Landstar System, Inc. — Second Quarter 2010 Form 10-Q
Reporting period: The 13-week quarter and 26 weeks ended June 26, 2010, compared with the periods ended June 27, 2009. Financial statements are unaudited. Landstar is a non-asset-based freight transportation and supply-chain services provider, operating through transportation logistics and insurance segments.
Financial performance
| Metric | Q2 2010 | Q2 2009 | 26 weeks 2010 | 26 weeks 2009 |
|---|---|---|---|---|
| Revenue | $641.7 million | $491.2 million | $1,189.8 million | $960.4 million |
| Operating income | $40.0 million | $29.8 million | $68.3 million | $53.5 million |
| Operating margin | 6.2% | 6.1% | 5.7% | 5.6% |
| Net income attributable to Landstar | $24.4 million | $17.9 million | $41.6 million | $31.8 million |
| Diluted EPS | $0.49 | $0.35 | $0.83 | $0.61 |
| Operating cash flow | Not separately reported | Not separately reported | $26.2 million | $106.3 million |
- Q2 revenue increased 30.7%; first-half revenue increased 23.9%. Management attributed growth primarily to higher load counts and revenue per load, reflecting improving U.S. economic activity, market-share gains from agents recruited in 2009, stronger demand, and tighter capacity. Acquired entities also contributed transportation-management fees.
- In Q2, loads rose 20% and revenue per load rose approximately 9%. First-half loads increased 19% and revenue per load approximately 4%.
- Purchased transportation rose to 76.4% of revenue in Q2 from 74.6%; for the first half it rose to 76.3% from 74.8%. The filing links the increase to a greater mix of truck-brokerage business and higher carrier rates. Lower agent commissions as a percentage of revenue and lower SG&A ratios partly offset this pressure.
- Insurance and claims were 2.1% of Q2 revenue versus 2.0% a year earlier. Management cited greater commercial-claim severity and favorable prior-year claim development in 2009.
Cash, liquidity and capital
- At June 26, 2010, cash and cash equivalents were $45.1 million and short-term investments were $33.2 million. Working capital was $164.7 million and the current ratio was 1.6 to 1.
- First-half operating cash flow was $26.2 million, down from $106.3 million. Management attributed the decline primarily to the timing of receivable collections.
- Total long-term debt, including current maturities, was $118.8 million, up $25.9 million from year-end. The company reported $65 million outstanding under its revolving credit facility, with $126.3 million available for future borrowing after outstanding facility letters of credit. The $225 million facility expires June 27, 2013; Landstar said it was in compliance with its covenants.
- Equity was $284.9 million, or 71% of total capitalization, versus $268.2 million, or 74%, at December 26, 2009. Landstar repurchased 630,233 shares for $25.1 million during the first half and paid $0.09 per share in dividends.
- First-half operating-property purchases were $24.7 million, including $21.1 million for its Jacksonville primary facility; it also obtained $14.1 million of trailing equipment through capital leases.
Outlook, commentary and risks
- The filing gives no specific revenue or earnings guidance. Management expected to purchase approximately $9 million of operating property during the remainder of fiscal 2010, primarily replacement trailing equipment and information-technology equipment, by purchase or lease financing. Management believed operating cash flow and available borrowing capacity would be adequate for debt service, growth, dividends, share repurchases and working-capital needs.
- The Board intended to continue quarterly dividends. At June 26, up to 745,220 additional shares remained authorized for repurchase.
- A single customer represented approximately 11% of Q2 revenue and 12% of first-half revenue; no customer reached 10% in the comparable 2009 periods.
- Key operating risks include claim frequency and severity, unfavorable development of insurance reserves, dependence on independent agents and third-party capacity providers, truck-capacity availability and pricing, economic conditions, customer receivable collections, and potential system disruptions. A 100-basis-point increase in borrowing rates, assuming $65 million of facility debt, was estimated to increase annual interest expense by $650,000.
- OOIDA and former independent contractors’ litigation remained pending on remand. Plaintiffs seek injunctive relief, damages and attorneys’ fees. The company said it believed plaintiffs had sustained no actual damages and any injunction was unlikely to have a material adverse financial effect, but noted the outcome was uncertain. Other routine litigation could affect results in a particular period.
- Landstar tested acquired-entity goodwill in Q2; only the first impairment-test step was required because estimated fair value exceeded carrying value. Management noted that receivable, insurance-claim, tax-position and goodwill estimates could affect earnings.
Important facts for investors to verify
- Whether higher purchased-transportation costs and truck-brokerage rates continue to pressure margins as capacity tightens.
- Whether the sharp first-half operating-cash-flow decline reverses as receivables are collected.
- The revenue and earnings exposure to the customer contributing 11% of Q2 revenue and 12% of first-half revenue.
- Developments in the OOIDA litigation and the adequacy of insurance-claim reserves, particularly given increased claim severity.
- Facility borrowing, covenant headroom, planned capital spending, and the continued ability to fund dividends and share repurchases.