Landstar System, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 25, 2010. This is an annual filing; it also reports fourth-quarter results. Amounts are in U.S. dollars.
Business context
Landstar is a non-asset-based freight transportation and supply-chain services provider, relying on independent commission sales agents and third-party capacity providers. Its two reportable segments are transportation logistics and insurance. Transportation logistics accounted for nearly all revenue; truck services represented 92% of total revenue. The 2009 acquisitions of NLM and A3i contributed for a full year in 2010; Landstar acquired the remaining 25% voting interest in A3i in January 2011.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $2,400.2 million | $2,008.8 million |
| Operating income | $140.0 million | $113.7 million |
| Net income attributable to Landstar | $87.5 million | $70.4 million |
| Diluted EPS | $1.77 | $1.37 |
| Operating cash flow | $108.8 million | $145.0 million |
| Long-term debt, including current maturities | $121.6 million | $92.9 million |
- Revenue increased 19.5%, primarily reflecting 11% more loads and approximately 8% higher revenue per load, amid stronger industrial activity and tighter capacity.
- Gross profit margin was 16.4%, versus 17.2% in 2009. Purchased transportation rose to 76.0% of revenue from 74.8%, mainly due to a higher mix and cost of Truck Brokerage Carrier loads. The company-defined operating margin—operating income as a percentage of gross profit—improved to 35.5% from 33.0%.
- Cash provided by operations fell 25%, primarily due to timing of trade-receivable collections. Cash and cash equivalents were $44.7 million at year-end, compared with $85.7 million.
- Working capital was $142.6 million and the current ratio was 1.5, compared with $168.0 million and 1.6 in 2009. The $225 million revolving credit facility had $80 million drawn and $111.3 million available for future borrowings after letters of credit. The company reported compliance with its debt covenants.
- Landstar repurchased 2.65 million shares for $102.7 million and paid $9.4 million in dividends during 2010. Equity declined to $251.0 million from $268.2 million.
- Fourth-quarter revenue was $587.5 million, versus $547.7 million in Q4 2009; net income attributable to Landstar was $24.1 million versus $18.6 million, and diluted EPS was $0.50 versus $0.37.
Material changes versus prior period
The 2010 recovery followed a 24.0% revenue decline in 2009. Growth in 2010 was broad across BCO Independent Contractor and Truck Brokerage Carrier revenue, while rail intermodal revenue declined 8%. Operating income and attributable net income rebounded, but gross margin narrowed as purchased transportation costs rose. Debt increased, while operating cash flow declined. The Acquired Entities' SG&A costs were $19.2 million in 2010, compared with $7.1 million in 2009, partly reflecting the full-year contribution.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management anticipated approximately $44 million of 2011 operating-property investment, primarily replacement trailers and information-technology equipment, and said operating cash flow plus borrowing capacity should meet expected needs.
- Management expected a significant decrease in revenue generated by one agent that produced approximately $216 million, or 9% of 2010 revenue, but less than 1% of gross profit. The decline could materially affect 2011 revenue, particularly in the first three quarters.
- Key risks include economic and freight-demand cyclicality, competitive pricing, availability and cost of third-party capacity, reliance on agents, accident and claims severity, and disruptions to technology or key vendors. The company retains commercial trucking liability up to $5 million per occurrence; insurance claims liabilities totaled $71.7 million at year-end.
- The FMCSA initiated its CSA motor-carrier oversight program in December 2010. Landstar said it could affect the number of approved brokerage carriers but did not anticipate a significant effect on aggregate trucks available. Proposed driver-hours, electronic-recording, and emissions rules could increase costs.
- In the OOIDA litigation, the appellate court largely upheld rulings favoring Landstar but remanded a claim concerning disclosure under a former lease. The company said actual damages were not expected and any injunction was unlikely to have a material financial effect; further appeal remained possible.
- 2010 SG&A included a $15.1 million incentive-bonus provision, whereas no such provision was included in 2009. Prior-year claims estimates produced favorable adjustments of $1.6 million in 2010, versus $4.1 million in 2009.
Important facts for investors to verify
- Whether the anticipated decline in the large agent’s business, and any changes among other major agents, affect 2011 revenue, gross profit, and loads.
- Whether higher purchased-transportation costs can be passed through to customers without further margin pressure.
- Subsequent operating cash flow, receivables collection, debt, and share repurchases relative to the company’s stated capital needs.
- Developments in insurance claims, the OOIDA litigation, and implementation of CSA or other transportation regulations.
- Progress integrating NLM and A3i and the performance of their technology and fee-based services.