Landstar System, Inc. — Q3 2015 Form 10-Q
Business and period. Landstar is an asset-light transportation and logistics provider that arranges freight transportation through independent sales agents and third-party capacity providers; it also operates an insurance segment. The quarter was the 13 weeks ended September 26, 2015; year-to-date figures cover 39 weeks. Interim statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Revenue | $841.7m | $819.3m | $2,472.5m | $2,322.0m |
| Operating income | $64.0m | $59.6m | $179.1m | $163.2m |
| Net income | $39.3m | $36.8m | $109.8m | $100.3m |
| Diluted EPS | $0.90 | $0.82 | $2.49 | $2.22 |
| Gross profit margin | 15.1% | 14.8% | 15.1% | 15.0% |
- Q3 revenue rose 3%, while operating income increased about 7% and net income about 7%. Loads increased 9%, but revenue per load declined about 6%; management cited lower fuel costs, mix and a softer freight environment versus the first half.
- For the first 39 weeks, revenue grew 6%, primarily on 9% more loads, partly offset by an approximately 2% decline in revenue per load. Multimode revenue rose 23% year over year, led by rail intermodal.
- Q3 purchased transportation was 76.7% of revenue versus 77.3%; agent commissions were 8.2% versus 7.9%. Reported operating margin, defined by Landstar as operating income divided by gross profit, was 50.4% versus 49.2%.
- Q3 insurance and claims expense declined year over year, but other operating costs rose, including higher trailer maintenance and lower gains on equipment sales. Year-to-date SG&A increased, including higher bad-debt provision related primarily to one customer.
Cash flow, liquidity and capital
- Year-to-date operating cash flow was $148.1m, compared with $72.6m a year earlier; management attributed the increase primarily to timing of trade-receivable collections. Investing cash use was $7.4m and financing cash use was $194.1m.
- Cash and cash equivalents were $108.9m at September 26, 2015, down from $163.9m at December 27, 2014; short-term investments were $49.0m. Working capital was $311.3m and the current ratio 1.9:1.
- Long-term debt, including current maturities, was $96.2m, down $15.1m from year-end. There were no borrowings under the $225m revolving credit facility; $192.2m was available, after $32.8m of outstanding letters of credit. The company reported compliance with debt covenants.
- Landstar repurchased 1.72m shares year to date for $112.7m and had authority to repurchase another 2.59m shares. It paid $54.5m in dividends during the period, including $44.8m of a special $1.00-per-share dividend declared in 2014. Quarterly dividends were $0.08 per share.
- Management anticipated approximately $57m of operating-property purchases or lease financing during the remainder of fiscal 2015, mainly trailers and IT equipment, and had agreed to buy Laredo land for approximately $4.9m. Management expected operating cash flow and borrowing capacity to cover debt service, growth, dividends, repurchases and working-capital needs.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management described Q3 freight conditions as somewhat softer than in the first half; demand and capacity availability, fuel costs and freight mix can affect revenue per load and margins.
- Prior-year self-insured claims developed unfavorably by $5.5m year to date, reducing net income by $3.4m, or $0.08 per diluted share. Management said this was primarily related to a previously reported March 13, 2015 verdict, including a $4.5m pretax charge on a single claim. The comparable prior-year impact was $7.1m pretax, or $0.10 per diluted share.
- Other disclosed risks include accident frequency and severity, adverse claims development, reliance on independent agents and third-party capacity, customer demand and competition, customer credit risk, and technology or regulatory disruptions. The company retains substantial per-occurrence exposure for certain claims.
- Management believed pending claims and litigation were adequately provided for and would not materially affect financial condition, though they could materially affect results in a quarter or year. The filing reported no significant change in internal controls. The new revenue-recognition standard was not expected to have a material impact.
Investor verification points
- Check whether subsequent periods sustain load growth and reverse or extend Q3’s decline in revenue per load.
- Review customer concentration and collectability, especially the customer driving increased bad-debt provision, and assess the adequacy of receivable allowances.
- Track self-insured claims reserves and further development of the claim associated with the 2015 verdict.
- Confirm planned capital spending, the Laredo land purchase, and the pace and funding of share repurchases and dividends.
- Assess available liquidity after letters of credit and insurance collateral requirements, and monitor debt covenant compliance.