Landstar System, Inc. — Q1 2018 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2018, compared with the thirteen weeks ended April 1, 2017. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Interim results are unaudited and are not necessarily indicative of full-year results.
Business context
Landstar is an asset-light transportation and logistics provider operating mainly through independent sales agents and third-party capacity providers. It reports transportation logistics and insurance segments. Transportation logistics revenue drove nearly all of the quarter’s growth.
Financial performance
| Metric | Q1 2018 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,047.9 million | $780.9 million | Up 34% |
| Operating income | $75.2 million | $52.3 million | Up 44% |
| Net income attributable to Landstar | $57.5 million | $32.4 million | Up 77% |
| Diluted EPS | $1.37 | $0.77 | Up 78% |
| Cash provided by operations | $72.0 million | $61.9 million | Up $10.1 million |
- Transportation revenue increased 35%, reflecting approximately 12% more loads and approximately 20% higher revenue per load. Management attributed higher truck rates to tighter capacity and higher diesel costs.
- Gross profit margin declined to 14.8% from 15.6%, as purchased transportation rose to 77.3% of revenue from 76.3%. Operating income as a share of revenue was approximately 7.2%, versus 6.7%; the company’s stated operating margin, calculated as operating income divided by gross profit, was 48.3%, versus 43.0%.
- Net income benefited by approximately $10.2 million, or $0.24 per share, from the U.S. corporate tax-rate reduction under the Tax Cuts and Jobs Act. The effective tax rate was 22.7%, versus 36.8%.
- Net unfavorable development of prior-year self-insured claims was $2.6 million, compared with $0.1 million of favorable development in the prior-year quarter.
Cash, liquidity and capital
- Cash and cash equivalents were $220.6 million at March 31, down from $242.4 million at December 30, 2017. Working capital was $455.8 million and the current ratio was 2.0:1.
- Total debt, including current maturities, was $113.3 million, down $11.8 million from year-end. There were no revolver borrowings; $216.9 million of the $250 million credit facility was available after outstanding letters of credit. The company reported compliance with its debt covenants.
- Investing activities used $2.2 million. Financing activities used $91.3 million, including $69.3 million in dividends paid and $11.8 million in capital-lease principal payments. The dividend cash outflow included payment of a previously declared $1.50-per-share dividend, as well as the quarter’s $0.15-per-share dividend.
- Landstar repurchased 14,354 shares for $1.5 million; 2,985,646 shares remained authorized for repurchase. It anticipated approximately $56 million of operating-property purchases or lease financing for the remainder of fiscal 2018, mainly trailers and technology equipment.
Outlook, accounting changes and risks
- Management said operating cash flow and available borrowing capacity should be adequate for debt service, growth, acquisitions, dividends, share repurchases and working capital. The filing provides no specific revenue or earnings guidance.
- Adoption of the new revenue-recognition standard shifted most transportation revenue recognition from delivery to over the transit period. It increased reported Q1 revenue by $2.2 million and Landstar-attributable net income by $0.2 million versus the amounts that would have been reported without adoption; comparative-period figures were not restated.
- Key disclosed risks include accident frequency and severity, unfavorable claims development, reliance on independent agents and third-party capacity, transportation demand and competition, customer collections, cyber or system disruptions, and regulatory changes. Management cautioned that litigation could materially affect results in a particular quarter or year, though it did not expect a material adverse effect on financial condition.
- The company held $1.1 million of net unrealized losses on available-for-sale investments, which management attributed primarily to rising interest rates and did not consider other-than-temporary. Management said a 100-basis-point interest-rate move would not materially affect annualized earnings on long-term investments.
Important facts for investors to verify
- Whether volume, higher rates and tighter truck capacity remain supportive, and how capacity costs affect gross profit margin.
- How much earnings growth is recurring versus the estimated $10.2 million tax-reform benefit, and the effects of share-based compensation and claims development.
- The timing and cash impact of planned $56 million capital spending, dividends and remaining share repurchases.
- Developments in self-insured claims, receivable collectability, the Mexico acquisition’s contingent obligations and any material litigation.
- Whether subsequent filings provide formal guidance or materially update the risks and outlook; Q1 results alone do not establish full-year performance.