Landstar System, Inc. — Q1 2016 Form 10-Q
Reporting period: Thirteen weeks ended March 26, 2016; comparisons are to the thirteen weeks ended March 28, 2015 unless otherwise noted. Landstar is an asset-light transportation management provider, relying on independent sales agents and third-party capacity providers. Its reportable segments are transportation logistics and insurance. Figures below are in millions except per-share data and where indicated.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $711.6 | $762.4; down 7% |
| Operating income | $47.9 | $49.0; down 2% |
| Net income | $29.2 | $30.0; down 3% |
| Diluted EPS | $0.69 | $0.67 |
| Gross profit margin | 15.8% | 15.1% |
| Operating margin on gross profit | 42.7% | 42.5% |
| Cash from operations | $72.0 | $49.3 |
| Cash and cash equivalents | $156.3 | $114.5 at Dec. 26, 2015 |
| Working capital / current ratio | $314.7 / 2.0:1 | $286.6 / 1.8:1 at Dec. 26, 2015 |
| Total debt, including current maturities | $124.5 | $124.3 at Dec. 26, 2015 |
Cash from investing activities was $0.9 million; financing activities used $31.7 million. The operating cash flow increase was primarily attributed to timing of trade receivable collections. The effective tax rate was 38.0%, versus 37.8%. Quarterly dividends were $0.08 per share, versus $0.07.
At March 26, 2016, total assets were $957.5 million and shareholders’ equity was $482.4 million. The company had no borrowings under its revolving credit facility, with $192.2 million available; it had $32.8 million of letters of credit outstanding under that facility. Separately, $59.4 million of insurance-related letters of credit were collateralized by $66.0 million of investments.
Material changes and operating drivers
- Transportation revenue declined 7%, mainly as revenue per load fell about 10%; total loads increased 4%. Management cited lower diesel prices, softer freight conditions, a looser capacity market, shorter average hauls in some categories, and a lower share of specialized loads as factors affecting revenue per load.
- Truck transportation revenue fell 8%, while loads increased about 3%. Rail intermodal, air and ocean revenue rose 5%, with loads up about 22% and revenue per load down about 14%.
- Purchased transportation declined to 75.9% of revenue from 77.0%, while agent commissions increased to 8.3% from 7.8%. Management attributed the purchased-transportation ratio improvement largely to lower rates paid to truck brokerage carriers.
- SG&A decreased $2.6 million, partly because the annual agent convention occurred in Q1 2015 but was scheduled for Q2 2016. Depreciation and amortization increased $1.4 million, mainly due to additional owned trailers.
- Transportation logistics operating income was $39.6 million versus $43.7 million; insurance segment operating income was $8.3 million versus $5.3 million. Insurance segment revenue was $11.5 million versus $10.6 million.
- EPS increased despite lower net income, alongside a lower average diluted share count (42.5 million versus 44.8 million). The company repurchased 175,000 shares for $10.2 million during the quarter.
Outlook, risks and unusual items
- Landstar anticipated approximately $64 million of operating-property acquisitions during the remainder of fiscal 2016, primarily trailers and IT equipment. It also purchased Laredo land for approximately $2.4 million in April and anticipated an additional $22.1 million for construction of a freight staging and transload facility. Management said operating cash flow and available borrowing capacity should be adequate for planned needs.
- Unfavorable development of prior-year self-insured claims reduced Q1 2016 operating income by $2.1 million, net income by $1.3 million, and EPS by $0.03. Comparable Q1 2015 impacts were $4.6 million, $2.9 million, and $0.06 per share. Management cautioned that claim outcomes may differ from reserves and could materially affect results in a quarter or year.
- Landstar disclosed first-quarter spear-phishing attacks that exposed personal employee data. It reported remedial security measures, including enhanced systems and employee training, and warned that future incidents or system disruptions could harm operations, reputation, results, or financial position.
- Other stated risks include transportation demand and competition, dependence on agents and third-party capacity, accident and insurance claims, receivable collectability, regulatory changes, and technology or vendor disruptions. Ordinary-course litigation was provided for; management did not expect the ultimate outcome, after provisions, to materially harm financial condition, though quarterly or annual results could be affected.
- The company adopted deferred-tax balance-sheet classification guidance retrospectively, reclassifying $6.6 million of prior-year current deferred tax assets as noncurrent. Management did not expect the cited revenue-recognition and lease standards to materially affect the financial statements; it was evaluating the share-based payment standard.
Key facts for investors to verify
- Whether lower revenue per load and softer freight conditions persist, and whether load growth can offset yield pressure.
- How much reported earnings and cash flow depend on working-capital timing, share repurchases, and the timing of the agent convention.
- Developments in self-insured claims, reserve estimates, and current-year claim severity.
- Execution, financing, and expected returns for the planned trailer, IT, and Laredo facility spending.
- The scope and consequences of the spear-phishing incident and effectiveness of remediation.