Landstar System, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2020; financial statements are unaudited. Landstar is an asset-light transportation and logistics provider that uses independent sales agents and third-party capacity providers.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $823.5 million | $1,045.0 million | $1,751.1 million | $2,078.0 million |
| Operating income | $32.2 million | $80.9 million | $86.2 million | $161.7 million |
| Net income | $24.3 million | $61.1 million | $65.1 million | $124.4 million |
| Diluted EPS | $0.63 | $1.53 | $1.68 | $3.11 |
| Gross profit margin | 13.7% | 15.1% | 14.6% | 15.1% |
| Operating margin on gross profit | 28.4% | 51.2% | 33.7% | 51.6% |
- Q2 revenue declined 21%; transportation revenue fell 21%. Truckload volumes were down about 16% and revenue per load about 6% year over year. Loads hauled by truck were 21% below prior-year levels in April and May and 9% below in June.
- For the first half, revenue declined 16%, reflecting approximately 11% fewer loads and a 6% decrease in revenue per load. Truck transportation represented 92% of first-half revenue.
- Q2 purchased transportation was 77.1% of revenue and agent commissions were 9.1%, compared with 76.5% and 8.4%, respectively, a year earlier. Insurance and claims were $19.8 million, versus $16.3 million; SG&A was $40.6 million, versus $41.3 million.
- Cash provided by operations was $198.4 million for the first half, compared with $184.1 million in 2019. Cash and cash equivalents were $245.5 million at quarter-end; short-term investments were $36.3 million.
- Working capital was $366.9 million and the current ratio was 1.8 to 1. Long-term debt, including current maturities, was $98.4 million, primarily finance lease obligations. No revolving-credit borrowings were outstanding; $215.8 million remained available under the credit facility.
Material changes and unusual items
- COVID-19-related demand disruption and softer U.S. manufacturing activity reduced freight volumes and pricing. Landstar also paid $12.6 million in temporary relief incentives to BCO independent contractors and agents for qualifying loads; management reported an adverse first-half earnings effect of approximately $0.24 per diluted share and a Q2 effect of approximately $0.25 per diluted share.
- Insurance and claims expense increased amid higher claim severity, unfavorable development of prior-year claims, a $5.0 million charge related to a fatal accident, and a $3.5 million provision for anticipated additional insurance premium. First-half unfavorable prior-year claims adjustments totaled $5.0 million.
- Excess commercial trucking liability premiums rose approximately $14 million, or more than 170%, at the May 1, 2020 renewal. The company warned that coverage availability and pricing could worsen.
- A $2.6 million non-cash impairment charge was recorded in Q2 for assets, primarily customer-related intangibles, associated with the Fletes Avella business in Mexico. Management cited deteriorating Mexican economic conditions; no goodwill impairment was recorded.
- Landstar acquired an independent agent’s truckload brokerage business in June for approximately $2.7 million in cash, plus about $0.2 million of contingent liabilities. It also formed Landstar Blue to develop and test digital technologies; management did not expect it to materially affect 2020 revenue or earnings.
- The company repurchased 1.18 million shares for $116.0 million and paid $93.4 million in dividends during the first half, including payment of $78.9 million of dividends declared in 2019.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management anticipated approximately $51 million of operating-property purchases for the remainder of fiscal 2020, primarily trailers and IT equipment, and believed operating cash flow and credit availability would cover operating needs, investment, dividends and share repurchases.
- Management emphasized uncertainty around the pandemic’s duration and effects on freight demand, capacity and operations. Further risks include accidents and claim development, rising insurance costs or reduced coverage, agent and capacity-provider dependence, and disruption or cyberattack affecting technology systems.
- The California independent-contractor misclassification action was dismissed in full by court order on July 15, 2020, without prejudice. The company said other ordinary-course claims were adequately provided for, while noting they could materially affect results in a particular period.
- The company reported compliance with its credit covenants. The revolving facility matures June 2, 2021. Management noted that operating results for the first half are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether freight volumes and revenue per load recover from pandemic-related declines, and whether capacity-provider availability changes.
- Future insurance premiums, excess-coverage availability, claim severity and development of self-insured claims.
- Cash generation and capital allocation relative to planned capital spending, dividends, repurchases and lease obligations.
- Progress and financial impact of Landstar Blue and performance of the Mexico-related assets following the impairment.
- Credit-facility renewal or refinancing plans ahead of its June 2021 maturity.