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Significant Accounting Policies (Policies)

12 Months Ended

Dec. 26, 2020

The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (“LSHI”). Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Significant intercompany accounts have been eliminated in consolidation.

Estimates

The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates.

Fiscal Year

Landstar’s fiscal year is the 52 or 53 week period ending the last Saturday in December.

Revenue Recognition

The nature of the Company’s freight transportation services and its performance obligations to customers, regardless of the mode of transportation used to perform such services, relate to the safe and

on-time

pick-up

and delivery of a customer’s freight on a

shipment-by-shipment

basis. Landstar customers are typically invoiced on a

shipment-by-shipment

basis at a

pre-defined

rate, payable thirty to sixty

(30-60)

days after the customer’s receipt of such invoice. Payment terms to customers do not contain a significant financing component and the amount owed by the customer does not contain variable terms, embedded or otherwise. We have determined that revenue recognition over the freight transit period provides a faithful depiction of the transfer of services to the customer as our obligation for which we are primarily responsible for fulfilling is performed over the transit period. Accordingly, transportation revenue billed to a customer for the physical transportation of freight and related direct freight expenses are recognized on a gross basis over the freight transit period as the performance obligation to the customer is satisfied. The Company determines the transit period for a given shipment based upon the

pick-up

date and the delivery date, which may be estimated if delivery has not occurred as of the reporting date. Determining the transit period and how much of it has been completed as of a given reporting date may therefore require management to make judgments that affect the timing of revenue recognized. With respect to shipments with a

pick-up

date in one reporting period and a delivery date in another, the Company recognizes such transportation revenue based on relative transit time in each reporting period. A days in transit output method is used to measure the progress of the performance of the Company’s freight transportation services as of the reporting date and a portion of the total revenue that will be billed to the customer once a load is delivered is recognized in each reporting period based on the percentage of total transit time that has been completed at the end of the applicable reporting period. Reinsurance premiums of the insurance segment are recognized over the period earned, which is usually on a monthly basis. Fuel surcharges billed to customers for freight hauled by independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”) are excluded from revenue and paid in entirety to the BCO Independent Contractors.

Adoption of Topic 606, "Revenue from Contracts with Customers"

Adoption of Topic 606, “Revenue from Contracts with Customers”

The Company adopted Accounting Standards Update

2014-09

–

Revenue from Contracts with Customers

(“ASU

2014-09”)

on December 31, 2017 under the modified retrospective transition method resulting in a $773,000 cumulative adjustment to retained earnings. Our reported results for 2020, 2019 and 2018 are presented under Topic 606

Revenue from Contracts with Customers – Disaggregation of Revenue

The following table summarizes

(i)

the percentage of consolidated revenue generated by mode of transportation and

(ii)

the

total

amount

truck transportation revenue

hauled

by BCO Independent Contractors and Truck Brokerage Carriers

generated by

equipment type during the fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018 (dollars in thousands):


	Fiscal Years Ended
Mode	December 26, 2020			December 28, 2019			December 29, 2018
Truck – BCO Independent Contractors		45	%		45	%		43	%
Truck – Truck Brokerage Carriers		47	%		47	%		49	%
Rail intermodal		3	%		3	%		3	%
Ocean and air cargo carriers		3	%		3	%		3	%
Truck Equipment Type
Van equipment	$	2,515,940		$	2,371,188		$	2,791,494
Unsided/platform equipment	$	1,202,295		$	1,295,817		$	1,386,387
Less-than-truckload	$	97,546		$	98,324		$	102,531

Insurance Claim Costs

Landstar provides, primarily on an actuarially determined basis, for the estimated costs of cargo, property, casualty, general liability and workers’ compensation claims both reported and for claims incurred but not reported. For periods prior to May 1, 2019, Landstar retains liability for commercial trucking claims up to $5,000,000 per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $5,000,000 self-insured retention. Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $5,000,000 and $10,000,000 (the “Initial Excess Policy”) with a third party insurance company. For commercial trucking claims incurred on or after May 1, 2019 through April 30, 2022, the Initial Excess Policy provides for a limit for a single loss of $5,000,000, with an aggregate limit of $15,000,000 for each policy year, an aggregate limit of $20,000,000 for the

thirty-six

month term ended April 30, 2022, and options to increase such aggregate limits for

pre-established

amounts of additional premium. If aggregate losses under the Initial Excess Policy exceed either the annual aggregate limit or the aggregate limit for the three year period ending April 30, 2022, and the Company did not elect to increase such aggregate limits for a

pre-established

amount of additional premium, Landstar would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention for commercial trucking claims during the remainder of the applicable policy year(s). Moreover,

s a result of the Company’s aggregate loss experience since it entered into the Initial Excess Policy, the

Initial Excess Policy required the Company to

pay additional premium

up to a pre-established maximum amount of $3,500,000,

which was provided for in insurance and claims costs for the Company’s 2020 fiscal first quarter.

The Company also maintains third party insurance arrangements providing excess coverage for commercial trucking liabilities in excess of $10,000,000. These third party arrangements provide coverage on a per occurrence or aggregated basis. Due to the increasing cost of commercial auto liability claims throughout the United States in recent years, the availability of such excess coverage has significantly decreased and the pricing associated with such excess coverage, to the extent available, has significantly increased. Effective May 1, 2020 with respect to the annual policy year ending April 30, 2021, the Company experienced an increase of approximately $14 million, or over 170%, in the premiums charged by third party insurance companies to the Company for excess coverage for commercial trucking liabilities in excess of $10,000,000.

In addition, third party insurance arrangements providing excess coverage for commercial trucking liabilities in excess of Landstar’s self-insured retention generally require that the Company fund settlement payments to claimants and seek reimbursement from the Company’s third party insurance providers, as applicable. In connection with settlements of claims in excess of the Company’s $5 million self-insured retention, the Company accrues for such anticipated settlement payments and records a corresponding receivable for amounts the Company expects to collect from its third party insurance providers following the payment of such settlement amounts. On the Company’s consolidated balance sheet as of December 26, 2020, the Company has an aggregate accrual of current liabilities in insurance claims for anticipated payments of settlement amounts above our self-insured retention of

$104,000,000, and a corresponding amount of current assets included in other receivables. The Company believes it is reasonably assured that it will collect these receivables from its third party insurance providers following its payment of the settlement amounts included in its accrual. The Company evaluates collectability of these receivables based on the credit worthiness and surplus of the applicable third party insurance provider, along with its prior experience and contractual terms with such third party insurance provider.

Further, the Company retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. In addition, under reinsurance arrangements by Signature of certain risks of the Company’s BCO Independent Contractors, the Company retains liability of up to $500,000, $1,000,000 or $2,000,000 with respect to certain occupational accident claims and up to $750,000 with respect to certain workers’ compensation claims.

Tires

Tires purchased as part of trailing equipment are capitalized as part of the cost of the equipment. Replacement tires are charged to expense when placed in service.

Cash and Cash Equivalents

Included in cash and cash equivalents are all investments, except those provided for collateral, with an original maturity of 3 months or less.

Financial Instruments

The Company’s financial instruments include cash equivalents, short and long-term investments, trade and other accounts receivable, accounts payable, other accrued liabilities, and long-term debt plus current maturities (“Debt”). The carrying value of cash equivalents, trade and other accounts receivable, accounts payable, current insurance claims and other accrued liabilities approximates fair value as the assets and liabilities are short term in nature. Short and long-term investments are carried at fair value as further described in Note 4 in the Company’s consolidated financial statements. The Company’s Debt includes borrowings under the Company’s revolving credit facility, to the extent there are any, plus borrowings relating to finance lease obligations used to finance trailing equipment. The interest rates on borrowings under the revolving credit facility are typically tied to short-term interest rates that adjust monthly and, as such, carrying value approximates fair value. Interest rates on borrowings under finance leases approximate the interest rates that would currently be available to the Company under similar terms and, as such, carrying value approximates fair value.

Trade and Other Receivables

The allowance for doubtful accounts for both trade and other receivables represents management’s estimate of the amount of outstanding receivables that will not be collected. Estimates are used to determine the allowance for doubtful accounts for both trade and other receivables and are generally based on specific identification, historical collection results, current economic trends and changes in payment trends.

Following is a summary of the activity in the allowance for doubtful accounts for fiscal years ending December 26, 2020, December 28, 2019 and December 29, 2018 (in thousands):


	Balance at Beginning of Period		Charged to Costs and Expenses		Write-offs, Net of Recoveries			Balance at End of Period
For the Fiscal Year Ended December 26, 2020
Trade receivables	$	7,284	$	6,121	$	(4,735	)	$	8,670
Other receivables		8,806		3,291		(3,698	)		8,399
Other non-current receivables		260		3		1			264

	$	16,350	$	9,415	$	(8,432	)	$	17,333

For the Fiscal Year Ended December 28, 2019
Trade receivables	$	6,413	$	4,309	$	(3,438	)	$	7,284
Other receivables		7,211		5,518		(3,923	)		8,806
Other non-current receivables		256		4		—			260

	$	13,880	$	9,831	$	(7,361	)	$	16,350

For the Fiscal Year Ended December 29, 2018
Trade receivables	$	6,131	$	3,886	$	(3,604	)	$	6,413
Other receivables		6,952		3,520		(3,261	)		7,211
Other non-current receivables		251		9		(4	)		256

	$	13,334	$	7,415	$	(6,869	)	$	13,880

Operating Property

Operating property is recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Buildings and improvements are being depreciated over 30 years. Trailing equipment is being depreciated over 7 to 10 years. Information technology hardware and software included in other equipment is generally being depreciated over 3 to 7 years.

Goodwill

Goodwill represents the excess of the purchase price paid over the fair value of the net assets of acquired businesses. The Company

has two reporting units within the transportation logistics segment that report goodwill. The Company reviews its goodwill balance annually for impairment for each reporting unit, unless circumstances dictate more frequent assessments, and in accordance with ASU

2011-08,

Testing Goodwill for Impairment

. ASU

2011-08

permits an initial assessment, commonly referred to as “step zero”, of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and also provides a basis for determining whether it is necessary to perform the quantitative analysis required by ASC Topic 350. In the fourth fiscal quarter of 2020, the Company performed the qualitative assessment of goodwill and determined it was more likely than not that the fair value of each of its reporting units would be greater than its carrying amount. Therefore, the Company determined it was not necessary to perform the quantitative goodwill impairment test. Furthermore, there has been no historical impairment of the Company’s goodwill.

Income Taxes

Income tax expense is equal to the current year’s liability for income taxes and a provision for deferred income taxes. Deferred tax assets and liabilities are recorded for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Share-Based Payments

The Company’s share-based payment arrangements include restricted stock units (“RSU”), stock options,

non-vested

restricted stock and Deferred Stock Units. The fair value of an RSU with a performance condition is determined based on the market value of the Company’s Common Stock on the date of grant, discounted for lack of marketability for a minimum post-vesting holding

requirement. With respect to RSU awards with a performance condition, the Company reports compensation expense ratably 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. The fair value of an RSU with a market condition is 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 RSU awards with a market condition, the Company recognizes compensation expense 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 estimates the fair value of stock option awards on the date of grant using the Black-Scholes pricing model and recognizes compensation cost for stock option awards expected to vest on a straight-line basis over the requisite service period for the entire award. Forfeitures are estimated at grant date based on historical experience and anticipated employee turnover. The fair values of each share of non-vested restricted stock issued and Deferred Stock Unit granted are based on the fair value of a share of the Company’s Common Stock on the date of grant and

compensation

costs for non-vested restricted stock and Deferred Stock Units are recognized on a straight-line basis over the requisite service period for the award.

Earnings Per Share

Earnings per common share

attributable

to Landstar System, Inc. and subsidiary are based on the weighted average number of shares

outstanding

, including outstanding

non-vested

restricted stock and outstanding Deferred Stock Units. Diluted

earnings

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

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


	Fiscal Years
	2020		2019		2018
Average number of common shares outstanding		38,602		39,786		41,273
Incremental shares from assumed exercises of stock options		—		—		37

Average number of common shares and common share equivalents outstanding		38,602		39,786		41,310

For the fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018, no options outstanding to purchase shares of Common Stock were antidilutive. Outstanding RSUs were excluded from the calculation of diluted earnings per share attributable to Landstar System, Inc. and subsidiary for all periods because the performance metric requirements or market condition for vesting had not been satisfied.

Dividends Payable

On December 8, 2020, the Company announced that its Board of Directors declared a special cash dividend of $2.00 per share payable on January 22, 2021, to stockholders of record of its Common Stock as of January 8, 2021. Dividends payable of $76,770,000 related to this special dividend were included in current liabilities in the consolidated balance sheet at December 26, 2020.

On December 10, 2019, the Company announced that its Board of Directors declared a special cash dividend of $2.00 per share payable on January 24, 2020, to stockholders of record of its Common Stock as of January 10, 2020. Dividends payable of $78,947,000 related to this special dividend were included in current liabilities in the consolidated balance sheet at December 28, 2019.

Foreign Currency Translation

Assets and liabilities of the Company’s Canadian and Mexican operations are translated from their functional currency to U.S. dollars using exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average monthly exchange rates during the period. Adjustments resulting from the translation process are included in accumulated other comprehensive income. Transactional gains and losses arising from receivable and payable balances, including intercompany balances, in the normal course of business that are denominated in a currency other than the functional currency of the operation are recorded in the statements of income when they occur.