Landstar System, Inc. — Q2 2016 Form 10-Q
Reporting period: Unaudited 13 weeks ended June 25, 2016, with comparisons to the 13 weeks ended June 27, 2015; also reports the 26-week year-to-date period. Amounts below are in U.S. dollars.
Business context
Landstar is an asset-light transportation management provider that arranges freight movement through independent sales agents and third-party capacity providers. It reports transportation logistics and insurance segments. The filing describes softer freight conditions and more readily available truck capacity compared with 2015.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Year to date 2016 | Year to date 2015 |
|---|---|---|---|---|
| Revenue | $775.2 million | $868.4 million | $1,486.9 million | $1,630.8 million |
| Operating income | $53.1 million | $66.0 million | $101.0 million | $115.1 million |
| Net income | $32.3 million | $40.5 million | $61.5 million | $70.5 million |
| Diluted EPS | $0.76 | $0.92 | $1.45 | $1.59 |
| Gross profit margin | 15.6% | 15.1% | 15.7% | 15.1% |
| Operating margin on gross profit (company-defined) | 43.9% | 50.5% | 43.3% | 46.7% |
- Q2 revenue declined 11%, operating income 20%, and net income 20% year over year. For the first half, revenue fell 9%, operating income 12%, and net income 13%.
- Q2 transportation revenue declined 11%, mainly from a roughly 9% decrease in revenue per load and a 2% decrease in loads. For the first half, transportation revenue fell 9%, primarily as revenue per load declined about 10%, partly offset by 1% more loads.
- Insurance and claims expense increased to $16.1 million in Q2 from $12.3 million. The company attributed the increase to greater severity of current-year claims, including a severe accident near quarter-end. Year-to-date expense was $30.3 million versus $27.1 million.
- Cash from operating activities was $105.1 million for the first half, up from $82.0 million; management attributed the increase primarily to the timing of receivable collections. Investing activities used $5.1 million and financing activities used $62.0 million.
- At June 25, cash and cash equivalents were $153.4 million and short-term investments were $61.5 million. Working capital was $321.9 million and the current ratio was 2.0 to 1, versus 1.8 to 1 at December 26, 2015.
- Total debt, including current maturities, was $118.9 million, down $5.4 million from year-end. The company had no borrowings under its revolving credit facility and reported $214.4 million of remaining borrowing availability. Shareholders’ equity was $497.3 million.
- First-half purchases of company shares totaled $26.5 million; dividends paid were $6.8 million, or $0.16 per share. The company had authorization to repurchase up to a further 1,386,125 shares.
Changes, outlook, and material items
- Lower diesel prices and readily available truck capacity reduced brokerage transportation costs and contributed to lower revenue per load. A large automotive project that boosted 2015 flatbed volumes ended in 2015; excluding those project loads, the filing says first-half flatbed loads increased 1%.
- Insurance and claims included $2.8 million of unfavorable development of prior-year claims in the first half, compared with $5.5 million in 2015. The 2016 amount reduced first-half operating income by $2.8 million, net income by $1.7 million, and EPS by $0.04.
- Landstar entered a new $250 million revolving credit agreement, maturing June 2, 2021, with a potential accordion increase to $400 million. The company reported covenant compliance; the agreement includes leverage-related restrictions on certain dividends and distributions.
- Management anticipated approximately $56 million of operating-property acquisitions during the remainder of 2016, primarily trailers and technology, and approximately $14.2 million in additional capital requirements to complete the Laredo facility. The filing provides no earnings or revenue guidance. Management expected operating cash flow and available credit to support debt service, growth, dividends, repurchases, and working capital.
- Landstar Ranger received an EPA information request in June 2016 concerning California truck and bus and drayage emissions regulations. The timing and outcome of the review are unknown; potential consequences described include legal and professional fees, fines, penalties, or injunctive relief if noncompliance is found. Landstar also said it is replacing its van trailers to maintain California compliance.
- The company disclosed first-quarter 2016 spear-phishing attacks that exposed personal employee data and said it had taken remedial steps, including enhanced security systems and employee training. It cautioned that further incidents or system disruptions could adversely affect operations.
- Management said ordinary-course claims and litigation were provided for and were not expected to materially affect financial condition, but could materially affect results in a particular quarter or year. Self-insured claim estimates, receivable collectability, and uncertain tax positions are key estimates subject to change.
Investor verification points
- Whether freight volumes and revenue per load stabilize, particularly across truck brokerage, flatbed, and multimode services.
- How current-year accident severity and prior-year claim development affect insurance costs and reserves in subsequent periods.
- The status and potential financial consequences of the EPA review, and the cost and progress of California-compliant trailer replacement.
- Actual capital spending against the stated 2016 plans, including the Laredo facility and trailer investment, and the impact of lease financing.
- Whether cash generation remains strong after considering working-capital timing, share repurchases, dividends, and capital spending; also monitor credit-facility covenants and availability.
- Whether the employee-data incident leads to further costs, litigation, operational disruption, or additional security investment.