Landstar System, Inc. — 2011 Second-Quarter Form 10-Q
Reporting period: Thirteen weeks ended June 25, 2011; year-to-date figures cover the twenty-six weeks ended June 25, 2011. Comparisons are with the corresponding 2010 periods. Landstar is a non-asset-based freight transportation and supply-chain services provider, with transportation logistics and insurance segments. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $675.6 | $641.7 | $1,247.5 | $1,189.8 |
| Operating income | $48.7 | $40.0 | $82.8 | $68.3 |
| Net income attributable to Landstar | $29.6 | $24.4 | $50.2 | $41.6 |
| Diluted EPS | $0.62 | $0.49 | $1.05 | $0.83 |
| Gross profit margin | 16.5% | 16.3% | 16.7% | 16.4% |
| Operating margin on gross profit (company-defined) | 43.6% | 38.2% | 39.8% | 35.0% |
For the first half, revenue rose 5% and operating income rose 21%; Q2 revenue rose 5% and operating income rose 22%. First-half transportation logistics revenue increased 5. Revenue per load increased about 11%, while loads hauled decreased 5%. Tighter domestic truck capacity was cited as a key driver of higher revenue per load. A planned reduction in one customer’s less-than-truckload substitute line-haul freight contributed to lower volume: this revenue was $38.1 million versus $147.8 million in the first half of 2010.
Purchased transportation declined to 75.4% of revenue in the first half from 76.3%; agent commissions rose to 7.9% from 7.3%. Management attributed the lower insurance and claims, other operating costs, and SG&A ratios relative to gross profit mainly to business mix, lower cargo claims, cost reductions, higher gross profit, and lower incentive compensation provisions. No customer represented 10% or more of 2011 revenue; one customer represented approximately 12% of first-half 2010 revenue.
Cash flow, liquidity and capital
- First-half cash from operations was $23.5 million, down from $26.2 million. Management attributed the decline primarily to timing of receivable collections; days sales outstanding increased to 48 from 46 a year earlier.
- Cash and cash equivalents were $39.5 million at June 25, 2011, versus $44.7 million at December 25, 2010. Working capital was $185.6 million and the current ratio was 1.6:1, compared with $142.6 million and 1.5:1 at year-end.
- Total debt, including current maturities, was $111.2 million, down $10.5 million from year-end. This included $80 million outstanding under the revolving credit facility. Another $111.5 million was available under the facility; Landstar reported compliance with its covenants. The credit agreement expires June 27, 2013.
- Equity was $282.5 million, or 72% of total capitalization, compared with $251.0 million, or 67%, at year-end. First-half investing activities provided $3.3 million, versus $53.2 million used in 2010; operating-property purchases were $2.8 million versus $24.7 million.
- Landstar paid $4.8 million in dividends ($0.10 per share) and repurchased 196,693 shares for $9.3 million during the first half. Up to 525,969 shares remained authorized for repurchase at June 25. Management stated its intention to continue quarterly dividends.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. Landstar anticipated approximately $39 million of operating-property purchases during the remainder of fiscal 2011, primarily replacement trailers and IT equipment. Management believed operating cash flow and borrowing capacity would be adequate for debt service, growth, dividends, repurchases and working capital needs.
- Management highlighted exposure to truck-capacity availability and pricing, competition, economic and freight-sector conditions, reliance on independent agents and third-party carriers, claims and insurance costs, receivable collections, and potential technology disruptions. A 100-basis-point increase in borrowing rates, assuming $80 million of revolver debt, was estimated to add $0.8 million of annual interest expense.
- OOIDA-related litigation remained pending after an appellate ruling largely upheld the current lease terms but remanded a limited issue involving a former lease and certain U.S. Department of Defense loads. Plaintiffs sought further Supreme Court review. Landstar believed actual damages were not sustained and any remand injunction was unlikely to have a material adverse financial effect, while noting the outcome was uncertain.
- In June 2011, the U.S. Attorney for the Western District of Kentucky issued a False Claims Act Civil Investigative Demand concerning certain freight to or from Fort Campbell billed to the U.S. government. Landstar said it was cooperating; the filing does not quantify potential exposure.
- First-half insurance and claims expense included $1.07 million of unfavorable adjustments to prior-year claim estimates, compared with $0.17 million in 2010. Management cautioned that claims, receivable allowances and uncertain tax positions depend on estimates and may affect results.
Important facts for investors to verify
- Whether higher revenue per load and improved margins can persist if truck capacity tightens or costs rise.
- How the customer-related line-haul volume decline and receivable-collection timing develop.
- Developments and potential financial consequences of the OOIDA litigation and Fort Campbell CID.
- Actual 2011 capital spending, debt levels, and continuing capacity for dividends and share repurchases.
- Future claims experience and revisions to self-insurance reserves.