Landstar System, Inc. — Q3 2021 Form 10-Q
Reporting period: Thirteen weeks ended September 25, 2021, compared with the thirteen weeks ended September 26, 2020; year-to-date figures cover 39 weeks. Financial statements are unaudited. Unless indicated otherwise, amounts are U.S. dollars.
Business context and performance
Landstar is an asset-light transportation management provider, relying on independent commission sales agents and third-party capacity providers. It reports transportation logistics and insurance segments. In Q3, demand drove revenue to a record level, while truck capacity remained tight. Results also reflect comparison with 2020, when COVID-19 significantly affected demand.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Revenue | $1,734.3 million | $1,085.5 million | $4,592.6 million | $2,836.6 million |
| Operating income | $131.4 million | $82.4 million | $356.9 million | $168.5 million |
| Net income | $98.7 million | $61.9 million | $268.2 million | $127.0 million |
| Diluted EPS | $2.58 | $1.61 | $7.00 | $3.28 |
| Gross profit margin | 10.9% | 11.0% | 11.1% | 10.3% |
| Operating margin | 7.6% | 7.6% | 7.8% | 5.9% |
Q3 revenue rose 60% year over year, with transportation revenue up 60%; management attributed the increase to approximately 32% higher revenue per load and 22% more loads. Year-to-date revenue increased 62%, reflecting approximately 31% higher revenue per load and 24% more loads. Q3 operating income increased 60% and net income increased 59% year over year. The year-to-date operating margin improvement reflected operating efficiencies from spreading infrastructure costs over a larger gross-profit base.
Cash flow and liquidity: Operating cash flow for the first 39 weeks was $217.0 million, versus $185.5 million. Capital expenditures for operating property were $18.6 million; the company also acquired $23.1 million of equipment through finance leases. Cash and cash equivalents were $230.6 million at September 25, 2021. Working capital was $564.8 million and the current ratio was 1.7, compared with $402.0 million and 1.5 at December 26, 2020.
Debt and funding: Long-term debt, including current maturities, was $97.3 million, consisting of finance lease obligations; Landstar had no borrowings under its revolving credit facility. The $250 million facility had $216.4 million available for borrowing after outstanding letters of credit. Total shareholders’ equity was $899.7 million. The filing reports dividends of $0.25 per share for Q3 and $0.67 per share year to date.
Material changes and management commentary
- In Q3, truck transportation revenue from third-party truck capacity providers increased 57%; revenue per load increased about 29% and truck loads increased about 22%. Tight capacity and strong freight demand were key drivers.
- Multimode transportation revenue increased 107% in Q3, with revenue per load up about 75%; management cited economic recovery and supply-chain disruptions.
- Purchased transportation rose to 78.2% of revenue in Q3 from 77.3%, mainly due to a greater revenue contribution from Truck Brokerage Carriers, which generally carry higher purchased-transportation costs.
- Q3 insurance and claims expense increased $7.7 million year over year, reflecting higher premiums, greater severity of current-year claims, and higher unfavorable development of prior-year claims. Net unfavorable prior-year claim adjustments were $3.5 million in Q3 2021 versus $1.1 million in Q3 2020.
- Q3 selling, general and administrative expense increased $20.3 million, including higher incentive compensation, stock-based compensation, wages and benefits. Year-to-date stock-based compensation expense was $18.7 million versus $2.7 million in the prior-year period.
- For the 39 weeks, the 2020 comparison included $12.6 million of COVID-related relief incentive payments to contractors and agents, which reduced prior-year earnings.
Outlook, risks and contingencies
Management anticipated approximately $69 million of additional operating-property purchases or lease financing during the remainder of fiscal 2021, primarily for replacement trailers and information technology equipment. It stated that operating cash flow and available borrowing capacity should be adequate for debt service, growth, dividends, share repurchases and working capital. The filing does not provide specific revenue or earnings guidance.
Key risks include capacity availability and cost, freight demand, dependence on independent agents and third-party carriers, and commercial trucking insurance costs and claims. Excess insurance coverage has become less available and more expensive; premiums for certain excess coverage increased approximately $3 million, or 19%, effective May 1, 2021, and Landstar increased its financial exposure to certain claims above $10 million. Management said pending claims and litigation were adequately provided for and were not expected to materially affect financial condition, though they could materially affect results in a particular period. One independent sales agency generated approximately 10% of consolidated revenue in the 39-week period; agent contracts are generally terminable on 10 to 30 days’ notice. Management reported compliance with credit covenants and effective disclosure controls.
Important facts for investors to verify
- Whether high revenue per load and tight capacity persist, and how freight volumes and capacity costs evolve.
- Insurance premium trends, claim severity, prior-year claim development, and the effect of increased retained exposure.
- Whether operating cash flow converts earnings into cash amid higher receivables and the company’s planned capital spending.
- Agent and customer concentration, including the disclosed agency responsible for about 10% of year-to-date revenue.
- Availability under the revolving facility and compliance with its covenants as dividends and repurchases continue.