Landstar System, Inc. — Q3 2019 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 28, 2019; comparisons are with the periods ended September 29, 2018. Landstar is an asset-light transportation and logistics provider using independent sales agents and third-party capacity providers.
Financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Revenue | $1,011.7 | $1,202.1 | $3,089.7 | $3,432.8 |
| Operating income | $70.6 | $87.1 | $232.4 | $245.6 |
| Net income attributable to Landstar | $53.3 | $67.0 | $177.7 | $187.0 |
| Diluted EPS | $1.35 | $1.63 | $4.45 | $4.50 |
| Gross profit margin | 15.1% | 14.3% | 15.1% | 14.5% |
- Q3 revenue fell 16% year over year, reflecting about 12% lower revenue per load and 5% fewer loads. For the first 39 weeks, revenue declined 10%, as revenue per load decreased about 9% and loads about 1%.
- Management attributed lower truck revenue per load primarily to softer freight demand and more readily available truck capacity. Q3 third-party truck-provider revenue decreased 17%; rail intermodal loadings also weakened.
- Purchased transportation declined to 76.6% of revenue from 77.5% in both comparison periods. Gross profit margin improved, but lower revenue and higher Q3 insurance and claims costs reduced earnings.
- Q3 insurance and claims expense rose $5.2 million year over year; selling, general and administrative expense decreased $8.5 million, partly reflecting lower incentive and stock-based compensation.
Cash flow, balance sheet and capital
- Cash provided by operations for the first 39 weeks was $260.7 million, versus $204.2 million a year earlier. Management cited timing of trade-receivable collections. Investing activities used $13.9 million and financing activities used $162.4 million.
- Cash and cash equivalents were $284.4 million at September 28, 2019; short-term investments were $31.6 million. Working capital was $487.0 million and the current ratio was 2.0, compared with $435.6 million and 1.8 at year-end 2018.
- Long-term debt, including current maturities, was $100.8 million, down $27.7 million from year-end. The amount represents finance lease liabilities; Landstar had no revolving-credit borrowings and $215.6 million available under its credit agreement. The company reported compliance with debt covenants.
- Landstar paid $20.6 million in dividends during the period ($0.515 per share) and spent $88.6 million repurchasing 849,068 shares. Up to 1,150,932 shares remained authorized for repurchase at quarter-end.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. Landstar anticipated approximately $45 million of operating-property purchases during the remainder of fiscal 2019, primarily replacement trailers and information technology equipment. Management said operating cash flow and available borrowing capacity should meet expected needs.
- Unfavorable development of prior-year self-insured claims reduced first-nine-month operating income by $9.5 million and diluted EPS by $0.18; Q3 effects were $6.6 million and $0.13 per share. Q3 claims expense also reflected increased severity of current-year claims, including one serious vehicular accident.
- Landstar retains trucking-claim liability up to $5 million per occurrence and disclosed a new insurance arrangement effective May 1, 2019 for specified losses above that level. Higher claim frequency or severity and adverse reserve development could materially affect results.
- California enacted AB 5, effective January 1, 2020, adopting an ABC test for worker classification. Landstar said the impact remained uncertain, identified potentially affected contractors and agents, and did not expect the law to materially affect its overall network; classification changes could nevertheless harm its operating model and financial results.
- A California lawsuit alleging owner-operator misclassification and related labor-law violations was changed to an individual action after class allegations were struck. The company could not assess the likelihood or amount of any adverse outcome and said it would vigorously defend the case.
- Landstar acquired the remaining minority interests in Landstar Metro and Landstar Servicios for $0.6 million in January 2019. Management also identified softer freight demand, contractor and carrier capacity, competition, cybersecurity, regulatory changes and other operational and legal matters as risks.
Important facts for investors to verify
- Whether freight demand, load counts and revenue per load stabilized or continued to decline after the quarter.
- Subsequent insurance-claim development, especially the Q3 increase in unfavorable prior-year development and the effect of the serious accident.
- How California AB 5 is interpreted and applied to Landstar’s contractors, agents and carrier network.
- Cash-flow sustainability after receivable-collection timing effects, alongside planned capital spending, dividends and repurchases.
- That the reported debt balance primarily reflects finance leases, and that the revolving credit facility remained undrawn with covenant compliance.