Summary of LANDSTAR SYSTEM INC

Item 2. 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 27, 2008 and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2008 Annual Report on Form 10-K.
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 transportation and logistics services company, providing transportation capacity and related transportation services to shippers throughout the United States and, to a lesser extent, in Canada, and between the United States and Canada, Mexico and other countries. These business 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 Company markets its services primarily through independent commission sales agents and exclusively utilizes third party capacity providers to handle customers' freight. The nature of the Company's business is such that a significant portion of its operating costs varies directly with revenue.
The transportation logistics segment provides a wide range of transportation and logistics services, including truckload transportation, rail intermodal, air cargo and ocean cargo services, the arrangement of multimodal (ground, air, ocean and rail) moves, supply chain solutions services 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 hardware. In addition, the transportation logistics segment provides transportation services to other transportation companies, including logistics and less-than-truckload service providers. The transportation logistics segment also provides dedicated contract and logistics solutions, including freight optimization and less-than-truckload freight consolidations, expedited ground and air delivery of time-critical freight and the movement of containers via ocean. This segment markets its services primarily through independent commission sales agents who enter into contractual arrangements with Landstar 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"), 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"). The Company has contracts with all of the Class 1 domestic railroads and certain Canadian railroads and contracts with domestic and international airlines and ocean lines. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Revenue recognized by the transportation logistics segment when providing capacity to customers to haul their freight is herein referred to 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 thirty nine weeks ended September 26, 2009, transportation services revenue hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal, ocean cargo carriers and air cargo carriers represented 59%, 34%, 4%, 2%, and 1%, respectively, of the Company's transportation logistics segment revenue.
In the first week of the Company's 2009 fiscal third quarter, the Company completed the acquisitions of Premier Logistics, Inc. (collectively with its subsidiaries, "Premier") and 75% of the voting interests of A3i Integration, LLC (collectively with its subsidiaries, "A3i"). These two supply chain transportation integration companies offer customers technology-based supply chain solutions and other value added services on a fee-for-service basis. The results of operations from Premier and A3i (collectively, the "Acquired Entities") are presented as part of the Company's transportation logistics segment. The Company expects that the acquisitions will not have a material effect on its revenues and earnings for the remainder of fiscal year 2009. Transportation management fees represented less than 1% of the Company's transportation logistics segment revenue in the 2009 period.
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 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 Landstar's operating subsidiaries. Revenue, representing premiums on reinsurance programs provided to the Company's BCO Independent Contractors, at the insurance segment represented approximately 2% of the Company's total revenue for the thirty nine weeks ended September 26, 2009. 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.

Table of Contents

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 2008 fiscal year, 484 independent commission sales agents generated $1 million or more of Landstar's revenue and thus qualified as Million Dollar Agents. During the 2008 fiscal year, the average revenue generated by a Million Dollar Agent was $4,907,000 and revenue generated by Million Dollar Agents in the aggregate represented 90% of consolidated Landstar revenue. The Company had 1,403 agent locations at both September 26, 2009 and September 27, 2008.
Management monitors business activity by tracking the number of loads (volume) and revenue per load (price). Revenue per load can be influenced by many factors which do not necessarily indicate a change in price. Those factors include the average length of haul, freight type, special handling and equipment requirements 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:

                                                   Thirty Nine Weeks Ended                Thirteen Weeks Ended
                                                Sept. 26,           Sept. 27,          Sept. 26,         Sept. 27,
                                                   2009               2008               2009               2008
Revenue generated through (in thousands):

BCO Independent Contractors                    $    840,391        $ 1,070,982        $   289,726        $  370,787
Truck Brokerage Carriers                            495,661            766,262            166,182           275,928
Rail intermodal                                      57,094            106,936             20,366            35,338
Ocean cargo carriers                                 25,459             29,329              7,941            11,109
Air cargo carriers                                   10,259             10,135              2,751             2,686
Other (1)                                            32,217             55,588             13,704            36,905

                                               $  1,461,081        $ 2,039,232        $   500,670        $  732,753


Number of loads:

BCO Independent Contractors                         561,840            638,330            196,840           209,250
Truck Brokerage Carriers                            363,000            435,250            122,980           146,280
Rail intermodal                                      28,600             45,610             10,310            14,610
Ocean cargo carriers                                  3,920              3,990              1,330             1,400
Air cargo carriers                                    6,440              5,520              1,340             1,650

                                                    963,800          1,128,700            332,800           373,190


Revenue per load:

BCO Independent Contractors                    $      1,496        $     1,678        $     1,472        $    1,772
Truck Brokerage Carriers                              1,365              1,761              1,351             1,886
Rail intermodal                                       1,996              2,345              1,975             2,419
Ocean cargo carriers                                  6,495              7,351              5,971             7,935
Air cargo carriers                                    1,593              1,836              2,053             1,628

(1) Includes premium revenue generated by the insurance segment and warehousing and transportation management fees generated by the transportation logistics segment. Also, included in the 2008 thirty-nine-week and thirteen-week periods was $27,638 of revenue for bus capacity provided for evacuation assistance related to the storms that impacted the Gulf Coast in the third quarter of 2008 (the "Bus Revenue").

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:

Table of Contents

                                                                   Sept. 26,          Sept. 27,
                                                                     2009               2008

BCO Independent Contractors                                             8,070              8,363
Truck Brokerage Carriers:
Approved and active (1)                                                14,541             16,400
Other approved                                                         10,576              9,120

                                                                       25,117             25,520

Total available truck capacity providers                               33,187             33,883

Number of trucks provided by BCO Independent Contractors                8,655              8,949

(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 rail intermodal, air cargo 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 costs are recognized upon the completion of freight delivery.
Commissions to agents are based on contractually agreed-upon percentages of revenue or gross profit, defined as revenue less the cost of purchased transportation. No commissions to agents were incurred in connection with the 2008 Bus Revenue. 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 the insurance segment and with changes in gross profit on services provided by Truck Brokerage Carriers, rail intermodal, air cargo and ocean cargo carriers. Commissions to agents are recognized upon the completion of freight delivery.
Maintenance costs for Company-provided trailing equipment, BCO Independent Contractor recruiting costs and bad debts from BCO Independent Contractors and independent commission sales agents are the largest components of other operating costs.
Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. Landstar's retained liability for individual commercial trucking claims varies depending on when such claims are incurred. 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, rail intermodal capacity providers 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 they maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers' compensation claims or the unfavorable development of existing claims could be expected to materially adversely affect Landstar's results of operations.
Employee compensation and benefits account for over half of the Company's selling, general and administrative costs.
Depreciation and amortization primarily relate to depreciation of trailing equipment and management information services equipment.

Table of Contents

The following table sets forth the percentage relationships of income and expense items to revenue for the periods indicated:

                                                    Thirty Nine Weeks Ended                  Thirteen Weeks Ended
                                                 Sept. 26,           Sept. 27,           Sept. 26,          Sept. 27,
                                                    2009                2008               2009               2008
Revenue                                              100.0 %             100.0 %            100.0 %            100.0 %
Investment income                                      0.1                 0.1                0.1                0.1
Costs and expenses:
Purchased transportation                              74.6                77.1               74.4               77.8
Commissions to agents                                  8.1                 7.5                7.9                7.4
Other operating costs                                  1.5                 1.0                1.4                0.9
Insurance and claims                                   2.0                 1.3                2.1                1.1
Selling, general and administrative                    6.8                 5.2                6.6                4.7
Depreciation and amortization                          1.2                 0.8                1.2                0.7

Total costs and expenses                              94.2                92.9               93.6               92.6


Operating income                                       5.9                 7.2                6.5                7.5
Interest and debt expense                              0.2                 0.3                0.2                0.3


Income before income taxes                             5.7                 6.9                6.3                7.2
Income taxes                                           2.2                 2.7                2.3                2.7


Net income                                             3.5 %               4.2 %              4.0 %              4.5 %

THIRTY NINE WEEKS ENDED SEPTEMBER 26, 2009 COMPARED TO THIRTY NINE WEEKS ENDED
SEPTEMBER 27, 2008
Revenue for the 2009 thirty-nine-week period was $1,461,081,000, a decrease of $578,151,000, or 28.4%, compared to the 2008 thirty-nine-week period. Revenue decreased $577,954,000, or 28.7%, at the transportation logistics segment. The decrease in revenue at the transportation logistics segment was primarily attributable to decreased revenue hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and ocean cargo carriers of 22%, 35%, 47% and 13%, respectively, partially offset by increased revenue hauled by air cargo carriers of 1%. Included in the 2009 thirty-nine-week period was $3,664,000 of transportation management fees. Included in the 2008 thirty-nine-week period was $27,638,000 of Bus Revenue. The number of loads in the 2009 period hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and ocean cargo carriers decreased 12%, 17%, 37% and 2%, respectively, compared to the 2008 period, while the number of loads hauled by air cargo carriers increased 17% over the same period. Revenue per load for loads hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers, ocean cargo carriers and air cargo carriers decreased approximately 11%, 22%, 15%, 12% and 13%, respectively, compared to the 2008 period. The decrease in revenue per load hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal and air and ocean cargo carriers was primarily attributable to lower demand due to the overall weak economic conditions which caused increased pressure on price. In addition, the decrease in revenue per load on Truck Brokerage Carrier revenue was partly attributable to decreased fuel surcharges identified separately in billings to customers in the 2009 period compared to the 2008 period. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $31,315,000 and $109,601,000 in the 2009 and 2008 periods, respectively. Fuel surcharges billed to customers on revenue hauled by BCO Independent Contractors are excluded from revenue.
Investment income at the insurance segment was $954,000 and $2,686,000 in the 2009 and 2008 thirty-nine-week periods, respectively. The decrease in investment income was primarily due to a decreased rate of return, attributable to a general decrease in interest rates on investments held by the insurance segment in the 2009 period.
Purchased transportation was 74.6% and 77.1% of revenue in the 2009 and 2008 thirty-nine-week periods, respectively. The decrease in purchased transportation as a percentage of revenue was primarily attributable to decreased rates of purchased transportation paid to Truck Brokerage Carriers, due to lower fuel prices and excess truck capacity industry wide, and an increase in the percentage of revenue hauled by BCO Independent Contractors, which tends to have a lower cost of purchased transportation. Commissions to agents were 8.1% of revenue in the 2009 period and 7.5% of revenue in the 2008 period. The increase in commissions to agents as a percentage of revenue was primarily attributable to increased gross profit, defined as revenue less the cost of purchased transportation, on revenue hauled by Truck Brokerage Carriers. Other operating costs were 1.5% and 1.0% of revenue in the 2009 and 2008 periods, respectively. The increase in other operating costs as a percentage of revenue was primarily attributable to the effect of decreased revenue, $870,000 of other operating costs from the Acquired Entities, increased trailing equipment maintenance costs and an increased provision for contractor bad debt, partially offset by decreased trailing equipment rental costs. Insurance and claims were 2.0% of revenue in the 2009 period and 1.3% of revenue in the 2008 period. The increase in insurance and claims as a percentage of revenue was primarily due to increased favorable development of prior year claims reported in the 2008 period. Selling, general and administrative costs were 6.8% of revenue in the 2009 period and 5.2% of revenue in the 2008 period. The increase in selling, general and administrative costs as a percentage of revenue was primarily attributable to the effect of decreased revenue, $2,005,000 of one-time acquisition related costs, $3,300,000 of selling, general and administrative costs from the Acquired Entities and an increased provision for customer bad debt. In addition, there was no provision for bonuses reported in the 2009 period as management does not currently anticipate achieving bonus targets, whereas the 2008 period included a provision for bonuses. Depreciation and amortization was 1.2% of revenue in the 2009 period compared with 0.8% in the 2008 period. The

Table of Contents

increase in depreciation and amortization as a percentage of revenue was primarily due to the effect of decreased revenue, depreciation on Company-owned trailing equipment and amortization of identifiable intangible assets attributed to the Acquired Entities.
Interest and debt expense was 0.2% of revenue in the 2009 thirty-nine-week period, compared to 0.3% in the 2008 period. The decrease in interest and debt expense as a percentage of revenue was primarily attributable to lower average borrowings on the Company's senior credit facility, a lower average rate on borrowings under the company's senior credit facility and lower average capital lease obligations during the 2009 period.
The provisions for income taxes for the 2009 and 2008 thirty-nine-week periods were based on estimated full year combined effective income tax rates of approximately 37.9% and 38.4%, 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 was primarily attributable to recognition of benefits relating to several uncertain tax positions for which the applicable statute of limitations passed in the 2009 third quarter.
The net loss attributable to noncontrolling interest of $214,000 represents the noncontrolling investor's 25 percent share of the net loss incurred by A3i during the 2009 thirty-nine-week period.
Net income attributable to the Company was $51,827,000, or $1.01 per common share ($1.01 per diluted share), in the 2009 thirty-nine-week period. Net income attributable to the Company was $86,325,000, or $1.64 per common share ($1.62 per diluted share), in the 2008 thirty-nine-week period. Included in the 2008 thirty-nine-week period is operating income of $2,870,000 related to the $27,638,000 of Bus Revenue. The $2,870,000 of operating income, net of related income taxes, increased 2008 thirty-nine-week period net income attributable to the Company by $1,722,000, or $0.03 per common share ($0.03 per diluted share).
THIRTEEN WEEKS ENDED SEPTEMBER 26, 2009 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 27, 2008
Revenue for the 2009 thirteen-week period was $500,670,000, a decrease of $232,083,000, or 31.7%, compared to the 2008 thirteen-week period. Revenue decreased $231,755,000, or 32.0%, at the transportation logistics segment. The decrease in revenue at the transportation logistics segment was primarily attributable to decreased revenue hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and ocean cargo carriers of 22%, 40%, 42% and 29%, respectively, partially offset by increased revenue hauled by air cargo carriers of 2%. Included in the 2009 thirteen-week period was $3,664,000 of transportation management fees. Included in the 2008 thirteen-week period was $27,638,000 of Bus Revenue. The number of loads in the 2009 period hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and ocean and air cargo carriers decreased 6%, 16%, 29%, 5% and 19%, respectively, compared to the 2008 period. Revenue per load for loads hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and ocean cargo carriers decreased approximately 17%, 28%, 18%, and 25%, respectively, compared to the 2008 period, while revenue per load for loads hauled by air cargo carriers increased 26% over the same period. The decrease in revenue per load hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal and ocean cargo carriers was primarily attributable to lower demand due to the overall weak economic conditions which caused increased pressure on price. In addition, the decrease in revenue per load on Truck Brokerage Carrier revenue was partly attributable to decreased fuel surcharges identified separately in billings to customers in the 2009 period compared to the 2008 period. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $12,329,000 and $41,853,000 in the 2009 and 2008 periods, respectively.
Investment income at the insurance segment was $279,000 and $817,000 in the 2009 and 2008 thirteen-week periods, respectively. The decrease in investment income was primarily due to a decreased rate of return, attributable to a general decrease in interest rates on investments held by the insurance segment in the 2009 period.
Purchased transportation was 74.4% and 77.8% of revenue in the 2009 and 2008 thirteen-week periods, respectively. The decrease in purchased transportation as . . .