Landstar System, Inc. — Q3 2011 Form 10-Q
Business context and reporting period
Landstar is a non-asset-based freight transportation and supply-chain services provider, using independent sales agents and third-party capacity providers. It reports transportation logistics and insurance segments. The quarter ended September 24, 2011; comparisons are with the thirteen and thirty-nine weeks ended September 25, 2010. Figures below are in millions of dollars unless otherwise stated.
Financial performance and liquidity
- Third quarter: Revenue was $684.0 million, up 10%; operating income was $49.5 million, up 38%; net income attributable to Landstar was $30.2 million, up 38%. Diluted EPS was $0.64 versus $0.44.
- Thirty-nine weeks: Revenue was $1,931.6 million, up 7%; operating income was $132.3 million, up 27%; net income attributable to Landstar was $80.4 million, up 27%. Diluted EPS was $1.68 versus $1.27.
- Margins: Gross profit margin was 16.2% in the quarter and 16.5% year to date, compared with 16.2% and 16.3%, respectively. The company-defined operating margin (operating income divided by gross profit) was 44.7% in the quarter and 41.5% year to date, versus 35.6% and 35.2%.
- Cash flow: Year-to-date operating cash flow was $84.4 million, versus $68.3 million. Investing activities provided $6.4 million, compared with $54.1 million used in the prior period; financing activities used $66.2 million. Cash and cash equivalents ended at $69.4 million, up from $44.7 million at December 25, 2010.
- Liquidity and debt: Working capital was $194.5 million and the current ratio was 1.5 to 1. Total debt, including current maturities, was $127.1 million, versus $121.6 million at year-end. Revolver borrowings were $90 million, with $101.5 million available; the company reported compliance with debt covenants. Equity was $278.5 million, or 69% of total capitalization.
- Capital returns: Year-to-date repurchases totaled $42.0 million and dividends paid totaled $7.4 million. Dividends were $0.155 per share year to date.
Material changes versus the prior comparable period
- Higher revenue per load was the main growth driver: approximately 10% year to date and 9% in the quarter. Domestic truck capacity was tight, supporting higher rates.
- Year-to-date loads declined 3%, mainly reflecting an anticipated reduction in one customer’s less-than-truckload substitute line-haul business. That revenue fell to $55.3 million from $196.2 million. In the quarter, total loads increased 1%.
- Multimode transportation revenue rose 23% in both comparison periods. Truck brokerage and BCO contractor services remained the predominant sources of revenue.
- Year-to-date purchased transportation declined to 75.6% of revenue from 76.3%; commissions rose to 7.9% from 7.4%. Lower insurance-and-claims and SG&A costs relative to gross profit also supported operating-margin improvement.
- The prior-year periods included a $3.8 million acquisition-related charge, reducing prior-year net income by $2.3 million after tax, or $0.05 per share.
Outlook, risks, contingencies, and unusual items
- No earnings or revenue guidance was provided. Management expected approximately $21 million of operating-property purchases during the remainder of fiscal 2011, primarily for replacement trailers and information technology. Management believed operating cash flow and available borrowing capacity would cover debt service, growth, dividends, share repurchases, and working capital needs.
- Management intended the board to continue quarterly dividends. The company had authorization to repurchase 709,155 additional shares as of quarter-end.
- A Georgia jury awarded approximately $40.2 million in a 2007 accident case. Landstar had recorded its $5 million self-insured retention in 2007; it recorded a matching $40.2 million insurance receivable and claims liability at quarter-end for the award amount. Landstar and its insurers planned to appeal; outcome is uncertain.
- The Supreme Court declined review of the OOIDA independent-contractor case; class decertification stood, leaving claims involving OOIDA and four named plaintiffs. A separate False Claims Act investigative demand concerned government freight involving Fort Campbell; Landstar submitted its response and said it would cooperate.
- Key risks include accident and claims severity, insurance recovery, independent agent and capacity-provider dependence, economic and transportation-sector conditions, government-contracting exposure, and collection of receivables. Trade receivable days outstanding rose to 49 from 46 a year earlier. Management noted claims reserves and other estimates could differ from ultimate outcomes.
- The filing stated disclosure controls were effective and there were no significant changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher revenue per load and tight truck capacity persist, and whether load volumes stabilize after the reduction in less-than-truckload substitute line-haul freight.
- Receivable collection trends, including the increase in days sales outstanding and the effect of customer mix.
- Outcome of the Georgia award appeal and collectibility/timing of the corresponding insurance recovery; monitor the OOIDA litigation and Fort Campbell inquiry.
- Cash requirements for planned capital spending, debt and lease obligations, dividends, and authorized repurchases, alongside available credit-facility capacity.