Landstar System, Inc. — Q3 2022 Form 10-Q
Reporting period: Third quarter (13 weeks) ended September 24, 2022; year-to-date (39 weeks) compared with periods ended September 25, 2021. Landstar is an asset-light transportation management provider using independent agents and third-party capacity providers.
Financial performance
- Q3 revenue: $1.816 billion, up 5% year over year. Loads were approximately flat and revenue per load rose about 4%. Net income was $100.2 million, up 2%; diluted EPS was $2.76, up 7%.
- Year-to-date revenue: $5.762 billion, up 25%; net income was $337.6 million, up 26%; diluted EPS was $9.15, up 31%.
- Operating income: Q3 $133.5 million, up 2%; year to date $446.7 million, up 25%. Q3 operating margin was approximately 7.3%, versus 7.6% a year earlier; year-to-date operating margin was approximately 7.8%, versus 7.8%.
- Margins: Q3 gross profit margin was 10.2%, down from 10.9%; variable contribution margin, a non-GAAP measure, was 13.5%, down from 14.0%. Year-to-date gross profit margin was 10.6%, down from 11.1%; variable contribution margin was 13.6%, down from 14.2%.
- Cash flow: Year-to-date operating cash flow was $436.4 million, versus $217.0 million, primarily reflecting higher earnings and favorable working-capital timing. Investing activities used $26.3 million and financing activities used $450.2 million.
- Liquidity: September 24 cash and cash equivalents were $177.8 million and short-term investments were $50.6 million. Working capital was $543.3 million and the current ratio was 1.6, versus $512.9 million and 1.5 at fiscal year-end 2021.
- Debt and credit: Long-term debt, consisting of finance lease obligations, totaled $109.5 million. There were no revolver borrowings; $266.5 million was available under the $300 million revolving facility after outstanding letters of credit. The facility matures July 2027.
- Capital returns: Year-to-date dividends were $0.80 per share. Landstar repurchased 1.9 million shares for $286.0 million and had authorization remaining for up to 1,099,174 shares at quarter-end.
Changes and management commentary
- Year-to-date transportation revenue growth reflected approximately 15% higher revenue per load and 9% more loads. Q3 growth moderated: truck loads and revenue per load were nearly flat year over year, while multimode revenue per load remained elevated despite lower load volume.
- Truck Brokerage Carriers accounted for 53% of revenue in both Q3 and year-to-date 2022, versus 51% and 50% in the comparable 2021 periods. Ocean and air cargo rose to 9% of Q3 revenue and 8% year to date, from 5% and 4%, respectively.
- Year-to-date insurance and claims expense rose $21.1 million, driven by greater current-year claim severity, higher premiums, and $7.5 million of unfavorable prior-year claim adjustments (versus $4.5 million). Q3 included $2.1 million of unfavorable prior-year adjustments, compared with $3.5 million.
- Year-to-date SG&A increased $6.5 million, while Q3 SG&A declined $5.7 million, principally because incentive and stock-based compensation fell. Depreciation and amortization increased in both periods, mainly from technology investments and, to a lesser extent, trailers.
- Management said operating cash flow and available borrowing capacity should be sufficient for debt service, growth, dividends, share repurchases, and working capital. It anticipated approximately $17 million of additional operating-property purchases or lease financing in the remainder of 2022, primarily trailers and IT equipment. The filing provides no specific earnings or revenue guidance.
Risks, contingencies, and unusual items
- Management highlighted exposure to severe trucking accidents and “nuclear verdicts,” rising insurance premiums, reduced availability of excess coverage, and potential exposure above insured layers. A hypothetical $35 million claim in the policy year ending April 30, 2023 could leave Landstar with approximately $10 million of exposure under its arrangements.
- Self-insured claim estimates may differ from ultimate outcomes; material unfavorable development could affect quarterly or annual results. Management believes provisions are adequate and litigation is not expected to materially affect financial condition, though it could materially affect results in a period.
- Available-for-sale investments had $11.3 million of net unrealized losses at September 24, 2022, which management attributed primarily to rising interest rates rather than credit deterioration. The company reported no related impairment charge and said it did not expect to sell the securities before recovering their cost basis.
- The company invested approximately $5.0 million in privately held Cavnue, focused on connected and autonomous vehicle infrastructure. It also disclosed Russia-Ukraine, pandemic, demand, capacity-provider, agent, cybersecurity, regulatory, and other operational risks.
- Landstar reported compliance with its credit covenants. The credit agreement limits certain distributions if a default occurs or, in specified circumstances, if a distribution would cause the leverage ratio to exceed 2.5 to 1.
Key facts for investors to verify
- Whether the Q3 flattening in truck loads and revenue per load persists, and how demand, freight mix, fuel, and capacity affect revenue and margins.
- Current and prior-year insurance claim development, claim severity, excess-coverage availability, and retained exposure above policy limits.
- Whether operating cash flow remains strong after working-capital timing effects, alongside the pace of repurchases, dividends, and lease commitments.
- The valuation and potential impairment of the Cavnue investment and the recovery outlook for unrealized investment losses.
- Available revolver capacity, letters of credit, and compliance with credit-facility covenants.