Landstar System, Inc. — Q3 2020 Form 10-Q
Reporting period: Thirteen weeks ended September 26, 2020; year-to-date figures cover the thirty-nine weeks ended that date. Comparisons are with the corresponding 2019 periods. Landstar is an asset-light transportation and logistics provider using independent sales agents and third-party capacity providers.
Financial performance
- Q3 revenue: $1,085.5 million, up 7% year over year. Loads increased about 3% and revenue per load about 5%, reflecting recovering demand and tighter truck capacity.
- Q3 earnings: Operating income was $82.4 million, up from $70.6 million; net income was $61.9 million versus $53.3 million; diluted EPS was $1.61 versus $1.35. Gross profit margin was 14.8%, versus 15.1%; operating margin on gross profit was 51.2%, versus 46.3%.
- Year-to-date revenue: $2,836.6 million, down 8%. Net income was $127.0 million versus $177.7 million, and diluted EPS was $3.28 versus $4.45. Gross profit margin was 14.7%, versus 15.1%; operating margin on gross profit was 40.4%, versus 49.8%.
- Cash flow: Year-to-date operating cash flow was $185.5 million, down from $260.7 million. Capital expenditures were $25.4 million. Cash and equivalents totaled $218.6 million at quarter end, compared with $319.5 million at fiscal year-end 2019.
- Liquidity and debt: Working capital was $420.5 million and the current ratio was 1.8. Finance lease obligations totaled $87.3 million, including current maturities. The company had no revolver borrowings and $216.4 million of capacity available under its $250 million facility, maturing August 2023; it was in compliance with covenants.
- Capital returns: Year-to-date dividends declared and paid were $0.58 per share; the Q3 dividend was $0.21 per share. The company repurchased 1.18 million shares for $116.0 million during the first nine months, but reported no repurchases in Q3.
Material changes and notable items
- Q3 performance improved year over year, following a sharp pandemic-related decline in demand during Q2 and a gradual recovery through Q3. In Q3, truck loads rose 7% in September versus the prior-year month, after declines in July and a smaller increase in August.
- Year-to-date results remained weaker: transportation volume and revenue per load declined, while purchased transportation rose to 77.0% of revenue from 76.6%. The company attributed the higher cost ratio partly to pandemic relief payments and increased rates paid to capacity providers.
- Insurance and claims costs rose year to date by $11.3 million, including a $5.0 million charge for the company’s retention related to a fatal accident, $3.5 million of anticipated additional excess-policy premium, and higher commercial trucking insurance premiums. The May 2020 renewal increased excess-coverage premiums by approximately $14 million, or over 170%.
- A $2.6 million non-cash impairment charge was recorded in Q2 for acquired Mexico-related intangible and other assets amid adverse macroeconomic conditions. No goodwill impairment was recorded.
- Landstar acquired an independent brokerage agent in June for approximately $2.8 million in cash; the acquisition was described as not material to consolidated results.
- In October, the company announced a BCO field-operations initiative and expected to record an approximately $15 million provision in Q4 for buyouts of certain agent incentive-commission arrangements following discontinuation of a recruitment and retention program.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management expected approximately $44 million of additional operating-property purchases or lease financing for the remainder of fiscal 2020, primarily trailers and IT equipment, and stated that operating cash flow plus borrowing capacity should cover anticipated needs.
- COVID-19’s future effects on demand, capacity, operations and cash flows remained uncertain. Management characterized the abrupt demand collapse and subsequent recovery as unprecedented.
- Insurance availability and pricing, accident severity, and unfavorable development of self-insured claims are significant risks. Year-to-date prior-year claim estimates included $6.2 million of net unfavorable adjustments.
- Management said ordinary-course claims and litigation were adequately provided for and were not expected to materially affect financial condition, although outcomes could materially affect results in a particular quarter or year.
- Adverse conditions in Mexico and peso depreciation could affect Mexican operations; the filing identifies COVID-19 and economic disruption there as risks.
Investor facts to verify
- Whether Q3’s volume and pricing recovery continued after September, and how capacity tightness affected purchased-transportation costs and margins.
- The final cost and timing of the expected $15 million Q4 agent-arrangement provision.
- Insurance renewal costs, excess-policy premiums and claims development, including the fatal-accident claim.
- Cash conversion and liquidity trends, given lower year-to-date operating cash flow and substantial dividends and share repurchases.
- Further impairment or operating effects from conditions in Mexico and the acquired Fletes Avella assets.