Landstar System, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. The unaudited filing covers the thirteen and thirty-nine weeks ended September 28, 2013, compared with periods ended September 29, 2012. Landstar is an asset-light freight transportation and logistics provider that relies on independent sales agents and third-party capacity providers. It reports transportation logistics and insurance segments.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Revenue | $680.5 million | $717.2 million | $1,988.2 million | $2,102.2 million |
| Operating income | $47.8 million | $54.4 million | $141.2 million | $156.3 million |
| Net income | $29.2 million | $33.1 million | $86.5 million | $95.8 million |
| Diluted EPS | $0.64 | $0.71 | $1.87 | $2.04 |
| Gross profit margin | 16.0% | 15.8% | 16.1% | 16.0% |
| Operating margin as a percentage of gross profit | 43.9% | 48.1% | 44.0% | 46.6% |
- Revenue declined 5% in both the quarter and year-to-date periods. Q3 loads fell 4% and revenue per load fell about 1%; year-to-date loads fell 4% and revenue per load about 2%.
- Q3 purchased transportation was 76.1% of revenue versus 76.4%; commissions were 7.9% versus 7.8%. Higher insurance and claims costs and depreciation weighed on operating performance despite slightly improved gross profit margin.
- Insurance and claims expense included $3.6 million of net unfavorable prior-year claims development in Q3; the year-to-date amount was $8.2 million. The comparable 2012 periods included favorable development of $1.6 million and $1.4 million, respectively.
- Transportation logistics revenue fell 5% in Q3 and 6% year to date. Insurance segment operating income was $5.6 million in Q3 versus $10.5 million, and $20.0 million year to date versus $26.3 million.
Cash flow, balance sheet and capital
- Year-to-date operating cash flow was $131.8 million, up from $103.3 million, primarily reflecting the timing of trade receivable collections. Investing cash use was $11.6 million; financing cash use was $96.5 million.
- Cash and cash equivalents were $97.6 million at September 28, 2013, and short-term investments were $34.6 million. Working capital was $251.9 million and the current ratio was 1.7, both broadly consistent with year-end 2012.
- Total debt, including current maturities, was $118.1 million. The company had $15.0 million drawn on its $225 million revolving credit facility and $175.2 million available for future borrowing; it reported compliance with debt covenants.
- Shareholders’ equity was $423.3 million, or 78% of total capitalization. The company repurchased $46.6 million of stock year to date and had authorization for up to 1,107,550 additional shares. It paid no dividends during the 2013 year-to-date period.
- Year-to-date purchases of operating property were $4.9 million, and $47.9 million of trailing equipment was acquired through capital leases. Management anticipated about $10 million of additional operating-property acquisitions during the remainder of fiscal 2013.
Outlook, risks and unusual matters
- Management said operating cash flow and available credit should be adequate for debt service, growth, acquisitions, the authorized share repurchase program and working capital. It gave no revenue or earnings forecast; results for the first 39 weeks were expressly not necessarily indicative of full-year results.
- Management attributed weaker freight revenue mainly to soft market demand, reduced loads, lower revenue per load and a less favorable mix of heavy/specialized freight. Q3 truck volumes were also affected by reduced less-than-truckload shipments, primarily from one customer.
- A Georgia jury award arising from a 2007 accident was amended to include attorney fees and interest. The company reported a $60.7 million insurance-provider receivable and matching insurance-claims liability; the defendants appealed. Landstar’s retained exposure under the relevant insurance program was up to $5 million, previously charged in 2007. The appeal outcome and possible effect on insurance premiums remain uncertain.
- The company disclosed a multi-state unclaimed-property audit with unpredictable timing and outcome; potential assessments, penalties, interest and professional fees could be significant. Other principal risks include accident and claims severity, dependence on insurers, independent agents and third-party capacity, economic and freight demand conditions, competition, regulation and technology disruptions.
- Management noted that seasonal trucking trends typically make the March quarter weaker than quarters ending in June, September and December. It also stated that no quarterly-result-related dividends were expected for the four quarters of fiscal 2013 and first three quarters of fiscal 2014.
Important facts for investors to verify
- Whether freight demand, load counts and revenue per load recover, particularly in truck and heavy/specialized freight.
- Future development of self-insured claims and the effect of the $8.2 million year-to-date unfavorable reserve development on claims expense.
- Outcome of the Georgia appeal, collectability and timing of the $60.7 million insurance receivable, and any implications for insurance costs.
- Outcome and potential financial exposure from the multi-state unclaimed-property audit.
- Cash generation, capital-lease commitments, debt levels, share repurchases and the stated dividend policy as the fiscal year progresses.