Landstar System, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the year included 53 weeks, versus 52 weeks in FY2015. Landstar is an asset-light transportation and logistics provider, relying on independent sales agents and third-party capacity providers. Truck transportation generated 93% of consolidated revenue. Figures below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $3,167.6 million | $3,321.1 million |
| Operating income | $223.3 million | $241.7 million |
| Net income | $137.4 million | $147.7 million |
| Diluted EPS | $3.25 | $3.37 |
| Operating cash flow | $190.2 million | $216.0 million |
| Gross profit margin | 15.4% | 15.0% |
| Operating margin on gross profit | 45.8% | 48.4% |
- Revenue fell 5%, as transportation revenue per load declined about 7%, partly offset by a 3% increase in loads. Management attributed lower revenue per load to softer freight conditions, greater truck-capacity availability and lower diesel prices; the extra operating week contributed about 20,000 truckloads.
- Purchased transportation declined to 76.3% of revenue from 76.8%, supporting improved gross margin. However, insurance and claims expense rose $8.5 million, while depreciation and amortization rose $6.7 million, contributing to lower operating income and net income.
- Cash and cash equivalents were $178.9 million at year-end. Working capital was $357.1 million and the current ratio was 1.9:1, compared with $286.6 million and 1.8:1 a year earlier. Operating cash flow decreased, mainly due to lower net income and the timing of receivable collections.
- Total debt, including current maturities, was $138.3 million, up from $124.3 million; it consisted of capital-lease obligations. The company had no revolving-credit borrowings and reported $214.4 million of available capacity under its $250 million revolving facility. Shareholders’ equity was $542.6 million.
- Landstar paid $0.34 per share in FY2016 dividends and repurchased 773,281 shares for $50.5 million. The board stated its intention to continue quarterly dividends, subject to credit-agreement restrictions.
Quarterly context and material changes
Fourth-quarter FY2016 revenue was $892.8 million, operating income $63.8 million, net income $39.6 million and diluted EPS $0.94. Fourth-quarter FY2015 revenue was $848.6 million and diluted EPS was $0.88.
- Full-year transportation revenue declined 5%; van loads increased 7%, while unsided/platform loads decreased 7%, including the absence of a large automotive project that had boosted 2015 activity.
- Insurance and claims expense reached $57.3 million, up from $48.8 million. The company cited higher current-year claim severity and increased commercial trucking insurance premiums; unfavorable prior-year claim development was lower, at $1.1 million versus $4.9 million.
- SG&A declined to $143.2 million from $149.7 million, partly due to lower incentive compensation, stock-based compensation and customer bad-debt provisions. Depreciation increased as Landstar added company-owned trailers to serve drop-and-hook demand.
- Landstar invested $22.6 million in operating property, including $17.2 million for its Laredo, Texas freight staging and transload facility, and added $61.5 million of property through capital leases.
Outlook, risks and contingencies
- Management anticipated approximately $43 million of FY2017 operating-property additions, mainly replacement trailers and information-technology equipment. It said operating cash flow and revolving-credit capacity should be adequate for planned needs. No specific revenue or earnings guidance was provided.
- Key operating exposures include freight-demand and rate cycles, competition, access to independent agents and third-party hauling capacity, and the possibility that capacity costs rise faster than customer pricing. The company’s 502 million-dollar agents generated 92% of revenue; BCO truck turnover increased to approximately 35% from 25%.
- Commercial trucking claims are self-insured up to $5 million per occurrence; for claims during May 1, 2016–April 30, 2017, an additional $700,000 aggregate retention applies above that amount. Management cited reduced availability and higher pricing of excess insurance after two major insurers exited that market.
- Landstar Ranger received an EPA information request in June 2016 regarding California truck and bus and drayage emissions regulations. The review’s timing and outcome were uncertain; potential outcomes include professional fees, fines, penalties or injunctive relief.
- The company reported first-quarter 2016 spear-phishing attacks that exposed personal employee data and said it had enhanced security and training. Further cyber incidents or system disruptions could affect operations.
- Landstar was undergoing a multi-state unclaimed-property audit; outcome and timing were uncertain. Ordinary-course claims and litigation were provided for, with management not expecting a material adverse effect on financial condition, though quarterly or annual results could be affected.
- Management reported compliance with credit covenants and effective disclosure controls and internal control over financial reporting. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether freight rates and revenue per load stabilize, and whether load growth persists after adjusting for the extra week in FY2016.
- Subsequent claim severity, insurance premiums and excess-coverage availability, including the development of self-insured reserves.
- Progress and financial impact of the EPA’s California compliance review and the multi-state unclaimed-property audit.
- Capacity-provider availability and BCO turnover, as well as the retention and productivity of high-revenue agents.
- Cash conversion, capital-lease obligations, planned capital spending, share repurchases and dividend capacity under credit-agreement terms.