Landstar System, Inc. — Q3 2010 Form 10-Q
Reporting period: Thirteen weeks ended September 25, 2010; year-to-date comparisons cover the thirty-nine weeks ended September 25, 2010. Unaudited results. Landstar is a non-asset-based freight transportation and supply-chain solutions provider operating through independent sales agents and third-party capacity providers.
Key financial results
| Metric | Q3 2010 | Q3 2009 | 39 weeks 2010 | 39 weeks 2009 |
|---|---|---|---|---|
| Revenue | $622.8 million | $500.7 million | $1,812.6 million | $1,461.1 million |
| Operating income | $35.9 million | $32.7 million | $104.2 million | $86.2 million |
| Net income attributable to Landstar | $21.8 million | $20.1 million | $63.4 million | $51.8 million |
| Diluted EPS | $0.44 | $0.39 | $1.27 | $1.01 |
| Operating margin | 5.8% | 6.5% | 5.7% | 5.9% |
- Q3 revenue increased 24.4%; management attributed the increase principally to 9% more loads and approximately 15% higher revenue per load, reflecting improved industrial production, market-share gains, stronger demand and tighter capacity.
- Q3 operating income rose about 9.8% and attributable net income about 8.6%. For the year-to-date period, revenue grew 24.1% and attributable net income grew about 22.4%.
- Purchased transportation consumed 76.2% of Q3 revenue, up from 74.4% a year earlier; management cited a larger truck-brokerage mix and higher carrier rates. Q3 operating margin consequently declined from 6.5% to 5.8%.
- Q3 transportation logistics operating income was $31.1 million versus $25.7 million; insurance segment operating income was $4.8 million versus $6.9 million. Year-to-date insurance operating income also declined, to $15.7 million from $23.9 million.
Cash flow, liquidity and capital
- Operating cash flow for the first 39 weeks was $68.3 million, down from $128.2 million. The company attributed the decrease primarily to higher customer receivables accompanying revenue growth.
- Cash and cash equivalents were $55.1 million at September 25, 2010, versus $85.7 million at December 26, 2009; short-term investments were $24.2 million. Working capital was $162.5 million and the current ratio was 1.6, unchanged from year-end.
- Total debt, including current maturities, was $127.1 million, up $34.2 million from year-end. The company reported $80.0 million outstanding on its revolving credit facility, $111.3 million available for future borrowing, and compliance with debt covenants. The facility provides $225 million of borrowing capacity and expires in June 2013.
- Year-to-date operating-property purchases were $25.5 million, including $21.1 million for the Jacksonville primary facility; a further $14.1 million of trailing equipment was acquired through capital leases. Cash used for share repurchases was $54.6 million, and dividends paid were $7.0 million.
Material changes, outlook and risks
- A $3.8 million one-time Q3 charge bought out NLM contingent purchase-price obligations. The after-tax impact was a $2.3 million reduction in attributable net income, or $0.05 per diluted share.
- Management anticipated approximately $1 million of additional operating-property purchases during the remainder of fiscal 2010 and stated that operating cash flow plus available borrowing capacity should meet debt service, growth, dividends, share repurchases and working-capital needs. The board intended to continue quarterly dividends; up to 2 million additional shares were authorized for repurchase. These statements are not earnings guidance.
- One customer represented approximately 11% of year-to-date revenue; no customer represented 10% or more of Q3 revenue. Truck capacity, carrier pricing, economic and transportation-sector conditions, agent and provider dependence, receivable collection, and accident and insurance-claim trends are key risks.
- On October 4, 2010, after quarter-end, the appellate court upheld the company’s current lease terms against the principal allegations but remanded a claim concerning disclosure in a former lease for possible injunctive relief and an evidentiary hearing on actual damages. Plaintiffs sought en banc rehearing. Landstar said it believed actual damages had not been sustained and any injunction was unlikely to materially affect its financial condition or results; the outcome was uncertain.
- Insurance and claims costs included $1.6 million of unfavorable prior-year claim adjustments year to date, compared with $5.6 million of favorable adjustments in the comparable 2009 period. Management noted that claim estimates and other accounting estimates may vary from actual outcomes.
Important facts for investors to verify
- Whether higher freight volumes and revenue per load continue to offset higher purchased-transportation costs and preserve operating margins.
- Whether receivable growth converts to cash and operating cash flow recovers from the year-to-date decline.
- Debt and liquidity capacity after repurchases, dividends, capital spending and any further borrowing.
- Developments in the OOIDA litigation, including the rehearing request, remand proceedings and any potential damages or legal costs.
- Customer concentration, insurance-claim development and the contribution and costs of the acquired logistics businesses.