Landstar System, Inc. — Q3 2018 Form 10-Q
Business context and period. Landstar is an asset-light transportation and logistics provider using independent sales agents and third-party capacity providers. This unaudited report covers the 13 and 39 weeks ended September 29, 2018, compared with the periods ended September 30, 2017.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Revenue | $1,202.1 million | $943.4 million | $3,432.8 million | $2,594.8 million |
| Operating income | $87.1 million | $60.6 million | $245.6 million | $173.9 million |
| Net income attributable to Landstar | $67.0 million | $42.4 million | $187.0 million | $112.3 million |
| Diluted EPS | $1.63 | $1.01 | $4.50 | $2.67 |
- Q3 revenue rose 27%; transportation revenue rose 28%, reflecting approximately 7% more loads and 18% higher revenue per load. Nine-month revenue rose 32%, with approximately 10% more loads and 20% higher revenue per load.
- Q3 gross profit margin was 14.3%, versus 14.8%; the company-defined operating margin (operating income as a percentage of gross profit) was 50.8%, versus 43.3%. For the nine months, these were 14.5% versus 15.2% and 49.3% versus 44.1%, respectively.
- Q3 purchased transportation was 77.5% of revenue, up from 77.0%; nine-month rate was 77.5%, up from 76.7%. The company attributed the increase mainly to a lower BCO contractor revenue mix and, for the nine-month comparison, higher brokerage carrier costs.
- Operating cash flow for the first 39 weeks was $204.2 million, compared with $132.3 million. Investing cash use was $5.8 million; financing cash use was $226.4 million, including $105.5 million for share repurchases and $82.3 million in dividends paid.
- At September 29, cash and cash equivalents were $214.0 million and short-term investments were $40.2 million. Working capital was $484.0 million and the current ratio was 1.9 to 1.
- Total debt, including current maturities, was $113.8 million, down $11.3 million from December 30, 2017. No revolving-credit borrowings were outstanding; $215.6 million remained available. Equity was $726.2 million.
Changes, outlook and risks
- Revenue and earnings growth reflected higher freight demand, increased loads, a tighter capacity environment and higher revenue per load. Q3 growth also compared against approximately $23 million of 2017 hurricane-relief revenue.
- The 2018 effective tax rates were 22.4% for Q3 and 23.1% for the first 39 weeks, versus 29.2% and 34.5%. The Tax Cuts and Jobs Act’s lower federal rate benefited nine-month net income by approximately $32.3 million, or $0.78 per diluted share; Q3 benefit was approximately $11.5 million, or $0.28 per diluted share.
- Unfavorable development of prior-year self-insured claims was $3.4 million in Q3 and $11.6 million for the first 39 weeks, compared with $1.1 million and $1.3 million in 2017. Management said the nine-month development was primarily attributable to five claims. Claim outcomes could materially affect results in an individual quarter or year.
- Management anticipated approximately $31 million of operating-property purchases for the remainder of fiscal 2018, mainly trailers and IT equipment. It said operating cash flow and available borrowing capacity should be adequate for operating, investment, dividend and repurchase needs. The filing gives no specific earnings or revenue guidance; nine-month results are not necessarily indicative of full-year results.
- Key risks include accident frequency and severity, unfavorable claims development, access to third-party capacity, demand and freight-market conditions, dependence on agents and vendors, cybersecurity and system disruptions, regulatory changes, and customer receivable collectability. Ordinary-course litigation was not expected to materially harm financial condition, though it could affect results in a given period.
- Revenue recognition changed in 2018: transportation revenue is recognized over the shipment transit period rather than generally at delivery. Adoption increased nine-month reported revenue by $4.1 million and net income by $0.4 million versus amounts without adoption; comparative 2017 figures were not restated. The opening retained-earnings adjustment was $0.8 million.
Important facts for investors to verify
- Whether freight demand, higher revenue per load and capacity conditions persist, and how much reported growth reflects volume versus pricing, fuel and mix.
- Future development of self-insured claims and the adequacy of reserves, particularly after the $11.6 million nine-month unfavorable adjustment.
- Cash conversion and capital allocation, including planned remaining-2018 capital spending, dividends and any further share repurchases.
- Effects of the new revenue-recognition timing on period-to-period comparisons and the implementation of upcoming accounting standards.
- Credit-facility availability, covenant compliance, investment portfolio valuation and contingent obligations, including letters of credit.