LANDSTAR SYSTEM INC – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 The following discussion should be read in conjunction with the attached interim consolidated financial statements and notes thereto, and with the Company's audited financial statements and notes thereto for the fiscal year ended December 31, 2011 and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2011 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," "expects," "plans," "predicts," "may," "should," "could," "will," the negative thereof and similar expressions are intended to identify forward-looking                                           14 

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  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; substantial industry competition; disruptions or failures in our computer systems; dependence on key vendors; changes in fuel taxes; status of independent contractors; regulatory and legislative changes; catastrophic loss of a Company facility; acquired businesses; intellectual property; doing business with the federal government; and other operational, financial or legal risks or uncertainties detailed in Landstar's Form 10-K for the 2011 fiscal year, described in Item 1A "Risk Factors", 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 non-asset based provider of freight transportation services and supply chain solutions. The Company offers services to its customers across multiple transportation modes, with the ability to arrange for individual shipments of freight to enterprise-wide solutions to manage all of a customer's transportation and logistics needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada, and between the United States and Canada, Mexico and other countries around the world. The Company's services emphasize safety, information coordination and customer service and are delivered through a network of independent commission sales agents and third party capacity providers linked together by a series of technological applications which are provided and coordinated by the Company. Landstar markets its freight transportation services and supply chain solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport and store customers' freight. The nature of the Company's business is such that a significant portion of its operating costs varies directly with revenue.  Landstar markets its freight transportation services and supply chain solutions primarily through independent commission sales agents who enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar's capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company's third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the "BCO Independent Contractors"), unrelated trucking companies who provide truck capacity to the Company under non-exclusive contractual arrangements (the "Truck Brokerage Carriers"), air cargo carriers, ocean cargo carriers, railroads and independent warehouse capacity providers ("Warehouse Capacity Owners"). Through this network of agents and capacity providers linked together by Landstar's information technology systems, Landstar operates a transportation services and supply chain solutions business primarily throughout North America with revenue of $2.6 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.  The transportation logistics segment provides a wide range of transportation services and supply chain solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, project cargo and customs brokerage. Supply chain solutions are based on advanced technology solutions utilizing intellectual property that may be owned by the Company or licensed from third parties. Such solutions as offered by the Company may include integrated multi-modal solutions, outsourced logistics, supply chain engineering and warehousing. Industries serviced by the transportation logistics segment include automotive products, paper, lumber and building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military equipment. In addition, the transportation logistics segment provides transportation services to other transportation companies, including logistics and less-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight. Supply chain solution customers are generally charged fees for the services provided. Revenue recognized by the transportation logistics segment when providing capacity to customers to haul their freight is referred to herein as "transportation services revenue" and revenue for freight management services recognized on a fee-for-service basis is referred to herein as "transportation management fees." During the twenty six weeks ended June 30, 2012, transportation services revenue hauled by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented 51%, 42% and 3%, respectively, of the Company's transportation logistics segment revenue. Collectively, transportation services revenue hauled by air and ocean carriers represented 3% of the Company's transportation logistics segment revenue in the twenty-six-week period ended June 30, 2012. Transportation management fees represented 1% of the Company's transportation logistics segment revenue in the twenty-six-week period ended June 30, 2012.                                           15 

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  The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore insurance subsidiary, and Risk Management Claim Services, Inc. This segment provides risk and claims management services to certain of Landstar's operating subsidiaries. In addition, it reinsures certain risks of the Company's BCO Independent Contractors and provides certain property and casualty insurance directly to certain of Landstar's operating subsidiaries. Revenue at the insurance segment represents reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk of loss is borne by the Company. Revenue at the insurance segment represented approximately 1% of the Company's consolidated revenue for the twenty six weeks ended June 30, 2012.  

Changes in Financial Condition and Results of Operations

  Management believes the Company's success principally depends on its ability to generate freight through its network of independent commission sales agents and to efficiently deliver that freight utilizing third party capacity providers. Management believes the most significant factors to the Company's success include increasing revenue, sourcing capacity and controlling costs, including insurance and claims.  While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management's primary focus 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 2011 fiscal year, 504 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2011 fiscal year, the average revenue generated by a Million Dollar Agent was $4,778,000 and revenue generated by Million Dollar Agents in the aggregate represented 91% of consolidated revenue.  Management monitors business activity by tracking the number of loads (volume) and revenue per load by mode of transportation. Revenue per load can be influenced by many factors other than a change in price. Those factors include the average length of haul, freight type, special handling and equipment requirements, fuel costs and delivery time requirements. For shipments involving two or more modes of transportation, revenue is classified by the mode of transportation having the highest cost for the load. The following table summarizes this data by mode of transportation:                                                    Twenty Six Weeks Ended          Thirteen Weeks Ended                                                June 30,        June 25,        June 30,       June 25,                                                  2012            2011            2012           2011

Revenue generated through (in thousands):

  BCO Independent Contractors                   $   701,248     $   669,748     $   371,886     $ 362,854 Truck Brokerage Carriers                          578,932         472,391         308,090       258,668 Rail intermodal                                    36,220          34,832          18,838        18,367 Ocean and air cargo carriers                       40,127          42,931          22,458        21,538 Other (1)                                          28,469          27,645          14,701        14,134                                                $ 1,384,996     $ 1,247,547     $   735,973     $ 675,561  Number of loads:  BCO Independent Contractors                       415,150         402,730         215,950       210,690 Truck Brokerage Carriers                          333,600         287,210         175,570       151,470 Rail intermodal                                    14,820          14,830           7,660         7,570 Ocean and air cargo carriers                        7,910           7,950           3,930         4,170                                                    771,480         712,720         403,110       373,900  Revenue per load:  BCO Independent Contractors                   $     1,689     $     1,663     $     1,722     $   1,722 Truck Brokerage Carriers                            1,735           1,645           1,755         1,708 Rail intermodal                                     2,444           2,349           2,459         2,426 Ocean and air cargo carriers                        5,073           5,400           5,715         5,165    

(1) Includes premium revenue generated by the insurance segment and warehousing

     and transportation management fee revenue generated by the transportation     logistics segment.                                            16 

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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 available truck capacity providers:

                                                                June 30,      June 25,                                                                2012          2011   BCO Independent Contractors                                    7,959         7,711   Truck Brokerage Carriers:   Approved and active (1)                                       19,283        17,696   Other approved                                                 9,051         8,984                                                                  28,334        26,680    Total available truck capacity providers                      36,293      

34,391

Number of trucks provided by BCO Independent Contractors 8,478

   8,231     

(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 the haul. Purchased transportation paid to a Truck Brokerage Carrier is based on either a negotiated rate for each load hauled or a contractually agreed-upon rate. Purchased transportation paid to railroads, air cargo carriers or ocean cargo carriers is based on contractually agreed-upon fixed rates. Purchased transportation as a percentage of revenue for truck brokerage, rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor and air cargo services. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases in proportion to the revenue generated through BCO Independent Contractors and other third party capacity providers, transportation management fees and revenue from the insurance segment. Purchased transportation as a percent of revenue also increases or decreases in relation to the availability of truck brokerage capacity and the price of fuel on revenue hauled by Truck Brokerage Carriers. Purchased transportation costs are recognized upon the completion of freight delivery.  Commissions to agents are based on contractually agreed-upon percentages of revenue or net revenue, defined as revenue less the cost of purchased transportation, or net revenue less a contractually agreed upon percentage of revenue retained by Landstar. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the various modes of transportation, transportation management fees and revenue from the insurance segment and with changes in net revenue on services provided by Truck Brokerage Carriers and 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.                                           17

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  In general, gross profit margin on revenue hauled by BCO Independent Contractors represents a fixed percentage of revenue due to the nature of the contracts that pay a fixed percentage of revenue to both the BCO Independent Contractors and independent commission sales agents. For revenue hauled by Truck Brokerage Carriers, gross profit margin is either fixed or variable as a percent of revenue, depending on the contract with each individual independent commission sales agent. Under certain contracts with independent commission sales agents, the Company retains a fixed percentage of revenue and the agent retains the amount remaining less the cost of purchased transportation (the "retention contracts"). Gross profit margin on revenue hauled by railroads, air cargo carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention contracts, is variable in nature as the Company's contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these types of loads. Approximately 62% of the Company's revenue in the twenty-six-week period ended June 30, 2012 had a fixed gross profit margin.  Maintenance costs for Company-provided trailing equipment, BCO Independent Contractor recruiting costs and the provision for uncollectible advances and other receivables due from BCO Independent Contractors and independent commission sales agents are the largest components of other operating costs. Also included in the operating costs are gains/losses, if any, on sales of Company owned trailing equipment.  Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. For commercial trucking claims, Landstar retains liability up to $5,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers' compensation claim and up to $250,000 for each cargo claim. The Company's exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air cargo 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.  

Employee compensation and benefits account for over sixty percent of the Company's selling, general and administrative costs.

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

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

                                                Twenty Six Weeks Ended                Thirteen Weeks Ended                                           June 30,           June 25,          June 30,           June 25,                                             2012               2011              2012               2011 Revenue                                        100.0 %           100.0 %           100.0 %            100.0 %  Purchased transportation                        76.2              75.4              76.5               75.5 Commissions to agents                            7.7               7.9               7.7                8.0  Gross profit margin                             16.1 %            16.7 %            15.9 %             16.5 %  Gross profit                                   100.0 %           100.0 %           100.0 %            100.0 % Investment income                                0.4               0.4               0.3                0.4 Indirect costs and expenses: Other operating costs                            5.0               7.5               4.0                6.9 Insurance and claims                             9.2              11.9               8.0               12.1 Selling, general and administrative             34.3              35.1              32.3               32.1 Depreciation and amortization                    6.0               6.1               5.7                5.7  Total costs and expenses                        54.6              60.6              50.0               56.8  Operating margin                                45.8 %            39.8 %            50.4 %             43.6 %                                               18 

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TWENTY SIX WEEKS ENDED JUNE 30, 2012 COMPARED TO TWENTY SIX WEEKS ENDED JUNE 25, 2011

  Revenue for the 2012 twenty-six-week period was $1,384,996,000, an increase of $137,449,000, or 11%, compared to the 2011 twenty-six-week period. Revenue increased $136,773,000, or 11%, at the transportation logistics segment. The increase in revenue at the transportation logistics segment was primarily attributable to an 8% increase in the number of loads hauled and an increased revenue per load of approximately 3%. Included in the 2012 and 2011 twenty-six-week periods was $10,650,000 and $10,419,000, respectively, of transportation management fee revenue. Revenue at the insurance segment, representing reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk of loss is borne by the Company, was $17,602,000 and $16,926,000 for the 2012 and 2011 twenty-six-week periods, respectively.  Truck transportation revenue hauled by BCO Independent Contractors and Truck Brokerage Carriers (together the "third-party truck capacity providers") for the twenty-six-week period ended June 30, 2012, which represented 92% of total revenue, was $1,280,180,000, an increase of $138,041,000, or 12%, compared to the 2011 twenty-six-week period. The number of loads hauled by third-party truck capacity providers in the 2012 twenty-six-week period increased 9% compared to the 2011 twenty-six-week period, and revenue per load for third-party truck capacity providers increased 3% compared to the 2011 twenty-six-week period. The increase in the number of loads hauled by third-party truck capacity providers was primarily attributable to increased demand, primarily related to truckload services utilizing unsided/platform trailing equipment and the addition of new independent commission sales agents. The increase in revenue per load on revenue hauled by third-party truck capacity providers was primarily attributable to both increased revenue per load and an increase in the percentage of revenue hauled on unsided/platform equipment, which has a higher revenue per load. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $55,548,000 and $45,226,000 in the 2012 and 2011 periods, respectively. Fuel surcharges billed to customers on revenue hauled by BCO Independent Contractors are excluded from revenue.  Transportation revenue hauled by railroads, air cargo carriers and ocean cargo carriers (together the "multimode capacity providers") for the twenty-six-week period ended June 30, 2012, which represented 6% of total revenue, was $76,347,000, a decrease of $1,416,000, or 2%, compared to the 2011 twenty-six-week period. The number of loads hauled by multimode capacity providers in the 2012 twenty-six-week period was approximately the same compared to the 2011 twenty-six-week period, while revenue per load for the multimode capacity providers decreased 2% over the same period. The decrease in revenue per load on revenue hauled by multimode capacity providers is influenced by many factors including the mode of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.  Purchased transportation was 76.2% and 75.4% of revenue in the 2012 and 2011 twenty-six-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily attributable to an increase in the percentage of revenue hauled by Truck Brokerage Carriers, which has a higher rate of purchased transportation. Commissions to agents were 7.7% and 7.9% of revenue in the 2012 and 2011 periods, respectively. The decrease in commissions to agents as a percentage of revenue was attributable to a decreased net revenue margin, defined as net revenue divided by revenue, on revenue hauled by Truck Brokerage Carriers.  Investment income at the insurance segment was $792,000 and $921,000 in the 2012 and 2011 twenty-six-week periods, respectively. The decrease in investment income was primarily due to a lower average rate of return on investments held by the insurance segment in the 2012 period.  Other operating costs were 5.0% and 7.5% of gross profit in the 2012 and 2011 twenty-six-week periods, respectively. The decrease in other operating costs as a percentage of gross profit was primarily attributable to the effect of increased gross profit, increased gains on sales of trailing equipment, a decreased provision for contractor bad debt and decreased trailing equipment maintenance costs. Insurance and claims were 9.2% of gross profit in the 2012 period and 11.9% of gross profit in the 2011 period. The decrease in insurance and claims as a percentage of gross profit was primarily due to the effect of an increase in the percent of gross profit contributed from revenue hauled by Truck Brokerage Carriers in the 2012 period, which has a lower liability exposure to the Company, a decrease in the severity of claims and lower unfavorable development of prior year claims in the 2012 twenty-six-week period. Selling, general and administrative costs were 34.3% of gross profit in the 2012 period and 35.1% of gross profit in the 2011 period. The decrease in selling, general and administrative costs as a percentage of gross profit was primarily attributable to the effect of increased gross profit, partially offset by an increased provision for bonuses under the Company's incentive compensation plan. Depreciation and amortization was 6.0% of gross profit in the 2012 period compared with 6.1% in the 2011 period. The decrease in depreciation and amortization as a percentage of gross profit was primarily due to the effect of increased gross profit in the 2012 period.                                           19

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  The provisions for income taxes for the 2012 and 2011 twenty-six-week periods were based on effective income tax rates of approximately 37.6% and 38.2%, 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 decrease in the effective income tax rate in the 2012 twenty-six-week period compared to the 2011 twenty-six-week period was due to income tax benefits recognized upon the disqualifying disposition of the Company's common stock by employees who obtained the stock through recent exercises of incentive stock options.  Net income attributable to the Company was $62,702,000, or $1.34 per common share ($1.33 per diluted share), in the 2012 twenty-six-week period. Net income attributable to the Company was $50,217,000, or $1.05 per common share ($1.05 per diluted share), in the 2011 twenty-six-week period.  

THIRTEEN WEEKS ENDED JUNE 30, 2012 COMPARED TO THIRTEEN WEEKS ENDED JUNE 25, 2011

  Revenue for the 2012 thirteen-week period was $735,973,000, an increase of $60,412,000, or 9%, compared to the 2011 thirteen-week period. Revenue increased $59,988,000, or 9%, at the transportation logistics segment. The increase in revenue at the transportation logistics segment was primarily attributable to an 8% increase in the number of loads hauled and an increased revenue per load of approximately 1%. Included in the 2012 and 2011 thirteen-week periods was $5,754,000 and $5,596,000, respectively, of transportation management fee revenue. Revenue at the insurance segment, representing reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk of loss is borne by the Company, was $8,831,000 and $8,407,000 for the 2012 and 2011 thirteen-week periods, respectively.  Truck transportation revenue hauled by third-party truck capacity providers for the thirteen-week period ended June 30, 2012, which represented 92% of total revenue, was $679,976,000, an increase of $58,454,000, or 9%, compared to the 2011 thirteen-week period. The number of loads hauled by third-party truck capacity providers in the 2012 thirteen-week period increased 8% compared to the 2011 thirteen-week period, and revenue per load for third-party truck capacity providers increased 1% compared to the 2011 thirteen-week period. The increase in the number of loads hauled by third-party truck capacity providers was primarily attributable to increased demand, primarily related to truckload services utilizing unsided/platform trailing equipment and the addition of new independent commission sales agents. The increase in revenue per load on revenue hauled by third-party truck capacity providers was primarily attributable to both increased revenue per load and an increase in the percentage of revenue hauled on unsided/platform equipment, which has a higher revenue per load. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $30,107,000 and $25,918,000 in the 2012 and 2011 periods, respectively.  Transportation revenue hauled by multimode capacity providers for the thirteen-week period ended June 30, 2012, which represented 6% of total revenue, was $41,296,000, an increase of $1,391,000, or 3%, compared to the 2011 thirteen-week period. The number of loads hauled by multimode capacity providers in the 2012 thirteen-week period decreased 1% compared to the 2011 thirteen-week period, while revenue per load for the multimode capacity providers increased 5% over the same period.  Purchased transportation was 76.5% and 75.5% of revenue in the 2012 and 2011 thirteen-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily attributable to an increase in the percentage of revenue hauled by Truck Brokerage Carriers, which has a higher rate of purchased transportation, and an increase in the rate of purchased transportation paid to Truck Brokerage Carriers. Commissions to agents were 7.7% of revenue in the 2012 period and 8.0% of revenue in the 2011 period. The decrease in commissions to agents as a percentage of revenue was primarily attributable to a decreased net revenue margin on revenue hauled by Truck Brokerage Carriers.  Investment income at the insurance segment was $405,000 and $393,000 in the 2012 and 2011 thirteen-week periods, respectively. The increase in investment income was primarily due to higher average investments held by the insurance segment in the 2012 period.  Other operating costs were 4.0% and 6.9% of gross profit in the 2012 and 2011 thirteen-week periods, respectively. The decrease in other operating costs as a percentage of gross profit was primarily attributable to the effect of increased gross profit, increased gains on sales of trailing equipment, a decreased provision for contractor bad debt and decreased trailing equipment maintenance costs. Insurance and claims were 8.0% of gross profit in the 2012 period and 12.1% of gross profit in the 2011 period. The decrease in insurance and claims as a percentage of gross profit was primarily due to the effect of an increase in the percent of gross profit contributed from revenue hauled by Truck Brokerage Carriers in the 2012 period, which has a lower liability exposure to the Company, and decreased severity of commercial trucking claims in the 2012 thirteen-week period. Selling, general and administrative costs were 32.3% of gross profit in the 2012 period and 32.1% of gross profit in the 2011 period. The increase in selling, general and administrative costs as a percentage of gross profit was primarily attributable to increased employee benefit costs, partially offset by the effect of increased gross profit. Depreciation and amortization was 5.7% of gross profit in both the 2012 and 2011 thirteen-week periods.                                           20 

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  The provisions for income taxes for the 2012 and 2011 thirteen-week periods were both based on an effective income tax rate of approximately 38.2%, which was 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.  Net income attributable to the Company was $35,855,000, or $0.76 per common share ($0.76 per diluted share), in the 2012 thirteen-week period. Net income attributable to the Company was $29,598,000, or $0.62 per common share ($0.62 per diluted share), in the 2011 thirteen-week period.  

CAPITAL RESOURCES AND LIQUIDITY

  Working capital and the ratio of current assets to current liabilities were $241,014,000 and 1.7 to 1, respectively, at June 30, 2012, compared with $220,679,000 and 1.7 to 1, respectively, at December 31, 2011. 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 $54,810,000 in the 2012 twenty-six-week period compared with $23,467,000 in the 2011 twenty-six-week period. The increase in cash flow provided by operating activities was primarily attributable to the timing of collections of trade receivables and increased net income.  The Company paid $0.11 per share, or $5,157,000, and $0.10 per share, or $4,788,000, in cash dividends during the twenty-six-week periods ended June 30, 2012 and June 25, 2011, respectively. During the twenty-six-week period ended June 30, 2012, the Company purchased 315,600 shares of its common stock at a total cost of $15,752,000. As of June 30, 2012, the Company may purchase up to an additional 200,951 shares of its common stock under its authorized stock purchase program. Long-term debt, including current maturities, was $125,554,000 at June 30, 2012, $6,788,000 lower than at December 31, 2011.  Equity was $347,759,000, or 73% of total capitalization (defined as long-term debt including current maturities plus equity), at June 30, 2012, compared to $300,577,000, or 69% of total capitalization, at December 31, 2011. The increase in equity was primarily a result of net income and the effect of the exercises of stock options during the period, partially offset by dividends paid by the Company.  On June 29, 2012, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the "Credit Agreement"). The Credit Agreement, which matures on June 29, 2017, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees. The initial borrowing of $60,000,000 under the Credit Agreement has been used to refinance $60,000,000 of outstanding borrowings under the prior credit agreement, which has been terminated. The initial borrowings under the Credit Agreement will bear interest at the rate of 1.50%.  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 in the event that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company's most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event that, among other things, a person or group acquires 25% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company's directors. None of these covenants are presently considered by management to be materially restrictive to the Company's operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Credit Agreement.  At June 30, 2012, the Company had $60,000,000 in borrowings outstanding and $33,552,000 of letters of credit outstanding under the Credit Agreement. At June 30, 2012, there was $131,448,000 available for future borrowings under the Credit Agreement. In addition, the Company has $45,146,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments and cash equivalents totaling $50,162,000 at June 30, 2012. Investments, all of which are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Fair value of investments is based primarily on quoted market prices. See Notes to Consolidated Financial Statements for further discussion on measurement of fair value of investments.                                             21 

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  Historically, the Company has generated sufficient operating cash flow to meet its debt service requirements, fund continued growth, both internal and through acquisitions, complete or execute share purchases of its common stock under authorized share purchase programs, pay dividends and meet working capital needs. As a non-asset based provider of transportation services and supply chain solutions, the Company's annual capital requirements for operating property are generally for trailing equipment and information technology hardware and software. In addition, a significant portion of the trailing equipment used by the Company is provided by third party capacity providers, thereby reducing the Company's capital requirements. During the 2012 twenty-six-week period, the Company purchased $2,982,000 of operating property and acquired $24,052,000 of trailing equipment by entering into capital leases. Landstar anticipates acquiring approximately $19,000,000 in operating property, primarily new trailing equipment to replace older trailing equipment and information technology equipment, during the remainder of fiscal year 2012 either by purchase or lease financing.  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

  Reference is made to the descriptions of certain pending legal proceedings in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011. There have been no material developments with respect to any such pending legal proceedings during the twenty-six-week period ended June 30, 2012.  In addition to the matters referred to above, the Company is involved in certain other 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 claims and that the potential of a material loss or material additional loss with respect to any claim in excess of amounts provided for is remote.  

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 June 30, 2012 is appropriate, a prolonged period of low or no economic growth may adversely affect the collection of these receivables. In addition, liquidity concerns and/or unanticipated bankruptcy proceedings at any of the Company's larger customers in which the Company is carrying a significant receivable could result in an increase in the provision for uncollectible receivables and have a significant impact on the Company's results of operations in a given quarter or year. However, it is not expected that an uncollectible accounts receivable resulting from an individual customer would have a significant impact on the Company's financial position. 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 2012 and 2011 twenty-six-week periods, insurance and claims costs included $241,000 and $1,070,000, respectively, of unfavorable adjustments to prior years' claims estimates. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims reserve at June 30, 2012.  The Company utilizes certain income tax planning strategies to reduce its overall cost of income taxes. If the Company were to be subject to an audit, it is possible that certain strategies might be disallowed resulting in an increased liability for income taxes. Certain of these tax planning strategies result in a level of uncertainty as to whether the related tax positions taken by the Company would result in a recognizable benefit. The Company has provided for its estimated exposure attributable to such tax positions due to the corresponding level of uncertainty with respect to the amount of income tax benefit that may ultimately be realized. Management believes that the provision for liabilities resulting from the uncertainty in certain income tax positions is appropriate. To date, the Company has not experienced an examination by governmental revenue authorities that would lead management to believe that the Company's past provisions for exposures related to the uncertainty of such income tax positions are not appropriate.                                           22

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  The Company tests for impairment of goodwill at least annually, typically in the fourth quarter, based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. Fair value of each reporting unit is estimated using a discounted cash flow model. The model includes a number of significant assumptions and estimates including future cash flows and discount rates. Such assumptions and estimates necessarily involve management judgments concerning, among other things, future revenues and profitability. If the carrying amount exceeds fair value under the first step of the impairment test, then the second step is performed to measure the amount of any impairment loss. Only the first step of the impairment test was required in 2011 as the estimated fair value of the reporting units significantly exceeded carrying value.  Significant variances from management's estimates for the amount of uncollectible receivables, the ultimate resolution of self-insured claims, the provision for uncertainty in income tax positions and impairment of goodwill could each be expected to positively or negatively affect Landstar's earnings in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations.  

EFFECTS OF INFLATION

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

SEASONALITY

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