Operating income
     148,270        20,268        168,538        200,767        31,618        232,385  
Expenditures on long-lived assets
     25,426           25,426        15,199           15,199  
Goodwill
     40,251           40,251        38,232           38,232  
 
    
Thirteen Weeks Ended
 
    
September 26, 2020
    
September 28, 2019
 
    
Transportation

Logistics
    
Insurance
    
Total
    
Transportation

Logistics
    
Insurance
    
Total
 
External revenue
   $  1,071,374      $  14,172      $  1,085,546      $  997,552      $  14,106      $  1,011,658  
Internal revenue
        9,078        9,078           9,611        9,611  
Investment income
        714        714           1,315        1,315  
Operating income
     71,752        10,600        82,352        64,848        5,790        70,638  
Expenditures on long-lived assets
     7,750           7,750        5,975           5,975  
 
13
In the thirty-nine-week periods ended
September 
26, 2020 and September 28, 2019, no single customer
accounted
for more than 10% of the Company’s consolidated revenue.​​​​​​​
(8)
Other Comprehensive Income
The following table
presents
the
components
of and changes in accumulated other comprehensive income (loss), net of related income taxes, as of and for the thirty-nine-week period ended September 26, 2020 (in thousands):
 
    
Unrealized
Holding Gains on
Available-for-Sale

Securities
    
Foreign Currency
Translation
    
Total
 
Balance as of December 28, 2019
   $  1,120      $  (3,332    $  (2,212
Other comprehensive gain (loss)
     1,510        (5,262      (3,752
  
 
 
    
 
 
    
 
 
 
Balance as of September 26, 2020
   $ 2,630      $  (8,594    $  (5,964
  
 
 
    
 
 
    
 
 
 
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 26, 2020.
 
(9)
Investments
Investments include primarily investment-grade corporate bonds and U.S. Treasury obligations having maturities of up to five years (the “bond portfolio”) and money market investments. Investments in the bond portfolio are reported as
available-for-sale
and are carried at fair value. Investments maturing less than one year from the balance sheet date are included in short-term investments and investments maturing more than one year from the balance sheet date are included in other assets in the consolidated balance sheets. Management performs an analysis of the nature of the unrealized losses on
available-for-sale
investments to determine whether an allowance for credit loss is necessary. Unrealized losses, representing the excess of the purchase price of an investment over its fair value as of the end of a period, considered to be a result of credit-related factors, are to be included as a charge in the statement of income, while unrealized losses considered to be a result of noncredit-related factors are to be included as a component of shareholders’ equity. Investments whose values are based on quoted market prices in active markets are classified within Level 1. Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, are classified within Level 2. As Level 2 investments include positions that are not traded in active markets, valuations may be adjusted to reflect illiquidity and/or
non-transferability,
which are generally based on available market information. Any transfers between levels are recognized as of the beginning of any reporting period. Fair value of the bond portfolio was determined using Level 1 inputs related to U.S. Treasury obligations and money market investments and Level 2 inputs related to investment-grade corporate bonds, asset-backed securities and direct obligations of government agencies. Unrealized gains, net of unrealized losses, on the investments in the bond portfolio were $3,350,000 and $1,427,000 at September 26, 2020 and December 28, 2019, respectively.
 
1
4

The amortized cost and fair values of
available-for-sale
investments are as follows at September 26, 2020 and December 28, 2019 (in thousands):    
 
    
Amortized

Cost
    
Gross

Unrealized

Gains
    
Gross

Unrealized

Losses
    
Fair

Value
 
September 26, 2020
           
Money market investments
   $ 14,456      $ —        $  —        $ 14,456  
Asset-backed securities
     569        —          38        531  
Corporate bonds and direct obligations of government agencies
     101,090        3,540        289        104,341  
U.S. Treasury obligations
     2,337        137        —          2,474  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $  118,452      $  3,677      $ 327      $  121,802  
  
 
 
    
 
 
    
 
 
    
 
 
 
December 28, 2019
           
Money market investments
   $ 15,691      $ —        $ —        $ 15,691  
Asset-backed securities
     572        —          1        571  
Corporate bonds and direct obligations of government agencies
     97,583        1,465        44        99,004  
U.S. Treasury obligations
     2,335        12        5        2,342  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 116,181      $ 1,477      $ 50      $ 117,608  
  
 
 
    
 
 
    
 
 
    
 
 
 
For those
available-for-sale
investments with unrealized losses at September 26, 2020 and December 28, 2019, the following table summarizes the duration of the unrealized loss (in thousands):
 
    
Less than 12 months
    
12 months or longer
    
Total
 
    
Fair

Value
    
Unrealized

Loss
    
Fair

Value
    
Unrealized

Loss
    
Fair

Value
    
Unrealized

Loss
 
September 26, 2020
                 
Asset-backed securities
   $ 531      $ 38      $ —        $  —        $ 531      $ 38  
Corporate bonds and direct obligations of government agencies
     4,277        289        —          —          4,277        289  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 4,808      $  327      $ —        $ —        $ 4,808      $  327  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
December 28, 2019
                 
Asset-backed securities
   $ 571      $ 1      $ —        $ —        $ 571      $ 1  
Corporate bonds and direct obligations of government agencies
     8,728        41        4,260        3        12,988        44  
U.S. Treasury obligations
     1,226        5        —          —          1,226        5  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total