Landstar System, Inc. — Q2 2018 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 30, 2018; comparisons are with periods ended July 1, 2017. Landstar is an asset-light transportation management provider operating transportation logistics and insurance segments. Financial amounts below are in U.S. dollars; millions are used unless otherwise noted.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $1,182.8m | $870.4m | $2,230.7m | $1,651.3m |
| Operating income | $83.4m | $61.0m | $158.6m | $113.4m |
| Net income attributable to Landstar | $62.5m | $37.5m | $120.0m | $69.9m |
| Diluted EPS | $1.51 | $0.89 | $2.87 | $1.66 |
| Gross profit margin | 14.5% | 15.2% | 14.7% | 15.4% |
- Growth and margins: Revenue rose 36% in Q2 and 35% in the first half. Management attributed the first-half transportation revenue increase to approximately 12% more loads and 21% higher revenue per load. Operating income increased 37% for the quarter and 40% for the half. Gross profit margin declined as purchased transportation rose to 77.5% of revenue in Q2 and 77.4% in the first half, versus 76.7% and 76.5%, respectively.
- Cash flow: First-half operating cash flow was $113.0m, up from $79.8m. Investing activities used $2.4m; financing activities used $203.4m, including $75.5m of dividends paid and $105.5m of share repurchases. Cash and cash equivalents ended at $148.6m, down from $242.4m at fiscal year-end.
- Liquidity and debt: Working capital was $419.3m and the current ratio was 1.8:1. Total debt, including current maturities, was $104.0m, down $21.2m from December 30, 2017. There were no revolver borrowings; $215.6m remained available under the $250m credit facility. Landstar reported compliance with its debt covenants.
- Other balance-sheet items: Total assets were $1,308.9m and equity was $660.9m at June 30, 2018. The company repurchased 1.0m shares for $105.5m during the first half and had authorization for up to 2.0m additional shares.
Material changes versus the prior period
- Transportation demand and pricing strengthened: truck loads increased about 11% in both the quarter and first half, while truck revenue per load increased about 22% in Q2 and 21% in the first half. Management cited broad-based customer demand, tighter truck capacity and higher diesel costs.
- Insurance and claims expense increased; unfavorable development of prior-year claims was $5.7m in Q2 and $8.2m in the first half, compared with $0.3m and $0.2m in the corresponding 2017 periods. The first-half effect reduced net income by $6.2m, or $0.15 per share; Q2 impact was $4.3m, or $0.10 per share.
- The lower U.S. corporate tax rate following the Tax Reform Act reduced the effective tax rate to 23.6% for the first half, versus 37.3% a year earlier. Management estimated the tax-rate change favorably affected first-half net income by $21.5m, or $0.52 per share; Q2 benefit was $11.3m, or $0.27 per share.
- Landstar adopted the new revenue recognition standard using the modified retrospective method. Revenue is generally recognized over transit time rather than at delivery; prior-year comparisons were not restated. For the first half, adoption increased reported revenue by $4.3m and net income by $0.4m versus results without adoption.
Outlook, commentary, risks and unusual items
- Management expected approximately $54m of operating-property purchases during the remainder of fiscal 2018, primarily for trailers and information technology equipment. It stated that operating cash flow and available borrowing capacity should be adequate for debt service, growth, dividends, share repurchases and working capital needs. No specific revenue or earnings guidance is provided in the filing.
- Management described freight demand as broad-based and the truck-capacity environment as tight. Results remain exposed to transportation demand, availability and cost of third-party capacity, fuel costs, competition, and reliance on independent agents and carriers.
- Insurance claims are a significant uncertainty: management noted that greater accident frequency or severity, or unfavorable development of existing claims, could materially affect results. The company retains specified layers of liability for trucking, general liability, workers’ compensation and cargo claims.
- Claims and litigation arise in the ordinary course. Management believes adequate provisions have been recorded and expects no material adverse effect on financial condition, while noting outcomes could materially affect a particular quarter or year. The filing also identifies customer receivable collection, cybersecurity, regulatory changes and economic conditions among risks.
- The company reported no material remaining performance obligations and no material expected future earnings impact from adoption of the revenue standard. It did not consider unrealized investment losses material or other-than-temporary, attributing them primarily to rising interest rates.
Most important facts for investors to verify
- Whether revenue growth and higher revenue per load persist, and whether freight capacity costs continue to pressure gross profit margins.
- Development of self-insured claims, particularly the reported $8.2m first-half unfavorable prior-year claims adjustment and its effect on future insurance expense.
- The contribution of the one-time Tax Reform Act benefit to reported earnings versus underlying operating performance.
- Cash use for dividends and repurchases, planned remaining 2018 capital spending, and ongoing availability under the credit facility and covenant compliance.
- Effects of the revenue-recognition change on period-to-period comparability, alongside the company’s stated adoption impacts.