Landstar System, Inc. — Q2 2019 Form 10-Q
Business context and period: Asset-light transportation and logistics provider using independent sales agents and third-party capacity providers. The unaudited quarter comprised the 13 weeks ended June 29, 2019; year-to-date figures cover 26 weeks. Comparisons are with the corresponding 2018 periods.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $1,045.0 million | $1,182.8 million | $2,078.0 million | $2,230.7 million |
| Operating income | $80.9 million | $83.4 million | $161.7 million | $158.6 million |
| Net income attributable to Landstar | $61.1 million | $62.5 million | $124.4 million | $120.0 million |
| Diluted EPS | $1.53 | $1.51 | $3.11 | $2.87 |
| Gross profit margin | 15.1% | 14.5% | 15.1% | 14.7% |
| Operating margin as defined by Landstar | 51.2% | 48.7% | 51.6% | 48.5% |
| Cash provided by operating activities | — | $184.1 million | $113.0 million |
Q2 revenue declined about 12% year over year, reflecting an approximately 11% drop in revenue per load and about 2% fewer loads. First-half revenue fell 7%, with loads approximately flat and revenue per load down about 8%. Management attributed weaker revenue per load primarily to softer freight demand and more available truck capacity. Despite lower revenue, Q2 diluted EPS increased as average diluted shares fell to 39.9 million from 41.5 million; first-half diluted EPS also benefited from improved operating income and fewer shares.
Q2 operating income decreased 3% and net income attributable to Landstar decreased 2%. For the first half, operating income increased 2% and attributable net income increased 4%. Purchased transportation declined as a share of revenue, while commissions to agents increased as a share of revenue. Lower insurance and claims and SG&A costs helped support margins.
Balance sheet, cash flow and capital
- At June 29, 2019, cash and cash equivalents were $250.2 million and short-term investments were $35.1 million. Working capital was $465.1 million; the current ratio was 2.0 to 1.
- Total debt, consisting of finance lease obligations, was $104.8 million, down $23.7 million from year-end. Landstar had no revolver borrowings and reported $215.6 million of availability under its $250 million credit facility, after $34.4 million of letters of credit.
- Operating cash flow was $184.1 million for the first half, versus $113.0 million a year earlier; management said the increase was primarily due to the timing of trade receivable collections. Investing activities used $7.5 million and financing activities used $127.1 million.
- Landstar repurchased 674,410 shares for $69.7 million and paid $13.3 million in dividends during the first half. Up to 1,325,590 shares remained authorized for repurchase at quarter-end.
- Management anticipated approximately $61 million of operating-property purchases or lease financing during the remainder of fiscal 2019, primarily trailers and information technology equipment. It said operating cash flow and available borrowing capacity should be adequate for expected needs, dividends and authorized repurchases.
Outlook, commentary and risks
- The filing provides no specific revenue, earnings or EPS guidance. Management emphasized revenue generation through its agent network, securing truck capacity, cost control and safety.
- Q2 truck transportation revenue fell 12%; truckload van revenue per load fell 13%, and rail intermodal loadings fell 16%. The company reported 67,766 available truck capacity providers, versus 61,952 a year earlier.
- Insurance and claims expense declined year over year, partly because unfavorable development of prior-year claims was lower: $1.5 million in Q2 and $2.9 million for the first half, versus $5.7 million and $8.2 million, respectively, in 2018. Claim estimates remain subject to actuarial uncertainty and can affect results materially in an individual period.
- Effective May 1, 2019, a new three-year commercial auto liability arrangement covers losses between $5 million and $10 million, subject to stated annual and term aggregate limits. Higher accident frequency or severity, or unfavorable claims development, could materially raise costs.
- A purported California class action alleges owner-operator misclassification and related labor-law violations. The company disputes the claims and intends to defend them, but said it could not assess the likelihood of an adverse outcome or potential damages at this preliminary stage.
- Other stated risks include demand and economic conditions, competition, reliance on agents and third-party capacity providers, regulatory changes, and technology or cybersecurity disruptions. Management reported effective disclosure controls and no significant change in internal control over financial reporting.
Most important facts for investors to verify
- Whether freight demand, revenue per load and shipment volumes stabilize or continue to weaken.
- Whether operating margin improvement persists as lower revenue interacts with operating costs, capacity costs and trailer investment.
- Whether the strong operating cash flow is repeatable, given management’s attribution of the year-over-year increase to collection timing.
- Developments in self-insured claims, the new excess-insurance arrangement and the California independent-contractor lawsuit.
- Actual fiscal 2019 capital spending, share repurchases and dividends compared with management’s stated plans and available liquidity.