Landstar System, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and thirty-nine weeks ended September 30, 2017; comparatives are the periods ended September 24, 2016. Unaudited results. Landstar is an asset-light transportation management provider using independent sales agents and third-party capacity providers.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Revenue | $943.4 million | $787.9 million | $2,594.8 million | $2,274.8 million |
| Operating income | $60.6 million | $58.5 million | $173.9 million | $159.5 million |
| Net income attributable to Landstar | $42.4 million | $36.3 million | $112.3 million | $97.8 million |
| Diluted EPS | $1.01 | $0.86 | $2.67 | $2.31 |
| Gross profit margin | 14.8% | 15.5% | 15.2% | 15.6% |
| Operating margin on gross profit | 43.3% | 48.0% | 44.1% | 44.9% |
For Q3, revenue grew 20%, net income attributable to Landstar rose about 17%, and diluted EPS increased 17%. For the 39-week period, revenue increased 14% and net income attributable to Landstar rose about 15%. Results include $23 million of Q3 revenue from approximately 16,000 disaster-relief loads related to hurricanes.
- Cash flow: Operating cash flow for 39 weeks was $132.3 million, versus $171.3 million a year earlier; management attributed the decline primarily to timing of receivable collections. Cash and cash equivalents ended the period at $249.7 million, versus $178.9 million at year-end 2016.
- Liquidity: Working capital was $431.0 million and the current ratio was 2.0 at September 30, 2017, compared with $357.1 million and 1.9 at December 31, 2016. Short-term investments were $45.7 million.
- Debt and capital: Debt, including current maturities, was $117.4 million, down $20.9 million from year-end. No credit-facility borrowings were outstanding; $216.9 million remained available under the $250 million revolving facility. Equity was $654.0 million, or 85% of total capitalization. The company paid $0.28 per share in dividends year to date and made no share repurchases during the period.
Performance drivers and changes
- Q3 transportation revenue rose 20%, supported by roughly 13% more loads and 6% higher revenue per load. Year-to-date transportation revenue increased 14%, reflecting approximately 11% more loads and 3% higher revenue per load.
- Freight demand was broadly stronger, while tighter truck capacity, higher fuel costs and hurricane-related disruption contributed to higher truck revenue per load. The 39-week increase in revenue per load for multimode services was partly driven by disaster-relief air shipments; rail intermodal loadings declined.
- Purchased transportation increased to 77.0% of revenue in Q3 from 76.3%; year to date it was 76.7% versus 76.1%. This reflected higher rates paid to truck brokerage carriers and a lower revenue mix from Landstar’s business capacity owner contractors.
- Insurance and claims costs increased in Q3, including a severe accident and unfavorable development of prior-year claims. Prior-year claims development added $1.1 million to Q3 operating income expense impact (versus $2.1 million of favorable development in the prior-year quarter); the year-to-date unfavorable development was $1.3 million.
- SG&A increased, principally due to incentive compensation provisions of $6.8 million in Q3 and $13.6 million year to date, compared with $0.4 million and $0.9 million, respectively, in the prior-year periods. Management linked the higher Q3 provision to earnings significantly exceeding targets.
Outlook, transactions and risks
- Landstar acquired substantially all assets of a Mexican asset-light logistics business on September 20, 2017. Cash consideration was about $8.2 million; the company also assumed approximately $2.2 million of liabilities. Seller-affiliated investors hold 30% interests in the Mexican entities. Acquisition goodwill was approximately $8.8 million, and the company incurred about $1.0 million of one-time acquisition-related costs year to date. Management did not expect the new operations to materially affect 2017 revenue or earnings.
- Management anticipated approximately $36 million of additional operating-property purchases or lease financing during the remainder of fiscal 2017, primarily trailers and IT equipment. It said operating cash flow and available borrowing capacity should be sufficient for debt service, growth, dividends, the authorized share-purchase program and working capital. No quantified earnings or revenue guidance was provided.
- Key risks include accident frequency and severity, adverse development of self-insured claims, dependence on independent sales agents and third-party capacity, transportation demand and capacity conditions, customer receivable collectability, cyber or system disruptions, regulatory changes, and the uncertain cost or timing of any future purchase of the Mexican minority interests. Litigation is described as arising in the normal course; management believes provisions are adequate and does not expect a material adverse effect on financial condition, though quarterly or annual results could be affected.
- Revenue recognition guidance was scheduled for adoption January 1, 2018; management expected recognition for most transportation services to shift from delivery to the transit period, without a material impact on results, financial position or cash flows. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess how much of Q3 growth and revenue-per-load improvement was attributable to hurricane relief and tighter capacity, and whether those conditions persisted after the quarter.
- Track purchased-transportation costs, gross profit margin and operating margin, which declined year over year despite higher revenue and earnings.
- Review insurance-claim severity and reserve development, including the impact of the severe Q3 accident and future claims experience.
- Monitor operating cash flow and receivable collections, along with planned capital spending and the company’s remaining credit availability.
- Review the Mexican acquisition’s performance, assumed liabilities, minority-interest purchase/sale options and any effects on future results.