Landstar System, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Landstar is an asset-light transportation and logistics provider using independent sales agents and third-party capacity providers. This unaudited report covers the 13 weeks ended March 30, 2019; comparisons are with the 13 weeks ended March 31, 2018. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2019 | Prior-year Q1 | Change |
|---|---|---|---|
| Revenue | $1,033.0 million | $1,047.9 million | Down 1% |
| Operating income | $80.9 million | $75.2 million | Up 8% |
| Net income attributable to Landstar | $63.3 million | $57.5 million | Up 10% |
| Diluted EPS | $1.58 | $1.37 | Up 15% |
| Operating cash flow | $121.4 million | $72.0 million | Up $49.4 million |
- Gross profit margin was 15.1%, versus 14.8%. Landstar’s defined operating margin—operating income divided by gross profit—was 52.0%, versus 48.3%.
- Cash and cash equivalents were $264.6 million at quarter-end; working capital was $471.0 million and the current ratio was 2.0 to 1.
- Long-term debt, including current maturities, was $116.4 million, all associated with finance leases. Landstar had no borrowings under its revolving credit facility and reported $215.6 million available for future borrowings.
- Cash used for purchases of operating property was $4.6 million. Operating cash flow less these purchases was approximately $116.8 million.
Material changes and drivers
- Transportation revenue fell 2%; lower revenue per load, particularly for truck transportation, outweighed higher shipment volume. Management attributed lower truck revenue per load to a softer freight environment and more readily available truck capacity.
- Third-party truck loads increased approximately 2%, while revenue per load declined approximately 5%. Multimode transportation revenue rose 15%, with higher ocean revenue per load and increased air shipments contributing.
- Purchased transportation declined to 76.6% of revenue from 77.3%; commissions to agents rose to 8.3% from 7.8%.
- Insurance and claims expense decreased by $2.4 million, and selling, general and administrative expense decreased by $4.0 million, contributing to improved operating income despite lower revenue. The effective tax rate was 21.0%, helped by $2.6 million of excess tax benefits from stock-based awards.
- Operating cash flow benefited substantially from the timing of receivable collections. Share repurchases totaled $13.0 million; dividends paid were $6.6 million, or $0.165 per share.
Outlook, risks and other notable items
- Management anticipated approximately $66 million of operating-property purchases during the remainder of fiscal 2019, primarily for replacement trailers and information technology equipment. It stated that operating cash flow and available credit should be adequate for debt service, growth, dividends, share repurchases and working capital. No revenue or earnings guidance was provided.
- Management noted typical trucking seasonality: truckload shipments in the March quarter are generally lower than in the June, September and December quarters.
- Unfavorable development of prior-year self-insured claims increased Q1 2019 operating income expense by $1.4 million, or $0.03 per diluted share, compared with $2.6 million, or $0.05 per share, in prior-year Q1. Claim estimates may change, and materially adverse claim development could affect quarterly or annual results.
- Other cited risks include weaker transportation demand, capacity availability and costs, reliance on agents and third-party carriers, accidents and insurance claims, cyber or systems disruptions, regulation, and trade relationships. Management reported no material developments in pending legal proceedings; claims and litigation could nevertheless affect results in a given period.
- On January 29, 2019, Landstar acquired the remaining minority interests in Landstar Metro and Landstar Servicios for $0.6 million, making both wholly owned subsidiaries. Lease accounting was adopted at the start of fiscal 2019; the adoption adjustment was not material.
Important facts for investors to verify
- Whether freight demand, revenue per load and truck capacity pricing continue to reflect the softer conditions described by management.
- Whether volume gains and multimode growth can offset pressure on transportation revenue per load.
- How self-insured claim estimates develop; the filing identifies claim severity and unfavorable prior-year development as potentially significant earnings variables.
- Whether the expected $66 million of remaining-year property purchases, dividends and repurchases remain consistent with cash generation and liquidity.
- That the quarter’s stronger operating cash flow was substantially influenced by receivable-collection timing, rather than solely by recurring earnings improvement.