Landstar System, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Landstar is an asset-light transportation management provider using independent sales agents and third-party capacity providers. The filing covers the 13 and 26 weeks ended July 1, 2017, compared with periods ended June 25, 2016. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance and liquidity
- Q2 revenue: $870.4 million, up 12%; operating income was $61.0 million, up 15%, and net income was $37.5 million, up 16%. Diluted EPS was $0.89 versus $0.76.
- First-half revenue: $1.651 billion, up 11%; operating income was $113.4 million, up 12%, and net income was $69.9 million, up 14%. Diluted EPS was $1.66 versus $1.45.
- Margins: Gross profit margin was 15.2% in Q2 and 15.4% in the first half, compared with 15.6% and 15.7%, respectively, in 2016. Operating margin, as defined by Landstar as operating income divided by gross profit, improved to 46.0% in Q2 and 44.6% in the first half, from 43.9% and 43.3%.
- Revenue drivers: Q2 transportation revenue rose 12%, from approximately 9% more loads and 3% higher revenue per load. For the first half, loads increased approximately 10% and revenue per load approximately 2%. Truck transportation accounted for the bulk of revenue growth; rail intermodal revenue declined.
- Cash flow: First-half operating cash flow was $79.8 million, down from $105.1 million, primarily due to timing of receivable collections. Investing activities used $4.7 million and financing activities used $32.5 million. Cash and cash equivalents ended at $222.1 million.
- Balance sheet: Working capital was $407.0 million and the current ratio was 2.1 to 1 at July 1. Cash plus short-term investments totaled $273.3 million. Total debt, including current maturities, was $119.0 million, down $19.3 million from year-end 2016. Shareholders’ equity was $609.5 million.
- Credit and capital returns: No revolving-credit borrowings were outstanding; $214.0 million remained available under the $250 million facility after letters of credit. The company paid $7.5 million in first-half dividends ($0.18 per share) and made no share repurchases in the period.
Material changes versus prior comparable periods
- Higher truck volumes and revenue per load drove revenue growth. Purchased transportation rose as a share of revenue to 76.7% in Q2 and 76.5% in the first half, from 76.0% in both prior-year periods, primarily reflecting higher rates paid to truck brokerage carriers and a shift in capacity mix.
- Insurance and claims expense declined year over year, including lower unfavorable development of prior-year claims in the first half ($0.2 million versus $2.8 million). Q2 expense also benefited from lower severity of current-year claims compared with a severe accident in Q2 2016.
- Selling, general and administrative expense increased, including incentive-compensation provisions of $3.9 million in Q2 and $6.8 million in the first half, compared with $0.3 million and $0.4 million, respectively, in 2016. Depreciation also increased with trailer additions.
- Landstar adopted ASU 2016-09 in 2017 and recognized $0.8 million of excess tax benefits, contributing to a lower effective tax rate. The reported effective rate was 37.7% in Q2 and 37.3% for the first half.
Outlook, commentary, risks and contingencies
- Management expects to acquire approximately $35 million of operating property during the remainder of fiscal 2017, primarily trailers and information-technology equipment. It believes operating cash flow and available credit will support debt service, growth, dividends, the share-repurchase authorization and working-capital needs. No specific earnings guidance is provided in the filing.
- Management identifies demand, recruiting and growing high-producing agents, securing third-party capacity at profitable rates, cost control, and insurance claims as important drivers. It cites broad-based customer demand for truck services in the reported periods.
- Key risks include accident frequency or severity and adverse claims development; dependence on agents, independent contractors and other capacity providers; reduced transportation demand; competition; cyber or system disruptions; regulatory changes; and customer receivable collectability. Management says pending ordinary-course claims and litigation are adequately provided for and are not expected to materially affect financial condition, but could materially affect results in a particular period.
- Management noted approximately $35.96 million of additional letters of credit under the credit agreement and $60.0 million of insurance-claim letters of credit secured by $66.7 million of investments. The company was in compliance with debt covenants. It reported effective disclosure controls and no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether load growth and higher revenue per load continue, and whether truck brokerage capacity costs keep pressuring gross profit margin.
- Cash conversion and receivable collection trends, given the year-over-year decline in operating cash flow.
- Future insurance claims development, reserves, and the impact of severe accidents on quarterly results.
- Whether incentive compensation, trailer investment and depreciation remain elevated, and how these affect operating leverage.
- Progress against the approximately $35 million remaining-2017 capital spending estimate and use of the share-repurchase authorization.