Business context and reporting period
Landstar System, Inc. is an asset-light transportation management provider using independent sales agents and third-party capacity providers. This unaudited Form 10-Q covers the 13 weeks ended March 28, 2015, compared with the 13 weeks ended March 29, 2014. Results for the quarter are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $762.4 million | $688.2 million |
| Operating income | $49.0 million | $45.0 million |
| Net income | $30.0 million | $27.6 million |
| Diluted EPS | $0.67 | $0.61 |
| Cash from operations | $49.3 million | $13.7 million |
| Gross profit margin | 15.1% | 15.3% |
| Operating margin on gross profit | 42.5% | 42.7% |
| Cash and cash equivalents | $114.9 million | $163.9 million at Dec. 27, 2014 |
| Long-term debt, including current maturities | $102.1 million | $111.3 million at Dec. 27, 2014 |
Revenue increased 11% year over year; transportation revenue rose 11%, reflecting approximately 7% more loads and 4% higher revenue per load. Net income increased 9%. Purchased transportation was 77.0% of revenue in both periods; commissions rose to 7.8% from 7.7%. Higher insurance and claims costs, including a material litigation charge, contributed to lower gross and operating margins.
Operating cash flow improved primarily because trade receivables were collected after the prior year-end. Working capital was $314.7 million and the current ratio was 2.0:1 at quarter-end. The company reported no borrowings under its revolving credit facility, with $192.0 million available; it was in compliance with credit covenants. Shareholders’ equity was $484.3 million, or 83% of total capitalization. Q1 financing cash use included $47.9 million of dividends paid (including a prior-year declared special dividend) and $31.3 million of share repurchases.
Material changes and operating drivers
- Truck transportation revenue increased 10%; truck loads rose about 6% and revenue per load about 3%. Management attributed volume growth to broad-based demand, especially van freight, and market share gains from new agents; pricing benefited from tight truck capacity.
- Multimode transportation revenue increased 28%, mainly from more rail intermodal loads. Loads rose about 32%, while revenue per load declined about 3%.
- Insurance and claims expense increased $2.9 million year over year. Unfavorable development of prior-year claims was $4.6 million, versus $1.9 million a year earlier.
- The transportation logistics segment generated $43.7 million of operating income, compared with $39.0 million; the insurance segment generated $5.3 million, compared with $6.0 million.
Outlook, risks and unusual items
Management expected to acquire approximately $70 million of operating property during the remainder of fiscal 2015, primarily replacement trailers and information technology equipment, by purchase or lease financing. The company also had an agreement to buy land in Laredo, Texas, for approximately $4.5 million, with plans for a freight staging and transload facility. Management said operating cash flow and available borrowing capacity should support debt service, growth, dividends, repurchases and working-capital needs. The filing gives no numerical revenue or earnings guidance.
A jury verdict in Bruno v. Landstar Ranger, Inc. was $19.25 million, but a pre-verdict agreement capped the company’s financial exposure at $4.5 million and waived appeals. Landstar recorded a $4.5 million pretax Q1 charge, approximately $0.06 per share. Management said other claims and litigation were adequately provided for, while noting that claims outcomes could materially affect results in a particular quarter or year.
Key risks include accident frequency and severity, adverse development of self-insured claims, reliance on third-party insurers, agents and capacity providers, changes in transportation demand and competition, regulatory changes, and disruptions to computer systems. The company also identified potential estimation sensitivity in receivables, claims reserves and uncertain tax positions. Operations are seasonal; March-quarter results are typically lower than those in the June, September and December quarters.
Important facts for investors to verify
- Whether volume growth and tight truck capacity persist, and how they affect revenue per load and purchased transportation costs.
- Future development of self-insured claims and the adequacy of reserves following the $4.5 million Bruno charge.
- Execution, timing and funding of the anticipated $70 million property investment and Laredo facility plan.
- Cash use for dividends and repurchases relative to operating cash generation, debt repayment and available revolver capacity.
- The filing says ASU 2014-09 was not expected to have a material financial-statement impact; verify the eventual adoption timing and assessment.