Landstar System, Inc. — FY2013 Form 10-K
Business context and reporting period. Fiscal year ended December 28, 2013; comparative figures are for the year ended December 29, 2012. Landstar is an asset-light transportation and logistics provider using independent sales agents and third-party capacity providers. Truck services generated 93% of consolidated revenue. On December 28, 2013, Landstar sold Landstar Supply Chain Solutions (LSCS) to XPO Logistics; LSCS results and the sale gain are presented as discontinued operations.
Key financial results
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $2,664.8 million | $2,770.8 million | Down 4% |
| Operating income | $176.6 million | $200.7 million | Down 12% |
| Income from continuing operations | $108.9 million | $126.6 million | Down 14% |
| Net income | $146.0 million | $129.8 million | Up 13% |
| Diluted EPS | $3.16 | $2.77 | Up 14% |
| Cash from continuing operating activities | $152.6 million | $120.3 million | Up $32.3 million |
- Net income included $37.1 million of after-tax discontinued-operations income, including a $33.0 million after-tax gain on the LSCS sale. Continuing diluted EPS was $2.36 versus $2.70.
- Gross profit margin was 15.3%, versus 15.2%. Operating income was 6.6% of revenue; the company’s defined operating margin was 43.4% of gross profit, down from 47.5%.
- Insurance and claims expense rose to $50.4 million from $37.3 million, principally reflecting $10.9 million of net unfavorable development in prior-year claim estimates, largely related to three claims.
- At year-end, cash and cash equivalents were $180.3 million; working capital was $306.8 million and the current ratio was 1.8. Total debt, including current maturities, was $101.5 million, mostly capital lease obligations; shareholders’ equity was $454.5 million.
- The $225 million revolving facility had $5.0 million drawn and $185.3 million available after letters of credit. Landstar reported compliance with debt covenants.
Material changes and fourth-quarter comparison
- Continuing revenue declined 4%, reflecting approximately 2% fewer loads and 2% lower revenue per load. Third-party truck capacity revenue fell 4%; multimode capacity revenue rose 5%.
- FY2012 revenue had increased 5% over FY2011, so FY2013 marked a reversal in reported revenue growth.
- Fourth-quarter 2013 revenue was $692.0 million, up about 1% year over year; operating income was $39.7 million versus $47.8 million. Continuing-operations income was $25.2 million versus $32.9 million. Reported Q4 net income of $59.6 million included $34.4 million of discontinued-operations income, principally the sale gain.
- Year-end cash increased from $74.3 million to $180.3 million. Landstar received $74.5 million of sale proceeds in cash-flow investing activities; management cited approximately $53 million net of estimated taxes and transaction costs.
Outlook, risks and unusual items
- Management anticipated approximately $57 million of 2014 operating-property acquisitions, primarily replacement trailers and information technology equipment. It stated operating cash flow and borrowing capacity should be adequate for debt service, growth, dividends, share repurchases and working capital. The filing provides no earnings or revenue forecast.
- Management cited economic and freight-demand cyclicality, competitive freight pricing, availability and cost of third-party capacity, agent dependence, and the potential effects of independent-contractor classification changes and transportation regulation. Safety, insurance availability and claims severity are significant risks; Landstar’s commercial trucking self-insured retention was up to $5 million per occurrence.
- A Georgia accident judgment remained on appeal. Landstar recorded a $60.7 million insurance receivable and matching claims liability, expected insurance/reinsurance to cover amounts above its $5 million retention, and stated the retention had been charged in 2007. Appeal outcome and potential effects on insurance premiums were uncertain.
- The company was undergoing a multi-state unclaimed-property audit; timing and outcome were not predictable. Other noted exposures include system/vendor disruption and severe weather affecting its Jacksonville headquarters.
- The Board declared a one-time $0.35-per-share dividend in connection with the LSCS sale, payable January 2014, and stated its intention to pay quarterly dividends going forward. Landstar repurchased $59.5 million of shares in FY2013. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Underlying earnings excluding the $33.0 million after-tax divestiture gain, and the continuing-operations trend after LSCS’s disposal.
- Whether lower truck loads and revenue per load persist, and how capacity availability and freight pricing affect margins.
- Future claims development, including the large appealed judgment, insurance recoveries and renewal premiums.
- Actual 2014 capital spending versus the approximately $57 million estimate, and the effect of capital leases on debt and cash flow.
- Cash deployment through dividends and buybacks, covenant headroom, and the outcome of the unclaimed-property audit.