Landstar System, Inc. — Q3 2014 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 27, 2014; comparable periods ended September 28, 2013. Unaudited interim results. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Landstar is an asset-light transportation and logistics provider using independent sales agents and third-party capacity providers. It reports Transportation Logistics and Insurance segments. The company sold Landstar Supply Chain Solutions (LSCS) on December 28, 2013; prior-year results were reclassified as discontinued operations, so continuing-operations comparisons are more informative.
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Revenue | $819.3 | $675.5 | $2,322.0 | $1,972.8 |
| Operating income | $59.6 | $46.6 | $163.2 | $136.8 |
| Income from continuing operations | $36.8 | $28.5 | $100.3 | $83.7 |
| Net income | $36.8 | $29.2 | $100.3 | $86.5 |
| Diluted EPS | $0.82 | $0.64 | $2.22 | $1.87 |
Financial condition and cash flow
- Q3 revenue grew 21%; loads increased approximately 11% and revenue per load approximately 10%. For the first 39 weeks, revenue rose 18%, reflecting about 8% more loads and 10% higher revenue per load. Management attributed truck growth to stronger demand, tight capacity and market-share gains from new agents.
- Gross profit margin was 14.8% in Q3 versus 15.4% a year earlier, and 15.0% for the 39 weeks versus 15.4%. Purchased transportation rose to 77.3% of Q3 revenue from 76.7%, as truck capacity tightened and a greater share of business used brokerage carriers. Conventional operating margin (operating income/revenue) was approximately 7.3% in Q3 versus 6.9%.
- Q3 operating income rose 28% and net income rose 26%. For 39 weeks, income from continuing operations increased about 20%; 2013 net income also included $2.7 million of discontinued-operation income.
- Operating cash flow was $72.6 million for 39 weeks, down from $125.3 million. Management primarily attributed the decline to higher receivables amid revenue growth; cash flow also reflected a $64.0 million decrease in insurance claims liabilities, versus a $26.6 million increase in the prior-year period.
- At September 27, cash and cash equivalents were $140.6 million and short-term investments $37.7 million. Working capital was $320.1 million and the current ratio 1.9:1. Total debt, including current maturities, was $115.1 million; there were no borrowings under the revolving credit facility and $192.0 million remained available. The company reported compliance with its debt covenants.
- Shareholders’ equity was $495.7 million. The company repurchased $56.4 million of stock during the 39 weeks and paid $24.5 million in dividends, including payment of a prior-year declared dividend. It had authorization to repurchase 1,827,782 additional shares at quarter-end.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected approximately $9 million of operating-property purchases during the remainder of fiscal 2014 and believed operating cash flow and available borrowing capacity would fund debt service, growth, dividends, buybacks and working capital needs.
- Management identified dependence on demand, independent agents and third-party capacity, as well as tight truck capacity and purchased-transportation costs, as important business considerations. Other disclosed risks include accidents and claims, customer collection or bankruptcy risk, competition, technology disruptions, regulation and key-vendor dependence.
- Unfavorable development of prior-year self-insured claims reduced 39-week operating income by $7.1 million and continuing-operations diluted EPS by $0.10 (prior year: $8.2 million and $0.11). Q3 impact was $0.4 million and $0.01 per diluted share, compared with $3.6 million and $0.05 a year earlier. Claims estimates remain sensitive to future developments.
- The 2007 accident litigation was settled: the settlement was paid in full and plaintiffs released the Landstar defendants. Landstar stated its $5 million self-insured retention had been charged in 2007 and excess amounts were covered by insurance/reinsurance; future insurance-premium effects were uncertain. Other claims and litigation could materially affect results in a particular period, though management did not expect a material adverse effect on financial condition after provisions.
- The company said the new revenue-recognition standard was not expected to have a material impact. Disclosure controls were judged effective, with no significant quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether the strong load and revenue-per-load growth persists and whether capacity costs continue to pressure gross profit margin.
- Receivables, collections and operating cash flow conversion as revenue expands.
- Insurance-claim reserve development, claim severity and potential effects on insurance costs and premiums.
- Capital-lease obligations and total debt trajectory alongside buybacks, dividends and the remaining credit capacity.
- Comparability of reported earnings, particularly the prior-year discontinued LSCS results and the claim-development effects.