Landstar System, Inc. — Q3 2012 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 29, 2012, compared with the corresponding periods ended September 24, 2011. Financial statements are unaudited. Amounts below are in millions except per-share data.
Business context
Landstar is a non-asset-based freight transportation and supply-chain services provider. It relies primarily on independent sales agents and third-party capacity providers; its two reportable segments are transportation logistics and insurance. The filing cautions that nine-month results are not necessarily indicative of full-year results.
Financial performance
| Metric | 39 weeks 2012 | 39 weeks 2011 | 13 weeks 2012 | 13 weeks 2011 |
|---|---|---|---|---|
| Revenue | $2,102.2 | $1,931.6 | $717.2 | $684.0 |
| Operating income | $156.3 | $132.3 | $54.4 | $49.5 |
| Net income attributable to Landstar | $95.8 | $80.4 | $33.1 | $30.2 |
| Diluted EPS | $2.04 | $1.68 | $0.71 | $0.64 |
- Nine-month revenue increased 9%; transportation-logistics revenue growth was primarily driven by 8% more loads and approximately 1% higher revenue per load. Third-party truck capacity providers generated 92% of total revenue; their revenue rose 10%.
- Third-quarter revenue increased 5%, principally from a 6% increase in loads, partly offset by approximately 1% lower revenue per load. Multimode revenue declined 13% in the quarter, reflecting fewer chartered-air loads and lower international air-freight demand.
- Nine-month gross profit margin was 16.0%, down from 16.5%; third-quarter margin was 15.8%, down from 16.2%. Purchased transportation rose to 76.3% of revenue for the nine months (75.6% prior year), mainly due to higher Truck Brokerage Carrier rates and mix. Operating income nevertheless increased as indirect costs relative to gross profit declined.
- Nine-month operating cash flow was $103.3, versus $84.4 in 2011, attributed mainly to receivables-collection timing and higher net income. Investing activities used $18.8; financing activities used $85.8. Cash and cash equivalents were $80.0 at period end, versus $80.9 at December 31, 2011.
Balance sheet, debt and liquidity
- At September 29, 2012, current assets were $619.7 and current liabilities $372.7; working capital was $247.1 and the current ratio 1.7 to 1, unchanged from year-end.
- Total debt, including current maturities, was $119.1, down $13.2 from December 31, 2011. Equity was $371.4, or 76% of total capitalization, compared with $300.6, or 69%, at year-end.
- A new revolving credit agreement provides $225.0 of capacity and matures June 29, 2017. At quarter-end, $40.0 was drawn and $33.6 of letters of credit was outstanding, leaving $151.4 available. The weighted-average rate on borrowings was 1.48%; the company reported compliance with all covenants.
- Landstar paid $8.0 in dividends and repurchased $24.6 of shares during the nine months. Up to 2,017,151 additional shares remained authorized for repurchase at quarter-end.
Outlook, risks and unusual items
- Management expected approximately $5.0 of operating-property acquisitions during the remainder of fiscal 2012, primarily replacement trailers and IT equipment, through purchase or lease financing. It stated operating cash flow and borrowing capacity should be adequate for debt service, growth, dividends, share repurchases and working capital. No specific earnings or revenue guidance was provided.
- Management reported $42.952 of trailing equipment acquired through capital leases during the nine-month period, compared with $13.038 in the prior-year period.
- Nine-month insurance and claims costs included $1.352 of favorable prior-year claims development, compared with $0.198 of unfavorable development in 2011. Management also cited lower claim severity and favorable prior-year development as factors behind reduced insurance costs relative to gross profit.
- Key risks include freight-demand and economic changes, availability and cost of third-party capacity, competition, agent and vendor dependence, accidents and claims, receivable collectibility, technology disruption, and regulatory changes. Management warned that claim estimates and receivable allowances involve uncertainty. It said existing legal matters had no material developments and that potential material losses beyond recorded provisions were remote.
- Management described seasonal patterns typical of trucking, with March-quarter results generally lower than those in the June, September and December quarters. A 100-basis-point interest-rate increase on the $40.0 facility balance would add an estimated $0.4 of annualized interest expense.
Investor verification priorities
- Whether higher purchased-transportation costs and truck-brokerage mix continue to pressure gross profit margin.
- Whether load growth, revenue per load, and weak multimode activity persist or change in subsequent quarters.
- Claims-reserve development, including the impact of favorable prior-year claims adjustments, and the company’s exposure to severe accidents.
- Cash conversion and working-capital movements, especially receivables collections and payables.
- Debt-facility availability, covenant compliance, capital-lease commitments, and the pace of dividends and share repurchases.