Landstar System, Inc. — Q1 2017 Form 10-Q
Reporting period: Thirteen weeks ended April 1, 2017, compared with the thirteen weeks ended March 26, 2016. The interim statements are unaudited. Landstar is an asset-light transportation and logistics provider using independent commission agents and third-party capacity providers; it reports transportation logistics and insurance segments.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $780.9 million | $711.6 million | +10% |
| Operating income | $52.3 million | $47.9 million | +9% |
| Net income | $32.4 million | $29.2 million | +11% |
| Diluted EPS | $0.77 | $0.69 | +12% |
| Operating cash flow | $61.9 million | $72.0 million | Down $10.1 million |
- Transportation revenue rose 10%, primarily on a roughly 10% increase in loads; revenue per load was approximately flat. Truck transportation revenue grew 11%, while multimode revenue fell 6%.
- Gross profit margin was 15.6%, versus 15.8%. Purchased transportation increased to 76.3% of revenue from 75.9%; commissions declined to 8.2% from 8.3%.
- Landstar’s reported operating margin, calculated as operating income divided by gross profit, was 43.0%, versus 42.7%. Selling, general and administrative costs and depreciation increased; other operating costs declined.
- Cash and cash equivalents were $215.5 million at April 1. Working capital was $380.4 million and the current ratio was 2.0:1. Management attributed lower operating cash flow year over year mainly to the timing of receivable collections.
- Total debt, including current maturities, was $125.9 million, down $12.4 million from year-end. There were no revolving-credit borrowings; $214.4 million remained available under the credit facility. Shareholders’ equity was $573.7 million.
Material changes and unusual items
- Truck load volume increased broadly across customer and industry groups. Truck brokerage transportation costs rose as a percentage of revenue, primarily due to higher rates paid to Truck Brokerage Carriers.
- Insurance and claims expense increased $0.3 million, but prior-year claims estimates developed favorably by $0.1 million in Q1 2017; the comparable period had $2.1 million of unfavorable development. Current-year claim severity and higher commercial trucking insurance premiums partly offset the favorable development.
- Adoption of ASU 2016-09 resulted in recognition of $0.6 million of excess tax benefits, contributing to a 36.8% effective tax rate versus 38.0% a year earlier.
- Cash dividends were $0.09 per share, up from $0.08. No shares were repurchased during the quarter.
Outlook, risks and contingencies
- No earnings or revenue guidance is provided. Landstar anticipated approximately $42 million of operating-property purchases during the rest of fiscal 2017, mainly trailers and information technology equipment. Management believed operating cash flow and available credit would be adequate for planned needs, growth, dividends and share repurchases.
- Management noted that March-quarter results are typically lower than those in the June, September and December quarters.
- Key risks include dependence on independent agents and third-party capacity, transportation demand and competition, accidents and adverse claims development, customer receivable collectability, cyber or systems disruptions, and regulatory changes. The company retains significant liability for certain claims; a material increase in claim frequency or severity could harm results.
- Ordinary-course claims and litigation are pending. Management believes provisions are adequate and does not expect a material adverse effect on financial condition, though outcomes could materially affect an individual quarter or year.
- At April 1, $58.7 million of insurance-related letters of credit were collateralized by $65.2 million of investments; an additional $35.6 million of letters of credit was outstanding under the credit agreement. The company reported compliance with debt covenants.
Important facts for investors to verify
- Whether the elevated truck-load growth and roughly flat revenue per load persisted after Q1, and how brokerage capacity rates affected margins.
- Subsequent development of self-insured claims and the adequacy of reserves, given management’s warning that outcomes may vary from estimates.
- Actual timing and funding of the anticipated $42 million of 2017 capital expenditures, and any effect on debt, liquidity or shareholder returns.
- Whether receivable collection timing normalized and operating cash flow recovered in later periods.
- Future tax results excluding the one-time $0.6 million stock-compensation tax benefit, and any material impact from new accounting standards.