Landstar System, Inc. — Q1 2020 Form 10-Q
Reporting period: Thirteen weeks ended March 28, 2020; unaudited. Comparisons are with the thirteen weeks ended March 30, 2019. Landstar is an asset-light transportation management provider using independent agents and third-party capacity providers.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $927.6 million | $1,033.0 million | Down 10% |
| Operating income | $54.0 million | $80.9 million | Down 33% |
| Net income attributable to Landstar | $40.9 million | $63.3 million | Down 35% |
| Diluted EPS | $1.04 | $1.58 | Down 34% |
| Operating cash flow | $99.2 million | $121.4 million | Down $22.2 million |
- Gross profit was approximately $142.9 million, with gross profit margin of 15.4%, versus 15.1% in the prior-year quarter. Operating margin, as Landstar defines it as operating income divided by gross profit, was 37.8%, versus 52.0%. Operating income was about 5.8% of revenue.
- Truck transportation revenue fell 10% to $854.6 million. Truckload volumes declined approximately 6% and revenue per load declined approximately 5%. Multimode transportation revenue decreased 10% to $54.7 million.
- Insurance and claims expense rose $10.0 million to $25.0 million, reflecting a $5.0 million charge for the self-insured retention on a fatal accident, $3.5 million of anticipated additional insurance premium, and higher unfavorable development of prior claims. SG&A increased $4.1 million to $45.3 million, including about $0.8 million for cancellation of the agent convention.
- Cash and cash equivalents were $177.2 million at March 28, down from $319.5 million at year-end. Working capital was $351.3 million and the current ratio was 1.8 to 1. Operating cash flow declined mainly due to collection timing and lower net income.
- Long-term debt, including current maturities, was $101.9 million, consisting of finance lease liabilities. The company had no revolver borrowings and reported $215.6 million available under its $250 million credit facility. Shareholders’ equity was $627.1 million, or 86% of total capitalization.
- Financing cash outflow included $86.3 million of dividends paid, including $78.9 million payable declared in 2019, and $116.0 million of share repurchases. The quarter’s declared dividend was $0.185 per share. Capital expenditures were $5.8 million.
Material changes and management commentary
- Revenue fell due to weaker freight demand, lower loads and lower revenue per load. Management cited softness in U.S. manufacturing and the pandemic’s adverse effect on volumes in the final week of the quarter. Total truck capacity providers numbered 65,000, down from 69,000 a year earlier.
- COVID-19 disruptions intensified in late March and early April. Management expected a significant adverse effect on truckload volumes in Q2; the impact on future pricing, results and cash flows was uncertain. The filing provides no numeric earnings or revenue guidance.
- For loads delivered April 1 through May 15, the company offered an additional $50 to both the BCO contractor hauling the load and the agent dispatching it. It also offered up to $2,000 to eligible BCOs testing positive or placed under mandatory quarantine. Management said these programs would affect Q2 results and further support might be provided.
- Management believed operating cash flow and available credit would be adequate for debt service, working capital, dividends and other needs, while saying share repurchases would be approached prudently as the pandemic’s duration and severity became clearer. It anticipated approximately $48 million of additional operating-property purchases or lease financing for the remainder of fiscal 2020.
- Two serious accidents during the insurance policy year led Landstar to increase aggregate excess-policy limits; the company recorded the expected additional-premium charge. Claims estimates remain subject to uncertainty and may materially affect results in a particular quarter or year.
- The company adopted the expected-credit-loss accounting standard on December 29, 2019, recording a $0.7 million cumulative reduction to retained earnings. Available-for-sale investment losses were attributed primarily to pandemic-related widening credit spreads; management did not expect to sell the affected securities before recovery.
- Management said ordinary-course litigation was adequately provided for and was not expected to materially affect financial condition, though it could affect results in a given period. The filing also highlights risks from COVID-19, capacity-provider availability, insurance claims, Mexican peso depreciation and possible impairment, and technology or cybersecurity disruption.
Most important facts for investors to verify
- Subsequent-quarter truckload volumes, revenue per load and pricing, particularly as COVID-19 disruptions evolved.
- Whether insurance and claims costs, including accident-related losses and prior-year claim development, remain elevated.
- Cash generation and liquidity after dividends, repurchases and pandemic-related support payments; monitor credit-facility availability and covenants.
- Actual cost and duration of contractor and agent relief programs, and whether additional support is provided.
- Potential effects of Mexican peso depreciation and any resulting impairment assessment for Mexican operations.