Landstar System, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017 (52 weeks), compared with the 53-week fiscal year ended December 31, 2016. Landstar is an asset-light transportation and logistics provider operating mainly in North America through independent sales agents and third-party capacity providers.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $3,646.4 million | $3,167.6 million | +15% |
| Operating income | $244.0 million | $223.3 million | +9% |
| Net income attributable to Landstar | $177.1 million | $137.4 million | +29% |
| Diluted EPS | $4.21 | $3.25 | +30% |
| Cash from operating activities | $139.0 million | $190.2 million | −27% |
- Transportation revenue rose 15%, reflecting approximately 9% more loads and 6% higher revenue per load. Management cited broad-based demand, tighter capacity, higher fuel costs for brokerage loads, and hurricane-related freight activity.
- Gross profit margin, as defined by Landstar, was 14.9%, down from 15.4%. Purchased transportation increased to 76.9% of revenue from 76.3%; agent commissions were 8.2% versus 8.3%.
- Operating income increased, but selling, general and administrative expense rose $27.3 million, including a $20.5 million incentive-compensation provision versus $1.4 million in 2016. Insurance and claims expense rose $5.3 million.
- FY2017 net income included an estimated $19.5 million tax benefit from revaluing deferred tax liabilities after U.S. tax reform, adding about $0.46 to diluted EPS. The reported effective tax rate was 26.5%, versus 37.4% in 2016.
- Q4 2017 revenue was $1,051.6 million and operating income was $70.0 million, compared with $892.8 million and $63.8 million in Q4 2016. Q4 diluted EPS was $1.54 versus $0.94; quarterly results include the year’s tax-reform effects.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $242.4 million; working capital was $412.6 million and the current ratio was 1.8. Operating cash flow fell primarily because of the timing of trade-receivable collections.
- Total debt, consisting of capital lease obligations, was $125.1 million. There were no borrowings under the $250 million revolving credit facility; $216.9 million was available after outstanding letters of credit. The company reported compliance with its debt covenants.
- Equity was $653.9 million, or 84% of total capitalization. The company reported $131.1 million of future capital-lease payments and estimated approximately $39 million of 2018 operating-property purchases, primarily trailers and IT equipment.
- Landstar paid $0.38 per share in regular dividends during 2017 and declared a $1.50-per-share special dividend, payable in January 2018. The special dividend liability of $63.0 million was recorded at year-end. A further quarterly dividend of $0.15 per share was announced in January 2018.
Material changes, outlook and risks
- Landstar acquired substantially all assets of a Mexican asset-light logistics business in September 2017, forming Landstar Metro. Landstar owns 70%; seller-affiliated investors hold 30%. The acquisition generated approximately $8.8 million of goodwill and less than 1% of transportation-logistics segment revenue in 2017.
- Management said operating cash flow and available credit should support operations, growth, dividends and share repurchases. It anticipated approximately $39 million of 2018 operating-property additions. The filing provides no specific revenue or earnings guidance.
- Revenue recognition changed beginning January 1, 2018: most transportation revenue is recognized over transit rather than at delivery. Management did not expect a material effect on results, financial position or cash flows.
- Principal risks include higher accident severity and claims development, limited availability or higher cost of excess insurance, dependence on sales agents and third-party carriers, freight demand and rate cycles, competition, and potential changes to independent-contractor classification or transportation regulation.
- Other disclosed exposures include an EPA review concerning California diesel-emissions rules, a multi-state unclaimed-property audit and Delaware voluntary-disclosure agreement, cyber and system-disruption risks, and ordinary-course litigation. Management said litigation provisions were adequate, while outcomes could affect results in a particular period.
Important facts for investors to verify
- How much of the earnings increase was recurring, excluding the $19.5 million tax benefit and other unusual items?
- Whether cash conversion improves as receivable collections normalize, and how working-capital needs evolve with revenue growth.
- Whether brokerage capacity costs, insurance claims severity and self-insured claim estimates continue to pressure margins.
- How the Mexico acquisition performs and whether its contingent purchase price or noncontrolling-interest arrangements create material future obligations.
- The outcomes of the EPA review and unclaimed-property audit, and the final accounting for tax-reform effects, which the company described as provisional.