Landstar System, Inc. — Q2 2013 Form 10-Q
Business context and reporting period
Asset-light freight transportation and logistics provider, with transportation logistics and insurance segments. The filing covers the 13 and 26 weeks ended June 29, 2013; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | 26 weeks 2013 | 26 weeks 2012 |
|---|---|---|---|---|
| Revenue | $679.3 | $736.0 | $1,307.7 | $1,385.0 |
| Operating income | $49.9 | $58.8 | $93.4 | $101.9 |
| Net income | $30.4 | $35.9 | $57.2 | $62.7 |
| Diluted EPS | $0.66 | $0.76 | $1.23 | $1.33 |
| Gross profit margin | 16.1% | 15.9% | 16.2% | 16.1% |
| Operating margin on gross profit | 45.7% | 50.4% | 44.1% | 45.8% |
For the first half, operating cash flow was $84.8 million versus $54.8 million; investing used $6.8 million and financing used $84.3 million. Cash and equivalents were $67.5 million at June 29, 2013. Working capital was $231.6 million and the current ratio was 1.7 to 1. Long-term debt including current maturities was $119.3 million; equity was $392.2 million, or 77% of total capitalization. The credit facility had $20.0 million drawn, $34.8 million of letters of credit outstanding, and $170.2 million available. The company reported compliance with its debt covenants.
Material changes versus prior comparable periods
- Q2 revenue fell 8%; first-half revenue fell 6%. Management attributed the declines principally to lower transportation demand, fewer loads, and lower revenue per load, especially for third-party truck capacity and platform/heavy-specialized freight.
- Q2 loads declined 5% and revenue per load declined about 3% across the transportation logistics segment; first-half loads and revenue per load each declined about 3%. Multimode revenue increased, partly offsetting truck weakness.
- Net income declined 15% in Q2 and 9% for the first half. Lower revenue and higher insurance and claims costs weighed on earnings, despite improved gross profit margin and lower purchased transportation as a share of revenue.
- Prior-year claims developed unfavorably by $2.3 million in Q2 and $4.6 million in the first half, compared with favorable development of $0.5 million in Q2 2012 and unfavorable development of $0.2 million in the first half of 2012.
- Operating cash flow improved year over year, primarily due to the timing of trade-receivable collections. The company repurchased 884,327 shares for $46.6 million in the first half.
Outlook, risks, contingencies, and unusual items
- Management anticipated approximately $24 million of operating-property purchases during the remainder of fiscal 2013, primarily replacement trailers and IT equipment, through purchases or lease financing. It said operating cash flow and borrowing capacity should be adequate for debt service, growth, share repurchases, and working capital. No earnings or revenue forecast was provided.
- The company stated it did not expect quarterly dividends for the four quarters of fiscal 2013 and the first three quarters of fiscal 2014, following its previously announced $0.50-per-share dividend. No cash dividends were paid in the first half of 2013.
- A Georgia jury award arising from a 2007 accident was amended to include attorney fees and interest; the judgment was approximately $55.2 million before further post-judgment interest. Landstar appealed and posted a bond. It recorded a $38.7 million insurance receivable and matching insurance-claims liability, and had previously recorded its $5 million self-insured retention. Coverage beyond that retention was expected from insurers, but the appeal outcome and potential effect on insurance premiums were uncertain.
- Key risks include accident frequency and severity, adverse claims development, dependence on third-party insurers, agents and capacity providers, transportation demand, competition, system disruptions, regulation, and customer receivable collectability. The filing notes that claims and litigation could materially affect results in a particular quarter or year.
- Capital leases for operating property totaled $36.7 million in the first half. Interest-rate sensitivity analysis estimated that a 100-basis-point increase with $20 million of facility borrowings would add approximately $0.2 million of annual interest expense.
Important facts for investors to verify
- Whether freight volumes and revenue per load stabilize, particularly in truck and heavy/specialized services.
- Subsequent development of insurance claims and the Georgia litigation appeal, including insurer coverage and future premiums.
- Whether operating cash generation, capital-lease commitments, and planned capital spending remain consistent with management’s liquidity assessment.
- Execution of the remaining share-repurchase authorization and the stated dividend suspension timetable.