Landstar System, Inc. — Q3 2016 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 24, 2016, compared with the corresponding periods ended September 26, 2015. The interim financial statements are unaudited. Landstar is an asset-light transportation and logistics provider operating through independent sales agents and third-party capacity providers, with transportation logistics and insurance segments.
Key financial results
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Revenue | $787.9 million | $841.7 million | $2,274.8 million | $2,472.5 million |
| Operating income | $58.5 million | $64.0 million | $159.5 million | $179.1 million |
| Net income | $36.3 million | $39.3 million | $97.8 million | $109.8 million |
| Diluted EPS | $0.86 | $0.90 | $2.31 | $2.49 |
| Gross profit margin | 15.5% | 15.1% | 15.6% | 15.1% |
| Company-defined operating margin | 48.0% | 50.4% | 44.9% | 48.0% |
Company-defined operating margin is operating income as a percentage of gross profit, not revenue. Revenue fell 6% in Q3 and 8% year to date; net income declined approximately 8% and 11%, respectively. Q3 dividends were $0.09 per share; year-to-date dividends were $0.25 per share.
- Cash flow: Operating cash flow was $171.3 million for the 39 weeks, versus $148.1 million in 2015. Investing activities used $10.6 million and financing activities used $105.1 million. Ending cash and equivalents were $170.8 million, up from $114.5 million at fiscal year-end 2015.
- Liquidity: Working capital was $318.5 million and the current ratio was 1.9:1 at September 24, 2016, compared with $286.6 million and 1.8:1 at December 26, 2015. Short-term investments were $56.7 million.
- Debt and capital: Long-term debt including current maturities was $135.6 million, up $11.3 million from year-end. The company had no borrowings under its $250 million revolving credit facility and reported $214.4 million available after outstanding facility letters of credit. Shareholders’ equity was $506.7 million, 79% of total capitalization.
Material changes and management commentary
- Transportation revenue declined primarily because revenue per load fell: about 6% in Q3 and 8% over 39 weeks, while truck load counts were approximately flat year to date. Management cited lower diesel fuel costs, a softer freight environment and greater truck capacity. Multimode revenue per load also fell, despite higher load counts.
- Year-to-date purchased transportation declined to 76.1% of revenue from 76.9%, reflecting lower truck brokerage costs and a greater contribution from BCO independent contractors. Gross profit margin improved, but operating margin fell as insurance and claims and depreciation consumed a larger share of gross profit.
- Insurance and claims costs rose year to date by $5.2 million. Current-year claims were more severe; prior-year claims development was $0.7 million unfavorable for the 39 weeks, compared with $5.5 million unfavorable in 2015. In Q3, prior-year development was $2.1 million favorable.
- Depreciation and amortization increased $4.9 million year to date, reflecting additional owned trailers supporting customer demand for drop-and-hook services. Capital lease obligations also increased.
- Management expected approximately $25 million of additional operating-property purchases or lease financing for the remainder of 2016, including about $7.2 million to complete its Laredo freight staging and transload facility. Management said operating cash flow and borrowing capacity should be adequate for debt service, growth, dividends, share repurchases and working capital; this is not earnings guidance.
Risks, contingencies and unusual items
- Landstar retains significant exposure to self-insured claims, including up to $5 million per commercial trucking occurrence. Claim frequency, severity and reserve development can materially affect results in a quarter or year.
- Pending claims and litigation arise in the normal course of business. Management believes provisions are adequate and the ultimate outcome will not materially affect financial condition, but results in a given period could be materially affected.
- Other stated risks include softer transportation demand, competition, dependence on agents and third-party capacity, cyber or systems disruption, regulatory changes, customer receivable losses and vendor dependence. Management cited a multi-year information-systems improvement project.
- The June 2016 credit agreement matures in 2021, includes financial covenants and may restrict distributions in specified circumstances. The company reported compliance with its covenants.
- The company repurchased 773,281 shares for $50.5 million during the 39 weeks; 1,036,125 shares remained authorized for repurchase at quarter-end. It had acquired 350,000 shares in Q3 at an average $68.66 per share.
- Management did not consider unrealized investment losses other-than-temporary and expected recovery of the securities’ amortized cost. No material changes to previously reported risk factors were disclosed in this quarter’s filing.
Important facts for investors to verify
- Whether freight demand and revenue per load stabilize, particularly in truck brokerage and multimode services.
- Subsequent insurance-claim severity and reserve development, including the effect on margins and earnings.
- Trailer investment, capital lease obligations and completion costs for the Laredo facility relative to expected customer demand.
- Use of the remaining share-repurchase authorization and the sustainability of dividends under the credit agreement’s covenants.
- Actual full-year performance: the filing states that 39-week results are not necessarily indicative of full-year results and provides no specific earnings or revenue forecast.