Landstar System, Inc. — Q1 2011 Form 10-Q
Reporting period: Thirteen weeks ended March 26, 2011; unaudited results compared with the thirteen weeks ended March 27, 2010. Dollar amounts below are U.S. dollars.
Business context
Landstar is a non-asset-based freight transportation and supply-chain services provider. It principally arranges transportation through independent commission sales agents and third-party capacity providers. Its reportable segments are transportation logistics and insurance.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $572.0 million | $548.1 million | +4% |
| Operating income | $34.1 million | $28.3 million | +20% |
| Income before taxes | $33.3 million | $27.4 million | +21% |
| Net income attributable to Landstar | $20.6 million | $17.2 million | +20% |
| Diluted EPS | $0.43 | $0.34 | +26% |
| Operating cash flow | $16.6 million | $24.1 million | Down $7.5 million |
- Gross profit margin improved to 16.9% from 16.5%. The filing’s operating margin measure—operating income divided by gross profit—rose to 35.4% from 31.3%.
- Purchased transportation declined to 75.4% of revenue from 76.1%; commissions to agents increased to 7.7% from 7.4% of revenue.
- Income tax provisions were based on an estimated full-year effective rate of approximately 38.2% in both periods.
Liquidity, debt and capital
- At March 26, 2011, cash was $45.2 million and short-term investments were $30.8 million. Working capital was $164.5 million and the current ratio was 1.5, unchanged from year-end 2010.
- Total debt, including current maturities, was $115.6 million, down $6.0 million from December 25, 2010. The balance included $80.0 million borrowed under the revolving credit facility.
- The $225 million credit facility matures June 27, 2013. After $33.7 million of facility letters of credit, $111.3 million remained available. The company reported compliance with debt covenants.
- Operating cash flow was lower mainly because of the timing of trade-receivable collections. Investing activities provided $1.7 million, versus $23.6 million used in the prior-year quarter; operating-property purchases were $1.8 million versus $22.2 million.
- Financing used $18.0 million, including $8.0 million to acquire the remaining A3i noncontrolling interest, $6.0 million of capital-lease principal payments and $2.4 million of dividends.
- Equity was $262.4 million, or 69% of total capitalization. The company paid a $0.05-per-share dividend and said the board intended to continue quarterly dividends. No shares were repurchased in the quarter; 722,662 shares remained authorized for repurchase.
Changes and management commentary
- Transportation logistics revenue increased about 4%, principally because revenue per load rose approximately 10%, partly offset by a 5% decline in loads. Management attributed higher truck revenue per load primarily to tighter U.S. truck capacity.
- Third-party truck-provider loads declined 6%, while revenue per load increased 9%. A major factor in lower volumes was the anticipated reduction in less-than-truckload substitute line-haul business: revenue in that service was $19.4 million versus $77.2 million a year earlier.
- Multimode revenue from rail, air and ocean providers increased 33%; loads increased 12% and revenue per load increased 18%.
- Insurance and claims costs improved as a percentage of gross profit, principally due to lower cargo-claim costs. Selling, general and administrative costs as a percentage of gross profit also declined, partly reflecting lower incentive-plan bonus provisions.
- In January 2011, Landstar acquired the remaining 25% voting interest in A3i. The 2010 comparison included the minority interest in A3i’s losses.
- No customer represented 10% or more of revenue in Q1 2011; one customer represented approximately 14% in Q1 2010.
Outlook, risks and contingencies
- Landstar anticipated approximately $42 million of operating-property purchases during the remainder of fiscal 2011, primarily replacement trailing equipment and information-technology equipment, by purchase or lease financing. It gave no specific revenue or earnings guidance in the provided filing text.
- Management believed operating cash flow and available borrowing capacity would be sufficient for debt service, growth, dividends, authorized share repurchases and working-capital needs. Results for the March quarter are typically seasonally lower than those in later quarters; interim results are not necessarily indicative of full-year results.
- Key exposures include dependence on agents and third-party capacity, freight demand and truck availability, competition, technology disruption, receivable collectability, and the frequency or severity and reserve development of self-insured claims. The company reported $722,000 of unfavorable prior-year claims adjustments in Q1 2011, versus $418,000 in Q1 2010.
- The OOIDA litigation remained pending. The appellate ruling upheld the legality of current lease terms on specified issues but remanded a claim concerning disclosure in an older lease; plaintiffs sought further Supreme Court review. Landstar said it believed actual damages had not been sustained and any remand injunction was unlikely to have a material adverse financial effect, while noting the outcome and possible attorneys’ fees were uncertain.
- Letters of credit of $45.2 million supporting insurance claims were collateralized by $50.2 million of investments and cash equivalents. Management also noted that claim-reserve estimates, tax positions, and other litigation outcomes could affect results.
Important facts for investors to verify
- Whether pricing and revenue-per-load gains can persist as capacity and freight-market conditions change, and how truck volumes develop after the large reduction in substitute line-haul revenue.
- Receivable collection trends and operating cash flow, given the quarter’s cash-flow decline attributed to collection timing.
- Capacity and covenant headroom under the revolving facility, alongside planned 2011 capital spending and continuing dividends.
- Developments in the OOIDA litigation and the adequacy of insurance-claim reserves, including future adverse or favorable development.
- Whether margin improvement continues and how much reflects sustainable operating performance versus mix, claims costs and lower incentive compensation.