Landstar System, Inc. — 2014 Q2 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 28, 2014; comparisons are with periods ended June 29, 2013. Amounts below are in U.S. dollars.
Business context
Landstar is an asset-light transportation management provider that arranges freight movement through independent sales agents and third-party capacity providers. It reports Transportation Logistics and Insurance segments. The company completed the sale of Landstar Supply Chain Solutions (LSCS) on December 28, 2013; prior-year LSCS results are presented as discontinued operations.
Financial performance and material changes
- Second quarter: Revenue rose 21% to $814.4 million. Loads increased about 9% and revenue per load about 12%. Operating income was $58.6 million, up 21%; net income was $35.9 million versus $30.4 million, and diluted EPS was $0.80 versus $0.66.
- First half: Revenue increased 16% to $1.503 billion. Operating income increased to $103.6 million from $90.2 million. Net income was $63.6 million versus $57.2 million, while diluted EPS was $1.40 versus $1.23. Prior-year net income included $2.0 million from discontinued operations; continuing-operations income was $55.2 million.
- Margins: Gross profit margin was 14.9% in Q2 versus 15.4% a year earlier, and 15.1% for the first half versus 15.4%. Landstar’s operating margin, defined as operating income divided by gross profit, was 48.1% in Q2 versus 46.7%, and 45.6% for the first half versus 45.1%.
- Cost and demand trends: Truck transportation revenue grew strongly amid broad-based demand and tight truck capacity. Purchased transportation rose to 77.2% of Q2 revenue from 76.7%, as carrier rates increased and brokerage-carrier mix grew. Multimode revenue declined 6% in Q2; first-half multimode revenue declined 10%, with severe winter weather disrupting rail in the first half.
- Cash flow: First-half operating cash flow from continuing operations fell to $13.6 million from $80.1 million, primarily because receivables increased with revenue growth. Cash and equivalents declined to $93.1 million from $180.3 million at year-end.
- Liquidity and debt: Working capital was $301.0 million and the current ratio was 1.8, both broadly in line with year-end. Total debt, including current maturities, was $92.8 million, down $8.7 million from year-end. The company had no revolver borrowings, $192 million available under its $225 million credit facility, and was in compliance with debt covenants.
- Capital returns: Landstar repurchased 939,872 shares for $56.4 million in the first half and paid $21.3 million in dividends, including payment of a dividend declared in 2013. It had authorization to repurchase a further 1,827,782 shares at June 28.
Outlook, risks and unusual items
- Management expected to acquire approximately $43 million of operating property during the remainder of fiscal 2014, primarily replacement trailers and IT equipment, through purchases or lease financing. It said operating cash flow and available borrowing capacity should be adequate for operating needs, growth, debt service, dividends and share repurchases. No specific revenue or earnings guidance is provided.
- Unfavorable development of prior-year self-insured claims reduced first-half operating income by $6.7 million and continuing-operations diluted EPS by $0.09; corresponding Q2 effects were $4.9 million and $0.07.
- A Georgia accident case was subject to a $42 million settlement agreement in principle dated July 9, 2014, after quarter-end. Landstar recorded a $40.5 million insurance receivable and matching insurance-claims liability at June 28. The company had previously recorded its $5 million self-insured retention. Management cautioned that the matter could affect future insurance premiums.
- Key risks include accident frequency and severity, unfavorable claims development, reliance on third-party insurers and capacity providers, demand and competition, customer receivable collectability, regulatory changes, and technology or vendor disruptions. Management said ordinary-course litigation provisions were adequate, but outcomes could materially affect a particular quarter or year.
- Landstar stated that the new revenue recognition standard was not expected to materially affect its financial statements. Disclosure controls were assessed as effective, with no significant internal-control changes reported during the quarter.
Important facts for investors to verify
- Whether higher freight demand and revenue per load persist, and whether capacity costs continue to pressure gross margin.
- Whether receivables convert to cash and operating cash flow recovers after the first-half working-capital increase.
- The final resolution and insurance recovery for the $42 million settlement, and any resulting change in insurance premiums or claims costs.
- Execution and funding of the planned remaining-year capital expenditures, dividends and share repurchases.