Landstar System, Inc. — Q1 2021 Form 10-Q
Business context and period: Asset-light transportation and logistics provider using independent sales agents and third-party capacity providers. The unaudited quarter covered 13 weeks ended March 27, 2021; comparisons are with the 13 weeks ended March 28, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $1,287.5 | $927.6 |
| Operating income | $103.3 | $54.0 |
| Net income | $77.2 | $40.9 |
| Diluted earnings per share | $2.01 | $1.04 |
| Cash from operating activities | $69.9 | $99.2 |
| Capital expenditures | $4.1 | $5.8 |
- Revenue rose 39%, driven by transportation revenue growth of 39%; truck loads increased about 13% and revenue per truck load about 24%.
- Gross profit margin was 14.7%, down from 15.4%. Purchased transportation increased to 77.5% of revenue from 76.5%; commissions declined to 7.8% from 8.1% of revenue.
- Operating income increased 91%. The company-defined operating margin, operating income as a percentage of gross profit, improved to 54.6% from 37.8%.
- Insurance and claims expense fell to $21.5 million from $25.0 million, reflecting a severe claim and unfavorable prior-year claim development in the 2020 quarter. Q1 2021 included $0.3 million of net favorable prior-year claim adjustments, versus $2.2 million unfavorable in Q1 2020.
- Operating cash flow decreased 30% to $69.9 million. Management attributed the decline primarily to revenue growth increasing net receivables; cash flow also reflected a $109.6 million decrease in insurance claims liabilities.
Balance sheet, liquidity and capital
- At March 27, 2021, cash and cash equivalents were $219.4 million; current assets were $1,137.3 million and current liabilities $662.7 million. Working capital was $474.7 million and the current ratio was 1.7 to 1, compared with 1.5 to 1 at December 26, 2020.
- Long-term debt, consisting of finance lease obligations, was $91.0 million, down $9.8 million from year-end. The company had no revolving-credit borrowings and reported $216.4 million available under its $250 million facility. It was in compliance with covenants.
- Shareholders’ equity was $762.9 million, or 89% of total capitalization. The company paid $84.8 million in dividends during the quarter, including payment of $76.8 million declared in 2020, and made no share repurchases. Up to 1,821,030 shares remained authorized for repurchase.
- Insurance-related letters of credit totaled $64.9 million and were collateralized by $72.1 million of investments. Short-term investments were $41.4 million; the filing also reports $81.2 million of non-current bond portfolio investments.
Material changes and management commentary
- Truck capacity was tight, with severe winter weather worsening constraints during March. Management linked higher truck revenue per load to reduced available capacity. Available truck capacity providers increased to 83,282 from 64,980 a year earlier, including growth in both BCO independent contractors and brokerage carriers.
- Multimode transportation revenue increased 45%, supported by higher revenue per load and more loads amid economic recovery and supply-chain disruption.
- Management expects to acquire operating property of approximately $107 million during the remainder of fiscal 2021, through purchases or lease financing, primarily for replacement trailers and information technology equipment. It believes operating cash flow and credit availability will meet expected capital, dividend, growth and working-capital needs.
- No full-year earnings or revenue guidance was provided. Results for the quarter are not necessarily indicative of the full fiscal year; trucking activity is seasonal, and March-quarter truckload shipments are typically lower than in later quarters.
Risks, contingencies and unusual items
- Key risks include changes in freight demand and third-party capacity availability, competition, COVID-19 impacts, accidents and claims, insurance cost and availability, cybersecurity and system disruptions, regulatory changes, and independent-contractor and agent relationships.
- Commercial auto excess-insurance premiums had increased approximately $14 million, or over 170%, effective May 1, 2020. Management cautioned that availability may deteriorate further and pricing may rise. Claims estimates are actuarial and could differ from ultimate settlements, potentially affecting quarterly or annual results.
- Ordinary-course claims and litigation are provided for where losses are considered probable. Management does not expect the ultimate outcome, after provisions, to materially affect financial condition, but it could materially affect results in a particular quarter or year.
- The credit agreement restricts dividends in default and, in certain circumstances, when a pro forma leverage ratio would exceed 2.5 to 1. Management said the covenants were not materially restrictive and the company was compliant.
Important facts for investors to verify
- Whether tight truck capacity and elevated revenue per load persist, and how brokerage carrier rates affect gross profit margin.
- Developments in commercial auto insurance pricing, coverage availability, claim frequency and severity, and prior-year reserve adjustments.
- Conversion of reported earnings into cash, particularly changes in receivables, payables and insurance-claim liabilities.
- Execution and financing of the approximately $107 million remaining-2021 property acquisition plan, alongside dividends and any share repurchases.
- Performance through seasonal demand changes and any material updates to the risks identified in the filing.