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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
 
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the Fiscal Year Ended December 29, 2012
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	 	32224	
Jacksonville, Florida	 	(Zip Code)	
(Address of principal executive offices)	 	 	
(904) 398-9400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	 	Name of Exchange on Which Registered	
Common Stock, $0.01 Par Value	 	The NASDAQ Stock Market, Inc.	
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   þ    No   ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨    No   þ
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    þ     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   þ     No    ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 	 	 	 	 	 	 	
Large accelerated filer  þ	 	Accelerated filer   ¨	  	Non-accelerated filer  ¨	 	Smaller reporting company   ¨	
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨    No   þ
The aggregate market value of the voting stock held by non-affiliates of the registrant was $2,392,435,000 (based on the per share closing price on June 30, 2012, the last business day of the Company’s second fiscal quarter, as reported on the NASDAQ Global Select Market). In making this calculation, the registrant has assumed, without admitting for any purpose, that all directors and executive officers of the registrant, and no other persons, are affiliates.
The number of shares of the registrant’s common stock, par value $0.01 per share (the “Common Stock”), outstanding as of the close of business on January 25, 2013 was 46,494,114.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference in this Form 10-K as indicated herein:

Document	 	Part of 10-K
Into Which
Incorporated	 	
Proxy Statement relating to Landstar System, Inc.’s Annual Meeting of Stockholders scheduled to be held on May 23, 2013	 	 	Part III	  	

 

Table of Contents
LANDSTAR SYSTEM, INC.
2012 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

 	  	 	  	Page	 	
 	  	PART I	  	 	 	
Item 1.	  	Business	  	 	3	  	
Item 1A.	  	Risk Factors	  	 	11	  	
Item 1B.	  	Unresolved Staff Comments	  	 	15	  	
Item 2.	  	Properties	  	 	15	  	
Item 3.	  	Legal Proceedings	  	 	16	  	
Item 4.	  	Mine Safety Disclosures	  	 	17	  	
 	 	 	
 	  	PART II	  	 	 	 	
Item 5.	  	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	  	 	18	  	
Item 6.	  	Selected Financial Data	  	 	21	  	
Item 7.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	 	21	  	
Item 7A.	  	Quantitative and Qualitative Disclosures About Market Risk	  	 	34	  	
Item 8.	  	Financial Statements and Supplementary Data	  	 	36	  	
Item 9.	  	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	  	 	59	  	
Item 9A.	  	Controls and Procedures	  	 	59	  	
Item 9B.	  	Other Information	  	 	62	  	
 	 	 	
 	  	PART III	  	 	 	 	
Item 10.	  	Directors, Executive Officers and Corporate Governance	  	 	63	  	
Item 11.	  	Executive Compensation	  	 	63	  	
Item 12.	  	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	  	 	63	  	
Item 13.	  	Certain Relationships and Related Transactions, and Director Independence	  	 	63	  	
Item 14.	  	Principal Accounting Fees and Services	  	 	63	  	
 	 	 	
 	  	PART IV	  	 	 	 	
Item 15.	  	Exhibits and Financial Statement Schedules	  	 	64	  	
Signatures	  	 	67	  	

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
EX – 101 Instance Document
EX – 101 Schema Document
EX – 101 Calculation Linkbase Document
EX – 101 Labels Linkbase Document
EX – 101 Presentation Linkbase Document
EX – 101 Definition Linkbase Document	
 
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PART I
 
Item 1.	Business	
General
Landstar System, Inc. was incorporated in January 1991 under the laws of the State of Delaware. It acquired all of the capital stock of its predecessor, Landstar System Holdings, Inc. (“LSHI”) on March 28, 1991. Landstar System, Inc. has been a publicly held company since its initial public offering in March 1993. LSHI owns directly or indirectly all of the common stock of Landstar Ranger, Inc. (“Landstar Ranger”), Landstar Inway, Inc. (“Landstar Inway”), Landstar Ligon, Inc. (“Landstar Ligon”), Landstar Gemini, Inc. (“Landstar Gemini”), Landstar Transportation Logistics, Inc. (“Landstar Transportation Logistics”), Landstar Global Logistics, Inc. (“Landstar Global Logistics”), Landstar Express America, Inc. (“Landstar Express America”), Landstar Canada Holdings, Inc. (“LCHI”), Landstar Canada, Inc. (“Landstar Canada”), Landstar Contractor Financing, Inc. (“LCFI”), Risk Management Claim Services, Inc. (“RMCS”), Landstar Supply Chain Solutions, Inc. (“LSCS”), Landstar Supply Chain Solutions LLC (“LSCSLLC”) and Signature Insurance Company (“Signature”). Landstar Ranger, Landstar Inway, Landstar Ligon, Landstar Gemini, Landstar Transportation Logistics, Landstar Global Logistics, Landstar Express America, LSCS, LSCSLLC and Landstar Canada are collectively herein referred to as Landstar’s “Operating Subsidiaries.” Landstar System, Inc., LSHI, LCFI, RMCS, LCHI, Signature and the Operating Subsidiaries are collectively referred to herein as “Landstar” or the “Company,” unless the context otherwise requires. The Company’s principal executive offices are located at 13410 Sutton Park Drive South, Jacksonville, Florida 32224 and its telephone number is (904) 398-9400. The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, proxy and current reports on Form 8-K as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). The Company’s website is www.landstar.com. The SEC maintains a website at http://www.sec.gov that contains the Company’s current and periodic reports, proxy and information statements and other information filed electronically with the SEC.
Description of Business
Landstar is a non-asset based provider of freight transportation services and supply chain 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 and logistics needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada 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. Landstar markets its freight transportation services and supply chain solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport and store customers’ freight. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue.
Landstar markets its freight transportation services and supply chain solutions primarily through independent commission sales agents who enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to 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, railroads and independent warehouse capacity providers (“Warehouse Capacity Owners”). Through this network of agents and capacity providers linked together by Landstar’s information technology systems, Landstar operates a transportation services and supply chain solutions business primarily throughout North America with revenue of $2.8 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.
 
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Transportation Logistics Segment
The transportation logistics segment provides a wide range of transportation services and supply chain 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. Supply chain solutions are based on advanced technology solutions utilizing intellectual property that may be owned by the Company or licensed from third parties. Such solutions as offered by the Company may include integrated multi-modal solutions, outsourced logistics, supply chain engineering and warehousing. Industries serviced by the transportation logistics segment include automotive products, lumber and 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 logistics and less-than-truckload service providers. Each of the Company’s independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight. Supply chain solutions customers are generally charged fees for the services provided. Revenue recognized by the transportation logistics segment when providing capacity to customers to haul their freight is referred to herein as “transportation services revenue” and revenue for freight management services recognized on a fee-for-service basis is referred to herein as “transportation management fees.” See “Notes to Consolidated Financial Statements” for the amount of revenue from external customers, measure of profit and total assets attributable to the transportation logistics segment for the last three fiscal years.
Truck Services.    The transportation logistics segment’s truck transportation services include a full array of truckload transportation for a wide range of commodities, much of which are transported over irregular or non-repetitive routes, and, to a lesser degree, less-than-truckload transportation services. The Company utilizes a broad assortment of equipment, including dry and specialty vans of various sizes, unsided trailers (including flatbeds, drop decks and light specialty trailers), temperature-controlled vans and containers. Available truck transportation services also include short-to-long haul movement of containers by truck and expedited ground and dedicated power-only truck capacity. During fiscal year 2012, revenue hauled by BCO Independent Contractors and Truck Brokerage Carriers was 49% and 43%, respectively, of total revenue. The Company’s truck services contributed 92% of total revenue in each of fiscal year 2012, 2011 and 2010.
Rail Intermodal Services.    The transportation logistics segment has contracts with Class 1 domestic and Canadian railroads, certain short-line railroads and most major asset-based intermodal equipment providers, including agreements with stacktrain operators and container and trailing equipment companies. In addition, the transportation logistics segment has contracts with a vast network of local trucking companies that handle pick-up and delivery of rail freight. These contracts provide the transportation logistics segment the ability to transport freight via rail throughout the United States, Canada and Mexico. The transportation logistics segment’s rail intermodal service capabilities include trailer on flat car, container on flat car, box car and railcar. The transportation logistics segment’s rail intermodal services contributed 3% of total revenue in each of fiscal year 2012, 2011 and 2010.
Air and Ocean Services.    The transportation logistics segment has contracts with domestic and international airlines and ocean lines. These contracts give the transportation logistics segment the capability to provide domestic and international air services and international ocean services to its customers. The transportation logistics segment executes international freight transportation as an International Air Transport Association (IATA) certified Indirect Air Carrier (IAC) and Federal Maritime Commission (FMC) licensed non-vessel operating common carrier (NVOCC). The transportation logistics segment also provides international freight transportation solutions as a licensed freight forwarder. Through its network of independent commission sales agents and relationships within a global network of foreign freight forwarders, the transportation logistics segment provides efficient and cost effective door-to-door transportation to most points in the world for a vast
 
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array of cargo types such as over-sized break bulk, consolidations, full container loads and refrigerated. The transportation logistics segment’s air and ocean services contributed 3% of total revenue in each of fiscal year 2012, 2011 and 2010.
Supply Chain Services.    The transportation logistics segment offers customers technology-based supply chain solutions and other value-added services on a fee-for-service basis and these services are also often provided in conjunction with the Company’s transportation service offerings. Service capabilities include logistics order management, shipment planning and optimization, rate management, transportation sourcing, in-transit visibility and shipment execution. The transportation logistics segment also offers warehousing solutions that provide customers with nationwide access to available warehouse capacity utilizing a network of independently owned and operated regional warehouse facilities without Landstar owning or leasing facilities or hiring employees to work at warehouses. The transportation logistics segment’s transportation management fee services contributed 1% of total revenue in each of fiscal year 2012, 2011 and 2010.
Insurance Segment
The insurance segment is comprised of Signature, a wholly owned offshore insurance subsidiary, and RMCS. 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 of loss is borne by the Company. Revenue at the insurance segment represented approximately 1% of the Company’s total revenue in each of fiscal year 2012, 2011 and 2010. See “Notes to Consolidated Financial Statements” for the amount of revenue from external customers, measure of profit and total assets attributable to the insurance segment for the last three fiscal years.
Factors Significant to the Company’s Operations
Management believes the following factors are particularly significant to the Company’s operations:
Agent Network
The Company’s primary day-to-day contact with its customers is through its network of independent commission sales agents and, to a lesser extent, through employees of the Company. The typical Landstar independent commission sales agent maintains a relationship with a number of shippers and services these shippers utilizing the Company’s network of information technology systems and the various modes of transportation made available through the Company’s network of third party capacity providers. The Company provides assistance to the agents in developing additional relationships with shippers and enhancing agent and Company relationships with larger shippers through the Company’s field employees, located throughout the United States and, to a lesser degree, in Canada. The Operating Subsidiaries emphasize programs to support the agents’ operations and to provide guidance on establishing pricing parameters for freight hauled by the various modes of transportation available to the agents. It is important to note that the Operating Subsidiaries, and not the Company’s agents, contract directly with customers and generally assume the related credit risk and potential liability for freight losses or damages when the Company is providing transportation services as a motor carrier.
Management believes the Company has more independent commission sales agents than any other non-asset based transportation and logistics services company. Landstar’s vast network of independent commission sales agent locations provides the Company regular contact with shippers at the local level and the capability to be highly responsive to shippers’ changing needs. The Company’s large fleet of available capacity provides the agent network the resources needed to service both large and small shippers. Through its agent network, the Company offers smaller shippers a level of service comparable to that typically enjoyed only by larger
 
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customers. Examples include the ability to provide transportation services on short notice (often within hours of notification to time of pick-up), multiple pick-up and delivery points, electronic data interchange capability and access to specialized equipment. In addition, a number of the Company’s agents specialize in certain types of freight and transportation services (such as oversized or heavy loads and/or rail, air and international freight transportation). Each independent commission sales agent has the opportunity to market all of the services provided by the transportation logistics segment.
The independent commission sales agents use a variety of proprietary and third party information technology applications, depending on the mode of transportation, provided by the Company to service the requirements of shippers. For truck services, the Company’s independent commission sales agents use Landstar proprietary software which enables agents to enter available freight, dispatch capacity and process most administrative procedures and then communicate that information to Landstar and its capacity providers via the internet. The Company’s web-based available truck information system provides a listing of available truck capacity to the Company’s independent commission sales agents. For modes of transportation other than trucking, the independent commission sales agents utilize mostly third party information technology applications provided by the Company.
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, the amount of transportation management fee revenue and revenue from the insurance segment and with changes in net 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 reported 504 agents who generated at least $1 million each in Landstar revenue in both 2012 and 2011 (the “Million Dollar Agents”). Landstar revenue from the Million Dollar Agents in the aggregate represented 90% and 91% of total Landstar revenue in 2012 and 2011, respectively. Historically, the Company has experienced very low turnover in the number of its Million Dollar Agents, as annual turnover in the number of Million Dollar Agents is typically less than 3%. Management believes that the majority of the Million Dollar Agents choose to represent the Company exclusively.
Third Party Capacity
The Company relies exclusively on independent third parties for its hauling capacity other than for trailing equipment owned or leased by the Company and utilized primarily by the BCO Independent Contractors. These third party transportation capacity providers consist of BCO Independent Contractors, Truck Brokerage Carriers, air and ocean cargo carriers and railroads. Landstar’s use of capacity provided by third parties allows it to maintain a lower level of capital investment, resulting in lower fixed costs. During the most recently completed fiscal year, revenue hauled by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented 49%, 43% and 3%, respectively, of the Company’s total revenue. Collectively, transportation services revenue hauled by air and ocean cargo carriers represented 3% of the Company’s total revenue during the most recently completed fiscal year. Transportation management fees represented 1% of the Company’s total revenue in the most recently completed fiscal year. Historically, the gross profit margin (defined as gross profit, which is defined as revenue less the cost of purchased transportation and commissions to agents, divided by revenue) generated from freight hauled by BCO Independent Contractors has been greater than that from freight hauled by other third party capacity providers. However, the Company’s insurance and claims costs and other operating costs are incurred primarily in support of BCO Independent Contractor capacity. In addition, as further described in the “Corporate Services” section that follows, the Company incurs significantly higher selling, general and administrative costs in support of BCO Independent Contractor capacity as compared to the other modes of transportation. Purchased transportation costs are recognized upon the completion of freight delivery.
 
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BCO Independent Contractors.    Management believes the Company has the largest fleet of truckload BCO Independent Contractors in the United States. BCO Independent Contractors provide truck capacity to the Company under exclusive lease arrangements. Each BCO Independent Contractor operates under the motor carrier operating authority issued by the U.S. Department of Transportation (“DOT”) to Landstar’s Operating Subsidiary to which such BCO Independent Contractor has leased his or her services and equipment. The Company’s network of BCO Independent Contractors provides marketing, operating, safety, recruiting, retention and financial advantages to the Company.
The Company’s BCO Independent Contractors are compensated based on a fixed percentage of the revenue generated from the freight they haul. This percentage generally ranges from 62% to 73% where the BCO Independent Contractor provides only a tractor and 72% to 75% where the BCO Independent Contractor provides both a tractor and trailing equipment. The BCO Independent Contractor must pay substantially all of the expenses of operating his/her equipment, including driver wages and benefits, fuel, physical damage insurance, maintenance, highway use taxes and debt service, if applicable. The Company passes 100% of fuel surcharges billed to customers for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. During 2012, the Company billed customers $295.2 million in fuel surcharges and passed 100% of such fuel surcharges to the BCO Independent Contractors. These fuel surcharges are excluded from revenue.
The Company maintains an internet site through which BCO Independent Contractors can view a comprehensive listing of the Company’s available freight, allowing them to consider rate, size, origin and destination when planning trips. The Landstar Contractors’ Advantage Purchasing Program (LCAPP) leverages Landstar’s purchasing power to provide discounts to eligible BCO Independent Contractors when they purchase equipment, fuel, tires and other items. In addition, LCFI provides a source of funds at competitive interest rates to the BCO Independent Contractors to purchase primarily trailing equipment and mobile communication equipment.
The number of trucks provided to the Company by BCO Independent Contractors was 8,523 at December 29, 2012, compared to 8,371 at December 31, 2011. At December 29, 2012, 97% of the trucks provided by BCO Independent Contractors were provided by BCO Independent Contractors who provided five or fewer trucks to the Company. The number of trucks provided by BCO Independent Contractors fluctuates daily as a result of truck recruiting and truck terminations. Trucks recruited and terminated were both lower in 2012 than in 2011, resulting in a net gain of 152 trucks during 2012. Landstar’s BCO Independent Contractor truck turnover was approximately 24% in 2012 compared to 27% in 2011. Approximately 40% of 2012 turnover was attributable to BCO Independent Contractors who had been with the Company for less than one year. Management believes that factors that have historically favorably impacted turnover include the Company’s extensive agent network, available freight, the Company’s programs to reduce the operating costs of its BCO Independent Contractors and Landstar’s reputation for quality, service, reliability and financial strength.
Truck Brokerage Carriers.    At December 29, 2012, the Company maintained a database of over 31,000 approved Truck Brokerage Carriers who provide truck hauling capacity to the Company. Truck Brokerage Carriers provide truck capacity to the Company under non-exclusive contractual arrangements and each operates under their own DOT-issued motor carrier operating authority. Truck Brokerage Carriers are paid either a negotiated rate for each load they haul or a contractually agreed-upon amount per load. The Company recruits, approves, establishes contracts with, tracks safety ratings and service records of and generally maintains the relationships with these third party trucking companies. In addition to providing additional capacity to the Company, the use of Truck Brokerage Carriers enables the Company to pursue different types and quality of freight such as temperature-controlled, short-haul traffic and less-than-truckload and, in certain instances, lower-priced freight that generally would not be handled by the Company’s BCO Independent Contractors.
The Company maintains an internet site through which Truck Brokerage Carriers can view a listing of the Company’s freight that is available to be hauled by Truck Brokerage Carriers. The Landstar Savings Plus Program leverages Landstar’s purchasing power to provide discounts to eligible Truck Brokerage Carriers when they purchase fuel and equipment and provides the Truck Brokerage Carriers with an electronic payment option.
 
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Railroads and Air and Ocean Cargo Carriers.    The Company has contracts with Class 1 domestic and Canadian railroads, certain short-line railroads and domestic and international airlines and ocean lines. These relationships allow the Company to pursue the freight best serviced by these forms of transportation capacity. Railroads and air and ocean cargo carriers are generally paid a contractually fixed amount per load. The Company also contracts with other third party capacity providers, such as air charter service providers, when required by specific customer needs.
Warehouse Capacity Owners.    The Company has contracts with Warehouse Capacity Owners throughout the United States. The services available to the Company’s customers provided from the warehouse capacity network include storage, order fulfillment, repackaging, labeling, inventory consolidations, sub-assembly and temperature and climate options. In general, Warehouse Capacity Owners are paid a fixed percentage of the gross revenue for storage and services provided through their warehouse. Warehouse storage and services revenue is reported net of the amount earned by the Warehouse Capacity Owner. Historically, warehousing services have not been a significant contributor to revenue or earnings. However, management believes that this service offering and relationships with Warehouse Capacity Owners provide the Company with additional transportation services opportunities.
Trailing Equipment
The Company offers its customers a large and diverse fleet of trailing equipment. Specialized services offered by the Company include those provided by a large fleet of flatbed trailers and multi-axle trailers capable of hauling extremely heavy or oversized loads. Management believes the Company, along with its network of capacity providers, offers the largest fleet of heavy/specialized trailing equipment in the United States.
The following table illustrates the mix of the trailing equipment as of December 29, 2012, either provided by the BCO Independent Contractors or owned or leased by the Company and made available primarily to BCO Independent Contractors. In general, Truck Brokerage Carriers utilize their own trailing equipment when providing transportation services on behalf of Landstar. Truck Brokerage Carrier trailing equipment is not included in the following table:

Trailers by Type	  	 	 	
Vans	  	 	9,564	  	
Unsided, including flatbeds, step decks, drop decks and low boys	  	 	3,338	  	
Temperature-controlled	  	 	65	  	
 	  	 	 	 	
Total	  	 	12,967	  	
 	  	 	 	 	
At December 29, 2012, 8,495 of the trailers available to the BCO Independent Contractors were owned by the Company and 382 were leased. In addition, at December 29, 2012, 4,090 trailers were provided by the BCO Independent Contractors.
Customers
The Company’s customer base is highly diversified and dispersed across many industries, commodities and geographic regions. The Company’s top 100 customers accounted for approximately 44% of the Company’s revenue during each of fiscal year 2012 and 2011. Management believes that the Company’s overall size, technological applications, geographic coverage, access to equipment and diverse service capability offer the Company significant competitive marketing and operating advantages. These advantages allow the Company to meet the needs of even the largest shippers. Larger shippers often consider reducing the number of authorized carriers they use in favor of a small number of “core carriers,” such as the Company, whose size and diverse service capabilities enable these core carriers to satisfy most of the shippers’ transportation needs. The Company’s national account customers include the United States Department of Defense and many of the
 
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companies included in the Fortune 500. Large shippers are also using third party logistics providers (“3PLs”) to outsource the management and coordination of their transportation needs. The Company’s supply chain solutions services provide shippers the opportunity to outsource the management and coordination of their transportation needs and provide these shippers the opportunity to utilize the significant amount of capacity available from the Company. 3PLs and other transportation companies also utilize the Company’s transportation capacity to satisfy their obligations to their shippers. There were 11 transportation service providers, including 3PLs, included in the Company’s top 25 customers for the fiscal year ended December 29, 2012. Management believes the Company’s network of agents and third party capacity providers allows it to efficiently attract and service smaller shippers which may not be as desirable to other large transportation providers (see above under “Agent Network”). No customer accounted for more than 5% of the Company’s 2012 revenue.
Technology
Management believes leadership in the development and application of information systems technology is an ongoing part of providing high quality service at competitive prices. The Company continues to focus on identifying, purchasing or developing and implementing software applications which are designed to improve its operational and administrative efficiency, assist its independent commission sales agents in sourcing capacity and pricing transportation services, assist customers in meeting their supply chain needs and assist its third party capacity providers in identifying desirable freight. Landstar focuses on providing transportation services and supply chain solutions which emphasize customer service and information coordination among its independent commission sales agents, customers and capacity providers. The Company offers customers technology-based supply chain solutions and other value-added services. These services provide the Company with the ability to offer customers complete enterprise solutions and compete in the freight management segment of the transportation industry. Landstar intends to continue to purchase or develop appropriate systems and technologies that offer integrated transportation and logistics solutions to meet the total needs of its customers.
The Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and, to a lesser extent, in Rockford, Illinois and Southfield, Michigan. In addition, the Company utilizes several third party data centers throughout the U.S. Landstar relies, in the regular course of its business, on the proper operation of its information technology systems.
Corporate Services
The Company provides many administrative support services to its network of independent commission sales agents, third party capacity providers and customers. Management believes that the technological applications purchased or developed and maintained by the Company and its administrative support services provide operational and financial advantages to its independent commission sales agents, third party capacity providers and customers. These, in turn, enhance the operational and financial efficiency of all aspects of the network.
Administrative support services that provide operational and financial advantages to the network include customer contract administration, customer credit review and approvals, sales administration and pricing, customer billing, accounts receivable collections, third party capacity payment, safety and operator and equipment compliance management, insurance claims handling, coordination of vendor discount programs and third party capacity quality programs. The Company also provides marketing and advertising strategies.
Management also believes that significant advantages result from the collective expertise and corporate services provided by Landstar’s corporate management. The primary functions provided by management include finance and treasury services, accounting, strategic initiatives, budgeting, taxes, legal, corporate communications and human resource management.
 
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Competition
Landstar competes primarily in the transportation and logistics services industry with truckload carriers, third party logistics companies, intermodal transportation and logistics service providers, railroads, less-than-truckload carriers and other non-asset based transportation and logistics service providers. The transportation and logistics services industry is extremely competitive and fragmented.
Management believes that competition for freight transported by the Company is based on service, efficiency and freight rates, which are influenced significantly by the economic environment, particularly the amount of available transportation capacity and freight demand. Management believes that Landstar’s overall size and availability of a wide range of equipment, together with its geographically dispersed local independent agent network and wide range of service offerings, present the Company with significant competitive advantages over many transportation and logistics service providers.
Self-Insured Claims
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. The Company also retains liability for each general liability claim up to $1,000,000, $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.
Regulation
Certain of the Operating Subsidiaries are considered motor carriers and/or brokers authorized to arrange for transportation services by motor carriers which are regulated by the Federal Motor Carrier Safety Administration (the “FMCSA”) and by various state agencies. The FMCSA has broad regulatory powers with respect to activities such as motor carrier operations, practices, periodic financial reporting and insurance. Subject to federal and state regulatory authorities or regulation, the Company’s capacity providers may transport most types of freight to and from any point in the United States over any route selected.
Interstate motor carrier operations are subject to safety requirements prescribed by the FMCSA. Each driver, whether a BCO Independent Contractor or Truck Brokerage Carrier, is required to have a commercial driver’s license and may be subject to mandatory drug and alcohol testing. The FMCSA’s commercial driver’s license and drug and alcohol testing requirements have not adversely affected the Company’s ability to source the capacity necessary to meet its customers’ transportation needs.
In addition, certain of the Operating Subsidiaries are licensed as ocean transportation intermediaries by the U.S. Federal Maritime Commission as non-vessel-operating common carriers and/or as ocean freight forwarders. The Company’s air transportation activities in the United States are subject to regulation by the U.S. Department of Transportation as an indirect air carrier. One of the Operating Subsidiaries is licensed by the U.S. Department of Homeland Security through the Bureau of U.S. Customs and Border Protection (“U.S. Customs”) as a customs broker. The Company is also subject to regulations and requirements relating to safety and security promulgated by, among others, the U.S. Department of Homeland Security through U.S. Customs and the Transportation Security Administration, the Canada Border Services Agency and various state and local agencies and port authorities.
The transportation industry is subject to possible other regulatory and legislative changes (such as the possibility of more stringent environmental, climate change and/or safety/security regulations or limits on vehicle
 
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weight and size) that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for motor carrier services or the cost of providing truckload or other transportation or logistics services.
In addition, because the U.S. government is one of the Company’s customers, the Company must comply with and is affected by laws and regulations relating to doing business with the federal government.
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 the quarters ending in June, September and December.
Employees
As of December 29, 2012, the Company and its subsidiaries employed 1,369 individuals. Approximately 11 Landstar Ranger drivers (out of a Company total of 8,523 drivers for BCO Independent Contractors) are members of the International Brotherhood of Teamsters. The Company considers relations with its employees to be good.
 
Item 1A.	Risk Factors	
Increased severity or frequency of accidents and other claims.    As noted above in Item 1, “Business —Factors Significant to the Company’s Operations — Self-Insured Claims,” 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. The Company also retains liability for each general liability claim up to $1,000,000, $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.
Dependence on third party insurance companies.    The Company is dependent on a limited number of third party insurance companies to provide insurance coverage in excess of its self-insured retention amounts. Historically, the Company has maintained insurance coverage for commercial trucking claims in excess of specific per occurrence limits, up to various maximum amounts, with a limited number of third party insurance companies. In an attempt to manage the cost of insurance and claims, the Company has historically increased or decreased the level of its financial exposure to commercial trucking claims on a per occurrence basis by increasing or decreasing its level of self-insured retention based on the estimated cost differential between proposed premiums from third party insurance companies and historical losses experienced by the Company at various levels of self-insured retention. To the extent that the third party insurance companies propose increases to their premiums for coverage of commercial trucking claims, the Company may pay such increased premiums or increase its financial exposure on an aggregate or per occurrence basis, including by increasing the amount of its self-insured retention. However, to the extent the third party insurance companies propose reduced premiums for coverage of commercial trucking claims, the Company may reduce its financial exposure on an aggregate or per occurrence basis, including by decreasing the amount of its self-insured retention. In addition, no assurance can be given that insurance coverage from third party insurers for claims in excess of its current $5 million self-insured retention will continue to be available on commercially reasonable terms.
Dependence on independent commission sales agents.    As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Agent Network,” the Company markets its services primarily
 
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through independent commission sales agents. During 2012, 504 agents generated revenue for Landstar of at least $1 million each (the “Million Dollar Agents”), or approximately 90% of Landstar’s consolidated revenue. Landstar competes with motor carriers and other third parties for the services of these independent commission sales agents. Landstar has historically experienced very limited agent turnover in the number of its Million Dollar Agents. There can be no assurances, however, that Landstar will continue to experience very limited turnover of its Million Dollar Agents in the future. Landstar’s contracts with its agents, including its Million Dollar Agents, are typically terminable without cause upon 10 to 30 days’ notice by either party and generally contain significant but not unqualified non-compete provisions limiting the ability of a former agent to compete with Landstar for a specified period of time post- termination, and other restrictive covenants. The loss of some of the Company’s Million Dollar Agents and/or a significant decrease in volume generated by other Million Dollar Agents could have a material adverse effect on Landstar, including its results of operations and revenue.
Dependence on third party capacity providers.    As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Transportation Capacity,” Landstar does not own trucks or other transportation equipment (other than trailing equipment) and relies on third party capacity providers, including BCO Independent Contractors, Truck Brokerage Carriers, railroads and air and ocean cargo carriers, to transport freight for its customers. The Company competes with motor carriers and other third parties for the services of BCO Independent Contractors and other third party capacity providers. The market for qualified truck owner-operators and other third party truck capacity providers is very competitive among motor carriers and no assurances can be given that the Company will be able to maintain or expand the number of BCO Independent Contractors or other third party truck capacity providers. A significant decrease in available capacity provided by either the Company’s BCO Independent Contractors or other third party capacity providers could have a material adverse effect on Landstar, including its results of operations and revenue.
Decreased demand for transportation services.    The transportation industry historically has experienced cyclical financial results as a result of slowdowns in economic activity, the business cycles of customers, price increases by capacity providers and other economic factors beyond Landstar’s control. The Company’s third party capacity providers other than BCO Independent Contractors can be expected to charge higher prices to cover increased operating expenses, such as any increases in the cost of fuel, and the Company’s operating income may decline without a corresponding increase in price to the customer. If a slowdown in economic activity or a downturn in the Company’s customers’ business cycles cause a reduction in the volume of freight shipped by those customers, the Company’s operating results could be materially adversely affected.
Substantial industry competition.    As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Competition,” Landstar competes primarily in the transportation and logistics services industry. This industry is extremely competitive and fragmented. Landstar competes primarily with truckload carriers, intermodal transportation service providers, railroads, less-than-truckload carriers, third party logistics companies and other non-asset based transportation and logistics service providers. Management believes that competition for the freight transported by the Company is based on service, efficiency and freight rates, which are influenced significantly by the economic environment, particularly the amount of available transportation capacity and freight demand. Historically, competition has created downward pressure on freight rates. In addition, many large shippers are using third party logistics providers (“3PLs”) other than the Company to outsource the management and coordination of their transportation needs rather than directly arranging for transportation services with carriers. As noted above, there were 11 transportation service providers, including 3PLs, included in the Company’s top 25 customers for the fiscal year ended December 29, 2012. Usage by large shippers of 3PLs often provides carriers, such as the Company, with a less direct relationship with the shipper and, as a result, may increase pressure on freight rates while making it more difficult for the Company to compete primarily based on service and efficiency. A decrease in freight rates could have a material adverse effect on Landstar, including its revenue and operating income.
Status of independent contractors.    From time to time, various legislative or regulatory proposals are introduced at the federal or state levels to change the status of independent contractors’ classification to
 
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employees for either employment tax purposes (withholding, social security, Medicare and unemployment taxes) or other benefits available to employees. Currently, most individuals are classified as employees or independent contractors for employment tax purposes based on 20 “common-law” factors rather than any definition found in the Internal Revenue Code or Internal Revenue Service regulations. In addition, under Section 530 of the Revenue Act of 1978, taxpayers that meet certain criteria may treat an individual as an independent contractor for employment tax purposes if they have been audited without being told to treat similarly situated workers as employees, if they have received a ruling from the Internal Revenue Service or a court decision affirming their treatment, or if they are following a long-standing recognized practice.
The Company classifies its BCO Independent Contractors and independent commission sales agents as independent contractors for all purposes, including employment tax and employee benefits. There can be no assurance that legislative, judicial, or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the employee/independent contractor classification of BCO Independent Contractors or independent commission sales agents doing business with the Company. Although management believes that there are no proposals currently pending that would significantly change the employee/independent contractor classification of BCO Independent Contractors or independent commission sales agents currently doing business with the Company, potential changes, if any, with respect to these BCO Independent Contractor and independent commission sales agent classifications could have a material adverse effect on Landstar’s operating model. Moreover, the costs associated with any such potential changes could have a material adverse effect on the Company’s results of operations and financial condition if Landstar were unable to pass through to its customers an increase in price corresponding to such increased costs.
Regulatory and legislative changes.    As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Regulation,” certain of the Operating Subsidiaries are motor carriers and/or property brokers authorized to arrange for transportation services by motor carriers which are regulated by the Federal Motor Carrier Safety Administration (FMCSA), an agency of the U.S. Department of Transportation, and by various state agencies. Certain of the Operating Subsidiaries are licensed as ocean transportation intermediaries by the U.S. Federal Maritime Commission as non-vessel-operating common carriers and/or as ocean freight forwarders. The Company’s air transportation activities in the United States are subject to regulation by the U.S. Department of Transportation as an indirect air carrier. One of the Company’s subsidiaries is licensed by the U.S. Department of Homeland Security through the Bureau of U.S. Customs and Border Protection (“U.S. Customs”) as a customs broker. The Company is also subject to regulations and requirements relating to safety and security promulgated by, among others, the U.S. Department of Homeland Security through U.S. Customs and the Transportation Security Administration, the Canada Border Services Agency and various state and local agencies and port authorities. The transportation industry is subject to possible regulatory and legislative changes (such as increasingly stringent environmental, climate change and/or safety/security regulations or limits on vehicle weight and size) that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload or other transportation or logistics services.
In December 2010, the FMCSA initiated its Compliance Safety Accountability (CSA) motor carrier oversight program (formerly Comprehensive Safety Analysis 2010). The Company believes the intent is to improve regulatory oversight of motor carriers and commercial drivers using a safety measurement system methodology that is fundamentally different from the methodology that the FMCSA had historically relied upon. The FMCSA is attempting to implement changes to the hours of service regulations which govern the work hours of commercial drivers and is consistently proposing regulatory changes that affect the operation of commercial motor carriers across the United States. It is difficult to predict which and in what form CSA or any other regulations may be implemented, modified or enforced and what impact any such regulation may have on motor carrier operations or the aggregate number of trucks that provide hauling capacity to the Company. In addition, recent focus on climate change and related environmental matters has led to efforts by federal and local governmental agencies to support legislation and regulations to limit the amount of carbon emissions, including emissions created by diesel engines utilized in tractors operated by the Company’s BCO Independent Contractors
 
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and Truck Brokerage Carriers. Moreover, federal and state governmental agencies, such as efforts by the California Air Resources Board, may also focus on regulation in relation to trailing equipment specifications in an effort to achieve, among other things, lower carbon emissions. Increased regulation on tractor or trailing equipment specifications, including emissions created by diesel engines, could create substantial costs on the Company and the Company’s third party capacity providers and, in turn, increase the cost of purchased transportation to the Company. An increase in the costs to purchase, lease or maintain trailing equipment or in purchased transportation cost caused by new regulations without a corresponding increase in price to the customer could have a material adverse effect on Landstar, including its results of operations and financial condition.
Disruptions or failures in the Company’s computer systems.    As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Technology,” the Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and to a lesser extent in Rockford, Illinois and Southfield, Michigan. In addition, the Company utilizes several third party data centers throughout the U.S. Landstar relies in the regular course of its business on the proper operation of its information technology systems to link its extensive network of customers, agents and third party capacity providers, including its BCO Independent Contractors. Although the Company has redundant systems for its critical operations, any significant disruption or failure of its technology systems or those of third party data centers on which it relies could significantly disrupt the Company’s operations and impose significant costs on the Company.
Dependence on key vendors.    As described above under “Dependence on third party insurance companies” and “Disruptions or failures in the Company’s computer systems, ” the Company is dependent on certain vendors, including third party insurance companies, third party data center providers, third party information technology application providers and third party payment system providers. Any inability to negotiate satisfactory terms with one of these key vendors or any other significant disruption to or termination of a relationship with one of these key vendors could disrupt the Company’s operations and impose significant costs on the Company.
Potential changes in fuel taxes.    From time to time, various legislative proposals are introduced to increase federal, state, or local taxes, including taxes on motor fuels. The Company cannot predict whether, or in what form, any increase in such taxes applicable to the transportation services provided by the Company will be enacted and, if enacted, whether or not the Company’s Truck Brokerage Carriers would attempt to pass the increase on to the Company or if the Company will be able to reflect this potential increased cost of capacity, if any, in prices to customers. Any such increase in fuel taxes, without a corresponding increase in price to the customer, could have a material adverse effect on Landstar, including its results of operations and financial condition. Moreover, competition from other transportation service companies including those that provide non-trucking modes of transportation and intermodal transportation would likely increase if state or federal taxes on fuel were to increase without a corresponding increase in taxes imposed upon other modes of transportation.
Catastrophic loss of a Company facility.    The Company faces the risk of a catastrophic loss of the use of all or a portion of its facilities located in Jacksonville, Florida, Rockford, Illinois and Southfield, Michigan due to hurricanes, flooding, tornados, other weather conditions, natural disasters, terrorist attacks or otherwise. The Company’s corporate headquarters and approximately two-thirds of the Company’s employees are located in its Jacksonville, Florida facility. In particular, a significant hurricane that impacts the Jacksonville, Florida metropolitan area could significantly disrupt the Company’s operations and impose significant costs on the Company.
Although the Company maintains insurance covering its facilities, including business interruption insurance, the Company’s insurance may not be adequate to cover all losses that may be incurred in the event of a catastrophic loss of one of the Company’s facilities. In addition, such insurance, including business interruption insurance, could in the future become more expensive and difficult to maintain and may not be available on commercially reasonable terms or at all.
 
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Acquired businesses.    In the Company’s 2009 fiscal third quarter, the Company completed the acquisitions of (i) National Logistics Management Co., together with a limited liability company and certain corporate subsidiaries and affiliates, now collectively known as LSCS and (ii) A3 Integration, LLC, now known as LSCSLLC. These two acquisitions are referred to herein collectively as the “2009 Acquisitions.” LSCS’s business is heavily dependent on the automotive industry which has been very volatile in the past few years. As of the time of its acquisition by the Company, LSCSLLC was a startup company with no customers under contract. LSCSLLC licenses its principal software technology from an unaffiliated third party. The Company’s strategic initiatives of the 2009 Acquisitions are to increase freight transportation opportunities of the Company by identifying and engaging agents and customers to utilize LSCSLLC’s supply chain solutions technology. The Company makes no assurance that the Company will be able to successfully achieve its strategic initiatives as it relates to the 2009 Acquisitions. The two acquired entities are considered one reporting unit as it relates to business valuation. As it relates to goodwill recorded upon the acquisition of these companies in July 2009, should the automotive industry experience a significant downturn and should the Company fail to add customers to the technology platform acquired with the start-up company, the Company could determine that its goodwill is impaired in the future. The Company will continue to monitor the economic environment and test for impairment of goodwill as necessary.
Intellectual property.    The Company uses both internally developed and purchased technology in conducting its business. Whether internally developed or purchased, it is possible that the use of these technologies could be claimed to infringe upon or violate the intellectual property rights of third parties. In the event that a claim is made against the Company by a third party for the infringement of intellectual property rights, any settlement or adverse judgment against the Company either in the form of increased costs of licensing or a cease and desist order in using the technology could have an adverse effect on the Company’s business and its results of operations.
Doing business with the federal government.    The Company must comply with and is affected by laws and regulations relating to doing business with the federal government. In addition, U.S. government agencies, including various agency Inspectors General, routinely audit and investigate government contractors like the Company. Government contractors may also be subject to investigation by the U.S. Department of Justice as a result of or in connection with allegations made by third parties. In connection with an audit or investigation by a U.S. government agency or the U.S. Department of Justice, the Government may allege violations of specific laws and regulations by the Company or those doing business with the Company. The Government may also seek remedies against the Company, such as fines and penalties, the termination of our contracts, or suspension or prohibition from doing business with the U.S. Government, any of which could cause the Company to suffer serious reputational harm and other adverse consequences.
 
Item 1B.	Unresolved Staff Comments	
None.
 
Item 2.	Properties	
The Company owns or leases various properties in the U.S. for the Company’s operations and administrative staff that support its independent commission sales agents, BCO Independent Contractors and other third party capacity providers. The transportation logistics segment’s primary facilities are located in Jacksonville, Florida, Rockford, Illinois and Southfield, Michigan. In addition, the Company’s corporate headquarters are located in Jacksonville, Florida. The Jacksonville, Florida and Rockford, Illinois facilities are owned by the Company, and the Southfield, Michigan facility is leased. Management believes that Landstar’s owned and leased properties are adequate for its current needs and that leased properties can be retained or replaced at an acceptable cost.
 
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Item 3.	Legal Proceedings	
As further described in periodic and current reports previously filed by the Company with the Securities and Exchange Commission (the “SEC”), the Company and certain of its subsidiaries (the “Defendants”) were defendants in a suit (the “Litigation”) brought in the United States District Court for the Middle District of Florida (the “District Court”) by the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and four former BCO Independent Contractors (the “Named Plaintiffs” and, with OOIDA, the “Plaintiffs”) on behalf of all independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (the “BCO Independent Contractors”). The initial complaint in the Litigation was filed on November 1, 2002. The Plaintiffs alleged that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violated certain federal leasing regulations and sought injunctive relief, an unspecified amount of damages and attorneys’ fees. Following a second trial in August 2012 in which all claims against the Defendants were denied, the Litigation was settled in December 2012. Under the terms of the settlement, the Plaintiffs dismissed their remaining claims in the Litigation, each party agreed to bear its own costs and fees in the Litigation, the parties exchanged releases, and OOIDA made a contribution to the BCO Benevolence Fund, Inc., a non-profit corporation founded by the Company to provide financial assistance to BCO Independent Contractors in hardship situations.
Also as further described in periodic and current reports previously filed by the Company with the SEC, in June 2011, Landstar System, Inc. received a Civil Investigative Demand (the “CID”) from the United States Attorney for the Western District of Kentucky (the “U.S. Attorney”) issued pursuant to a complaint (the “Complaint”) filed by a third party under the False Claims Act. The Company cooperated fully with the CID, which requested documents and answers to written interrogatories limited to freight hauled to or from Fort Campbell, Kentucky by certain subsidiaries of the Company and billed to the U.S. government. In November 2012, the Company was informed by the U.S. Attorney of the dismissal of the Complaint and the consent by the U.S. government to such dismissal. The Company believes this matter has been concluded.
On September 23, 2011, a jury sitting in a state court in Cobb County, Georgia, entered a damage award of approximately $40.2 million (such amount, plus pre-judgment interest, post-judgment interest and a portion of plaintiffs’ attorney fees in an amount not yet determined are collectively referred to herein as the “Damage Award”) against Landstar Ranger, Inc., Landstar System Holdings, Inc. and Landstar System, Inc. While a judgment has been entered by the court on the verdict, execution on that judgment is stayed and no judgment has been entered on the pre-judgment interest claims and attorney fee claims due to the pendency of certain post-trial motions. The Damage Award arises out of an accident that occurred in February 2007 involving a BCO Independent Contractor leased to Landstar Ranger, Inc. Under the terms of the commercial trucking insurance program that Landstar had in place in 2007, Landstar retained liability for up to $5 million with respect to the accident giving rise to the Damage Award. Landstar has third party insurance and/or reinsurance policies in place that are expected to provide coverage for all amounts of the Damage Award in excess of such retention, including all related out-of-pocket expenses, such as the costs of an appeal bond, interest and attorney fees comprising the Damage Award that may be entered by the trial court or an appellate court in the future. The Company recorded a $5 million charge representing its self-insured retention in respect of this accident in the consolidated financial results of the Company in the 2007 first quarter. Accordingly, that portion of the Damage Award has been previously recorded by the Company and therefore did not reduce consolidated operating income or net income for the Company’s 2011 or 2012 fiscal years. Under the terms of the Company’s insurance policies, the Company is the primary obligor of the amount of the Damage Award, and as such, the Company has reported a $38.7 million receivable from the third party insurance providers in other receivables and a corresponding liability of the same amount in insurance claims in the consolidated balance sheets at December 29, 2012. The Company and its insurers have filed post-trial motions challenging the Damage Award and seeking a new trial and intend to appeal the Damage Award to the extent necessary following the resolution of those motions. No assurances can be given regarding the outcome of the pending motions or any such appeal, including as to the impact of the Damage Award on the premiums charged by the Company’s third party insurers from time to time for commercial trucking insurance.
 
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The Company is involved in certain claims and pending litigation, including those described herein, arising from the normal conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
 
Item 4.	Mine Safety Disclosures	
Not applicable.
 
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PART II
 
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	
The Common Stock of the Company is listed and traded on the NASDAQ Global Select Market under the symbol “LSTR.” The following table sets forth the high and low reported sale prices for the Common Stock on the NASDAQ Global Select Market and the per share value of dividends declared for the periods indicated.

 	  	2012 Market Price	 	  	2011 Market Price	 	  	Dividends Declared	 	
Fiscal Period	  	High	 	  	Low	 	  	High	 	  	Low	 	  	2012	 	  	2011	 	
First Quarter	  	$	58.61	  	  	$	46.48	  	  	$	45.66	  	  	$	40.50	  	  	$	0.055	  	  	$	0.050	  	
Second Quarter	  	 	59.02	  	  	 	48.40	  	  	 	48.31	  	  	 	42.89	  	  	 	0.055	  	  	 	0.050	  	
Third Quarter	  	 	53.22	  	  	 	46.01	  	  	 	49.66	  	  	 	36.64	  	  	 	0.060	  	  	 	0.055	  	
Fourth Quarter	  	 	52.56	  	  	 	46.34	  	  	 	48.69	  	  	 	38.16	  	  	 	0.560	  	  	 	0.055	  	
The reported last sale price per share of the Common Stock as reported on the NASDAQ Global Select Market on January 25, 2013 was $59.32 per share. As of such date, Landstar had 46,494,114 shares of Common Stock outstanding. As of January 25, 2013, the Company had 60 stockholders of record of its Common Stock. However, the Company estimates that it has a significantly greater number of stockholders because a substantial number of the Company’s shares are held by brokers or dealers for their customers in street name.
Purchases of Equity Securities by the Company
The following table provides information regarding the Company’s purchases of its Common Stock during the period from September 30, 2012 to December 29, 2012, the Company’s fourth fiscal quarter:

Fiscal Period	  	Total Number of
Shares Purchased	 	  	Average Price
Paid Per Share	 	  	Total Number of Shares
Purchased as Part of
Publicly Announced
Programs	 	  	Maximum Number of
Shares  That May Yet Be
Purchased Under the
Programs	 	
September 29, 2012	  	 	 	 	  	 	 	 	  	 	 	 	  	 	2,017,151	  	
Sept. 30, 2012 – Oct. 27, 2012	  	 	—	  	  	$	—	  	  	 	—	  	  	 	2,017,151	  	
Oct. 28, 2012 – Nov. 24, 2012	  	 	—	  	  	 	—	  	  	 	—	  	  	 	2,017,151	  	
Nov. 25, 2012 – Dec. 29, 2012	  	 	25,274	  	  	 	49.22	  	  	 	25,274	  	  	 	1,991,877	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	 	25,274	  	  	$	49.22	  	  	 	25,274	  	  	 	 	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
On August 16, 2011, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to 1,000,000 shares of its Common Stock from time to time in the open market and in privately negotiated transactions. During its 2012 fourth quarter, the Company completed the purchase of the balance of the shares authorized for purchase under this program. On July 25, 2012, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to 2,000,000 shares of its Common Stock from time to time in the open market and in privately negotiated transactions. As of December 29, 2012, the Company has authorization to purchase 1,991,877 shares of its Common Stock under this program. No specific expiration date has been assigned to the July 25, 2012 authorization.
Dividends
During 2012, Landstar paid dividends as follows:

Dividend Amount per Share	  	Declaration
Date	 	  	Record
Date	 	  	Payment
Date	 	
 	 	 	 	
$0.055	  	 	January 25, 2012	  	  	 	February 20, 2012	  	  	 	March 16, 2012	  	
 	 	 	 	
$0.055	  	 	April 25, 2012	  	  	 	May 10, 2012	  	  	 	June 1, 2012	  	
 	 	 	 	
$0.060	  	 	July 25, 2012	  	  	 	August 13, 2012	  	  	 	August 31, 2012	  	
 	 	 	 	
$0.060	  	 	October 24, 2012	  	  	 	November 13, 2012	  	  	 	December 7, 2012	  	
 	 	 	 	
$0.500	  	 	December 4, 2012	  	  	 	December 17, 2012	  	  	 	December 27, 2012	  	
 
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On December 5, 2012, the Company announced that it expects the dividend declared on December 4, 2012 to be in lieu of any quarterly dividends it may otherwise have declared and paid in connection with its quarterly earnings results for the four quarters of fiscal 2013 and for the first three quarters of fiscal 2014.
On June 29, 2012, 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.
Equity Compensation Plan Information
The Company maintains one stock compensation plan for members of its Board of Directors and two employee equity incentive plans. The following table presents information related to securities authorized for issuance under these plans at December 29, 2012:

Plan Category	  	Number of Securities
to be Issued Upon
Exercise of
Outstanding Options	 	  	Weighted-average
Exercise Price of
Outstanding Options	 	  	Number of  Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans	 	
Equity Compensation Plans Approved by Security Holders	  	 	1,781,182	  	  	$	42.56	  	  	 	5,591,984	  	
Equity Compensation Plans Not Approved by Security Holders	  	 	0	  	  	 	0	  	  	 	0	  	
Under the 2011 Equity Incentive Plan (the “2011 EIP”), the issuance of a non-vested share of Landstar Common Stock counts as the issuance of two securities against the number of securities available for future issuance. Included in the number of securities remaining available for future issuance under equity compensation plans were 114,808 shares of Common Stock reserved for issuance under the 2003 Directors’ Stock Compensation Plan.
 
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Financial Model Shareholder Returns
The following graph illustrates the return that would have been realized, assuming reinvestment of dividends, by an investor who invested $100 in each of the Company’s Common Stock, the Standard and Poor’s 500 Stock Index and the Dow Jones Transportation Stock Index for the period commencing December 29, 2007 through December 29, 2012.

 
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Item 6.	Selected Financial Data	
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)

 	  	Fiscal Years	 	
Income Statement Data:	  	2012	 	  	2011	 	 	2010	 	 	2009	 	 	2008	 	
Revenue	  	$	2,793,420	  	  	$	2,649,082	  	 	$	2,400,170	  	 	$	2,008,796	  	 	$	2,643,069	  	
Investment income	  	 	1,563	  	  	 	1,705	  	 	 	1,558	  	 	 	1,268	  	 	 	3,339	  	
Costs and expenses:	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchased transportation	  	 	2,129,345	  	  	 	2,007,102	  	 	 	1,824,308	  	 	 	1,503,520	  	 	 	2,033,384	  	
Commissions to agents	  	 	218,363	  	  	 	210,088	  	 	 	181,405	  	 	 	160,571	  	 	 	203,058	  	
Other operating costs	  	 	22,949	  	  	 	28,865	  	 	 	28,826	  	 	 	29,173	  	 	 	28,033	  	
Insurance and claims	  	 	37,451	  	  	 	42,766	  	 	 	49,334	  	 	 	45,918	  	 	 	36,374	  	
Selling, general and administrative	  	 	153,566	  	  	 	152,907	  	 	 	153,080	  	 	 	133,612	  	 	 	137,758	  	
Depreciation and amortization	  	 	27,456	  	  	 	25,814	  	 	 	24,804	  	 	 	23,528	  	 	 	20,960	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total costs and expenses	  	 	2,589,130	  	  	 	2,467,542	  	 	 	2,261,757	  	 	 	1,896,322	  	 	 	2,459,567	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	  	 	205,853	  	  	 	183,245	  	 	 	139,971	  	 	 	113,742	  	 	 	186,841	  	
Interest and debt expense	  	 	3,104	  	  	 	3,112	  	 	 	3,623	  	 	 	4,030	  	 	 	7,351	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	  	 	202,749	  	  	 	180,133	  	 	 	136,348	  	 	 	109,712	  	 	 	179,490	  	
Income taxes	  	 	72,968	  	  	 	67,188	  	 	 	49,766	  	 	 	39,762	  	 	 	68,560	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	 	129,781	  	  	 	112,945	  	 	 	86,582	  	 	 	69,950	  	 	 	110,930	  	
Less: Net loss attributable to noncontrolling interest	  	 	—	  	  	 	(62	) 	 	 	(932	) 	 	 	(445	) 	 	 	—	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income attributable to Landstar System, Inc. and subsidiary	  	$	129,781	  	  	$	113,007	  	 	$	87,514	  	 	$	70,395	  	 	$	110,930	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share attributable to Landstar System, Inc. and subsidiary	  	$	2.78	  	  	$	2.38	  	 	$	1.77	  	 	$	1.38	  	 	$	2.11	  	
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary	  	$	2.77	  	  	$	2.38	  	 	$	1.77	  	 	$	1.37	  	 	$	2.10	  	
Dividends paid per common share	  	$	0.730	  	  	$	0.210	  	 	$	0.190	  	 	$	0.170	  	 	$	0.155	  	

Balance Sheet Data:	  	Dec. 29,
2012	 	  	Dec. 31,
2011	 	  	Dec. 25,
2010	 	  	Dec. 26,
2009	 	  	Dec. 27,
2008	 	
Total assets	  	$	879,421	  	  	$	808,449	  	  	$	683,882	  	  	$	648,792	  	  	$	663,530	  	
Long-term debt, including current maturities	  	 	114,141	  	  	 	132,342	  	  	 	121,611	  	  	 	92,898	  	  	 	136,445	  	
Shareholders’ equity	  	 	379,454	  	  	 	300,577	  	  	 	250,967	  	  	 	268,151	  	  	 	253,136	  	
 
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
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-K contain forward-looking statements, such as statements which relate to Landstar’s business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “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
 
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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; substantial industry competition; disruptions or failures in our computer systems; dependence on key vendors; changes in fuel taxes; status of independent contractors; regulatory and legislative changes; catastrophic loss of a Company facility; acquired businesses; intellectual property; and other operational, financial or legal risks or uncertainties detailed in this and Landstar’s other SEC filings from time to time and described in Item 1A of this Form 10-K under the heading “Risk Factors.” 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 non-asset based provider of freight transportation services and supply chain 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 and logistics needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada, 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. Landstar markets its freight transportation services and supply chain solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport and store customers’ freight. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue.
Landstar markets its freight transportation services and supply chain solutions primarily through independent commission sales agents who 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, railroads and independent warehouse capacity providers (“Warehouse Capacity Owners”). Through this network of agents and capacity providers linked together by Landstar’s information technology systems, Landstar operates a transportation services and supply chain solutions business primarily throughout North America with revenue of $2.8 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 transportation services and supply chain 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. Supply chain solutions are based on advanced technology solutions utilizing intellectual property that may be owned by the Company or licensed from third parties. Such solutions as offered by the Company may include integrated multi-modal solutions, outsourced logistics, supply chain engineering and warehousing. Industries serviced by the transportation logistics segment include automotive products, lumber and 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 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. Freight transportation services are typically charged to customers on a per shipment basis for the
 
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physical transportation of freight. Supply chain solutions customers are generally charged fees for the services provided. Revenue recognized by the transportation logistics segment when providing capacity to customers to haul their freight is referred to herein as “transportation services revenue” and revenue for freight management services recognized on a fee-for-service basis is referred to herein as “transportation management fees.” During 2012, transportation services revenue hauled by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented 50%, 43%, and 3%, respectively, of the Company’s transportation logistics segment revenue. Collectively, transportation services revenue hauled by air and ocean cargo carriers represented 3% of the Company’s transportation logistics segment revenue during 2012. Transportation management fees represented 1% of the Company’s transportation logistics segment revenue in 2012.
The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore insurance subsidiary, 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 borne by the Company. Revenue at the insurance segment represented approximately 1% of the Company’s consolidated revenue for 2012.
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 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. The following table shows the number of Million Dollar Agents, the average revenue generated by these agents and the percent of consolidated revenue generated by these agents during the past three fiscal years:

 	  	Fiscal Year	 	
 	  	2012	 	 	2011	 	 	2010	 	
Number of Million Dollar Agents	  	 	504	  	 	 	504	  	 	 	468	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Average revenue generated per Million Dollar Agent	  	$	4,999,000	  	 	$	4,778,000	  	 	$	4,576,000	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Percent of consolidated revenue generated by Million Dollar Agents	  	 	90	% 	 	 	91	% 	 	 	89	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
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
 
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classified by the mode of transportation having the highest cost for the load. The following table summarizes information by mode of transportation for the past three fiscal years:

 	  	Fiscal Year	 	
 	  	2012	 	  	2011	 	  	2010	 	
Revenue generated through (in thousands):	  	 	 	 	  	 	 	 	  	 	 	 	
BCO Independent Contractors	  	$	1,385,046	  	  	$	1,374,664	  	  	$	1,289,395	  	
Truck Brokerage Carriers	  	 	1,197,876	  	  	 	1,052,605	  	  	 	919,605	  	
Rail intermodal	  	 	73,932	  	  	 	75,979	  	  	 	70,299	  	
Ocean and air cargo carriers	  	 	77,898	  	  	 	90,424	  	  	 	66,168	  	
Other(1)	  	 	58,668	  	  	 	55,410	  	  	 	54,703	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	2,793,420	  	  	$	2,649,082	  	  	$	2,400,170	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Number of loads:	  	 	 	 	  	 	 	 	  	 	 	 	
BCO Independent Contractors	  	 	806,350	  	  	 	808,210	  	  	 	821,330	  	
Truck Brokerage Carriers	  	 	680,970	  	  	 	613,790	  	  	 	591,810	  	
Rail intermodal	  	 	29,810	  	  	 	31,370	  	  	 	31,070	  	
Ocean and air cargo carriers	  	 	15,390	  	  	 	16,440	  	  	 	13,710	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	 	1,532,520	  	  	 	1,469,810	  	  	 	1,457,920	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Revenue per load:	  	 	 	 	  	 	 	 	  	 	 	 	
BCO Independent Contractors	  	$	1,718	  	  	$	1,701	  	  	$	1,570	  	
Truck Brokerage Carriers	  	 	1,759	  	  	 	1,715	  	  	 	1,554	  	
Rail intermodal	  	 	2,480	  	  	 	2,422	  	  	 	2,263	  	
Ocean and air cargo carriers	  	 	5,062	  	  	 	5,500	  	  	 	4,826	  	

(1)	Includes premium revenue generated by the insurance segment and warehousing and transportation management fee revenue generated by the transportation logistics 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 available truck capacity providers as of the end of the three most recent fiscal years:

 	  	Dec. 29,
2012	 	  	Dec. 31,
2011	 	  	Dec. 25,
2010	 	
BCO Independent Contractors	  	 	8,010	  	  	 	7,871	  	  	 	7,865	  	
Truck Brokerage Carriers:	  	 	 	 	  	 	 	 	  	 	 	 	
Approved and active(1)	  	 	20,922	  	  	 	19,223	  	  	 	18,049	  	
Other approved	  	 	10,623	  	  	 	9,272	  	  	 	9,938	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	 	31,545	  	  	 	28,495	  	  	 	27,987	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Total available truck capacity providers	  	 	39,555	  	  	 	36,366	  	  	 	35,852	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Number of trucks provided by BCO Independent Contractors	  	 	8,523	  	  	 	8,371	  	  	 	8,452	  	

 
(1)	Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal year 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.
 
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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 the haul. Purchased transportation paid to a Truck Brokerage Carrier is based on either a negotiated rate for each load hauled or a contractually agreed-upon rate. Purchased transportation paid to railroads, air cargo carriers or ocean cargo carriers is 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 in proportion to the revenue generated through BCO Independent Contractors and other third party capacity providers, transportation management fees and revenue from the insurance segment. Purchased transportation as a percent of revenue also increases or decreases in relation to the availability of truck brokerage capacity and the price of fuel on revenue hauled by Truck Brokerage Carriers. 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, transportation management fees and revenue from the insurance segment 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 hauled 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 hauled 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 hauled by railroads, air cargo carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention contracts, is variable in nature as the Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these types of loads. Approximately 61% of the Company’s revenue in 2012 had a fixed gross profit margin.
Maintenance costs for Company-provided trailing equipment and BCO Independent Contractor recruiting costs are the largest components of other operating costs. Also included in other operating costs are 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.
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. The Company also retains liability for each general liability claim up to $1,000,000, $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.
 
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Employee compensation and benefits account for over sixty percent of the Company’s selling, general and administrative costs.
Depreciation and amortization primarily relate to depreciation of trailing equipment, amortization of intangible assets and depreciation of 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:

 	  	Fiscal Year	 	
 	  	2012	 	 	2011	 	 	2010	 	
Revenue	  	 	100.0	% 	 	 	100.0	% 	 	 	100.0	% 	
Purchased transportation	  	 	76.2	  	 	 	75.8	  	 	 	76.0	  	
Commissions to agents	  	 	7.8	  	 	 	7.9	  	 	 	7.6	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Gross profit margin	  	 	16.0	% 	 	 	16.3	% 	 	 	16.4	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	  	 	100.0	% 	 	 	100.0	% 	 	 	100.0	% 	
Investment income	  	 	0.4	  	 	 	0.4	  	 	 	0.4	  	
Indirect costs and expenses:	  	 	 	 	 	 	 	 	 	 	 	 	
Other operating costs	  	 	5.1	  	 	 	6.7	  	 	 	7.3	  	
Insurance and claims	  	 	8.4	  	 	 	9.9	  	 	 	12.5	  	
Selling, general and administrative	  	 	34.5	  	 	 	35.4	  	 	 	38.8	  	
Depreciation and amortization	  	 	6.2	  	 	 	6.0	  	 	 	6.3	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Total costs and expenses	  	 	54.2	  	 	 	58.0	  	 	 	64.9	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Operating margin	  	 	46.2	% 	 	 	42.4	% 	 	 	35.5	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Fiscal Year Ended December 29, 2012 Compared to Fiscal Year Ended December 31, 2011
Revenue for fiscal year 2012 was $2,793,420,000, an increase of $144,338,000, or 5%, compared to fiscal year 2011. Revenue increased $142,820,000, or 5%, at the transportation logistics segment. The increase in revenue at the transportation logistics segment was primarily attributable to a 4% increase in the number of loads hauled and an increased revenue per load of approximately 1%. Included in fiscal years 2012 and 2011 was $22,381,000 and $20,516,000, respectively, of transportation management fee revenue. Revenue at the insurance segment, representing reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk of loss is borne by the Company, was $35,861,000 and $34,343,000 for fiscal years 2012 and 2011, respectively.
Truck transportation revenue hauled by BCO Independent Contractors and Truck Brokerage Carriers (together, the “third party truck capacity providers”) for fiscal year 2012, was $2,582,922,000, or 92% of total revenue, an increase of $155,653,000, or 6%, compared to fiscal year 2011. The number of loads hauled by third party truck capacity providers in fiscal year 2012 increased 5% compared to fiscal year 2011, and revenue per load increased 2% compared to fiscal year 2011. The increase in the number of loads hauled by third party truck capacity providers was primarily attributable to increased loads hauled on unsided/platform trailing equipment and loads generated from the addition of new independent commission sales agents. The increase in revenue per load on revenue hauled by third party truck capacity providers was primarily attributable to both an increase in the number of loads hauled on unsided/platform equipment, which has a higher revenue per load, and a slight increase in the revenue per load billed on loads hauled on unsided/platform equipment. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $114,426,000 and $101,114,000 in fiscal years 2012 and 2011, respectively. Fuel surcharges billed to customers on revenue hauled by BCO Independent Contractors are excluded from revenue.
 
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Transportation revenue hauled by rail intermodal, air cargo and ocean cargo carriers (collectively, the “multimode capacity providers”) for fiscal year 2012, was $151,830,000, or 5% of total revenue, a decrease of $14,573,000, or 9%, compared to fiscal year 2011. The number of loads hauled by multimode capacity providers in fiscal year 2012 decreased 5% compared to fiscal year 2011, and revenue per load on revenue hauled by multimode capacity providers decreased 3% over the same period. The decrease in the number of loads hauled by multimode capacity providers was primarily attributable to decreased chartered air loads resulting partly from the termination of one independent commission sales agent in fiscal year 2012 plus lower demand for international air freight services. Revenue per load on revenue hauled by multimode capacity providers is influenced by many factors, including the mode of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.
Purchased transportation was 76.2% and 75.8% of revenue in fiscal years 2012 and 2011, respectively. The increase in purchased transportation as a percentage of revenue was primarily attributable to an increase in the percentage of revenue hauled by Truck Brokerage Carriers, which has a higher rate of purchased transportation, and increased rates of purchased transportation paid to Truck Brokerage Carriers. Commissions to agents were 7.8% and 7.9% of revenue in fiscal years 2012 and 2011, respectively. The decrease in commissions to agents as a percentage of revenue was primarily attributable to a decreased net revenue margin, defined as net revenue divided by revenue, on revenue hauled by Truck Brokerage Carriers.
Investment income at the insurance segment was $1,563,000 and $1,705,000 in fiscal years 2012 and 2011, respectively. The decrease in investment income was primarily due to a lower average rate of return on investments held by the insurance segment during fiscal year 2012.
Other operating costs were 5.1% and 6.7% of gross profit in fiscal years 2012 and 2011, respectively. The decrease in other operating costs as a percentage of gross profit was primarily attributable to the effect of increased gross profit, increased gains on sales of trailing equipment, a decreased provision for contractor bad debt and decreased trailing equipment maintenance costs. Insurance and claims were 8.4% of gross profit in fiscal year 2012 and 9.9% of gross profit in fiscal year 2011. The decrease in insurance and claims as a percentage of gross profit was primarily due to an increase in the percent of gross profit contributed from revenue hauled by Truck Brokerage Carriers in fiscal year 2012, which has a lower liability exposure to the Company, and a decrease in the severity of commercial trucking claims during 2012. Selling, general and administrative costs were 34.5% of gross profit in fiscal year 2012 and 35.4% of gross profit in fiscal year 2011. The decrease in selling, general and administrative costs as a percentage of gross profit was primarily attributable to the effect of increased gross profit, a decreased provision for bonuses under the Company’s incentive compensation plan and decreased legal fees. Depreciation and amortization was 6.2% of gross profit in fiscal year 2012 and 6.0% of gross profit in fiscal year 2011. The increase in depreciation and amortization as a percentage of gross profit was primarily due to additions of trailing equipment that replaced older, fully depreciated trailing equipment in fiscal year 2012.
The provisions for income taxes for fiscal years 2012 and 2011 were based on estimated full year combined effective income tax rates of approximately 36.0% and 37.3%, respectively, which were higher than the statutory federal income tax rate primarily as a result of state taxes, the meals and entertainment exclusion and non-deductible stock compensation expense, partly offset by recognition of benefits relating to several uncertain tax positions in both years. The year over prior year decrease in the effective income tax rate was due to increased benefits relating to uncertain tax positions recognized in 2012 over 2011 and income tax benefits resulting from disqualifying disposition of the Company’s Common Stock by employees who obtained the stock through exercises of incentive stock options during 2012.
Net income attributable to the Company was $129,781,000, or $2.78 per common share ($2.77 per diluted share), in fiscal year 2012. Net income attributable to the Company was $113,007,000, or $2.38 per common share ($2.38 per diluted share), in fiscal year 2011.
 
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Fiscal Year Ended December 31, 2011 Compared to Fiscal Year Ended December 25, 2010
Revenue for fiscal year 2011 was $2,649,082,000, an increase of $248,912,000, or 10%, compared to fiscal year 2010. Revenue increased $248,707,000, or 11%, at the transportation logistics segment. The increase in revenue at the transportation logistics segment was primarily attributable to a higher revenue per load of approximately 10% and a 1% increase in the number of loads hauled. Included in fiscal years 2011 and 2010 were transportation management fees of $20,516,000 and $17,652,000, respectively. Revenue, representing premiums on reinsurance programs provided to BCO Independent Contractors, at the insurance segment was $34,343,000 and $34,138,000 for fiscal years 2011 and 2010, respectively.
Truck transportation revenue hauled by third-party truck capacity providers for fiscal year 2011, which represented 92% of total revenue, was $2,427,269,000, an increase of $218,269,000, or 10%, compared to fiscal year 2010. The number of loads hauled by third-party truck capacity providers in fiscal year 2011 increased 1% compared to fiscal year 2010, and revenue per load increased 9% compared to fiscal year 2010. The increase in the number of loads hauled by third-party truck capacity providers was primarily attributable to increased industrial production in the domestic marketplace as well as the impact of market share gains from agents recruited during 2011 and 2010, partially offset by the anticipated reduction of freight hauled on behalf of one customer in the Company’s less-than-truckload substitute line haul service offering. Less-than-truckload substitute line haul revenue was $74,823,000 and $219,872,000 in fiscal years 2011 and 2010, respectively. The increase in revenue per load on revenue hauled by third-party truck capacity providers was primarily attributable to tighter truck capacity in the domestic market during 2011. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $101,114,000 and $79,898,000 in fiscal years 2011 and 2010, respectively. Fuel surcharges billed to customers on revenue hauled by BCO Independent Contractors are excluded from revenue.
Transportation revenue hauled by multimode capacity providers for fiscal year 2011, which represented 6% of total revenue, was $166,403,000, an increase of $29,936,000, or 22%, compared to fiscal year 2010. The number of loads hauled by multimode capacity providers in fiscal year 2011 increased 7% compared to fiscal year 2010, and revenue per load increased 14% over the same period. The increase in revenue per load on revenue hauled by multimode capacity providers is influenced by many factors including the mode of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.
Purchased transportation was 75.8% and 76.0% of revenue in fiscal years 2011 and 2010, respectively. The decrease in purchased transportation as a percentage of revenue was primarily attributable to reduced less-than-truckload substitute line-haul revenue, which has a higher rate of purchased transportation, partially offset by an increase in the percentage of revenue hauled by Truck Brokerage Carriers excluding less-than-truckload substitute line-haul revenue. Commissions to agents were 7.9% of revenue in fiscal year 2011 and 7.6% of revenue in fiscal year 2010. The increase in commissions to agents as a percentage of revenue was primarily attributable to decreased less-than-truckload substitute line-haul revenue, which typically has a lower commission rate.
Investment income at the insurance segment was $1,705,000 and $1,558,000 in fiscal years 2011 and 2010, respectively. The increase in investment income was primarily due to an increased average rate of return on investments held by the insurance segment, partly offset by a lower average investment balance during fiscal year 2011.
Other operating costs were 6.7% and 7.3% of gross profit in fiscal years 2011 and 2010, respectively. The decrease in other operating costs as a percentage of gross profit was primarily attributable to the effect of increased gross profit and a reduction in certain outsourced logistics services costs in fiscal year 2011. Insurance and claims were 9.9% of gross profit in fiscal year 2011 and 12.5% of gross profit in fiscal year 2010. The decrease in insurance and claims as a percentage of gross profit was primarily due to an increase in the percent of gross profit contributed from revenue hauled by Truck Brokerage Carriers in fiscal year 2011, which has a lower
 
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claims risk profile and favorable frequency and severity of accidents in fiscal year 2011. Selling, general and administrative costs were 35.4% of gross profit in fiscal year 2011 and 38.8% of gross profit in fiscal year 2010. The decrease in selling, general and administrative costs as a percentage of gross profit was primarily attributable to the effect of increased gross profit and a decreased provision for bonuses under the Company’s incentive compensation plan, partially offset by an increase in the provision for customer bad debt in fiscal year 2011 with a significant portion related to one specific customer. In addition, selling, general and administrative costs included a one-time charge in fiscal year 2010 of $3,800,000 related to the buyout by the Company of its remaining contingent payment obligations relating to an acquisition completed in 2009. Depreciation and amortization was 6.0% of gross profit in fiscal year 2011 and 6.3% of gross profit in fiscal year 2010. The decrease in depreciation and amortization as a percentage of gross profit was primarily due to the effect of increased gross profit in fiscal year 2011.
Interest and debt expense in fiscal year 2011 was $511,000 lower than fiscal year 2010. The decrease in interest and debt expense was primarily attributable to lower average capital lease obligations and lower average borrowing rates on capital leases, partially offset by increased average borrowings on the Company’s revolving credit facility during fiscal year 2011.
The provisions for income taxes for fiscal years 2011 and 2010 were based on estimated full year combined effective income tax rates of approximately 37.3% and 36.5%, respectively, which were higher than the statutory federal income tax rate primarily as a result of state taxes, the meals and entertainment exclusion and non-deductible stock compensation expense, partly offset by recognition of benefits relating to several uncertain tax provisions in both years.
In the Company’s 2009 fiscal third quarter, the Company acquired A3 Integration, LLC, now known as LSCS LLC, and its subsidiaries through A3i Acquisition LLC, an entity in which the Company owned 100% of the non-voting, preferred interests and, from the date of acquisition to January 2011, 75% of the voting, common equity interests. The net losses attributable to noncontrolling interest of $62,000 and $932,000 in fiscal years 2011 and 2010, respectively, represent the noncontrolling investor’s 25% share of the net loss incurred by A3i Acquisition through January 2011. The Company purchased the remaining 25% of A3i Acquisition in January 2011.
Net income attributable to the Company was $113,007,000, or $2.38 per common share ($2.38 per diluted share), in fiscal year 2011. Net income attributable to the Company was $87,514,000, or $1.77 per common share ($1.77 per diluted share), in fiscal year 2010.
Capital Resources and Liquidity
Working capital and the ratio of current assets to current liabilities were $247,605,000 and 1.7 to 1, respectively, at December 29, 2012, compared with $220,679,000 and 1.7 to 1, respectively, at December 31, 2011 and $142,571,000 and 1.5 to 1, respectively, at December 25, 2010. 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 $125,584,000, $118,034,000, and $108,758,000 in 2012, 2011 and 2010, respectively. The increase in cash flow provided by operating activities for 2012 compared to 2011 was primarily attributable to the timing of collections of trade receivables and increased net income, partially offset by timing of payments. The increase in cash flow provided by operating activities for 2011 compared to 2010 was primarily attributable to increased net income and the timing of payments, partially offset by timing of collections of trade receivables.
The Company paid $0.73, $0.21, and $0.19 per share, or $33,981,000, $9,983,000 and $9,422,000 in cash dividends during 2012, 2011, and 2010, respectively. On December 5, 2012, the Company announced that its Board of Directors declared a dividend of $0.50 per share to holders of record of its Common Stock as of December 17, 2012. In conjunction with the announcement of this dividend, the Company announced that it does not expect the declaration and payment of dividends in connection with its quarterly earnings results for the four quarters of fiscal 2013 and for the first three quarters of fiscal 2014. During 2012, the Company purchased
 
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524,674 shares of its Common Stock at a total cost of $25,826,000. During 2011 and 2010, the Company purchased 1,206,111 and 2,652,791 shares of its Common Stock at a total cost of $50,450,000 and $102,736,000, respectively. The Company has used cash provided by operating activities and borrowings on the Company’s revolving credit facilities to fund the purchases. Since January 1997, the Company has purchased approximately $1,051,000,000 of its Common Stock under programs authorized by the Board of Directors of the Company in open market and private block transactions. As of December 29, 2012, the Company may purchase up to an additional 1,991,877 shares of its Common Stock under its authorized stock purchase program. Long-term debt, including current maturities, was $114,141,000 at December 29, 2012, compared to $132,342,000 at December 31, 2011 and $121,611,000 at December 25, 2010.
Equity was $379,454,000, or 77% of total capitalization (defined as long-term debt including current maturities plus equity), at December 29, 2012, compared to $300,577,000, or 69% of total capitalization, at December 31, 2011 and $250,967,000, or 67% of total capitalization, at December 25, 2010. The increase in equity in 2012 over 2011 was primarily a result of net income and the effect of the exercises of stock options during the period, partially offset by purchases of shares of the Company’s Common Stock and dividends paid by the Company. The increase in equity in 2011 over 2010 was primarily a result of net income and the effect of the exercises of stock options during the period, partially offset by the January 2011 purchase of the noncontrolling interest, purchases of shares of the Company’s Common Stock and dividends paid by the Company.
On June 29, 2012, 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 29, 2017, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees. The initial borrowing of $60,000,000 under the Credit Agreement was used to refinance $60,000,000 of outstanding borrowings under the prior credit agreement, which was terminated.
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 25% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors. 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 December 29, 2012, the Company had $40,000,000 in borrowings outstanding and $32,754,000 of letters of credit outstanding under the Credit Agreement. At December 29, 2012, there was $152,246,000 available for future borrowings under the Credit Agreement. In addition, the Company has $45,146,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments totaling $50,162,000 at December 29, 2012. 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 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 internal and through acquisitions, complete or execute share
 
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purchases of its Common Stock under authorized share purchase programs, pay dividends and meet working capital needs. As a non-asset based provider of transportation services and supply chain 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 2012, 2011 and 2010, the Company purchased $7,072,000, $4,337,000 and $27,505,000, respectively, of operating property and acquired $43,077,000, $34,044,000 and $14,986,000, respectively, of trailing equipment by entering into capital leases. The Company purchased its primary facility in Jacksonville, Florida in 2010 for $21,135,000. Landstar anticipates acquiring approximately $65,000,000 in operating property, primarily new trailing equipment to replace older trailing equipment and information technology equipment, during fiscal year 2013 either by purchase or lease financing. The Company does not currently anticipate any other significant capital requirements in 2013.
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.
Contractual Obligations and Commitments
At December 29, 2012, the Company’s obligations and commitments to make future payments under contracts, such as debt and lease agreements, were as follows (in thousands):

 	  	Payments Due By Period	 	
Contractual Obligation	  	Total	 	  	Less Than
1 Year	 	  	1-3
Years	 	  	3-5
Years	 	  	More Than
5 Years	 	
Long-term debt obligations	  	$	40,000	  	  	 	 	 	  	 	 	 	  	$	40,000	  	  	 	 	 	
Capital lease obligations	  	 	77,980	  	  	$	20,696	  	  	$	37,675	  	  	 	19,609	  	  	 	 	 	
Operating lease obligations	  	 	6,629	  	  	 	2,152	  	  	 	2,743	  	  	 	1,146	  	  	$	588	  	
Purchase obligations	  	 	49,860	  	  	 	46,719	  	  	 	3,001	  	  	 	140	  	  	 	 	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	174,469	  	  	$	69,567	  	  	$	43,419	  	  	$	60,895	  	  	$	588	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Long-term debt obligations represent borrowings under the Credit Agreement and do not include interest. Capital lease obligations above include $3,839,000 of imputed interest. At December 29, 2012, the Company has gross unrecognized tax benefits of $2,329,000. This amount is excluded from the table above as the Company cannot reasonably estimate the period of cash settlement with the respective taxing authorities. At December 29, 2012, the Company has insurance claims liabilities of $86,405,000. This amount is excluded from the table above as the Company cannot reasonably estimate the period of cash settlement on these liabilities. The short-term portion of the insurance claims liability is reported on the consolidated balance sheets primarily on an actuarially determined basis. Included in purchase obligations in the table above is $41,034,000 of obligations related to trailing equipment to replace older trailer equipment.
Off-Balance Sheet Arrangements
As of December 29, 2012, the Company had no off-balance sheet arrangements, other than operating leases as disclosed in the table of Contractual Obligations and Commitments above, that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Legal Matters
As further described in periodic and current reports previously filed by the Company with the Securities and Exchange Commission (the “SEC”), the Company and certain of its subsidiaries (the “Defendants”) were
 
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defendants in a suit (the “Litigation”) brought in the United States District Court for the Middle District of Florida (the “District Court”) by the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and four former BCO Independent Contractors (the “Named Plaintiffs” and, with OOIDA, the “Plaintiffs”) on behalf of all independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (the “BCO Independent Contractors”). The initial complaint in the Litigation was filed on November 1, 2002. The Plaintiffs alleged that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violated certain federal leasing regulations and sought injunctive relief, an unspecified amount of damages and attorneys’ fees. Following a second trial in August 2012 in which all claims against the Defendants were denied, the Litigation was settled in December 2012. Under the terms of the settlement, the Plaintiffs dismissed their remaining claims in the Litigation, each party agreed to bear its own costs and fees in the Litigation, the parties exchanged releases, and OOIDA made a contribution to the BCO Benevolence Fund, Inc., a non-profit corporation founded by the Company to provide financial assistance to BCO Independent Contractors in hardship situations.
Also as further described in periodic and current reports previously filed by the Company with the SEC, in June 2011, Landstar System, Inc. received a Civil Investigative Demand (the “CID”) from the United States Attorney for the Western District of Kentucky (the “U.S. Attorney”) issued pursuant to a complaint (the “Complaint”) filed by a third party under the False Claims Act. The Company cooperated fully with the CID, which requested documents and answers to written interrogatories limited to freight hauled to or from Fort Campbell, Kentucky by certain subsidiaries of the Company and billed to the U.S. government. In November 2012, the Company was informed by the U.S. Attorney of the dismissal of the Complaint and the consent by the U.S. government to such dismissal. The Company believes this matter has been concluded.
On September 23, 2011, a jury sitting in a state court in Cobb County, Georgia, entered a damage award of approximately $40.2 million (such amount, plus pre-judgment interest, post-judgment interest and a portion of plaintiffs’ attorney fees in an amount not yet determined are collectively referred to herein as the “Damage Award”) against Landstar Ranger, Inc., Landstar System Holdings, Inc. and Landstar System, Inc. While a judgment has been entered by the court on the verdict, execution on that judgment is stayed and no judgment has been entered on the pre-judgment interest claims and attorney fee claims due to the pendency of certain post-trial motions. The Damage Award arises out of an accident that occurred in February 2007 involving a BCO Independent Contractor leased to Landstar Ranger, Inc. Under the terms of the commercial trucking insurance program that Landstar had in place in 2007, Landstar retained liability for up to $5 million with respect to the accident giving rise to the Damage Award. Landstar has third party insurance and/or reinsurance policies in place that are expected to provide coverage for all amounts of the Damage Award in excess of such retention, including all related out-of-pocket expenses, such as the costs of an appeal bond, interest and attorney fees comprising the Damage Award that may be entered by the trial court or an appellate court in the future. The Company recorded a $5 million charge representing its self-insured retention in respect of this accident in the consolidated financial results of the Company in the 2007 first quarter. Accordingly, that portion of the Damage Award has been previously recorded by the Company and therefore did not reduce consolidated operating income or net income for the Company’s 2011 or 2012 fiscal years. Under the terms of the Company’s insurance policies, the Company is the primary obligor of the amount of the Damage Award, and as such, the Company has reported a $38.7 million receivable from the third party insurance providers in other receivables and a corresponding liability of the same amount in insurance claims in the consolidated balance sheets at December 29, 2012. The Company and its insurers have filed post-trial motions challenging the Damage Award and seeking a new trial and intend to appeal the Damage Award to the extent necessary following the resolution of those motions. No assurances can be given regarding the outcome of the pending motions or any such appeal, including as to the impact of the Damage Award on the premiums charged by the Company’s third party insurers from time to time for commercial trucking insurance.
The Company is involved in certain claims and pending litigation, including those described herein, arising from the normal conduct of business. 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
 
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resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
Critical Accounting Policies and Estimates
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 December 29, 2012 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 fiscal year 2012, insurance and claims costs included $11,000 of unfavorable adjustments to prior years’ claims estimates. During fiscal years 2011 and 2010, insurance and claims costs included $505,000 and $1,582,000 of favorable 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 December 29, 2012.
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.
The Company tests for impairment of goodwill at least annually, typically in the fourth quarter, based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. Fair value of each reporting unit is estimated using a discounted cash flow model. The model includes a number of significant assumptions and estimates including future cash flows and discount rates. Such assumptions and estimates necessarily involve management judgments concerning, among other things, future revenues and profitability. If the carrying amount exceeds fair value under the first step of the impairment test, then the second step is performed to measure the amount of any impairment loss. Only the first step of the impairment test was required in 2012 as the estimated fair value of the reporting units significantly exceeded carrying value.
The Company purchased two companies in July 2009, one of which was highly dependent on the U.S. automotive manufacturing industry and the other of which was a start-up. On the date of the acquisitions, the
 
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Company recorded $26,300,000 of goodwill. The two acquired entities are considered one reporting unit as it relates to business valuation. As it relates to goodwill recorded upon the acquisition of these companies in July 2009, should the automotive industry experience a significant downturn and should the Company fail to add customers to the technology platform acquired with the start-up company, the Company could determine that its goodwill is impaired in the future. The Company will continue to monitor the economic environment and test for impairment of goodwill as necessary.
Significant variances from management’s estimates for the amount of uncollectible receivables, the ultimate resolution of self-insured claims, the provision for uncertainty in income tax positions and impairment of goodwill 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 historical 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 the quarters ending June, September and December.
 
Item 7A.	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 the revolving credit facility, and investing activities with respect to investments held by the insurance segment.
On June 29, 2012, 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 29, 2017, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees. The initial borrowing of $60,000,000 under the Credit Agreement was used to refinance $60,000,000 of outstanding borrowings under the prior credit agreement, which was terminated.
Depending upon the specific type of borrowing, borrowings under the Credit Agreement bear interest based on either (a) the prime rate, (b) the federal funds effective rate, (c) the rate at the time offered to JPMorgan Chase Bank, N.A. in the Eurodollar market or (d) the London Interbank Offered Rate, plus a margin that is determined based on the level of the Company’s Leverage Ratio, as defined in the Credit Agreement. As of December 29, 2012 and December 31, 2011, the weighted average interest rate on borrowings outstanding was 1.22% and 1.15%, respectively. During the fourth quarter of 2012 and 2011, the average outstanding balance under the Credit Agreement was approximately $34,882,000 and $85,296,000, respectively. Assuming that debt levels on the Credit Agreement remain at $40,000,000, the balance at December 29, 2012, a hypothetical increase of 100 basis points in current rates provided for under the Credit Agreement is estimated to result in an increase in interest expense of $400,000 on an annualized basis. Based on the borrowing rates in the Credit Agreement and the repayment terms, the fair value of the outstanding borrowings as of December 29, 2012 was estimated to approximate carrying value. All amounts outstanding under the Credit Agreement are payable on June 29, 2017, the maturity date of the Credit Agreement.
 
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Long-term investments, all of which are available-for-sale and are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Assuming that the long-term portion of investments remains at $56,874,000, the balance at December 29, 2012, 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.
Assets and liabilities of the Company’s Canadian operation 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 net assets held at the Company’s Canadian subsidiary at December 29, 2012 were, as translated to U.S. dollars, less than 1% of total consolidated net assets. Accordingly, any translation gain or loss related to the Canadian operation would not be material.
 
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Item 8.	Financial Statements and Supplementary Data	
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)

 	  	Dec. 29,
2012	 	 	Dec. 31,
2011	 	
ASSETS	  	
Current Assets	  	 	 	 	 	 	 	 	
Cash and cash equivalents	  	$	74,284	  	 	$	80,900	  	
Short-term investments	  	 	35,528	  	 	 	27,944	  	
Trade accounts receivable, less allowance of $8,650 and $6,591	  	 	408,787	  	 	 	368,377	  	
Other receivables, including advances to independent contractors, less allowance of $4,657 and $5,384	  	 	55,278	  	 	 	53,263	  	
Deferred income taxes and other current assets	  	 	18,067	  	 	 	21,308	  	
 	  	 	 	 	 	 	 	 	
Total current assets	  	 	591,944	  	 	 	551,792	  	
 	  	 	 	 	 	 	 	 	
Operating property, less accumulated depreciation and amortization of $158,999 and $145,804	  	 	158,953	  	 	 	142,146	  	
Goodwill	  	 	57,470	  	 	 	57,470	  	
Other assets	  	 	71,054	  	 	 	57,041	  	
 	  	 	 	 	 	 	 	 	
Total assets	  	$	879,421	  	 	$	808,449	  	
 	  	 	 	 	 	 	 	 	
LIABILITIES AND EQUITY	  	
Current Liabilities	  	 	 	 	 	 	 	 	
Cash overdraft	  	$	33,647	  	 	$	25,905	  	
Accounts payable	  	 	188,981	  	 	 	163,307	  	
Current maturities of long-term debt	  	 	19,016	  	 	 	17,212	  	
Insurance claims	  	 	64,509	  	 	 	76,624	  	
Other current liabilities	  	 	38,186	  	 	 	48,065	  	
 	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	344,339	  	 	 	331,113	  	
 	  	 	 	 	 	 	 	 	
Long-term debt, excluding current maturities	  	 	95,125	  	 	 	115,130	  	
Insurance claims	  	 	21,896	  	 	 	27,494	  	
Deferred income taxes and other noncurrent liabilities	  	 	38,607	  	 	 	34,135	  	
Shareholders’ Equity	  	 	 	 	 	 	 	 	
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 66,859,864 and 66,602,486 shares	  	 	669	  	 	 	666	  	
Additional paid-in capital	  	 	173,976	  	 	 	165,712	  	
Retained earnings	  	 	1,042,956	  	 	 	947,156	  	
Cost of 20,411,736 and 19,882,289 shares of common stock in treasury	  	 	(839,517	) 	 	 	(813,684	) 	
Accumulated other comprehensive income	  	 	1,370	  	 	 	727	  	
 	  	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	379,454	  	 	 	300,577	  	
 	  	 	 	 	 	 	 	 	
Total liabilities and shareholders’equity	  	$	879,421	  	 	$	808,449	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)

 	  	Fiscal Years Ended	 	
 	  	Dec. 29,
2012	 	  	Dec. 31,
2011	 	 	Dec. 25,
2010	 	
Revenue	  	$	2,793,420	  	  	$	2,649,082	  	 	$	2,400,170	  	
Investment income	  	 	1,563	  	  	 	1,705	  	 	 	1,558	  	
Costs and expenses:	  	 	 	 	  	 	 	 	 	 	 	 	
Purchased transportation	  	 	2,129,345	  	  	 	2,007,102	  	 	 	1,824,308	  	
Commissions to agents	  	 	218,363	  	  	 	210,088	  	 	 	181,405	  	
Other operating costs	  	 	22,949	  	  	 	28,865	  	 	 	28,826	  	
Insurance and claims	  	 	37,451	  	  	 	42,766	  	 	 	49,334	  	
Selling, general and administrative	  	 	153,566	  	  	 	152,907	  	 	 	153,080	  	
Depreciation and amortization	  	 	27,456	  	  	 	25,814	  	 	 	24,804	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Total costs and expenses	  	 	2,589,130	  	  	 	2,467,542	  	 	 	2,261,757	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Operating income	  	 	205,853	  	  	 	183,245	  	 	 	139,971	  	
Interest and debt expense	  	 	3,104	  	  	 	3,112	  	 	 	3,623	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Income before income taxes	  	 	202,749	  	  	 	180,133	  	 	 	136,348	  	
Income taxes	  	 	72,968	  	  	 	67,188	  	 	 	49,766	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Net income	  	 	129,781	  	  	 	112,945	  	 	 	86,582	  	
Less: Net loss attributable to noncontrolling interest	  	 	—  	  	  	 	(62	) 	 	 	(932	) 	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Net income attributable to Landstar System, Inc. and subsidiary	  	$	129,781	  	  	$	113,007	  	 	$	87,514	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Earnings per common share attributable to Landstar System, Inc. and subsidiary	  	$	2.78	  	  	$	2.38	  	 	$	1.77	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary	  	$	2.77	  	  	$	2.38	  	 	$	1.77	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Average number of shares outstanding:	  	 	 	 	  	 	 	 	 	 	 	 	
Earnings per common share	  	 	46,698,000	  	  	 	47,444,000	  	 	 	49,523,000	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Diluted earnings per share	  	 	46,877,000	  	  	 	47,524,000	  	 	 	49,580,000	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Dividends paid per common share	  	$	0.73	  	  	$	0.21	  	 	$	0.19	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)

 	  	Fiscal Years Ended	 	
 	  	Dec. 29,
2012	 	  	Dec. 31,
2011	 	 	Dec. 25,
2010	 	
Net income attributable to Landstar System, Inc. and subsidiary	  	$	129,781	  	  	$	113,007	  	 	$	87,514	  	
Other comprehensive income (loss):	  	 	 	 	  	 	 	 	 	 	 	 	
Unrealized holding gains on available-for-sale investments, net of tax expense of $221, $9 and $111	  	 	400	  	  	 	17	  	 	 	201	  	
Foreign currency translation gains (losses)	  	 	243	  	  	 	(171	) 	 	 	182	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Other comprehensive income (loss)	  	 	643	  	  	 	(154	) 	 	 	383	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Comprehensive income attributable to Landstar System, Inc. and subsidiary	  	$	130,424	  	  	$	112,853	  	 	$	87,897	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

 	  	Fiscal Years Ended	 	
 	  	Dec. 29,
2012	 	 	Dec. 31,
2011	 	 	Dec. 25,
2010	 	
OPERATING ACTIVITIES	  	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	129,781	  	 	$	112,945	  	 	$	86,582	  	
Adjustments to reconcile net income to net cash provided by operating activities:	  	 	 	 	 	 	 	 	 	 	 	 	
Depreciation and amortization of operating property and intangible assets	  	 	27,456	  	 	 	25,814	  	 	 	24,804	  	
Non-cash interest charges	  	 	218	  	 	 	218	  	 	 	219	  	
Provisions for losses on trade and other accounts receivable	  	 	4,984	  	 	 	7,804	  	 	 	3,916	  	
Losses (gains) on sales/disposals of operating property	  	 	(2,795	) 	 	 	(266	) 	 	 	1,058	  	
Deferred income taxes, net	  	 	4,261	  	 	 	10,071	  	 	 	525	  	
Stock-based compensation	  	 	6,149	  	 	 	5,012	  	 	 	4,769	  	
Changes in operating assets and liabilities:	  	 	 	 	 	 	 	 	 	 	 	 	
Increase in trade and other accounts receivable	  	 	(47,409	) 	 	 	(98,151	) 	 	 	(38,206	) 	
Decrease (increase) in other assets	  	 	3,206	  	 	 	1,871	  	 	 	(1,752	) 	
Increase in accounts payable	  	 	25,674	  	 	 	26,010	  	 	 	16,267	  	
Increase (decrease) in other liabilities	  	 	(8,228	) 	 	 	(5,729	) 	 	 	11,200	  	
Increase (decrease) in insurance claims	  	 	(17,713	) 	 	 	32,435	  	 	 	(624	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
NET CASH PROVIDED BY OPERATING ACTIVITIES	  	 	125,584	  	 	 	118,034	  	 	 	108,758	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
INVESTING ACTIVITIES	  	 	 	 	 	 	 	 	 	 	 	 	
Net change in other short-term investments	  	 	—	  	 	 	—	  	 	 	1,730	  	
Sales and maturities of investments	  	 	33,028	  	 	 	67,174	  	 	 	39,187	  	
Purchases of investments	  	 	(56,897	) 	 	 	(58,413	) 	 	 	(65,818	) 	
Purchases of operating property	  	 	(7,072	) 	 	 	(4,337	) 	 	 	(27,505	) 	
Proceeds from sales of operating property	  	 	9,730	  	 	 	4,385	  	 	 	1,686	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES	  	 	(21,211	) 	 	 	8,809	  	 	 	(50,720	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
FINANCING ACTIVITIES	  	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) in cash overdraft	  	 	7,742	  	 	 	1,028	  	 	 	(4,042	) 	
Dividends paid	  	 	(33,981	) 	 	 	(9,983	) 	 	 	(9,422	) 	
Proceeds from exercises of stock options	  	 	1,360	  	 	 	923	  	 	 	1,660	  	
Excess (shortfall) tax effect on stock option exercises	  	 	751	  	 	 	(683	) 	 	 	1,580	  	
Borrowings on revolving credit facility	  	 	60,000	  	 	 	10,000	  	 	 	40,000	  	
Purchases of common stock	  	 	(25,826	) 	 	 	(50,450	) 	 	 	(102,736	) 	
Principal payments on long-term debt and capital lease obligations	  	 	(121,278	) 	 	 	(33,313	) 	 	 	(26,273	) 	
Purchase of noncontrolling interest	  	 	—	  	 	 	(8,000	) 	 	 	—	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
NET CASH USED BY FINANCING ACTIVITIES	  	 	(111,232	) 	 	 	(90,478	) 	 	 	(99,233	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Effect of exchange rate changes on cash and cash equivalents	  	 	243	  	 	 	(171	) 	 	 	182	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) in cash and cash equivalents	  	 	(6,616	) 	 	 	36,194	  	 	 	(41,013	) 	
Cash and cash equivalents at beginning of period	  	 	80,900	  	 	 	44,706	  	 	 	85,719	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents at end of period	  	$	74,284	  	 	$	80,900	  	 	$	44,706	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Fiscal Years Ended December 29, 2012,
December 31, 2011 and December 25, 2010
(Dollars in thousands)

 	 	Landstar System, Inc. and Subsidiary Shareholders	 	 	 	 	 	 	 	 	
 	 	Common Stock	 	 	Additional
Paid-In
Capital	 	 	Retained
Earnings	 	 	Treasury
Stock at Cost	 	 	Accumulated
Other
Comprehensive
Income (Loss)	 	 	Non-
controlling
Interest	 	 	Total	 	 	
 	 	Shares	 	 	Amount	 	 	 	 	 	 	 	 	Shares	 	 	Amount	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance December 26, 2009	 	 	66,255,358	  	 	$	663	  	 	$	161,261	  	 	$	766,040	  	 	 	16,022,111	  	 	$	(660,446	) 	 	$	498	  	 	$	135	  	 	$	268,151	  	 	 	 	 	 	 	 	
Net income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	87,514	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(932	) 	 	 	86,582	  	 	 	 	 	 	 	 	
Dividends paid ($0.19 per share)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(9,422	) 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(9,422	) 	 	 	 	 	 	 	 	
Purchases of common stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,652,791	  	 	 	(102,736	) 	 	 	 	 	 	 	 	 	 	 	(102,736	) 	 	 	 	 	 	 	 	
Exercises of stock options and issuance of non-vested stock, including excess tax effect	 	 	279,811	  	 	 	2	  	 	 	3,238	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	3,240	  	 	 	 	 	 	 	 	
Stock-based compensation	 	 	 	 	 	 	 	 	 	 	4,769	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	4,769	  	 	 	 	 	 	 	 	
Foreign currency translation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	182	  	 	 	 	 	 	 	182	  	 	 	 	 	 	 	 	
Unrealized gain on available-for-sale investments, net of income taxes	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	201	  	 	 	 	 	 	 	201	  	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance December 25, 2010	 	 	66,535,169	  	 	$	665	  	 	$	169,268	  	 	$	844,132	  	 	 	18,674,902	  	 	$	(763,182	) 	 	$	881	  	 	$	(797	) 	 	$	250,967	  	 	 	 	 	 	 	 	
Net income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	113,007	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(62	) 	 	 	112,945	  	 	 	 	 	 	 	 	
Dividends paid ($0.21 per share)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(9,983	) 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(9,983	) 	 	 	 	 	 	 	 	
Purchases of common stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	1,206,111	  	 	 	(50,450	) 	 	 	 	 	 	 	 	 	 	 	(50,450	) 	 	 	 	 	 	 	 	
Purchase of noncontrolling interest	 	 	 	 	 	 	 	 	 	 	(8,859	) 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	859	  	 	 	(8,000	) 	 	 	 	 	 	 	 	
Exercises of stock options and issuance and vesting of non-vested stock, including shortfall tax effect	 	 	67,317	  	 	 	1	  	 	 	291	  	 	 	 	 	 	 	1,276	  	 	 	(52	) 	 	 	 	 	 	 	 	 	 	 	240	  	 	 	 	 	 	 	 	
Stock-based compensation	 	 	 	 	 	 	 	 	 	 	5,012	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	5,012	  	 	 	 	 	 	 	 	
Foreign currency translation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(171	) 	 	 	 	 	 	 	(171	) 	 	 	 	 	 	 	 	
Unrealized gain on available-for-sale investments, net of income taxes	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	17	  	 	 	 	 	 	 	17	  	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance December 31, 2011	 	 	66,602,486	  	 	$	666	  	 	$	165,712	  	 	$	947,156	  	 	 	19,882,289	  	 	$	(813,684	) 	 	$	727	  	 	$	—	  	 	$	300,577	  	 	 	 	 	 	 	 	
Net income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	129,781	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	129,781	  	 	 	 	 	 	 	 	
Dividends paid ($0.73 per share)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(33,981	) 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(33,981	) 	 	 	 	 	 	 	 	
Purchases of common stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	524,674	  	 	 	(25,826	) 	 	 	 	 	 	 	 	 	 	 	(25,826	) 	 	 	 	 	 	 	 	
Exercises of stock options and issuances net of forfeitures and vesting of non- vested stock, including excess tax effect	 	 	257,378	  	 	 	3	  	 	 	2,115	  	 	 	 	 	 	 	4,773	  	 	 	(7	) 	 	 	 	 	 	 	 	 	 	 	2,111	  	 	 	 	 	 	 	 	
Stock-based compensation	 	 	 	 	 	 	 	 	 	 	6,149	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	6,149	  	 	 	 	 	 	 	 	
Foreign currency translation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	243	  	 	 	 	 	 	 	243	  	 	 	 	 	 	 	 	
Unrealized gain on available-for-sale investments, net of income taxes	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	400	  	 	 	 	 	 	 	400	  	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance December 29, 2012	 	 	66,859,864	  	 	$	669	  	 	$	173,976	  	 	$	1,042,956	  	 	 	20,411,736	  	 	$	(839,517	) 	 	$	1,370	  	 	$	—	  	 	$	379,454	  	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)     Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (“LSHI”). Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Significant inter-company accounts have been eliminated in consolidation.
Estimates
The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates.
Fiscal Year
Landstar’s fiscal year is the 52 or 53 week period ending the last Saturday in December.
Revenue Recognition
When providing the physical transportation of freight, the Company is the primary obligor with respect to freight delivery and assumes the related credit risk. Accordingly, transportation services revenue billed to customers for the physical transportation of freight and the related direct freight expenses are recognized on a gross basis upon completion of freight delivery. In general, when providing transportation management services under a fee-for-service basis, the Company does not assume credit risk for billings related to the physical transportation of freight. Accordingly, transportation management fee revenue is recognized net of freight expenses upon completion of freight delivery. Insurance premiums of the insurance segment are recognized over the period earned, which is usually on a monthly basis. Fuel surcharges billed to customers for freight hauled by independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”) are excluded from revenue and paid in entirety to the BCO Independent Contractors.
Insurance Claim Costs
Landstar provides, primarily on an actuarially determined basis, for the estimated costs of cargo, property, casualty, general liability and workers’ compensation claims both reported and for claims incurred but not reported. Landstar retains liability for individual commercial trucking claims up to $5,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim.
Tires
Tires purchased as part of trailing equipment are capitalized as part of the cost of the equipment. Replacement tires are charged to expense when placed in service.
Cash and Cash Equivalents
Included in cash and cash equivalents are all investments, except those provided for collateral, with an original maturity of 3 months or less.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Financial Instruments
The Company’s financial instruments include cash equivalents, short and long-term investments, trade and other accounts receivable, accounts payable, other accrued liabilities, current and non-current insurance claims and long-term debt plus current maturities (“Debt”). The carrying value of cash equivalents, trade and other accounts receivable, accounts payable, current insurance claims and other accrued liabilities approximate fair value as the assets and liabilities are short term in nature. Short and long-term investments are carried at fair value as further described in the “Investments” footnote below. The carrying value of non-current insurance claims approximate fair value as the Company generally has the ability to, but is not required to, settle claims in a short term. The Company’s Debt includes borrowings under the Company’s revolving credit facility plus borrowings relating to capital lease obligations used to finance trailing equipment. The interest rates on borrowings under the revolving credit facility are typically tied to short-term LIBOR rates that adjust monthly and, as such, carrying value approximates fair value. Interest rates on borrowings under capital leases approximate the interest rates that would currently be available to the Company under similar terms and, as such, carrying value approximates fair value.
Trade and Other Receivables
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. Estimates are used to determine the allowance for doubtful accounts for both trade and other receivables and are generally based on specific identification, historical collection results, current economic trends and changes in payment terms. Following is a summary of the activity in the allowance for doubtful accounts for fiscal years ending December 29, 2012, December 31, 2011 and December 25, 2010 (in thousands):

 	  	Balance at
Beginning
of  Period	 	  	Charged to
Costs and
Expenses	 	  	Write-offs,
Net of
Recoveries	 	 	Balance at
End of
Period	 	
For the Fiscal Year Ended December 29, 2012	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Trade receivables	  	$	6,591	  	  	$	4,368	  	  	$	(2,309	) 	 	$	8,650	  	
Other receivables	  	 	7,768	  	  	 	610	  	  	 	(2,766	) 	 	 	5,612	  	
Other non-current receivables	  	 	274	  	  	 	6	  	  	 	(41	) 	 	 	239	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
 	  	$	14,633	  	  	$	4,984	  	  	$	(5,116	) 	 	$	14,501	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
For the Fiscal Year Ended December 31, 2011	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Trade receivables	  	$	5,324	  	  	$	4,503	  	  	$	(3,236	) 	 	$	6,591	  	
Other receivables	  	 	7,499	  	  	 	3,293	  	  	 	(3,024	) 	 	 	7,768	  	
Other non-current receivables	  	 	312	  	  	 	8	  	  	 	(46	) 	 	 	274	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
 	  	$	13,135	  	  	$	7,804	  	  	$	(6,306	) 	 	$	14,633	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
For the Fiscal Year Ended December 25, 2010	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Trade receivables	  	$	5,547	  	  	$	1,395	  	  	$	(1,618	) 	 	$	5,324	  	
Other receivables	  	 	6,727	  	  	 	2,516	  	  	 	(1,744	) 	 	 	7,499	  	
Other non-current receivables	  	 	319	  	  	 	5	  	  	 	(12	) 	 	 	312	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
 	  	$	12,593	  	  	$	3,916	  	  	$	(3,374	) 	 	$	13,135	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Operating Property
Operating property is recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Buildings and improvements are being depreciated over 30 years. Trailing
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
equipment is being depreciated over 7 to 10 years. Information technology hardware and software included in other equipment is generally being depreciated over 3 to 7 years.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price paid over the fair value of the net assets of acquired businesses. The Company has two reporting units within the transportation logistics segment that report goodwill. The Company tests for impairment of goodwill at least annually, typically in the fourth quarter, based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. Fair value of each reporting unit is estimated using a discounted cash flow model. The model includes a number of significant assumptions and estimates including future cash flows and discount rates. If the carrying amount exceeds fair value under the first step of the impairment test, then the second step is performed to measure the amount of any impairment loss. Only the first step of the impairment test was required in 2012 as the estimated fair value of the reporting units significantly exceeded carrying value. Other intangible assets, which consist primarily of non-contractual customer relationships, developed technology, trademarks and non-compete agreements, are included in other assets on the consolidated balance sheets and are amortized over their estimated useful lives, which range from five to ten years.
Income Taxes
Income tax expense is equal to the current year’s liability for income taxes and a provision for deferred income taxes. Deferred tax assets and liabilities are recorded for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Share-Based Payments
The Company’s share-based payment arrangements include restricted stock units (“RSU”), non-vested restricted stock and stock options. The Company estimates the fair value of stock option awards on the date of grant using the Black-Scholes pricing model and recognizes compensation cost for stock option awards expected to vest on a straight-line basis over the requisite service period for the entire award. Forfeitures are estimated at grant date based on historical experience and anticipated employee turnover. The fair value of each share of non-vested restricted stock is based on the fair value of such share on the date of grant and compensation costs for non-vested restricted stock are recognized on a straight-line basis over the requisite service period for the award. The fair value of each RSU is based on the market value of the Company’s Common Stock on the date of grant, discounted for lack of marketability for a minimum post-vesting holding requirement. The compensation costs for RSUs are recognized over the life of the award based on an estimated number of shares that will vest over the life of the award, multiplied by the fair value of an RSU.
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. Diluted earnings per share attributable to Landstar System, Inc. and subsidiary are based on the weighted average number of common shares outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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):

 	  	Fiscal Year	 	
 	  	2012	 	  	2011	 	  	2010	 	
Average number of common shares outstanding	  	 	46,698	  	  	 	47,444	  	  	 	49,523	  	
Incremental shares from assumed exercises of stock options	  	 	179	  	  	 	80	  	  	 	57	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Average number of common shares and common share equivalents outstanding	  	 	46,877	  	  	 	47,524	  	  	 	49,580	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
For the fiscal years ended December 29, 2012, December 31, 2011 and December 25, 2010, there were 321,000, 220,244 and 1,349,313 options outstanding, respectively, to purchase shares of Common Stock excluded from the calculation of diluted earnings per share attributable to Landstar because they were antidilutive. For the fiscal year ended December 29, 2012, RSUs were excluded from the calculation of diluted earnings per share attributable to Landstar because the performance metric requirements for vesting have not been satisfied.
Foreign Currency Translation
Assets and liabilities of the Company’s Canadian operation 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.
(2)    Noncontrolling Interest
In the Company’s 2009 fiscal third quarter, the Company acquired A3 Integration, LLC, now known as LSCSLLC, and its subsidiaries through A3i Acquisition LLC, an entity in which the Company owned 100% of the non-voting, preferred interests and, from the date of acquisition to January 2011, 75% of the voting, common equity interests. A subsidiary of the Company purchased the remaining 25% of the voting, common equity interests in A3i Acquisition LLC in January 2011.
(3)    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 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
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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, mortgage-backed securities and direct obligations of government agencies. Unrealized gains, net of unrealized losses, on the investments in the bond portfolio were $1,407,000 and $786,000 at December 29, 2012 and December 31, 2011, respectively.
The amortized cost and fair values of available-for-sale investments are as follows at December 29, 2012 and December 31, 2011 (in thousands):

 	  	Amortized
Cost	 	  	Gross
Unrealized
Gains	 	  	Gross
Unrealized
Losses	 	  	Fair
Value	 	
December 29, 2012	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Money market investments	  	$	2,865	  	  	$	—	  	  	$	—	  	  	$	2,865	  	
Mortgage-backed securities	  	 	2,175	  	  	 	73	  	  	 	—	  	  	 	2,248	  	
Corporate bonds and direct obligations of government agencies	  	 	69,173	  	  	 	1,294	  	  	 	6	  	  	 	70,461	  	
U.S. Treasury obligations	  	 	16,782	  	  	 	47	  	  	 	1	  	  	 	16,828	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	90,995	  	  	$	1,414	  	  	$	7	  	  	$	92,402	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
December 31, 2011	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Money market investments	  	$	1,989	  	  	$	—	  	  	$	—	  	  	$	1,989	  	
Mortgage-backed securities	  	 	3,017	  	  	 	61	  	  	 	18	  	  	 	3,060	  	
Corporate bonds and direct obligations of government agencies	  	 	51,014	  	  	 	819	  	  	 	126	  	  	 	51,707	  	
U.S. Treasury obligations	  	 	11,682	  	  	 	51	  	  	 	1	  	  	 	11,732	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	67,702	  	  	$	931	  	  	$	145	  	  	$	68,488	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
For those available-for-sale investments with unrealized losses at December 29, 2012 and December 31, 2011, 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	 	
December 29, 2012	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Corporate bonds and direct obligations of government agencies	  	$	3,387	  	  	$	6	  	  	$	—	  	  	$	—	  	  	$	3,387	  	  	$	6	  	
U.S. Treasury obligations	  	 	770	  	  	 	1	  	  	 	—	  	  	 	—	  	  	 	770	  	  	 	1	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	4,157	  	  	$	7	  	  	$	—	  	  	$	—	  	  	$	4,157	  	  	$	7	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
December 31, 2011	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Mortgage-backed securities	  	$	468	  	  	$	18	  	  	$	—	  	  	$	—	  	  	$	468	  	  	$	18	  	
Corporate bonds and direct obligations of government agencies	  	 	6,067	  	  	 	126	  	  	 	—	  	  	 	—	  	  	 	6,067	  	  	 	126	  	
U.S. Treasury obligations	  	 	591	  	  	 	1	  	  	 	—	  	  	 	—	  	  	 	591	  	  	 	1	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	7,126	  	  	$	145	  	  	$	—	  	  	$	—	  	  	$	7,126	  	  	$	145	  	

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Short-term investments include $35,528,000 in current maturities of investments held by the Company’s insurance segment at December 29, 2012. The non-current portion of the bond portfolio of $56,874,000 is included in other assets. The short-term investments, together with $14,634,000 of non-current investments, provide collateral for the $45,146,000 of letters of credit issued to guarantee payment of insurance claims.
Investment income represents the earnings on the insurance segment’s assets. Investment income earned from the assets of the insurance segment are included as a component of operating income as the investment of these assets is critical to providing collateral, liquidity and earnings with respect to the operation of the Company’s insurance programs.
(4)    Income Taxes
The provisions for income taxes consisted of the following (in thousands):

 	  	Fiscal Year	 	
 	  	2012	 	  	2011	 	  	2010	 	
Current:	  	 	 	 	  	 	 	 	  	 	 	 	
Federal	  	$	65,307	  	  	$	53,413	  	  	$	46,164	  	
State	  	 	2,387	  	  	 	3,247	  	  	 	2,199	  	
Canadian	  	 	1,013	  	  	 	1,023	  	  	 	878	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Total current	  	$	68,707	  	  	$	57,683	  	  	$	49,241	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Deferred:	  	 	 	 	  	 	 	 	  	 	 	 	
Federal	  	$	4,117	  	  	$	9,056	  	  	$	801	  	
State	  	 	144	  	  	 	449	  	  	 	(276	) 	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Total deferred	  	 	4,261	  	  	 	9,505	  	  	 	525	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Income taxes	  	$	72,968	  	  	$	67,188	  	  	$	49,766	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities consisted of the following (in thousands):

 	  	Dec. 29,
2012	 	  	Dec. 31,
2011	 	
Deferred tax assets:	  	 	 	 	  	 	 	 	
Receivable valuations	  	$	5,386	  	  	$	4,570	  	
Share-based payments	  	 	4,182	  	  	 	5,843	  	
Self-insured claims	  	 	5,541	  	  	 	5,940	  	
Other	  	 	5,076	  	  	 	5,316	  	
 	  	 	 	 	  	 	 	 	
Total deferred tax assets	  	$	20,185	  	  	$	21,669	  	
 	  	 	 	 	  	 	 	 	
Deferred tax liabilities:	  	 	 	 	  	 	 	 	
Operating property	  	$	39,469	  	  	$	38,040	  	
Goodwill	  	 	7,190	  	  	 	6,721	  	
Other	  	 	2,417	  	  	 	1,538	  	
 	  	 	 	 	  	 	 	 	
Total deferred tax liabilities	  	$	49,076	  	  	$	46,299	  	
 	  	 	 	 	  	 	 	 	
Net deferred tax liability	  	$	28,891	  	  	$	24,630	  	

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes the differences between income taxes calculated at the federal income tax rate of 35% on income before income taxes and the provisions for income taxes (in thousands):

 	  	Fiscal Year	 	
 	  	2012	 	 	2011	 	  	2010	 	
Income taxes at federal income tax rate	  	$	70,962	  	 	$	63,047	  	  	$	47,722	  	
State income taxes, net of federal income tax benefit	  	 	1,465	  	 	 	2,424	  	  	 	695	  	
Meals and entertainment exclusion	  	 	950	  	 	 	972	  	  	 	691	  	
Share-based payments	  	 	(122	) 	 	 	708	  	  	 	550	  	
Other, net	  	 	(287	) 	 	 	37	  	  	 	108	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	
Income taxes	  	$	72,968	  	 	$	67,188	  	  	$	49,766	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	
As of December 29, 2012 and December 31, 2011, the Company had $1,643,000 and $5,069,000, respectively, of net unrecognized tax benefits representing the provision for the uncertainty of certain tax positions plus a component of interest and penalties. Estimated interest and penalties on the provision for the uncertainty of certain tax positions is included in income tax expense. At December 29, 2012 and December 31, 2011 there was $626,000 and $2,214,000, respectively, accrued for estimated interest and penalties related to the uncertainty of certain tax positions. The Company does not currently anticipate any significant increase or decrease to the unrecognized tax benefit during 2013.
The Company files a consolidated U.S. federal income tax return. The Company or its subsidiaries file state tax returns in the majority of the U.S. state tax jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to U.S. federal or state income tax examinations by tax authorities for 2008 and prior years. The Company’s wholly owned Canadian subsidiary, Landstar Canada, Inc., is subject to Canadian income and other taxes.
The following table summarizes the rollforward of the total amounts of gross unrecognized tax benefits for fiscal years 2012 and 2011 (in thousands):

 	  	Fiscal Year	 	
 	  	2012	 	 	2011	 	
Gross unrecognized tax benefits — beginning of the year	  	$	7,364	  	 	$	9,209	  	
Gross increases related to current year tax positions	  	 	373	  	 	 	553	  	
Gross increases related to prior year tax positions	  	 	929	  	 	 	755	  	
Gross decreases related to prior year tax positions	  	 	(5,212	) 	 	 	(2,098	) 	
Settlements	  	 	(246	) 	 	 	(274	) 	
Lapse of statute of limitations	  	 	(879	) 	 	 	(781	) 	
 	  	 	 	 	 	 	 	 	
Gross unrecognized tax benefits — end of the year	  	$	2,329	  	 	$	7,364	  	
 	  	 	 	 	 	 	 	 	
Landstar paid income taxes of $71,033,000 in 2012, $59,442,000 in 2011 and $51,542,000 in 2010.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
(5)    Operating Property
Operating property is summarized as follows (in thousands):

 	  	Dec. 29,
2012	 	  	Dec. 31,
2011	 	
Land	  	$	7,982	  	  	$	7,982	  	
Buildings and improvements	  	 	33,622	  	  	 	33,688	  	
Trailing equipment	  	 	230,213	  	  	 	204,117	  	
Other equipment	  	 	46,135	  	  	 	42,163	  	
 	  	 	 	 	  	 	 	 	
Total operating property, gross	  	 	317,952	  	  	 	287,950	  	
Less accumulated depreciation and amortization	  	 	158,999	  	  	 	145,804	  	
 	  	 	 	 	  	 	 	 	
Total operating property, net	  	$	158,953	  	  	$	142,146	  	
 	  	 	 	 	  	 	 	 	
Included above is $98,054,000 in 2012 and $112,599,000 in 2011 of operating property under capital leases, $82,833,000 and $76,603,000, respectively, net of accumulated amortization. Landstar acquired operating property by entering into capital leases in the amount of $43,077,000 in 2012, $34,044,000 in 2011 and $14,986,000 in 2010.
(6)    Retirement Plan
Landstar sponsors an Internal Revenue Code section 401(k) defined contribution plan for the benefit of full-time employees who have completed one year of service. Eligible employees make voluntary contributions up to 75% of their base salary, subject to certain limitations. Landstar contributes an amount equal to 100% of the first 3% and 50% of the next 2% of such contributions, subject to certain limitations.
The expense for the Company-sponsored defined contribution plan included in selling, general and administrative expense was $1,809,000 in 2012, $1,754,000 in 2011 and $1,663,000 in 2010.
(7)    Debt
Long-term debt is summarized as follows (in thousands):

 	  	Dec. 29,
2012	 	  	Dec. 31,
2011	 	
Capital leases	  	$	74,141	  	  	$	52,342	  	
Revolving credit facility	  	 	40,000	  	  	 	80,000	  	
 	  	 	 	 	  	 	 	 	
 	  	 	114,141	  	  	 	132,342	  	
Less current maturities	  	 	19,016	  	  	 	17,212	  	
 	  	 	 	 	  	 	 	 	
Total long-term debt	  	$	95,125	  	  	$	115,130	  	
 	  	 	 	 	  	 	 	 	
On June 29, 2012, 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 29, 2017, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees. The initial borrowing of $60,000,000 under the Credit Agreement was used to refinance $60,000,000 of outstanding borrowings under the prior credit agreement, which was terminated. Borrowings under the Credit Agreement are unsecured, however, all but two of the
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Company’s subsidiaries guarantee the obligations under the Credit Agreement. All amounts outstanding under the Credit Agreement are payable on June 29, 2017, the maturity date of the Credit Agreement.
Depending upon the specific type of borrowing, borrowings under the Credit Agreement bear interest based on either (a) the prime rate, (b) the federal funds effective rate, (c) the rate at the time offered to JPMorgan Chase Bank, N.A. in the Eurodollar market or (d) the London Interbank Offered Rate, plus a margin that is determined based on the level of the Company’s Leverage Ratio, as defined in the Credit Agreement. The unused portion of the revolving credit facility under the Credit Agreement carries a commitment fee determined based on the level of the Leverage Ratio. The commitment fee for the unused portion of the revolving credit facility under the Credit Agreement ranges from .15% to .35%, based on achieving certain levels of the Leverage Ratio. As of December 29, 2012, the weighted average interest rate on borrowings outstanding was 1.22%.
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 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 25% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors. None of these covenants are presently considered by management to be materially restrictive to the Company’s operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Credit Agreement.
The interest rates on borrowings under the revolving credit facility are typically tied to short-term LIBOR rates that adjust monthly and, as such, carrying value approximates fair value. Interest rates on borrowings under capital leases approximate the interest rates that would currently be available to the Company under similar terms and, as such, carrying value approximates fair value.
Landstar paid interest of $3,156,000 in 2012, $3,133,000 in 2011 and $3,785,000 in 2010.
(8)    Leases
The future minimum lease payments under all noncancelable leases at December 29, 2012, principally for trailing equipment, are shown in the following table (in thousands):

  	  	Capital
Leases	 	  	Operating
Leases	 	
2013	  	$	20,696	  	  	$	2,152	  	
2014	  	 	19,973	  	  	 	1,659	  	
2015	  	 	17,702	  	  	 	1,084	  	
2016	  	 	14,918	  	  	 	574	  	
2017	  	 	4,691	  	  	 	572	  	
Thereafter	  	 	—	  	  	 	588	  	
 	  	 	 	 	  	 	 	 	
 	  	 	77,980	  	  	$	6,629	  	
 	  	 	 	 	  	 	 	 	
Less amount representing interest (2.1% to 5.0%)	  	 	3,839	  	  	 	 	 	
 	  	 	 	 	  	 	 	 	
Present value of minimum lease payments	  	$	74,141	  	  	 	 	 	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Total rent expense, net of sublease income, was $1,042,000 in 2012, $1,238,000 in 2011 and $356,000 in 2010.
(9)    Share-Based Payment Arrangements
As of December 29, 2012, 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”). The Company also has a stock compensation plan for members of its Board of Directors (the “Directors Stock Compensation Plan”). The ESOSIP, 2011 EIP and Directors Stock Compensation Plan are each referred to herein as a “Plan,” and, collectively, as the “Plans.” No further grants can be made under the ESOSIP. Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands):

 	  	Fiscal Years	 	
 	  	2012	 	  	2011	 	  	2010	 	
Total cost of the Plans during the period	  	$	6,149	  	  	$	5,012	  	  	$	4,769	  	
Amount of related income tax benefit recognized during the period	  	 	2,398	  	  	 	983	  	  	 	1,194	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Net cost of the Plans during the period	  	$	3,751	  	  	$	4,029	  	  	$	3,575	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Included in income tax benefits recognized in the fiscal years ended December 29, 2012 and December 31, 2011 were income tax benefits of $771,000 and $78,000, 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.
Stock Options
Options granted under the Plans generally become exercisable in either five equal annual installments commencing on the first anniversary of the date of grant or 100% on the fifth anniversary from the date of grant, subject to acceleration in certain circumstances. All options granted under the Plans expire on the tenth anniversary of the date of grant. Under the Plans, the exercise price of each option equals the fair market value of the Company’s Common Stock on the date of grant.
The fair value of each option grant on its grant date was calculated using the Black-Scholes option pricing model with the following weighted average assumptions for grants made in 2012, 2011 and 2010:

 	  	2012	 	 	2011	 	 	2010	 	
Expected volatility	  	 	34.0	% 	 	 	35.0	% 	 	 	37.0	% 	
Expected dividend yield	  	 	0.420	% 	 	 	0.450	% 	 	 	0.400	% 	
Risk-free interest rate	  	 	0.90	% 	 	 	1.75	% 	 	 	2.50	% 	
Expected lives (in years)	  	 	4.0	  	 	 	4.0	  	 	 	4.2	  	
The Company utilizes historical data, including exercise patterns and employee departure behavior, in estimating the term that options will be outstanding. Expected volatility was based on historical volatility and other factors, such as expected changes in volatility arising from planned changes to the Company’s business, if any. The risk-free interest rate was based on the yield of zero coupon U.S. Treasury bonds for terms that approximated the terms of the options granted. The weighted average grant date fair value of stock options granted during 2012, 2011 and 2010 was $13.99, $12.06 and $12.03, respectively.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes information regarding the Company’s outstanding stock options under the Plans:

 	  	Options Outstanding	 	  	Options Exercisable	 	
 	  	Number of
Options	 	 	Weighted Average
Exercise Price
per Share	 	  	Number of
Options	 	  	Weighted Average
Exercise Price
per Share	 	
Options at December 26, 2009	  	 	2,557,802	  	 	$	36.86	  	  	 	1,225,802	  	  	$	32.43	  	
Granted	  	 	230,250	  	 	$	37.41	  	  	 	 	 	  	 	 	 	
Exercised	  	 	(424,354	) 	 	$	20.73	  	  	 	 	 	  	 	 	 	
Forfeited	  	 	(67,867	) 	 	$	42.64	  	  	 	 	 	  	 	 	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Options at December 25, 2010	  	 	2,295,831	  	 	$	39.73	  	  	 	936,081	  	  	$	38.85	  	
Granted	  	 	273,000	  	 	$	41.79	  	  	 	 	 	  	 	 	 	
Exercised	  	 	(111,355	) 	 	$	34.84	  	  	 	 	 	  	 	 	 	
Forfeited	  	 	(130,700	) 	 	$	41.48	  	  	 	 	 	  	 	 	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Options at December 31, 2011	  	 	2,326,776	  	 	$	40.11	  	  	 	1,110,743	  	  	$	39.74	  	
Granted	  	 	329,500	  	 	$	52.03	  	  	 	 	 	  	 	 	 	
Exercised	  	 	(846,294	) 	 	$	39.47	  	  	 	 	 	  	 	 	 	
Forfeited	  	 	(28,800	) 	 	$	43.23	  	  	 	 	 	  	 	 	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Options at December 29, 2012	  	 	1,781,182	  	 	$	42.56	  	  	 	661,865	  	  	$	40.64	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
The following tables summarize stock options outstanding and exercisable at December 29, 2012:

 	  	Options Outstanding	 	
Range of Exercise Prices Per Share	  	Number
Outstanding	 	  	Weighted Average
Remaining  Contractual
Term (years)	 	  	Weighted Average
Exercise Price
per Share	 	
$14.62 - $ 25.00	  	 	18,019	  	  	 	0.8	  	  	$	18.77	  	
$25.01 - $ 35.00	  	 	55,704	  	  	 	2.1	  	  	$	32.13	  	
$35.01 - $ 40.00	  	 	458,663	  	  	 	6.0	  	  	$	37.89	  	
$40.01 - $ 45.00	  	 	865,696	  	  	 	5.4	  	  	$	42.31	  	
$45.01 - $ 57.83	  	 	383,100	  	  	 	8.4	  	  	$	51.37	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	 	1,781,182	  	  	 	6.1	  	  	$	42.56	  	

 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	Options Exercisable	 	
Range of Exercise Prices Per Share	  	Number
Exercisable	 	  	Weighted Average
Remaining  Contractual
Term (years)	 	  	Weighted Average
Exercise Price
per Share	 	
$14.62 - $ 25.00	  	 	18,019	  	  	 	0.8	  	  	$	18.77	  	
$25.01 - $ 35.00	  	 	55,704	  	  	 	2.1	  	  	$	32.13	  	
$35.01 - $ 40.00	  	 	131,479	  	  	 	4.8	  	  	$	37.11	  	
$40.01 - $ 45.00	  	 	407,963	  	  	 	4.3	  	  	$	43.03	  	
$45.01 - $ 51.99	  	 	48,700	  	  	 	5.0	  	  	$	47.94	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	 	661,865	  	  	 	4.2	  	  	$	40.64	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
At December 29, 2012, the total intrinsic value of options outstanding was $16,134,000. At December 29, 2012, the total intrinsic value of options outstanding and exercisable was $7,270,000. The total intrinsic value of stock options exercised during 2012, 2011 and 2010 was $12,476,000, $1,052,000 and $9,657,000, respectively.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
As of December 29, 2012, there was $6,724,000 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 over a weighted average period of 3.2 years.
Non-vested Restricted Stock
The 2011 EIP provides the Compensation Committee of the Board of Directors with the authority to issues shares of Common Stock of the Company, subject to certain vesting and other restrictions on transfer (“restricted stock”). Shares of restricted stock generally are granted under the 2011 EIP subject to vesting in three year annual installments or 100% on the fifth anniversary of the date of grant and the shares of restricted stock remain subject to forfeiture unless the grantee remains continuously employed with the Company or a subsidiary thereof through the applicable vesting date. The fair value of each share of non-vested restricted stock issued under the Plans is based on the fair value of a share of the Company’s Common Stock on the date of grant.
The following table summarizes information regarding the Company’s outstanding non-vested restricted stock under the Plans:

 	  	Number of
Shares	 	 	Weighted Average
Grant Date Fair
Value	 	
Outstanding at December 26, 2009	  	 	11,500	  	 	$	34.82	  	
Granted	  	 	18,354	  	 	$	42.41	  	
 	  	 	 	 	 	 	 	 	
Outstanding at December 25, 2010	  	 	29,854	  	 	$	39.49	  	
Granted	  	 	22,410	  	 	$	44.82	  	
Vested	  	 	(8,333	) 	 	$	42.14	  	
Forfeited	  	 	(2,938	) 	 	$	37.13	  	
 	  	 	 	 	 	 	 	 	
Outstanding at December 31, 2011	  	 	40,993	  	 	$	42.03	  	
Granted	  	 	4,151	  	 	$	54.20	  	
Vested	  	 	(8,732	) 	 	$	44.35	  	
Forfeited	  	 	(1,693	) 	 	$	45.21	  	
 	  	 	 	 	 	 	 	 	
Outstanding at December 29, 2012	  	 	34,719	  	 	$	42.75	  	
 	  	 	 	 	 	 	 	 	
As of December 29, 2012, there was $799,000 of total unrecognized compensation cost related to non-vested shares of restricted stock granted under the Plans. The unrecognized compensation cost related to these non-vested shares of restricted stock is expected to be recognized over a weighted average period of 2.0 years.
Restricted Stock Units
A restricted stock unit (“RSU”) award issued under the 2011 EIP represents a contractual right to receive one share of the Company’s Common Stock upon achievement of certain performance objectives. RSU awards typically have contractual lives of five years from the date of grant and requirements for continuous employment.
The Company has historically granted stock options and restricted stock as part of its equity incentive plans. On January 2, 2012, the Company granted 113,000 performance related stock awards in the form of RSUs to members of management. The number of RSUs that vest is determined annually, for each year in the five-year period from date of grant, by multiplying the number of RSUs granted by the sum of (a) the average of the
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
percentage change (positive or negative) in operating income and diluted earnings per share in each of the 5 years as compared to operating income and diluted earnings per share reported in the Company’s 2011 fiscal year, plus (b) 5%, rounded to the nearest whole number, less (c) the number of RSUs from that grant that have previously vested. No dividends are paid on RSUs and RSUs have no voting rights. The fair value of an RSU is determined based on the market value of the Company’s Common Stock on the date of grant, discounted for lack of marketability for a minimum post-vesting holding requirement. The Company reports compensation expense over the life of the award based on an estimated number of shares that will vest over the life of the award, multiplied by the fair value of an RSU. The closing market price of a share of the Company’s Common Stock on the grant date was $48.15 as reported on the NASDAQ Global Select Market and the lack of marketability discount rate used for RSU award grants during 2012 was 7%. As of December 29, 2012, 113,000 performance-related RSU awards were outstanding.
The Company recognized approximately $964,000 of share-based compensation expense related to RSU awards in 2012. As of December 29, 2012, there was a maximum of $4.1 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 4.0 years. The amount of future compensation expense to be recognized will be determined based on actual future operating results.
Directors’ Stock Compensation Plan
Upon election or re-election to the Board of Directors for a three year term, outside members of the Board of Directors may receive a grant of such number of restricted shares of the Company’s Common Stock equal to the quotient of $225,000 divided by the fair market value of a share of Common Stock on the date immediately following the date of such Director’s re-election or election to the Board. In 2012, 2011 and 2010, 4,151, 9,510 and 9,954 restricted shares, respectively, were granted to outside Directors upon their re-election to the Board. The restricted shares vest in three equal annual installments on the first three annual anniversary dates of the date of grant. During 2012, 2011 and 2010, $292,000, $242,000 and $98,000, respectively, of compensation cost was recorded for the grant of these restricted shares.
As of December 29, 2012, there were 7,371,358 shares of the Company’s Common Stock reserved for issuance in the aggregate under the ESOSIP and 2011 EIP. As of December 29, 2012, there were 114,808 shares of the Company’s Common Stock reserved for issuance upon the grant of Common Stock under the Directors’ Stock Compensation Plan.
(10)    Equity
On August 16, 2011, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to 1,000,000 shares of its Common Stock from time to time in the open market and in privately negotiated transactions. During its 2012 fourth quarter, the Company completed the purchase of shares authorized for purchase under this program. On July 25, 2012, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to an additional 2,000,000 shares of its Common Stock from time to time in the open market and in privately negotiated transactions. As of December 29, 2012, Landstar is authorized to purchase 1,991,877 shares of its Common Stock under this authorization. No specific expiration date has been assigned to the July 25, 2012 authorization. During 2012, Landstar purchased a total of 524,674 shares of its Common Stock at a total cost of $25,826,000 pursuant to its previously announced stock purchase programs.
The Company has 2,000,000 shares of preferred stock authorized and unissued.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
(11)    Commitments and Contingencies
At December 29, 2012, in addition to the $45,146,000 letters of credit secured by investments, Landstar had $32,754,000 of letters of credit outstanding under the Credit Agreement.
As further described in periodic and current reports previously filed by the Company with the Securities and Exchange Commission (the “SEC”), the Company and certain of its subsidiaries (the “Defendants”) were defendants in a suit (the “Litigation”) brought in the United States District Court for the Middle District of Florida (the “District Court”) by the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and four former BCO Independent Contractors (the “Named Plaintiffs” and, with OOIDA, the “Plaintiffs”) on behalf of all independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (the “BCO Independent Contractors”). The initial complaint in the Litigation was filed on November 1, 2002. The Plaintiffs alleged that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violated certain federal leasing regulations and sought injunctive relief, an unspecified amount of damages and attorneys’ fees. Following a second trial in August 2012 in which all claims against the Defendants were denied, the Litigation was settled in December 2012. Under the terms of the settlement, the Plaintiffs dismissed their remaining claims in the Litigation, each party agreed to bear its own costs and fees in the Litigation, the parties exchanged releases, and OOIDA made a contribution to the BCO Benevolence Fund, Inc., a non-profit corporation founded by the Company to provide financial assistance to BCO Independent Contractors in hardship situations.
Also as further described in periodic and current reports previously filed by the Company with the SEC, in June 2011, Landstar System, Inc. received a Civil Investigative Demand (the “CID”) from the United States Attorney for the Western District of Kentucky (the “U.S. Attorney”) issued pursuant to a complaint (the “Complaint”) filed by a third party under the False Claims Act. The Company cooperated fully with the CID, which requested documents and answers to written interrogatories limited to freight hauled to or from Fort Campbell, Kentucky by certain subsidiaries of the Company and billed to the U.S. government. In November 2012, the Company was informed by the U.S. Attorney of the dismissal of the Complaint and the consent by the U.S. government to such dismissal. The Company believes this matter has been concluded.
On September 23, 2011, a jury sitting in a state court in Cobb County, Georgia, entered a damage award of approximately $40.2 million (such amount, plus pre-judgment interest, post-judgment interest and a portion of plaintiffs’ attorney fees in an amount not yet determined are collectively referred to herein as the “Damage Award”) against Landstar Ranger, Inc., Landstar System Holdings, Inc. and Landstar System, Inc. While a judgment has been entered by the court on the verdict, execution on that judgment is stayed and no judgment has been entered on the pre-judgment interest claims and attorney fee claims due to the pendency of certain post-trial motions. The Damage Award arises out of an accident that occurred in February 2007 involving a BCO Independent Contractor leased to Landstar Ranger, Inc. Under the terms of the commercial trucking insurance program that Landstar had in place in 2007, Landstar retained liability for up to $5 million with respect to the accident giving rise to the Damage Award. Landstar has third party insurance and/or reinsurance policies in place that are expected to provide coverage for all amounts of the Damage Award in excess of such retention, including all related out-of-pocket expenses, such as the costs of an appeal bond, interest and attorney fees comprising the Damage Award that may be entered by the trial court or an appellate court in the future. The Company recorded a $5 million charge representing its self-insured retention in respect of this accident in the consolidated financial results of the Company in the 2007 first quarter. Accordingly, that portion of the Damage Award has been previously recorded by the Company and therefore did not reduce consolidated operating income or net income for the Company’s 2011 or 2012 fiscal years. Under the terms of the Company’s insurance policies, the Company is the primary obligor of the amount of the Damage Award, and as such, the Company has reported a $38.7 million receivable from the third party insurance providers in other receivables and a corresponding liability of
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
the same amount in insurance claims in the consolidated balance sheets at December 29, 2012. The Company and its insurers have filed post-trial motions challenging the Damage Award and seeking a new trial and intend to appeal the Damage Award to the extent necessary following the resolution of those motions. No assurances can be given regarding the outcome of the pending motions or any such appeal, including as to the impact of the Damage Award on the premiums charged by the Company’s third party insurers from time to time for commercial trucking insurance.
The Company is involved in certain claims and pending litigation, including those described herein, arising from the normal conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
(12)    Segment Information
Landstar markets its freight transportation services and supply chain solutions primarily through independent commission sales agents who 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, railroads and independent warehouse capacity providers (“Warehouse Capacity Owners”). Through this network of agents and capacity providers linked together by Landstar’s information technology systems, Landstar operates a transportation services and supply chain solutions business primarily throughout North America with revenue of $2.8 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 transportation services and supply chain 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. Supply chain solutions are based on advanced technology solutions utilizing intellectual property that may be owned by the Company or licensed from third parties. Such solutions as offered by the Company may include integrated multi-modal solutions, outsourced logistics, supply chain engineering and warehousing. Industries serviced by the transportation logistics segment include automotive products, lumber and 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 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. Freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight. Supply chain solutions customers are generally charged fees for the services provided.
The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore insurance subsidiary, and Risk Management Claim Services, Inc. The insurance segment provides risk and claims management services to certain of Landstar’s operating subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
certain of Landstar’s operating subsidiaries. Internal revenue for premiums billed by the insurance segment to the transportation logistics segment is calculated each fiscal period based primarily on an actuarial calculation of historical loss experience and is believed to approximate the cost that would have been incurred by the transportation logistics segment had similar insurance been obtained from an unrelated third party.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates a segment’s performance based on operating income.
No single customer accounted for more than 10% of consolidated revenue in 2012, 2011 or 2010. Substantially all of the Company’s revenue is generated in North America, primarily through customers located in the United States.
The following tables summarize information about the Company’s reportable business segments as of and for the fiscal years ending December 29, 2012, December 31, 2011 and December 25, 2010 (in thousands):

 	  	Transportation
Logistics	 	  	Insurance	 	  	Total	 	
2012	  	 	 	 	  	 	 	 	  	 	 	 	
External revenue	  	$	2,757,559	  	  	$	35,861	  	  	$	2,793,420	  	
Internal revenue	  	 	 	 	  	 	28,446	  	  	 	28,446	  	
Investment income	  	 	 	 	  	 	1,563	  	  	 	1,563	  	
Interest and debt expense	  	 	3,104	  	  	 	 	 	  	 	3,104	  	
Depreciation and amortization	  	 	27,456	  	  	 	 	 	  	 	27,456	  	
Operating income	  	 	172,740	  	  	 	33,113	  	  	 	205,853	  	
Expenditures on long-lived assets	  	 	7,072	  	  	 	 	 	  	 	7,072	  	
Goodwill	  	 	57,470	  	  	 	 	 	  	 	57,470	  	
Capital lease additions	  	 	43,077	  	  	 	 	 	  	 	43,077	  	
Total assets	  	 	708,233	  	  	 	171,188	  	  	 	879,421	  	
2011	  	 	 	 	  	 	 	 	  	 	 	 	
External revenue	  	$	2,614,739	  	  	$	34,343	  	  	$	2,649,082	  	
Internal revenue	  	 	 	 	  	 	27,544	  	  	 	27,544	  	
Investment income	  	 	 	 	  	 	1,705	  	  	 	1,705	  	
Interest and debt expense	  	 	3,112	  	  	 	 	 	  	 	3,112	  	
Depreciation and amortization	  	 	25,814	  	  	 	 	 	  	 	25,814	  	
Operating income	  	 	156,354	  	  	 	26,891	  	  	 	183,245	  	
Expenditures on long-lived assets	  	 	4,337	  	  	 	 	 	  	 	4,337	  	
Goodwill	  	 	57,470	  	  	 	 	 	  	 	57,470	  	
Capital lease additions	  	 	34,044	  	  	 	 	 	  	 	34,044	  	
Total assets	  	 	647,002	  	  	 	161,447	  	  	 	808,449	  	
2010	  	 	 	 	  	 	 	 	  	 	 	 	
External revenue	  	$	2,366,032	  	  	$	34,138	  	  	$	2,400,170	  	
Internal revenue	  	 	 	 	  	 	27,535	  	  	 	27,535	  	
Investment income	  	 	 	 	  	 	1,558	  	  	 	1,558	  	
Interest and debt expense	  	 	3,623	  	  	 	 	 	  	 	3,623	  	
Depreciation and amortization	  	 	24,804	  	  	 	 	 	  	 	24,804	  	
Operating income	  	 	116,512	  	  	 	23,459	  	  	 	139,971	  	
Expenditures on long-lived assets	  	 	27,505	  	  	 	 	 	  	 	27,505	  	
Goodwill	  	 	57,470	  	  	 	 	 	  	 	57,470	  	
Capital lease additions	  	 	14,986	  	  	 	 	 	  	 	14,986	  	
Total assets	  	 	576,334	  	  	 	107,548	  	  	 	683,882	  	
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Landstar System, Inc.:
We have audited the accompanying consolidated balance sheets of Landstar System, Inc. and subsidiary (the Company) as of December 29, 2012 and December 31, 2011, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the fiscal years ended December 29, 2012, December 31, 2011 and December 25, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Landstar System, Inc. and subsidiary as of December 29, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the fiscal years ended December 29, 2012, December 31, 2011 and December 25, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Landstar System, Inc.’s internal control over financial reporting as of December 29, 2012, based on criteria established in  Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 2013, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/S/    KPMG LLP	
February 21, 2013
Jacksonville, Florida
Certified Public Accountants
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
(Unaudited)

 	  	Fourth
Quarter
2012	 	  	Third
Quarter
2012	 	  	Second
Quarter
2012	 	  	First
Quarter
2012	 	
Revenue	  	$	691,256	  	  	$	717,168	  	  	$	735,973	  	  	$	649,023	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Operating income	  	$	49,535	  	  	$	54,379	  	  	$	58,789	  	  	$	43,150	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Income before income taxes	  	$	48,743	  	  	$	53,561	  	  	$	58,019	  	  	$	42,426	  	
Income taxes	  	 	14,765	  	  	 	20,460	  	  	 	22,164	  	  	 	15,579	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Net income	  	$	33,978	  	  	$	33,101	  	  	$	35,855	  	  	$	26,847	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Earnings per common share attributable to Landstar System, Inc. and subsidiary(1)	  	$	0.73	  	  	$	0.71	  	  	$	0.76	  	  	$	0.57	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary(1)	  	$	0.73	  	  	$	0.71	  	  	$	0.76	  	  	$	0.57	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Dividends paid per common share	  	$	0.560	  	  	$	0.060	  	  	$	0.055	  	  	$	0.055	  	

 	  	Fourth
Quarter
2011	 	  	Third
Quarter
2011	 	  	Second
Quarter
2011	 	  	First
Quarter
2011	 	
Revenue	  	$	717,522	  	  	$	684,013	  	  	$	675,561	  	  	$	571,986	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Operating income	  	$	50,950	  	  	$	49,533	  	  	$	48,670	  	  	$	34,092	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Income before income taxes	  	$	50,178	  	  	$	48,798	  	  	$	47,893	  	  	$	33,264	  	
Income taxes	  	 	17,546	  	  	 	18,640	  	  	 	18,295	  	  	 	12,707	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Net income	  	$	32,632	  	  	$	30,158	  	  	$	29,598	  	  	$	20,557	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Less: Net loss attributable to noncontrolling interest	  	 	—	  	  	 	—	  	  	 	—	  	  	 	(62	) 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Net income attributable to Landstar System, Inc. and subsidiary	  	$	32,632	  	  	$	30,158	  	  	$	29,598	  	  	$	20,619	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Earnings per common share attributable to Landstar System, Inc. and subsidiary(1)	  	$	0.70	  	  	$	0.64	  	  	$	0.62	  	  	$	0.43	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary(1)	  	$	0.70	  	  	$	0.64	  	  	$	0.62	  	  	$	0.43	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Dividends paid per common share	  	$	0.055	  	  	$	0.055	  	  	$	0.050	  	  	$	0.050	  	

(1)	Due to the changes in the number of average common shares and common stock equivalents outstanding during the year, the sum of earnings per share amounts for each quarter do not necessarily sum in the aggregate to the earnings per share amounts for the full year.	
 
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Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	
None.
 
Item 9A.	Controls and Procedures	
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, 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 December 29, 2012 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.
In designing and evaluating disclosure controls and procedures, Company management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitation in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.
Internal Control Over Financial Reporting
(a)  Management’s Report on Internal Control over Financial Reporting
Management of Landstar System, Inc. (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act, as amended.
Internal control over financial reporting is a process designed 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. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Management, with the participation of the Company’s principal executive and principal financial officers, assessed the effectiveness of the Company’s internal control over financial reporting as of December 29, 2012. This assessment was performed using the criteria established under the Internal Control-Integrated Framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error or circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and reporting and may not prevent or
 
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detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on the assessment performed using the criteria established by COSO, management has concluded that the Company maintained effective internal control over financial reporting as of December 29, 2012.
KPMG LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K for the fiscal year ended December 29, 2012, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Such report appears immediately below.
(b) Attestation Report of the Registered Public Accounting Firm
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Landstar System, Inc.:
We have audited Landstar System, Inc.’s internal control over financial reporting as of December 29, 2012, based on criteria established in Internal Control — Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Landstar System, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Landstar System, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 29, 2012, based on criteria established in  Internal Control — Integrated Framework  issued by COSO .
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 29, 2012 and December 31, 2011, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the fiscal years ended December 29, 2012, December 31, 2011 and December 25, 2010, and our report dated February 21, 2013, expressed an unqualified opinion on those consolidated financial statements.
/s/    KPMG LLP
February 21, 2013
Jacksonville, Florida
Certified Public Accountants
 
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(c)  Changes in Internal Control Over Financial Reporting
There were no significant changes in the Company’s internal control over financial reporting during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Item 9B.	Other Information	
None
 
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PART III
 
Item 10.	Directors, Executive Officers and Corporate Governance	
The information required by this Item concerning the Directors (and nominees for Directors) and Executive Officers of the Company is set forth under the captions “Election of Directors,” “Directors of the Company,” “Information Regarding Board of Directors and Committees,” and “Executive Officers of the Company” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. The information required by this Item concerning the Company’s Audit Committee and the Audit Committee’s Financial Expert is set forth under the caption “Information Regarding Board of Directors and Committees” and “Report of the Audit Committee” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
The Company has adopted a Code of Ethics and Business Conduct that applies to each of its directors and employees, including its principal executive officer, principal financial officer, controller and all other employees performing similar functions. The Code of Ethics and Business Conduct is available on the Company’s website at  www.landstar.com  under “Investor Relations — Corporate Governance.” The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendments to, or waivers from, a provision or provisions of the Code of Ethics and Business Conduct by posting such information on its website at the web address indicated above.
 
Item 11.	Executive Compensation	
The information required by this Item is set forth under the captions “Compensation of Directors,” “Compensation of Executive Officers,” “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Option Exercises and Stock Vested,” “Outstanding Equity Awards at Fiscal Year End,” “Nonqualified Deferred Compensation,” “Report of the Compensation Committee on Executive Compensation” and “Key Executive Employment Protection Agreements” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
 
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	
The information required by this Item pursuant to Item 201(d) of Regulation S-K is set forth under the caption “Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of this report, and is incorporated by reference herein.
The information required by this Item pursuant to Item 403 of Regulation S-K is set forth under the caption “Security Ownership by Management and Others” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
 
Item 13.	Certain Relationships and Related Transactions, and Director Independence	
None, other than information required to be disclosed under this item in regard to Director Independence, which is set forth under the caption “Independent Directors” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A and incorporated herein by reference.
 
Item 14.	Principal Accounting Fees and Services	
The information required by this item is set forth under the caption “Report of the Audit Committee” and “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
 
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PART IV
 
Item 15.	Exhibits and Financial Statement Schedules	
(a)(1) Financial Statements and Supplementary Data

 	  	Page	 	
Consolidated Balance Sheets	  	 	36	  	
Consolidated Statements of Income	  	 	37	  	
Consolidated Statements of Comprehensive Income	  	 	38	  	
Consolidated Statements of Cash Flows	  	 	39	  	
Consolidated Statements of Changes in Equity	  	 	40	  	
Notes to Consolidated Financial Statements	  	 	41	  	
Report of Independent Registered Public Accounting Firm	  	 	57	  	
(2) Financial Statement Schedules
Financial statement schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
(3) Exhibits

Exhibit
No.	  	Description	
(3)	  	Articles of Incorporation and By-Laws:	
3.1	  	Restated Certificate of Incorporation of the Company dated March 6, 2006, including Certificate of Designation of Junior Participating Preferred Stock dated February 10, 1993. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (Commission File No. 0-21238))	
3.2	  	The Company’s Bylaws, as amended and restated on February 21, 2011. (Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for fiscal year ended December 25, 2010 (Commission File No. 0-21238))	
(4)	  	Instruments defining the rights of security holders, including indentures:	
4.1	  	Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 33-57174))	
4.2	  	Amended and Restated Credit Agreement, dated as of June 29, 2012, among Landstar System Holding, Inc., the Company, the lenders named therein, and JPMorgan Chase Bank, N.A. as Administrative Agent (including exhibits and schedules thereto). (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K filed on July 5, 2012 (Commission File No. 0-21238))	
(10)	  	Material contracts:	
  10.1+	  	Landstar System, Inc. Executive Incentive Compensation Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on April 12, 2012 (Commission File No. 0-21238))	
  10.2+	  	Landstar System, Inc. Supplemental Executive Retirement Plan, as amended and restated as of January 1, 2012 (Incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (Commission File No. 0-21238))	
  10.3+	  	Amended and Restated Landstar System, Inc. 2002 Employee Stock Option and Stock Incentive Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on March 23, 2009 (Commission File No. 0-21238))	
  10.4+	  	Landstar System, Inc. 2011 Equity Incentive Plan, as amended through November 29, 2011 (Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (Commission File No. 0-21238))	
 
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Exhibit
No.	  	Description	
  10.5+	  	Directors Stock Compensation Plan, as amended and restated as of February 22, 2010 (Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 26, 2009 (Commission File No. 0-21238))	
  10.6+	  	Form of Indemnification Agreement between the Company and each of the directors and Executive Officers of the Company. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 2003 (Commission No. 0-21238))	
  10.7+	  	Form of Key Executive Employment Protection Agreement between Landstar System, Inc. and each of the Executive Officers of the Company (Incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (Commission File No. 0-21238))	
  10.8+	  	Form of Amendment to Key Executive Employment Protection Agreement between Landstar System, Inc. and each of the Executive Officers of the Company (Incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for fiscal year ended December 27, 2008 (Commission File No. 0-21238))	
  10.9+	  	Amendment to Key Executive Employment Protection Agreement, dated May 16, 2012, between Landstar System, Inc. and Henry H. Gerkens (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on May 16, 2012 (Commission File No. 0-21238))	
  10.10+*	  	Form of Amendment to Key Executive Employment Protection Agreement between Landstar System, Inc. and each of the Executive Officers of the Company other than Henry H. Gerkens	
  10.11+	  	Letter Agreement, dated July 2, 2002 from Jeffrey C. Crowe to Henry H. Gerkens. (Incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (Commission File No. 0-21238))	
  10.12+	  	Letter Agreement, dated January 3, 2012, between Landstar System, Inc. and Henry H. Gerkens (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on January 3, 2012 (Commission File No. 0-21238))	
  10.13+	  	Amendment, dated January 23, 2013, to the Letter Agreement dated January 2, 2012, between Landstar System, Inc. and Henry H. Gerkens (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on January 25, 2013 (Commission File No. 0-21238))	
  10.14+	  	Performance Related Stock Award Agreement, dated January 23, 2013, between Landstar System, Inc. and Henry H. Gerkens (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on January 25, 2013 (Commission File No. 0-21238))	
  10.15+	  	Consulting Services Agreement, dated as of December 18, 2009, between Landstar System, Inc. and Jeffrey C. Crowe (Incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 26, 2009 (Commission File No. 0-21238))	
(21)	  	Subsidiaries of the Registrant:	
  21.1*	  	List of Subsidiaries of the Registrant	
(23)	  	Consents of experts and counsel:	
  23.1*	  	Consent of KPMG LLP as Independent Registered Public Accounting Firm	
(24)	  	Power of attorney:	
  24.1*	  	Powers of Attorney	
(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	
 
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Exhibit
No.	 	Description	
(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.LAB**	 	XBRL Labels Linkbase Document	
  101.PRE**	 	XBRL Presentation Linkbase Document	
  101.DEF**	 	XBRL Definition Linkbase Document	
 
   +	management contract or compensatory plan or arrangement	
   *	Filed herewith.	
**	Furnished herewith.	
THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO ANY SHAREHOLDER OF THE COMPANY WHO SO REQUESTS IN WRITING, A COPY OF ANY EXHIBITS, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ANY SUCH REQUEST SHOULD BE DIRECTED TO LANDSTAR SYSTEM, INC., ATTENTION: INVESTOR RELATIONS, 13410 SUTTON PARK DRIVE SOUTH, JACKSONVILLE, FLORIDA 32224.
 
66

Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.

Date: February 21, 2013	 	 	 	LANDSTAR SYSTEM, INC.	
 	 	 	 	
 	 	 	 	By:	 	/s/    HENRY H. GERKENS        	
 	 	 	 	 	 	Henry H. Gerkens	
 	 	 	 	 	 	Chairman of the Board, President and
Chief Executive Officer	
 	 	 	 	
 	 	 	 	By:	 	/s/    JAMES B. GATTONI        	
 	 	 	 	 	 	James B. Gattoni	
 	 	 	 	 	 	Executive Vice President and
Chief Financial Officer	
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	  	Title	 	Date	
 	 	 	
/s/    HENRY H. GERKENS          
Henry H. Gerkens	  	Chairman, President and
Chief Executive Officer; Principal Executive Officer	 	February 21, 2013	
 	 	 	
/s/    JAMES B. GATTONI        
James B. Gattoni	  	Executive Vice President and
Chief Financial Officer; Principal Accounting Officer	 	February 21, 2013	
 	 	 	
*
Homaira Akbari	  	Director	 	February 21, 2013	
 	 	 	
*
David G. Bannister	  	Director	 	February 21, 2013	
 	 	 	
*
Jeffrey C. Crowe	  	Director	 	February 21, 2013	
 	 	 	
*
Michael A. Henning	  	Director	 	February 21, 2013	
 	 	 	
*
Diana M. Murphy	  	Director	 	February 21, 2013	
 	 	 	
*
Larry J. Thoele	  	Director	 	February 21, 2013	

 	 	
By:	 	/s/    MICHAEL K. KNELLER        	
 	 	Michael K. Kneller	
 	 	Attorney In Fact*	
 
67

Exhibit 10.10

January 30, 2013
[name of Executive]
13410 Sutton Park Drive South
Jacksonville, Florida 32224
Dear [_______]:
In recognition of evolving “best practices” with respect to long-standing provisions of your Key Executive Employment Protection Agreement (“ KEEPA ”), for good and valuable consideration you hereby agree to the following:
 
 	•	 	Deletion of Modified Single Trigger: Section 3(a) of your KEEPA is amended to delete clause (y) in its entirety.	
 
 	•	 	Deletion of Excise Tax Gross-Up: Sections 3(d) and (e) of your KEEPA are hereby deleted in their entirety.	
 
 	•	 	Imposition of Cap on Severance Payments: Notwithstanding anything in your KEEPA, as amended by this letter, to the contrary, the severance payable to you under the KEEPA in connection with a change in control shall be reduced if and to the extent necessary so that no excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, would be imposed if doing so would result in your retaining a larger after–tax amount, taking into account the income, excise and employment taxes imposed on the payments payable to you and benefits made available to you in connection with the change in control.	
Except as expressly modified by this letter agreement, your KEEPA remains in full force and effect in accordance with its terms.
Please confirm your acceptance of this letter agreement by signing where indicated below.

 	  	Sincerely,
 
James B. Gattoni
Executive Vice President and Chief Financial Officer	
Agreed and Accepted:
 
[name of Executive]
Dated: January __, 2013	  	 	

Exhibit 21.1
LIST OF SUBSIDIARIES OF LANDSTAR SYSTEM, INC.

Name	  	Jurisdiction of
Incorporation	  	% of Voting
Securities Owned	 	
Subsidiary of Landstar System, Inc.	  	 	  	 	 	 	
Landstar System Holdings, Inc.	  	Delaware	  	 	100	  	
Subsidiaries of Landstar System Holdings, Inc.	  	 	  	 	 	 	
Landstar Inway, Inc.	  	Delaware	  	 	100	  	
Landstar Global Logistics, Inc.	  	Delaware	  	 	100	  	
Landstar Ligon, Inc.	  	Delaware	  	 	100	  	
Landstar Ranger, Inc.	  	Delaware	  	 	100	  	
Risk Management Claim Services, Inc.	  	Delaware	  	 	100	  	
Also d/b/a RMCS, Inc. in Alabama and California	  	 	  	 	 	 	
Landstar Transportation Logistics, Inc.	  	Delaware	  	 	100	  	
Also d/b/a Landstar Carrier Services, Inc.	  	 	  	 	 	 	
Landstar Contractor Financing, Inc.	  	Delaware	  	 	100	  	
Signature Insurance Company	  	Cayman Islands,
BWI	  	 	100	  	
Landstar Canada Holdings, Inc.	  	Delaware	  	 	100	  	
Landstar Supply Chain Solutions, Inc.	  	Delaware	  	 	100	  	
Subsidiary of Landstar Supply Chain Solutions, Inc.	  	 	  	 	 	 	
Landstar Supply Chain Solutions LLC	  	Delaware	  	 	100	  	
Subsidiary of Landstar Canada Holdings, Inc.	  	 	  	 	 	 	
Landstar Canada, Inc.	  	Ontario, Canada	  	 	100	  	
Also d/b/a Enterprise Landstar Canada in Quebec	  	 	  	 	 	 	
Also d/b/a Landstar Canada Forwarding	  	 	  	 	 	 	
Subsidiary of Landstar Global Logistics, Inc.	  	 	  	 	 	 	
Landstar Express America, Inc.	  	Delaware	  	 	100	  	
Subsidiary of Landstar Ranger, Inc.	  	 	  	 	 	 	
Landstar Gemini, Inc.	  	Delaware	  	 	100	  	
Also d/b/a Landstar Less Than Truck Load	  	 	  	 	 	 	
Also d/b/a Landstar LTL	  	 	  	 	 	 	

Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Landstar System, Inc.:
We consent to incorporation by reference in the registration statements (No. 333-68454, No. 333-68452, No. 333-105618, No. 333-105619 and No. 333-175890) on Form S-8 of Landstar System, Inc. of our reports dated February 21, 2013, with respect to the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 29, 2012 and December 31, 2011, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the fiscal years ended December 29, 2012, December 31, 2011 and December 25, 2010, and the effectiveness of internal control over financial reporting as of December 29, 2012, which reports appear in the December 29, 2012 annual report on Form 10-K of Landstar System, Inc.
/s/ KPMG LLP
February 21, 2013
Jacksonville, Florida
Certified Public Accountants

Exhibit 24.1
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/29/12
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, and each of them, with full power in each to act without the other, her true and lawful attorney-in-fact and agent, in her name, place and stead to execute on her behalf, as an officer and/or director of Landstar System, Inc. (the “Company”), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2012, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the “SEC”) pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Act”), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as she might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that her said attorneys-in-fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand on the date indicated below.

/s/ Homaira Akbari	
Homaira Akbari	
DATED: January 23, 2013

POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/29/12
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, and each of them, with full power in each to act without the other, his true and lawful attorney-in-fact and agent, in his name, place and stead to execute on his behalf, as an officer and/or director of Landstar System, Inc. (the “Company”), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2012, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the “SEC”) pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Act”), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as he might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that his said attorneys-in-fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date indicated below.

/s/ David G. Bannister	
David G. Bannister	
DATED: January 23, 2013

POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/29/12
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, and each of them, with full power in each to act without the other, her true and lawful attorney-in-fact and agent, in her name, place and stead to execute on her behalf, as an officer and/or director of Landstar System, Inc. (the “Company”), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2012, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the “SEC”) pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Act”), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as she might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that her said attorneys-in-fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand on the date indicated below.

/s/ Diana M. Murphy	
Diana M. Murphy	
DATED: January 23, 2013

POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/29/12
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, and each of them, with full power in each to act without the other, his true and lawful attorney-in-fact and agent, in his name, place and stead to execute on his behalf, as an officer and/or director of Landstar System, Inc. (the “Company”), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2012, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the “SEC”) pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Act”), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as he might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that his said attorneys-in-fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date indicated below.

/s/ Larry J. Thoele	
Larry J. Thoele	
DATED: January 23, 2013

POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/29/12
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, and each of them, with full power in each to act without the other, his true and lawful attorney-in-fact and agent, in his name, place and stead to execute on his behalf, as an officer and/or director of Landstar System, Inc. (the “Company”), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2012, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the “SEC”) pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Act”), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as he might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that his said attorneys-in-fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date indicated below.

/s/ Jeffrey C. Crowe	
Jeffrey C. Crowe	
DATED: January 23, 2013

POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/29/12
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, and each of them, with full power in each to act without the other, his true and lawful attorney-in-fact and agent, in his name, place and stead to execute on his behalf, as an officer and/or director of Landstar System, Inc. (the “Company”), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2012, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the “SEC”) pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Act”), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as he might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that his said attorneys-in-fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date indicated below.

/s/ Michael A. Henning	
Michael A. Henning	
DATED: January 23, 2013

EXHIBIT 31.1
SECTION 302 CERTIFICATION
I, Henry H. Gerkens, certify that:
 
1.	I have reviewed this annual report on Form 10-K 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;
4. 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 15(d)-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: February 21 , 2013

/s/ Henry H. Gerkens	
Henry H. Gerkens	
Chairman of the Board, President and Chief Executive Officer	

EXHIBIT 31.2
SECTION 302 CERTIFICATION
I, James B. Gattoni, certify that:
1. I have reviewed this annual report on Form 10-K 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;
4. 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 15(d)-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: February 21, 2013

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

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 Annual Report of Landstar System, Inc. (the “Company”) on Form 10-K for the period ending December 29, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Henry H. Gerkens, 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.

/s/ Henry H. Gerkens	
Henry H. Gerkens	
Chairman of the Board, President and Chief Executive Officer	
February 21, 2013

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 Annual Report of Landstar System, Inc. (the “Company”) on Form 10-K for the period ending December 29, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James B. Gattoni, 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.

/s/ James B. Gattoni	
James B. Gattoni	
Executive Vice President and Chief Financial Officer	
February 21, 2013