Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended April 1, 2017
OR
 
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the transition period from                      to                     
Commission File Number: 0-21238

 

LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)

 
 	 	 	
Delaware	  	06-1313069	
(State or other jurisdiction of
incorporation or organization)	  	(I.R.S. Employer
Identification No.)	
13410 Sutton Park Drive South, Jacksonville, Florida
(Address of principal executive offices)
32224
(Zip Code)

(904) 398-9400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes  ☑            No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):
Yes  ☑            No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    ☑	  	Accelerated filer    ☐	
Non-accelerated filer      ☐ (Do not check if a smaller reporting company)	  	Smaller reporting company    ☐	
 	  	Emerging growth company    ☐	
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ☐            No  ☑
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of the close of business on April 24, 2017 was 41,924,876.

 

Table of Contents
IndexPART I – Financial Information

Item 1. Financial Statements (unaudited)	  	 	 	 	
 	 	
Consolidated Balance Sheets as of April 1, 2017 and December  31, 2016	  	 	Page 4	 	
 	 	
Consolidated Statements of Income for the Thirteen Weeks Ended April  1, 2017 and March 26, 2016	  	 	Page 5	 	
 	 	
Consolidated Statements of Comprehensive Income for the Thirteen Weeks Ended April 1, 2017 and March 26, 2016	  	 	Page 6	 	
 	 	
Consolidated Statements of Cash Flows for the Thirteen Weeks Ended April 1, 2017 and March 26, 2016	  	 	Page 7	 	
 	 	
Consolidated Statement of Changes in Shareholders’ Equity for the Thirteen Weeks Ended April 1, 2017	  	 	Page 8	 	
 	 	
Notes to Consolidated Financial Statements	  	 	Page 9	 	
 	 	
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	 	Page 15	 	
 	 	
Item 3. Quantitative and Qualitative Disclosures About Market Risk	  	 	Page 24	 	
 	 	
Item 4. Controls and Procedures	  	 	Page 24	 	
PART II – Other Information

Item 1. Legal Proceedings	  	 	Page 25	 	
 	 	
Item 1A. Risk Factors	  	 	Page 25	 	
 	 	
Item  2. Unregistered Sales of Equity Securities and Use of Proceeds	  	 	Page 25	 	
 	 	
Item 6. Exhibits	  	 	Page 26	 	
 	 	
Signatures	  	 	Page 28	 	
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	  	 	 	 	
 
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PART I - FINANCIAL INFORMATION
 
Item 1.	Financial Statements	
The interim consolidated financial statements contained herein reflect all adjustments (all of a normal, recurring nature) which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations, cash flows and changes in shareholders’ equity for the periods presented. They have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the thirteen weeks ended April 1, 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 30, 2017.
These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2016 Annual Report on Form 10-K.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)

 	  	April 1,
2017	 	 	December 31,
2016	 	
ASSETS	  	 	 	 	 	 	 	 	
Current Assets	  	 	 	 	 	 	 	 	
Cash and cash equivalents	  	$	215,468	 	 	$	178,897	 	
Short-term investments	  	 	62,058	 	 	 	66,560	 	
Trade accounts receivable, less allowance of $5,524 and $5,161	  	 	439,510	 	 	 	463,102	 	
Other receivables, including advances to independent contractors, less allowance of $5,706 and $5,523	  	 	23,875	 	 	 	18,567	 	
Other current assets	  	 	8,095	 	 	 	10,281	 	
 	  	 	 	 	 	 	 	 	
Total current assets	  	 	749,006	 	 	 	737,407	 	
 	  	 	 	 	 	 	 	 	
Operating property, less accumulated depreciation and amortization of $195,581 and $190,374	  	 	263,375	 	 	 	272,843	 	
Goodwill	  	 	31,134	 	 	 	31,134	 	
Other assets	  	 	62,627	 	 	 	55,207	 	
 	  	 	 	 	 	 	 	 	
Total assets	  	$	1,106,142	 	 	$	1,096,591	 	

LIABILITIES AND SHAREHOLDERS’ EQUITY	  	 	 	 	 	 	 	 	
Current Liabilities	  	 	 	 	 	 	 	 	
Cash overdraft	  	$	29,373	 	 	$	36,251	 	
Accounts payable	  	 	200,675	 	 	 	219,409	 	
Current maturities of long-term debt	  	 	42,909	 	 	 	45,047	 	
Insurance claims	  	 	28,859	 	 	 	26,121	 	
Accrued income taxes	  	 	19,430	 	 	 	5,437	 	
Other current liabilities	  	 	47,391	 	 	 	48,046	 	
 	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	368,637	 	 	 	380,311	 	
 	  	 	 	 	 	 	 	 	
Long-term debt, excluding current maturities	  	 	82,987	 	 	 	93,257	 	
Insurance claims	  	 	27,847	 	 	 	26,883	 	
Deferred income taxes and other noncurrent liabilities	  	 	52,928	 	 	 	53,583	 	
 	 	 	
Shareholders’ Equity	  	 	 	 	 	 	 	 	
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 67,671,338 and 67,585,675 shares	  	 	677	 	 	 	676	 	
Additional paid-in capital	  	 	201,948	 	 	 	199,414	 	
Retained earnings	  	 	1,541,606	 	 	 	1,512,993	 	
Cost of 25,749,493 and 25,747,541 shares of common stock in treasury	  	 	(1,167,600	) 	 	 	(1,167,437	) 	
Accumulated other comprehensive loss	  	 	(2,888	) 	 	 	(3,089	) 	
 	  	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	573,743	 	 	 	542,557	 	
 	  	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	  	$	1,106,142	 	 	$	1,096,591	 	
 	  	 	 	 	 	 	 	 	
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)
(Unaudited)

 	  	Thirteen Weeks Ended	 	
 	  	April 1,
2017	 	  	March 26,
2016	 	
Revenue	  	$	780,908	 	  	$	711,644	 	
Investment income	  	 	414	 	  	 	380	 	
Costs and expenses:	  	 	 	 	  	 	 	 	
Purchased transportation	  	 	595,523	 	  	 	540,328	 	
Commissions to agents	  	 	63,798	 	  	 	59,092	 	
Other operating costs, net of gains on asset sales/dispositions	  	 	6,897	 	  	 	7,407	 	
Insurance and claims	  	 	14,513	 	  	 	14,213	 	
Selling, general and administrative	  	 	38,323	 	  	 	34,614	 	
Depreciation and amortization	  	 	9,934	 	  	 	8,438	 	
 	  	 	 	 	  	 	 	 	
Total costs and expenses	  	 	728,988	 	  	 	664,092	 	
 	  	 	 	 	  	 	 	 	
Operating income	  	 	52,334	 	  	 	47,932	 	
Interest and debt expense	  	 	1,083	 	  	 	889	 	
 	  	 	 	 	  	 	 	 	
Income before income taxes	  	 	51,251	 	  	 	47,043	 	
Income taxes	  	 	18,868	 	  	 	17,859	 	
 	  	 	 	 	  	 	 	 	
Net income	  	$	32,383	 	  	$	29,184	 	
 	  	 	 	 	  	 	 	 	
Earnings per common share	  	$	0.77	 	  	$	0.69	 	
 	  	 	 	 	  	 	 	 	
Diluted earnings per share	  	$	0.77	 	  	$	0.69	 	
 	  	 	 	 	  	 	 	 	
Average number of shares outstanding:	  	 	 	 	  	 	 	 	
Earnings per common share	  	 	41,879,000	 	  	 	42,395,000	 	
 	  	 	 	 	  	 	 	 	
Diluted earnings per share	  	 	41,998,000	 	  	 	42,489,000	 	
 	  	 	 	 	  	 	 	 	
Dividends per common share	  	$	0.09	 	  	$	0.08	 	
 	  	 	 	 	  	 	 	 	
See accompanying notes to consolidated financial statements.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)

 	  	Thirteen Weeks Ended	 	
 	  	April 1,
2017	 	  	March 26,
2016	 	
Net income	  	$	32,383	 	  	$	29,184	 	
Other comprehensive income:	  	 	 	 	  	 	 	 	
Unrealized holding gains on available-for-sale investments, net of tax expenses of $35 and $100	  	 	64	 	  	 	182	 	
Foreign currency translation gains	  	 	137	 	  	 	583	 	
 	  	 	 	 	  	 	 	 	
Other comprehensive income	  	 	201	 	  	 	765	 	
 	  	 	 	 	  	 	 	 	
Comprehensive income	  	$	32,584	 	  	$	29,949	 	
 	  	 	 	 	  	 	 	 	
See accompanying notes to consolidated financial statements.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

 	  	Thirteen Weeks Ended	 	
 	  	April 1,
2017	 	 	March 26,
2016	 	
OPERATING ACTIVITIES	  	 	 	 	 	 	 	 	
Net income	  	$	32,383	 	 	$	29,184	 	
Adjustments to reconcile net income to net cash provided by operating activities:	  	 	 	 	 	 	 	 	
Depreciation and amortization of operating property	  	 	9,934	 	 	 	8,438	 	
Non-cash interest charges	  	 	64	 	 	 	54	 	
Provisions for losses on trade and other accounts receivable	  	 	1,857	 	 	 	1,494	 	
Gains on sales/disposals of operating property	  	 	(463	) 	 	 	(874	) 	
Deferred income taxes, net	  	 	(709	) 	 	 	2,682	 	
Stock-based compensation	  	 	994	 	 	 	1,100	 	
Changes in operating assets and liabilities:	  	 	 	 	 	 	 	 	
Decrease in trade and other accounts receivable	  	 	16,427	 	 	 	67,842	 	
(Increase) decrease in other assets	  	 	(174	) 	 	 	9,783	 	
Decrease in accounts payable	  	 	(15,424	) 	 	 	(51,674	) 	
Increase in other liabilities	  	 	13,357	 	 	 	1,724	 	
Increase in insurance claims	  	 	3,702	 	 	 	2,285	 	
 	  	 	 	 	 	 	 	 	
NET CASH PROVIDED BY OPERATING ACTIVITIES	  	 	61,948	 	 	 	72,038	 	

INVESTING ACTIVITIES	  	 	 	 	 	 	 	 	
Sales and maturities of investments	  	 	23,155	 	 	 	10,636	 	
Purchases of investments	  	 	(23,678	) 	 	 	(11,190	) 	
Purchases of operating property	  	 	(4,978	) 	 	 	(828	) 	
Proceeds from sales of operating property	  	 	1,665	 	 	 	2,273	 	
 	  	 	 	 	 	 	 	 	
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES	  	 	(3,836	) 	 	 	891	 	

FINANCING ACTIVITIES	  	 	 	 	 	 	 	 	
Decrease in cash overdraft	  	 	(6,878	) 	 	 	(5,536	) 	
Dividends paid	  	 	(3,770	) 	 	 	(3,396	) 	
Proceeds from exercises of stock options	  	 	1,717	 	 	 	105	 	
Taxes paid in lieu of shares issued related to stock-based compensation plans	  	 	(339	) 	 	 	(1,527	) 	
Excess tax benefits from stock-based awards	  	 	—  	 	 	 	149	 	
Purchases of common stock	  	 	—  	 	 	 	(10,228	) 	
Principal payments on capital lease obligations	  	 	(12,408	) 	 	 	(11,315	) 	
 	  	 	 	 	 	 	 	 	
NET CASH USED BY FINANCING ACTIVITIES	  	 	(21,678	) 	 	 	(31,748	) 	

Effect of exchange rate changes on cash and cash equivalents	  	 	137	 	 	 	583	 	

Increase in cash and cash equivalents	  	 	36,571	 	 	 	41,764	 	
Cash and cash equivalents at beginning of period	  	 	178,897	 	 	 	114,520	 	
 	  	 	 	 	 	 	 	 	
Cash and cash equivalents at end of period	  	$	215,468	 	 	$	156,284	 	
 	  	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
Thirteen Weeks Ended April 1, 2017
(Dollars in thousands)
(Unaudited)

 	  	Common Stock	 	  	Additional
Paid-In
Capital	 	  	Retained
Earnings	 	 	Treasury Stock at Cost	 	 	Accumulated
Other
Comprehensive	 	 	Total	 	 	
 	  	Shares	 	  	Amount	 	  	 	 	  	 	 	 	Shares	 	  	Amount	 	 	(Loss) Income	 	 	 	 	 	 	 	 	 	 	
Balance December 31, 2016	  	 	67,585,675	 	  	$	676	 	  	$	199,414	 	  	$	1,512,993	 	 	 	25,747,541	 	  	$	(1,167,437	) 	 	$	(3,089	) 	 	$	542,557	 	 	 	 	 	 	 	
Net income	  	 	 	 	  	 	 	 	  	 	 	 	  	 	32,383	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	32,383	 	 	 	 	 	 	 	
Dividends ($0.09 per share)	  	 	 	 	  	 	 	 	  	 	 	 	  	 	(3,770	) 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	(3,770	) 	 	 	 	 	 	 	
Issuance of stock related to stock-based compensation plans	  	 	85,663	 	  	 	1	 	  	 	1,540	 	  	 	 	 	 	 	1,952	 	  	 	(163	) 	 	 	 	 	 	 	1,378	 	 	 	 	 	 	 	
Stock-based compensation	  	 	 	 	  	 	 	 	  	 	994	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	994	 	 	 	 	 	 	 	
Other comprehensive income	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	201	 	 	 	201	 	 	 	 	 	 	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance April 1, 2017	  	 	67,671,338	 	  	$	677	 	  	$	201,948	 	  	$	1,541,606	 	 	 	25,749,493	 	  	$	(1,167,600	) 	 	$	(2,888	) 	 	$	573,743	 	 	 	 	 	 	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates. Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Certain prior year amounts have been reclassified for consistency with the current year presentation. Significant intercompany accounts have been eliminated in consolidation.
 
(1)	Share-based Payment Arrangements	
As of April 1, 2017, the Company had two employee equity incentive plans, the 2002 employee stock option and stock incentive plan (the “ESOSIP”) and the 2011 equity incentive plan (the “2011 EIP”). No further grants can be made under the ESOSIP. The Company also has a stock compensation plan for members of its Board of Directors, the Amended and Restated 2013 Directors Stock Compensation Plan (as amended and restated as of May 17, 2016, the “2013 DSCP”). 6,000,000 shares of the Company’s common stock were authorized for issuance under the 2011 EIP and 115,000 shares of the Company’s common stock were authorized for issuance under the 2013 DSCP. The ESOSIP, 2011 EIP and 2013 DSCP are each referred to herein as a “Plan,” and, collectively, as the “Plans.” Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands):

 	  	Thirteen Weeks Ended	 	
 	  	April 1,
2017	 	  	March 26,
2016	 	
Total cost of the Plans during the period	  	$	994	 	  	$	1,100	 	
Amount of related income tax benefit recognized during the period	  	 	(1,127	) 	  	 	(471	) 	
 	  	 	 	 	  	 	 	 	
Net cost of the Plans during the period	  	$	(133	) 	  	$	629	 	
 	  	 	 	 	  	 	 	 	
Included in income tax benefits recognized in the thirteen-week periods ended April 1, 2017 and March 26, 2016 were income tax benefits of $221,000 and $113,000, respectively, recognized on disqualifying dispositions of the Company’s common stock by employees who obtained shares of common stock through exercises of incentive stock options. Also included in income tax benefits recognized in the thirteen-week period ended April 1, 2017 were excess tax benefits from stock-based awards of $563,000, as required by the Company’s adoption of Accounting Standards Update 2016-09 during the first fiscal quarter of 2017. See Note 10, Recent Accounting Pronouncements, for further information.
As of April 1, 2017, there were 86,572 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 4,781,030 shares of the Company’s common stock reserved for issuance in the aggregate under the ESOSIP and 2011 EIP.
Restricted Stock Units
The following table summarizes information regarding the Company’s outstanding restricted stock unit (“RSU”) awards under the Plans:

 	  	Number of
RSUs	 	  	Weighted Average
Grant Date Fair
Value	 	
Outstanding at December 31, 2016	  	 	378,238	 	  	$	50.46	 	
Granted	  	 	67,387	 	  	$	76.95	 	
Forfeited	  	 	(56,771	) 	  	$	45.35	 	
 	  	 	 	 	  	 	 	 	
Outstanding at April 1, 2017	  	 	388,854	 	  	$	55.79	 	

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During the thirteen-week period ended April 1, 2017, the Company granted RSUs with a performance condition. RSUs with a performance condition granted on February 2, 2017 may vest on January 31 of 2020, 2021 and 2022 based on growth in operating income and diluted earnings per share from continuing operations as compared to the results from the 2016 fiscal year. Outstanding RSUs at both December 31, 2016 and April 1, 2017 include RSUs with a performance condition and RSUs with a market condition, as further described below.
RSUs with a performance condition vest over a 5 year period from the date of grant based on growth in operating income and diluted earnings per share as compared to a base year, being the year immediately preceding the year of grant. At the time of grant, the target number of common shares available for issuance under the February 2, 2017, January 29, 2016 and January 27, 2015 grants equals 100% of the number of RSUs granted, and the maximum number of common shares available for issuance under the February 2, 2017, January 29, 2016 and January 27, 2015 grants equals 200% of the number of RSUs granted. In the event actual results exceed the target, the number of shares that will be granted will exceed the number of RSUs granted. The maximum number of common shares available for issuance under grants made prior to 2015 equals 100% of the number of RSUs granted. The fair value of an RSU with a performance condition was 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 discount rate due to lack of marketability used for RSU award grants with a performance condition for all periods was 7%. With respect to RSU awards with a performance condition, the Company reports compensation expense over the life of the award based on an estimated number of units that will vest over the life of the award, multiplied by the fair value of an RSU.
On May 1, 2015, the Company granted 20,000 RSUs that vest based on a market condition. These RSUs may vest on April 30 of 2019, 2020 and 2021 based on the Company’s total shareholder return (“TSR”) compound annual growth rate over the vesting periods, adjusted to reflect dividends (if any) paid during such periods and capital adjustments as may be necessary. The target number of common shares available for issuance under the May 1, 2015 grant equals 100% of the number of RSUs granted, and the maximum number of common shares available for issuance under the May 1, 2015 grant equals 150% of the number of RSUs granted. In the event actual results exceed the target TSR compound annual growth rate, the number of shares that will be granted will exceed the number of RSUs granted. The fair value of this RSU award was determined at the time of grant based on the expected achievement of the market condition at the end of each vesting period. With respect to these RSU awards with a market condition, compensation expense is recognized ratably over the requisite service period under an award based on the fair market value of the award at the time of grant, regardless of whether the market condition is satisfied. Previously recognized compensation cost would be reversed, however, if the employee terminated employment prior to completing such requisite service period.
The Company recognized approximately $524,000 and $640,000 of share-based compensation expense related to RSU awards in the thirteen-week periods ended April 1, 2017 and March 26, 2016, respectively. As of April 1, 2017, there was a maximum of $34.1 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 3.3 years. With respect to RSU awards with a performance condition, the amount of future compensation expense to be recognized will be determined based on future operating results.
Stock Options
The following table summarizes information regarding the Company’s outstanding stock options under the Plans:

 	  	Number of
Options	 	 	Weighted Average
Exercise Price
per Share	 	  	Weighted Average
Remaining
Contractual
Term (years)	 	  	Aggregate Intrinsic
Value (000s)	 	
Options outstanding at December 31, 2016	  	 	372,561	 	 	$	48.24	 	  	 	 	 	  	 	 	 	
Exercised	  	 	(92,033	) 	 	$	46.30	 	  	 	 	 	  	 	 	 	
Forfeited	  	 	(600	) 	 	$	54.93	 	  	 	 	 	  	 	 	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Options outstanding at April 1, 2017	  	 	279,928	 	 	$	48.86	 	  	 	4.4	 	  	$	10,299	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Options exercisable at April 1, 2017	  	 	259,228	 	 	$	48.25	 	  	 	4.3	 	  	$	9,695	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
The total intrinsic value of stock options exercised during the thirteen-week periods ended April 1, 2017 and March 26, 2016 was $3,620,000 and $409,000, respectively.
 
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As of April 1, 2017, there was $221,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The unrecognized compensation cost related to these non-vested options is expected to be recognized during 2017.
Non-vested Restricted Stock
The following table summarizes information regarding the Company’s outstanding shares of non-vested restricted stock under the Plans:

 	  	Number of
Shares	 	  	Weighted Average
Grant Date
Fair Value	 	
Outstanding at December 31, 2016	  	 	28,409	 	  	$	58.91	 	
Granted	  	 	25,564	 	  	$	82.80	 	
Vested	  	 	(6,089	) 	  	$	55.47	 	
 	  	 	 	 	  	 	 	 	
Outstanding at April 1, 2017	  	 	47,884	 	  	$	72.10	 	
 	  	 	 	 	  	 	 	 	
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. Shares of non-vested restricted stock are subject to vesting in three equal annual installments either on the first, second and third anniversary of the date of the grant or the third, fourth and fifth anniversary of the date of the grant, or 100% on the first anniversary of the date of the grant.
As of April 1, 2017, there was $2,735,000 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 3.4 years.
 
(2)	Income Taxes	
The provisions for income taxes for both the 2017 and 2016 thirteen-week periods were based on estimated annual effective income tax rates of 38.2% adjusted for discrete events, such as benefits resulting from disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options. The effective income tax rates for the 2017 and 2016 thirteen-week periods were 36.8% and 38.0%, 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-based compensation.
During the first fiscal quarter of 2017, the Company adopted ASU 2016-09, as further described in footnote 10. As required by ASU 2016-09, the Company recognized $563,000 of excess tax benefits on stock-based awards in its provision for income taxes in the 2017 thirteen-week period ended April 1, 2017.
 
(3)	Earnings Per Share	
Earnings per common share are based on the weighted average number of shares outstanding, including outstanding non-vested restricted stock. Diluted earnings per share 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.
The following table provides a reconciliation of the average number of common shares outstanding used to calculate earnings per common share to the average number of common shares and common share equivalents outstanding used to calculate diluted earnings per share (in thousands):

 	  	Thirteen Weeks Ended	 	
 	  	April 1,
2017	 	  	March 26,
2016	 	
Average number of common shares outstanding	  	 	41,879	 	  	 	42,395	 	
Incremental shares from assumed exercises of stock options	  	 	119	 	  	 	94	 	
 	  	 	 	 	  	 	 	 	
Average number of common shares and common share equivalents outstanding	  	 	41,998	 	  	 	42,489	 	
 	  	 	 	 	  	 	 	 	
For each of the thirteen-week periods ended April 1, 2017 and March 26, 2016, no options outstanding to purchase shares of common stock were antidilutive. Outstanding RSUs were excluded from the calculation of diluted earnings per share for all periods because the performance metric requirements or market condition for vesting had not been satisfied.
 
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(4)	Additional Cash Flow Information	
During the 2017 thirteen-week period, Landstar paid income taxes and interest of $5,464,000 and $1,099,000, respectively. During the 2016 thirteen-week period, Landstar paid income taxes and interest of $209,000 and $913,000, respectively. Landstar did not acquire any operating property by entering into capital leases in the 2017 thirteen-week period. Landstar acquired operating property by entering into capital leases in the amount of $11,556,000 in the 2016 thirteen-week period. In addition, during the 2017 thirteen-week period Landstar acquired $945,000 of operating property for which the Company accrued a corresponding liability in accounts payable as of April 1, 2017 related to the completion of a new freight staging and transload facility in Laredo, TX. The Company had unpaid capital expenditure purchases included in accounts payable of $1,988,000 and $5,298,000 at April 1, 2017 and December 31, 2016, respectively. Capital expenditure purchases are recorded as cash outflows from investing activities in the consolidated statement of cash flows in the period in which they are paid.
 
(5)	Segment Information	
The following table summarizes information about the Company’s reportable business segments as of and for the thirteen-week periods ended April 1, 2017 and March 26, 2016 (in thousands):

 	  	Thirteen Weeks Ended	 	
 	  	April 1, 2017	 	  	March 26, 2016	 	
 	  	Transportation
Logistics	 	  	Insurance	 	  	Total	 	  	Transportation
Logistics	 	  	Insurance	 	  	Total	 	
External revenue	  	$	769,348	 	  	$	11,560	 	  	$	780,908	 	  	$	700,100	 	  	$	11,544	 	  	$	711,644	 	
Internal revenue	  	 	 	 	  	 	7,334	 	  	 	7,334	 	  	 	 	 	  	 	7,231	 	  	 	7,231	 	
Investment income	  	 	 	 	  	 	414	 	  	 	414	 	  	 	 	 	  	 	380	 	  	 	380	 	
Operating income	  	 	44,114	 	  	 	8,220	 	  	 	52,334	 	  	 	39,625	 	  	 	8,307	 	  	 	47,932	 	
Expenditures on long-lived assets	  	 	4,978	 	  	 	 	 	  	 	4,978	 	  	 	828	 	  	 	 	 	  	 	828	 	
Goodwill	  	 	31,134	 	  	 	 	 	  	 	31,134	 	  	 	31,134	 	  	 	 	 	  	 	31,134	 	
In the thirteen-week periods ended April 1, 2017 and March 26, 2016, no single customer accounted for more than 10% of the Company’s consolidated revenue.
 
(6)	Other Comprehensive Income	
The following table presents the components of and changes in accumulated other comprehensive income, net of related income taxes, as of and for the thirteen-week period ended April 1, 2017 (in thousands):

 	  	Unrealized
Holding (Losses)
Gains on
Available-for-Sale
Securities	 	  	Foreign Currency
Translation	 	  	Total	 	
Balance as of December 31, 2016	  	$	(71	) 	  	$	(3,018	) 	  	$	(3,089	) 	
Other comprehensive income	  	 	64	 	  	 	137	 	  	 	201	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Balance as of April 1, 2017	  	$	(7	) 	  	$	(2,881	) 	  	$	(2,888	) 	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Amounts reclassified from accumulated other comprehensive income to investment income due to the realization of previously unrealized gains and losses in the accompanying consolidated statements of income were not significant for the thirteen-week period ended April 1, 2017.
 
(7)	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
 
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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 prices, are classified within Level 2. As Level 2 investments include positions that are not traded in active markets, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. Any transfers between levels are recognized as of the beginning of any reporting period. Fair value of the bond portfolio was determined using Level 1 inputs related to U.S. Treasury obligations and money market investments and Level 2 inputs related to investment-grade corporate bonds, asset-backed securities and direct obligations of government agencies. Unrealized losses, net of unrealized gains, on the investments in the bond portfolio were $10,000 and $109,000 at April 1, 2017 and December 31, 2016, respectively.
The amortized cost and fair values of available-for-sale investments are as follows at April 1, 2017 and December 31, 2016 (in thousands):

 	  	 	 	  	Gross	 	  	Gross	 	  	 	 	 	
 	  	Amortized
Cost	 	  	Unrealized
Gains	 	  	Unrealized
Losses	 	  	Fair
Value	 	 	
April 1, 2017	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	
Money market investments	  	$	18,410	 	  	$	—  	 	  	$	—  	 	  	$	18,410	 	 	
Asset-backed securities	  	 	3,847	 	  	 	4	 	  	 	11	 	  	 	3,840	 	 	
Corporate bonds and direct obligations of government agencies	  	 	74,950	 	  	 	191	 	  	 	183	 	  	 	74,958	 	 	
U.S. Treasury obligations	  	 	12,747	 	  	 	—  	 	  	 	11	 	  	 	12,736	 	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	
Total	  	$	109,954	 	  	$	195	 	  	$	205	 	  	$	109,944	 	 	

December 31, 2016	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	
Money market investments	  	$	12,395	 	  	$	—  	 	  	$	—  	 	  	$	12,395	 	 	
Asset-backed securities	  	 	4,027	 	  	 	3	 	  	 	19	 	  	 	4,011	 	 	
Corporate bonds and direct obligations of government agencies	  	 	70,069	 	  	 	150	 	  	 	239	 	  	 	69,980	 	 	
U.S. Treasury obligations	  	 	23,037	 	  	 	2	 	  	 	6	 	  	 	23,033	 	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	
Total	  	$	109,528	 	  	$	155	 	  	$	264	 	  	$	109,419	 	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	
For those available-for-sale investments with unrealized losses at April 1, 2017 and December 31, 2016, the following table summarizes the duration of the unrealized loss (in thousands):

 	  	Less than 12 months	 	  	12 months or longer	 	  	Total	 	
 	  	Fair
Value	 	  	Unrealized
Loss	 	  	Fair
Value	 	  	Unrealized
Loss	 	  	Fair
Value	 	  	Unrealized
Loss	 	
April 1, 2017	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Asset-backed securities	  	$	1,268	 	  	$	2	 	  	$	2,240	 	  	$	9	 	  	$	3,508	 	  	$	11	 	
Corporate bonds and direct obligations of government agencies	  	 	32,190	 	  	 	155	 	  	 	1,377	 	  	 	28	 	  	 	33,567	 	  	 	183	 	
U.S. Treasury obligations	  	 	12,736	 	  	 	11	 	  	 	—  	 	  	 	—  	 	  	 	12,736	 	  	 	11	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	46,194	 	  	$	168	 	  	$	3,617	 	  	$	37	 	  	$	49,811	 	  	$	205	 	

December 31, 2016	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Asset-backed securities	  	$	1,363	 	  	$	6	 	  	$	2,314	 	  	$	13	 	  	$	3,677	 	  	$	19	 	
Corporate bonds and direct obligations of government agencies	  	 	28,809	 	  	 	195	 	  	 	1,367	 	  	 	44	 	  	 	30,176	 	  	 	239	 	
U.S. Treasury obligations	  	 	12,734	 	  	 	6	 	  	 	—  	 	  	 	—  	 	  	 	12,734	 	  	 	6	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	42,906	 	  	$	207	 	  	$	3,681	 	  	$	57	 	  	$	46,587	 	  	$	264	 	

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The Company believes that unrealized losses on investments were primarily caused by rising interest rates rather than changes in credit quality. The Company expects to recover the amortized cost basis of these securities as it does not intend to sell, and does not anticipate being required to sell, these securities before recovery of the cost basis. For these reasons, the Company does not consider the unrealized losses on these securities to be other-than-temporary at April 1, 2017.
 
(8)	Commitments and Contingencies	
Short-term investments include $62,058,000 in current maturities of investments held by the Company’s insurance segment at April 1, 2017. The non-current portion of the bond portfolio of $47,886,000 is included in other assets. The short-term investments, together with $3,163,000 of non-current investments, provide collateral for the $58,699,000 of letters of credit issued to guarantee payment of insurance claims. As of April 1, 2017, Landstar also had $35,599,000 of additional letters of credit outstanding under the Company’s Credit Agreement.
The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
 
(9)	Change in Accounting Estimate for Self-Insured Claims	
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.
The following table summarizes the effect of the increase in the cost of insurance claims resulting from (favorable) unfavorable development of prior year self-insured claims estimates on operating income, net income and earnings per share amounts in the consolidated statements of income for the thirteen-week periods ended April 1, 2017 and March 26, 2016 (in thousands, except per share amounts):

 	 	 	 	 	 	 	 	 	
 	  	Thirteen Weeks Ended	 	
 	  	April 1,
2017	 	  	March 26,
2016	 	
Operating income	  	$	(104	) 	  	$	2,078	 	
Net income	  	 	(64	) 	  	 	1,284	 	
Earnings per share	  	 	—  	 	  	$	0.03	 	
Diluted earnings per share	  	 	—  	 	  	$	0.03	 	
 
(10)	Recent Accounting Pronouncements	
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09— Revenue from Contracts with Customers  (“ASU 2014-09”). ASU 2014-09 is a comprehensive revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. On July 9, 2015, the FASB approved deferring the effective date by one year to December 15, 2017 for annual reporting periods
 
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beginning after that date. The FASB also approved permitting early adoption of the standard, but not before the original effective date of December 15, 2016. ASU 2014-09 is not expected to have a material impact, if any, on the Company’s results of operations, financial position and cash flows. The Company is still evaluating the disclosure requirements under this standard.
In February 2016, the FASB issued Accounting Standards Update 2016-02 –Leases (“ASU 2016-02”). ASU 2016-02 requires a company to recognize a right-of-use asset and lease liability for the obligation to make lease payments measured at the present value of the lease payments for all leases with terms greater than twelve months. Companies are required to use a modified retrospective transition approach to recognize leases at the beginning of the earliest period presented. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods therein, and early adoption is permitted. ASU 2016-02 is not expected to have a material impact on the Company’s financial statements.
In March 2016, the FASB issued Accounting Standards Update 2016-09 –Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting  (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods therein. As such, the Company adopted this guidance during the first quarter of 2017 with an effective date of January 1, 2017. As a result of the adoption, the Company recognized excess tax benefits in the consolidated statement of income of $563,000 for the thirteen-week period ended April 1, 2017. Prior period amounts have not been reclassified.
In June 2016, the FASB issued Accounting Standards Update 2016-13–Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments  (“ASU 2016-13”), which requires measurement and recognition of expected versus incurred credit losses for financial assets held. ASU 2016-13 is effective for annual periods beginning after December  15, 2019, and interim periods therein. The Company is currently evaluating the impact of ASU 2016-13 on its financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the interim consolidated financial statements and notes thereto included herein, and with the Company’s audited financial statements and notes thereto for the fiscal year ended December 31, 2016 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2016 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
The following is a “safe harbor” statement under the Private Securities Litigation Reform Act of 1995. Statements contained in this document that are not based on historical facts are “forward-looking statements.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward-looking statements, such as statements which relate to Landstar’s business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “intention,” “expects,” “plans,” “predicts,” “may,” “should,” “could,” “will,” the negative thereof and similar expressions are intended to identify forward-looking statements. Such statements are by nature subject to uncertainties and risks, including but not limited to: an increase in the frequency or severity of accidents or other claims; unfavorable development of existing accident claims; dependence on third party insurance companies; dependence on independent commission sales agents; dependence on third party capacity providers; decreased demand for transportation services; U.S. foreign trade relationships; substantial industry competition; disruptions or failures in the Company’s computer systems; cyber and other information security incidents; dependence on key vendors; changes in fuel taxes; status of independent contractors; regulatory and legislative changes; regulations focused on diesel emissions and other air quality matters; catastrophic loss of a Company facility; intellectual property; unclaimed property; and other operational, financial or legal risks or uncertainties detailed in Landstar’s Form 10-K for the 2016 fiscal year, described in Item 1A “Risk Factors”, in this report or in Landstar’s other Securities and Exchange Commission filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements and the Company undertakes no obligation to publicly update or revise any forward-looking statements.
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred to herein as “Landstar” or the “Company”), is a worldwide asset-light provider of integrated transportation management solutions. The Company offers services to its customers across multiple transportation modes, with the ability to arrange for individual shipments of freight to enterprise-wide solutions
 
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to manage all of a customer’s transportation needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada, and between the United States and Canada, Mexico and other countries around the world. The Company’s services emphasize safety, information coordination and customer service and are delivered through a network of independent commission sales agents and third party capacity providers linked together by a series of technological applications which are provided and coordinated by the Company. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue.
Landstar markets its integrated transportation management solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. Landstar’s independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under non-exclusive contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers and railroads. Through this network of agents and capacity providers linked together by Landstar’s information technology systems, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $3.2 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.
The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive products, building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military equipment. In addition, the transportation logistics segment provides transportation services to other transportation companies, including third party logistics and less-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Billings for freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight and are referred to as transportation revenue. During the thirteen weeks ended April 1, 2017, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 47%, 46% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3% of the Company’s consolidated revenue in the thirteen-week period ended April 1, 2017.
The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore insurance subsidiary (“Signature”), and Risk Management Claim Services, Inc. This segment provides risk and claims management services to certain of Landstar’s operating subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to certain of Landstar’s operating subsidiaries. Revenue at the insurance segment represents reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk is ultimately borne by Signature. Revenue at the insurance segment represented approximately 1% of the Company’s consolidated revenue for the thirteen-week period ended April 1, 2017.
Changes in Financial Condition and Results of Operations
Management believes the Company’s success principally depends on its ability to generate freight through its network of independent commission sales agents and to safely and efficiently deliver that freight utilizing third party capacity providers. Management believes the most significant factors to the Company’s success include increasing revenue, sourcing capacity and controlling costs, including insurance and claims.
While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s emphasis with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents”). Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents and increasing the revenue opportunities generated by existing independent commission sales agents. During the 2016 fiscal year, 502 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2016 fiscal year, the average revenue generated by a Million Dollar Agent was $5,831,000 and revenue generated by Million Dollar Agents in the aggregate represented 92% of consolidated revenue.
 
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Management monitors business activity by tracking the number of loads (volume) and revenue per load by mode of transportation. Revenue per load can be influenced by many factors other than a change in price. Those factors include the average length of haul, freight type, special handling and equipment requirements, fuel costs and delivery time requirements. For shipments involving two or more modes of transportation, revenue is generally classified by the mode of transportation having the highest cost for the load. The following table summarizes this information by trailer type for truck transportation and by mode for all others:

 	  	Thirteen Weeks Ended	 	
 	  	April 1,
2017	 	 	March 26,
2016	 	
Revenue generated through (in thousands):	  	 	 	 	 	 	 	 	
Truck transportation	  	 	 	 	 	 	 	 	
Truckload:	  	 	 	 	 	 	 	 	
Van equipment	  	$	469,783	 	 	$	428,193	 	
Unsided/platform equipment	  	 	237,177	 	 	 	209,422	 	
Less-than-truckload	  	 	19,857	 	 	 	17,477	 	
 	  	 	 	 	 	 	 	 	
Total truck transportation	  	 	726,817	 	 	 	655,092	 	
Rail intermodal	  	 	22,842	 	 	 	26,108	 	
Ocean and air cargo carriers	  	 	19,590	 	 	 	18,808	 	
Other (1)	  	 	11,659	 	 	 	11,636	 	
 	  	 	 	 	 	 	 	 	
 	  	$	780,908	 	 	$	711,644	 	

Revenue on loads hauled via BCO Independent Contractors included in total truck transportation	  	$	364,908	 	 	$	334,278	 	
 	 	 	
Number of loads:	  	 	 	 	 	 	 	 	
Truck transportation	  	 	 	 	 	 	 	 	
Truckload:	  	 	 	 	 	 	 	 	
Van equipment	  	 	298,066	 	 	 	269,040	 	
Unsided/platform equipment	  	 	111,185	 	 	 	102,742	 	
Less-than-truckload	  	 	29,919	 	 	 	26,898	 	
 	  	 	 	 	 	 	 	 	
Total truck transportation	  	 	439,170	 	 	 	398,680	 	
Rail intermodal	  	 	10,650	 	 	 	12,030	 	
Ocean and air cargo carriers	  	 	5,730	 	 	 	4,560	 	
 	  	 	 	 	 	 	 	 	
 	  	 	455,550	 	 	 	415,270	 	

Loads hauled via BCO Independent Contractors included in total truck transportation	  	 	218,230	 	 	 	197,670	 	
 	 	 	
Revenue per load:	  	 	 	 	 	 	 	 	
Truck transportation	  	 	 	 	 	 	 	 	
Truckload:	  	 	 	 	 	 	 	 	
Van equipment	  	$	1,576	 	 	$	1,592	 	
Unsided/platform equipment	  	 	2,133	 	 	 	2,038	 	
Less-than-truckload	  	 	664	 	 	 	650	 	
Total truck transportation	  	 	1,655	 	 	 	1,643	 	
Rail intermodal	  	 	2,145	 	 	 	2,170	 	
Ocean and air cargo carriers	  	 	3,419	 	 	 	4,125	 	
 	 	 	
Revenue per load on loads hauled via BCO Independent Contractors	  	$	1,672	 	 	$	1,691	 	
 	 	 	
Revenue by capacity type (as a % of total revenue):	  	 	 	 	 	 	 	 	
Truck capacity providers:	  	 	 	 	 	 	 	 	
BCO Independent Contractors	  	 	47	% 	 	 	47	% 	
Truck Brokerage Carriers	  	 	46	% 	 	 	45	% 	
Rail intermodal	  	 	3	% 	 	 	4	% 	
Ocean and air cargo carriers	  	 	3	% 	 	 	3	% 	
Other	  	 	1	% 	 	 	2	% 	
 
(1)	Includes primarily reinsurance premium revenue generated by the insurance segment.	
 
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Also critical to the Company’s success is its ability to secure capacity, particularly truck capacity, at rates that allow the Company to profitably transport customers’ freight. The following table summarizes the number of available truck capacity providers on the dates indicated:

 	  	April 1,
2017	 	  	March 26,
2016	 	
BCO Independent Contractors	  	 	8,772	 	  	 	8,889	 	
Truck Brokerage Carriers:	  	 	 	 	  	 	 	 	
Approved and active (1)	  	 	31,566	 	  	 	29,523	 	
Other approved	  	 	15,889	 	  	 	15,748	 	
 	  	 	 	 	  	 	 	 	
 	  	 	47,455	 	  	 	45,271	 	
 	  	 	 	 	  	 	 	 	
Total available truck capacity providers	  	 	56,227	 	  	 	54,160	 	

Trucks provided by BCO Independent Contractors	  	 	9,370	 	  	 	9,497	 	
 
(1)	Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal quarter end.	
The Company incurs costs that are directly related to the transportation of freight that include purchased transportation and commissions to agents. The Company incurs indirect costs associated with the transportation of freight that include other operating costs and insurance and claims. In addition, the Company incurs selling, general and administrative costs essential to administering its business operations. Management continually monitors all components of the costs incurred by the Company and establishes annual cost budgets which, in general, are used to benchmark costs incurred on a monthly basis.
Purchased transportation represents the amount a BCO Independent Contractor or other third party capacity provider is paid to haul freight. The amount of purchased transportation paid to a BCO Independent Contractor is primarily based on a contractually agreed-upon percentage of revenue generated by loads hauled by the BCO Independent Contractor. Purchased transportation paid to a Truck Brokerage Carrier is based on either a negotiated rate for each load hauled or, to a lesser extent, a contractually agreed-upon fixed rate per load. Purchased transportation paid to railroads is based on either a negotiated rate for each load hauled or a contractually agreed-upon fixed rate per load. Purchased transportation paid to air cargo carriers is generally based on a negotiated rate for each load hauled and purchased transportation paid to ocean cargo carriers is generally based on contractually agreed-upon fixed rates. Purchased transportation as a percentage of revenue for truck brokerage, rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor and air cargo services. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases as a percentage of consolidated revenue in proportion to changes in the percentage of consolidated revenue generated through BCO Independent Contractors and other third party capacity providers and external revenue from the insurance segment, consisting of reinsurance premiums. Purchased transportation as a percent of revenue also increases or decreases in relation to the availability of truck brokerage capacity and with changes in the price of fuel on revenue generated by Truck Brokerage Carriers. The Company passes 100% of fuel surcharges billed to customers for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. These fuel surcharges are excluded from revenue and the cost of purchased transportation. Purchased transportation costs are recognized upon the completion of freight delivery.
Commissions to agents are based on contractually agreed-upon percentages of revenue or net revenue, defined as revenue less the cost of purchased transportation, or net revenue less a contractually agreed upon percentage of revenue retained by Landstar. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the various modes of transportation and reinsurance premiums and with changes in net revenue margin, defined as net revenue divided by revenue, on services provided by Truck Brokerage Carriers, railroads, air cargo carriers and ocean cargo carriers. Commissions to agents are recognized upon the completion of freight delivery.
The Company defines gross profit as revenue less the cost of purchased transportation and commissions to agents. Gross profit divided by revenue is referred to as gross profit margin. The Company’s operating margin is defined as operating income divided by gross profit.
In general, gross profit margin on revenue generated by BCO Independent Contractors represents a fixed percentage of revenue due to the nature of the contracts that pay a fixed percentage of revenue to both the BCO Independent Contractors and independent commission sales agents. For revenue generated by Truck Brokerage Carriers, gross profit margin is either fixed or variable as a percent of revenue, depending on the contract with each individual independent commission sales agent. Under certain contracts with independent commission sales agents, the Company retains a fixed percentage of revenue and the agent retains the amount remaining less the cost of purchased transportation (the “retention contracts”). Gross profit margin on revenue generated by railroads, air cargo carriers, ocean cargo
 
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carriers and Truck Brokerage Carriers, other than those under retention contracts, is variable in nature as the Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these type of loads. Approximately 54% of the Company’s consolidated revenue in the thirteen-week period ended April 1, 2017 was generated under contracts that have a fixed gross profit margin while 46% was under contracts that have a variable gross profit margin.
Maintenance costs for Company-provided trailing equipment and BCO Independent Contractor recruiting and qualification costs are the largest components of other operating costs. Also included in other operating costs are trailer rental costs, the provision for uncollectible advances and other receivables due from BCO Independent Contractors and independent commission sales agents and gains/losses, if any, on sales of Company-owned trailing equipment.
With respect to insurance and claims cost, potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. For commercial trucking claims, Landstar retains liability up to $5,000,000 per occurrence. In addition, for commercial trucking claims incurred on or after May 1, 2016 through April 30, 2017, the Company retains liability up to an additional $700,000 in the aggregate on any claims exceeding its $5,000,000 per occurrence self-insured retention. The Company also retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on Landstar’s cost of insurance and claims and its results of operations.
During the thirteen-week period ended April 1, 2017, employee compensation and benefits accounted for approximately seventy percent of the Company’s selling, general and administrative costs.
Depreciation and amortization primarily relate to depreciation of trailing equipment and information technology hardware and software.
The following table sets forth the percentage relationship of purchased transportation and commissions to agents, both being direct costs, to revenue and indirect costs as a percentage of gross profit for the periods indicated:

 	  	Thirteen Weeks Ended	 	
 	  	April 1,
2017	 	 	March 26,
2016	 	
Revenue	  	 	100.0	% 	 	 	100.0	% 	
 	 	 	
Purchased transportation	  	 	76.3	 	 	 	75.9	 	
Commissions to agents	  	 	8.2	 	 	 	8.3	 	

Gross profit margin	  	 	15.6	% 	 	 	15.8	% 	

Gross profit	  	 	100.0	% 	 	 	100.0	% 	
Investment income	  	 	0.3	 	 	 	0.3	 	
Indirect costs and expenses:	  	 	 	 	 	 	 	 	
Other operating costs, net of gains on asset sales/dispositions	  	 	5.7	 	 	 	6.6	 	
Insurance and claims	  	 	11.9	 	 	 	12.7	 	
Selling, general and administrative	  	 	31.5	 	 	 	30.8	 	
Depreciation and amortization	  	 	8.2	 	 	 	7.5	 	
 	  	 	 	 	 	 	 	 	
Total costs and expenses	  	 	57.3	 	 	 	57.6	 	
 	  	 	 	 	 	 	 	 	
Operating margin	  	 	43.0	% 	 	 	42.7	% 	
 	  	 	 	 	 	 	 	 	
Management believes that a discussion of indirect costs as a percentage of gross profit is useful and meaningful to potential investors for the following principal reasons: (1) disclosure of these relative measures (i.e., each indirect operating cost line item as a percentage of gross profit) allows investors to better understand the underlying trends in the Company’s results of operations; (2) due to the generally fixed nature of these indirect costs (other than insurance and claims costs), these relative measures are meaningful to investors’ evaluations of the Company’s management of its indirect costs attributable to operations; (3) management considers this financial
 
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information in its decision-making, such as budgeting for infrastructure, trailing equipment and selling, general and administrative costs; and (4) this information facilitates comparisons by investors of the Company’s results to the results of other non-asset or asset-light companies in the transportation and logistics services industry who report “net revenue” in Management Discussion and Analysis, which represents revenue less the cost of purchased transportation. The difference between the Company’s use of the term “gross profit” and use of the term “net revenue” by other companies in the transportation and logistics services industry is due to the direct cost of commissions to agents under the Landstar business model, whereas other companies in this industry generally have no commissions to agents.
Also, as previously mentioned, the Company reports two operating segments: the transportation logistics segment and the insurance segment. External revenue at the insurance segment, representing reinsurance premiums, has historically been relatively consistent on a year-over-year basis at 2% or less of consolidated revenue and generally corresponds directly with the number of trucks provided by BCO Independent Contractors. The discussion of indirect cost line items in Management’s Discussion and Analysis of Financial Condition and Results of Operations considers the Company’s costs on a consolidated basis rather than on a segment basis. Management believes this presentation format is the most appropriate to assist users of the financial statements in understanding the Company’s business for the following reasons: (1) the insurance segment has no other operating costs; (2) discussion of insurance and claims at either segment without reference to the other may create confusion amongst investors and potential investors due to intercompany arrangements and specific deductible programs that affect comparability of financial results by segment between various fiscal periods but that have no effect on the Company from a consolidated reporting perspective; (3) selling, general and administrative costs of the insurance segment comprise less than 10% of consolidated selling, general and administrative costs and have historically been relatively consistent on a year-over-year basis; and (4) the insurance segment has no depreciation and amortization.
THIRTEEN WEEKS ENDED APRIL 1, 2017 COMPARED TO THIRTEEN WEEKS ENDED MARCH 26, 2016
Revenue for the 2017 thirteen-week period was $780,908,000, an increase of $69,264,000, or 10%, compared to the 2016 thirteen-week period. Transportation revenue increased $69,248,000, or 10%. The increase in transportation revenue was attributable to an increased number of loads hauled of approximately 10%, while revenue per load was approximately equal to the prior year period. Reinsurance premiums were $11,560,000 and $11,544,000 for the 2017 and 2016 thirteen-week periods, respectively.
Truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers (together, the “third party truck capacity providers”) for the 2017 thirteen-week period was $726,817,000, or 93% of total revenue, an increase of $71,725,000, or 11%, compared to the 2016 thirteen-week period. The number of loads hauled by third party truck capacity providers increased approximately 10% in the 2017 thirteen-week period compared to the 2016 thirteen-week period, and revenue per load increased approximately 1% compared to the 2016 thirteen-week period. The increases in the number of loads hauled via truck on van and unsided/platform equipment and less-than-truckload loadings compared to the 2016 thirteen-week period were all due to a broad-based increase in demand across many customers and industries for Landstar’s various truck service offerings. The increase in revenue per load on loads hauled via truck of 1% was due to an increase in the percentage of revenue contributed by heavy/specialized equipment, which typically has a higher revenue per load, an increase in heavy/specialized revenue per load and the impact of higher diesel fuel costs on loads hauled via Truck Brokerage Carriers, partially offset by the impact of a 1% decrease in revenue per load on loads hauled by van equipment. Fuel surcharges billed to customers on revenue generated by BCO Independent Contractors are excluded from revenue. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $15,062,000 and $11,988,000 in the 2017 and 2016 thirteen-week periods, respectively. It should be noted that many customers of truck brokerage services require a single all-in rate that does not separately identify fuel surcharge. Accordingly, the overall impact of changes in fuel prices on revenue and revenue per load on loads hauled via truck is likely to be greater than that indicated.
Transportation revenue generated by rail intermodal, air cargo and ocean cargo carriers (collectively, the “multimode capacity providers”) for the thirteen-week period ended April 1, 2017, was $42,432,000, or 5% of total revenue, a decrease of $2,484,000, or 6%, compared to the 2016 thirteen-week period. The number of loads hauled by multimode capacity providers in the 2017 thirteen-week period decreased approximately 1% compared to the 2016 thirteen-week period and revenue per load on revenue generated by multimode capacity providers decreased approximately 4% over the same period. The decrease in loads hauled by multimode capacity providers was primarily due to an 11% decrease in rail intermodal loads, entirely attributable to decreased loadings at two specific agencies, partially offset by a 26% increase in loads hauled by air and ocean cargo carriers. The 26% increase in loads hauled by air and ocean cargo carriers was broad-based across many customers. While revenue per load on loads hauled by multimode capacity providers decreased for all modes, the decrease of 4% was primarily driven by a decrease in revenue per load generated by ocean cargo carriers. Also, revenue per load on revenue generated by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.
 
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Purchased transportation was 76.3% and 75.9% of revenue in the 2017 and 2016 thirteen-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased rate of purchased transportation paid to Truck Brokerage Carriers. Commissions to agents were 8.2% and 8.3% of revenue in the 2017 and 2016 thirteen-week periods, respectively. The decrease in commissions to agents as a percentage of revenue was primarily attributable to a decreased net revenue margin on revenue generated by Truck Brokerage Carriers.
Investment income was $414,000 and $380,000 in the 2017 and 2016 thirteen-week periods, respectively.
Other operating costs decreased $510,000 in the 2017 thirteen-week period compared to the 2016 thirteen-week period and represented 5.7% of gross profit in the 2017 period compared to 6.6% of gross profit in the 2016 period. The decrease in other operating costs compared to the prior year was primarily due to decreased trailing equipment maintenance costs due to a lower average age of the Company-owned trailer fleet, partially offset by decreased gains on sales of used trailing equipment. The decrease in other operating costs as a percentage of gross profit was caused by the decrease in other operating costs and the effect of increased gross profit.
Insurance and claims increased $300,000 in the 2017 thirteen-week period compared to the 2016 thirteen-week period and represented 11.9% of gross profit in the 2017 period compared to 12.7% of gross profit in the 2016 period. The increase in insurance and claims expense compared to prior year was due to increased severity of current year claims in the 2017 period and increased insurance premiums on the Company’s commercial trucking liability coverage, partially offset by net favorable development of prior years’ claims in the 2017 period. Favorable development of prior years’ claims was $104,000 in the 2017 thirteen-week period, while unfavorable development of prior years’ claims was $2,078,000 in the 2016 thirteen-week period. The decrease in insurance and claims as a percent of gross profit was caused by the effect of increased gross profit, partially offset by the increase in insurance and claims costs.
Selling, general and administrative costs increased $3,709,000 in the 2017 thirteen-week period compared to the 2016 thirteen-week period and represented 31.5% of gross profit in the 2017 period compared to 30.8% of gross profit in the 2016 period. The increase in selling, general and administrative costs compared to prior year was attributable to an increased provision for bonuses under the Company’s incentive compensation plan and increased professional fees. The increase in selling, general and administrative costs as a percent of gross profit was due primarily to the increase in selling, general and administrative costs, partially offset by the effect of increased gross profit.
Depreciation and amortization increased $1,496,000 in the 2017 thirteen-week period compared to the 2016 thirteen-week period and represented 8.2% of gross profit in the 2017 period compared to 7.5% of gross profit in the 2016 period. The increase in depreciation and amortization expenses was due to an increased number of owned trailers in response to increased customer demand for the Company’s drop and hook services and a lower average age of the trailer fleet during the 2017 period as compared to the 2016 thirteen-week period. The increase in depreciation and amortization as a percentage of gross profit was primarily due to the increased depreciation costs, partially offset by the effect of increased gross profit.
Interest and debt expense in the 2017 thirteen-week period increased $194,000 compared to the 2016 thirteen-week period. The increase in interest and debt expense was primarily attributable to increased interest related to capital lease obligations as the Company increased its number of owned trailers in response to customer demand.
The provisions for income taxes for both the 2017 and 2016 thirteen-week periods were based on estimated annual effective income tax rates of 38.2%, adjusted for discrete events, such as benefits resulting from disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options. The effective income tax rates for the 2017 and 2016 thirteen-week periods were 36.8% and 38.0%, 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. The effective income tax rate in the 2017 thirteen-week period of 36.8% was less than the 38.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements resulting from the Company’s adoption of ASU 2016-09 during the first fiscal quarter of 2017 and disqualifying dispositions of the Company’s common stock by employees who obtained the stock through the exercises of incentive stock options in the 2017 period. The effective income tax rate in the 2016 thirteen-week period of 38.0% was less than the 38.2% estimated annual effective income tax rate primarily due to disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options in the 2016 period.
Net income was $32,383,000, or $0.77 per common share ($0.77 per diluted share), in the 2017 thirteen-week period. Net income was $29,184,000, or $0.69 per common share ($0.69 per diluted share), in the 2016 thirteen-week period.
 
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CAPITAL RESOURCES AND LIQUIDITY
Working capital and the ratio of current assets to current liabilities were $380,369,000 and 2.0 to 1, respectively, at April 1, 2017, compared with $357,096,000 and 1.9 to 1, respectively, at December 31, 2016. Landstar has historically operated with current ratios within the range of 1.5 to 1 to 2.0 to 1. Cash provided by operating activities was $61,948,000 in the 2017 thirteen-week period compared with $72,038,000 in the 2016 thirteen-week period. The decrease in cash flow provided by operating activities was primarily attributable to the timing of collections of trade receivables.
The Company declared and paid $0.09 per share, or $3,770,000 in the aggregate, in cash dividends during the thirteen-week period ended April 1, 2017. The Company declared and paid $0.08 per share, or $3,396,000 in the aggregate, in cash dividends during the thirteen-week period ended March 26, 2016. During the thirteen-week period ended April 1, 2017, the Company did not purchase any shares of its common stock. As of April 1, 2017, the Company may purchase up to 1,036,125 shares of its common stock under its authorized stock purchase program. Long-term debt, including current maturities, was $125,896,000 at April 1, 2017, $12,408,000 lower than at December 31, 2016.
Shareholders’ equity was $573,743,000, or 82% of total capitalization (defined as long-term debt including current maturities plus equity), at April 1, 2017, compared to $542,557,000, or 80% of total capitalization, at December 31, 2016. The increase in equity was primarily a result of net income, partially offset by dividends declared by the Company in the 2017 thirteen-week period.
On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on June 2, 2021, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing amount of $400,000,000. The Company’s prior credit agreement was terminated on June 2, 2016.
The Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness. The Company is required to, among other things, maintain a minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage Ratio, as defined in the Credit Agreement, below a specified maximum. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the amount of such cash dividends and other distributions to stockholders to the extent that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event that, among other things, a person or group acquires 35% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors or the directors cease to consist of a majority of Continuing Directors, as defined in the Credit Agreement. None of these covenants are presently considered by management to be materially restrictive to the Company’s operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Credit Agreement.
At April 1, 2017, the Company had no borrowings outstanding and $35,599,000 of letters of credit outstanding under the Credit Agreement. At April 1, 2017, there was $214,401,000 available for future borrowings under the Credit Agreement. In addition, the Company has $58,699,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments totaling $65,221,000 at April 1, 2017. Investments, all of which are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Fair value of investments is based primarily on quoted market prices. See Notes to Consolidated Financial Statements included herein for further discussion on measurement of fair value of investments.
Historically, the Company has generated sufficient operating cash flow to meet its debt service requirements, fund continued growth, both organic and through acquisitions, complete or execute share purchases of its common stock under authorized share purchase programs, pay dividends and meet working capital needs. As an asset-light provider of integrated transportation management solutions, the Company’s annual capital requirements for operating property are generally for trailing equipment and information technology hardware and software. In addition, a significant portion of the trailing equipment used by the Company is provided by third party capacity providers, thereby reducing the Company’s capital requirements. During the 2017 thirteen-week period, the Company purchased $4,978,000 of operating property. Included in the $4,978,000 of purchases of operating property during the 2017 thirteen-week period is $4,255,000 related to a new freight staging and transload facility in Laredo, Texas for which the Company accrued a corresponding liability in accounts payable as of December 31, 2016. Landstar also acquired $945,000 of operating property relating to the completion of
 
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the Laredo property for which the Company accrued a corresponding liability in accounts payable as of April 1, 2017. Landstar anticipates acquiring either by purchase or lease financing during the remainder of fiscal year 2017 approximately $42,000,000 in operating property, consisting primarily of new trailing equipment to replace older trailing equipment and information technology equipment.
Management believes that cash flow from operations combined with the Company’s borrowing capacity under the Credit Agreement will be adequate to meet Landstar’s debt service requirements, fund continued growth, both internal and through acquisitions, pay dividends, complete the authorized share purchase program and meet working capital needs.
LEGAL MATTERS
The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 April 1, 2017 is appropriate, a prolonged period of low or no economic growth may adversely affect the collection of these receivables. In addition, liquidity concerns and/or unanticipated bankruptcy proceedings at any of the Company’s larger customers in which the Company is carrying a significant receivable could result in an increase in the provision for uncollectible receivables and have a significant impact on the Company’s results of operations in a given quarter or year. However, it is not expected that an uncollectible accounts receivable resulting from an individual customer would have a significant impact on the Company’s financial condition. Conversely, a more robust economic environment or the recovery of a previously provided for uncollectible receivable from an individual customer may result in the realization of some portion of the estimated uncollectible receivables.
Landstar provides for the estimated costs of self-insured claims primarily on an actuarial basis. The amount recorded for the estimated liability for claims incurred is based upon the facts and circumstances known on the applicable balance sheet date. The ultimate resolution of these claims may be for an amount greater or less than the amount estimated by management. The Company continually revises its existing claim estimates as new or revised information becomes available on the status of each claim. Historically, the Company has experienced both favorable and unfavorable development of prior years’ claims estimates. During the 2017 and 2016 thirteen-week periods, insurance and claims costs included $104,000 of net favorable and $2,078,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims reserve at April 1, 2017.
The Company utilizes certain income tax planning strategies to reduce its overall cost of income taxes. If the Company were to be subject to an audit, it is possible that certain strategies might be disallowed resulting in an increased liability for income taxes. Certain of these tax planning strategies result in a level of uncertainty as to whether the related tax positions taken by the Company would result in a recognizable benefit. The Company has provided for its estimated exposure attributable to such tax positions due to the corresponding level of uncertainty with respect to the amount of income tax benefit that may ultimately be realized. Management believes that the provision for liabilities resulting from the uncertainty in certain income tax positions is appropriate. To date, the Company has not experienced an examination by governmental revenue authorities that would lead management to believe that the Company’s past provisions for exposures related to the uncertainty of such income tax positions are not appropriate.
Significant variances from management’s estimates for the amount of uncollectible receivables, the ultimate resolution of self-insured claims and the provision for uncertainty in income tax positions could each be expected to positively or negatively affect Landstar’s earnings in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations.
 
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EFFECTS OF INFLATION
Management does not believe inflation has had a material impact on the results of operations or financial condition of Landstar in the past five years. However, inflation in excess of historic trends might have an adverse effect on the Company’s results of operations in the future.
SEASONALITY
Landstar’s operations are subject to seasonal trends common to the trucking industry. Results of operations for the quarter ending in March are typically lower than for the quarters ending June, September and December.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates as a result of its financing activities, primarily its borrowings on its revolving credit facility, and investing activities with respect to investments held by the insurance segment.
On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on June 2, 2021, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing amount of $400,000,000.
Depending upon the specific type of borrowing, borrowings under the Credit Agreement bear interest based on either (a) the prime rate, (b) the Federal Reserve Bank of New York rate plus 0.5% or (c) the London Interbank Offered Rate, plus 1.25%. As of April 1, 2017 and during the entire 2017 first quarter, the Company had no borrowings outstanding under the Credit Agreement.
Long-term investments, all of which are available-for-sale and are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Assuming that the long-term portion of investments remains at $47,886,000, the balance at April 1, 2017, a hypothetical increase or decrease in interest rates of 100 basis points would not have a material impact on future earnings on an annualized basis. Short-term investments consist of short-term investment-grade instruments and the current maturities of investment-grade corporate bonds and U.S. Treasury obligations. Accordingly, any future interest rate risk on these short-term investments would not be material to the Company’s operating results.
Assets and liabilities of the Company’s Canadian operations are translated from their functional currency to U.S. dollars using exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average monthly exchange rates during the period. Adjustments resulting from the translation process are included in accumulated other comprehensive income. Transactional gains and losses arising from receivable and payable balances, including intercompany balances, in the normal course of business that are denominated in a currency other than the functional currency of the operation are recorded in the statements of income when they occur. The assets held at the Company’s Canadian subsidiary at April 1, 2017 were, as translated to U.S. dollars, approximately 1% of total consolidated assets. Accordingly, any translation gain or loss related to the Canadian operation would not be material.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of April 1, 2017 to provide reasonable assurance that information required to be disclosed by the Company in reports that it filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended April 1, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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In designing and evaluating controls and procedures, Company management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitation in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
Item 1A. Risk Factors
For a discussion identifying additional risk factors and other important factors that could cause actual results to differ materially from those anticipated, see the discussions under Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” in this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Company
The Company did not purchase any shares of its common stock during the period from January 1, 2017 to April 1, 2017, the Company’s first fiscal quarter.
On May 19, 2015, the Landstar System, Inc. Board of Directors authorized the Company to increase the number of shares of the Company’s common stock that the Company is authorized to purchase from time to time in the open market and in privately negotiated transactions under a previously announced purchase program to 3,000,000 shares. As of April 1, 2017, the Company has authorization to purchase 1,036,125 shares of its common stock under this program. No specific expiration date has been assigned to the May 19, 2015 authorization.
Dividends
During the thirteen-week period ended April 1, 2017, Landstar paid dividends as follows:

Dividend Amount per Share	  	Declaration Date	  	Record Date	  	Payment Date	
 	 	 	 	
$0.09	  	January 30, 2017	  	February 20, 2017	  	March 17, 2017	
On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock in the event there is a default under the Credit Agreement. In addition, the Credit Agreement, under certain circumstances, limits the amount of such cash dividends and other distributions to stockholders to the extent that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio, as defined in the Credit Agreement, would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter.
 
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits listed on the Exhibit Index are furnished as part of this quarterly report on Form 10-Q.
 
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EXHIBIT INDEX
Registrant’s Commission File No.: 0-21238

Exhibit
No.	 	Description	
 	 	
    (31)	 	Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	
    31.1 *	 	Chief Executive Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	
    31.2 *	 	Chief Financial Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	
    (32)	 	Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	 	
    32.1 **	 	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	 	
    32.2 **	 	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	 	
101.INS*	 	XBRL Instance Document	
 	 	
101.SCH*	 	XBRL Schema Document	
 	 	
101.CAL*	 	XBRL Calculation Linkbase Document	
 	 	
101.DEF*	 	XBRL Definition Linkbase Document	
 	 	
101.LAB*	 	XBRL Labels Linkbase Document	
 	 	
101.PRE*	 	XBRL Presentation Linkbase Document	
 
*	Filed herewith	
**	Furnished herewith	
 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	 	 	 	 	 	LANDSTAR SYSTEM, INC.	
 	 	 	 	
Date: May 5, 2017	 	 	 	 	 	/s/ James B. Gattoni	
 	 	 	 	 	 	James B. Gattoni	
 	 	 	 	 	 	President and	
 	 	 	 	 	 	Chief Executive Officer	
 	 	 	 	
Date: May 5, 2017	 	 	 	 	 	/s/ L. Kevin Stout	
 	 	 	 	 	 	L. Kevin Stout	
 	 	 	 	 	 	Vice President and	
 	 	 	 	 	 	Chief Financial Officer	
 
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EXHIBIT 31.1
SECTION 302 CERTIFICATION
I, James B. Gattoni, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Landstar System, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 5, 2017

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

EXHIBIT 31.2
SECTION 302 CERTIFICATION
I, L. Kevin Stout, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Landstar System, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 5, 2017

 	
/s/ L. Kevin Stout	
L. Kevin Stout
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 Quarterly Report of Landstar System, Inc. (the “Company”) on Form 10-Q for the period ending April 1, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James B. Gattoni, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and	
 
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
Date: May 5, 2017

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

EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Landstar System, Inc. (the “Company”) on Form 10-Q for the period ending April 1, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, L. Kevin Stout, Vice President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and	
 
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
Date: May 5, 2017

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