Landstar System, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are to the corresponding periods ended June 25, 2011. Amounts below are in U.S. dollars.
Business context
Landstar is a non-asset-based transportation and supply-chain services provider, using independent commission sales agents and third-party capacity providers. It reports Transportation Logistics and Insurance segments. Transportation Logistics generated approximately 99% of consolidated revenue in the first half of 2012.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $736.0 million | $675.6 million | $1,385.0 million | $1,247.5 million |
| Operating income | $58.8 million | $48.7 million | $101.9 million | $82.8 million |
| Net income attributable to Landstar | $35.9 million | $29.6 million | $62.7 million | $50.2 million |
| Diluted EPS | $0.76 | $0.62 | $1.33 | $1.05 |
| Gross profit margin | 15.9% | 16.5% | 16.1% | 16.7% |
| Operating margin on gross profit | 50.4% | 43.6% | 45.8% | 39.8% |
- Q2 revenue rose 9%; management attributed the increase mainly to 8% more loads and approximately 1% higher revenue per load. First-half revenue increased 11%, reflecting 8% more loads and approximately 3% higher revenue per load.
- First-half truck transportation revenue from BCO Independent Contractors and Truck Brokerage Carriers increased 12%. Multimode revenue declined 2% for the half, while Q2 multimode revenue increased 3%.
- Purchased transportation increased to 76.5% of revenue in Q2 and 76.2% for the half, from 75.5% and 75.4%, respectively. The company cited a greater mix of Truck Brokerage Carrier revenue, which carries higher purchased-transportation costs. Lower insurance and claims and other operating costs as a share of gross profit helped lift operating margin.
- First-half operating cash flow was $54.8 million, versus $23.5 million a year earlier. Management cited higher net income and the timing of receivable collections; receivables nevertheless used $58.2 million of cash during the period.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $64.4 million and short-term investments were $36.6 million. Working capital was $241.0 million and the current ratio was 1.7, unchanged from December 31, 2011.
- Total debt, including current maturities, was $125.6 million, down $6.8 million from year-end. The balance sheet reports $16.9 million of current maturities and $108.6 million of long-term debt.
- A new $225 million revolving credit agreement matures June 29, 2017. At quarter-end, $60 million was borrowed and $33.6 million of letters of credit were outstanding under the facility, leaving $131.4 million available. The initial borrowing rate was 1.50%; Landstar reported compliance with covenants.
- Financing cash use included $90.8 million of principal payments on debt and capital leases, partly offset by $60 million of revolving-facility borrowings. The filing also reports $24.1 million of trailing equipment acquired through capital leases in the half.
- Landstar paid $5.2 million in dividends and repurchased 315,600 shares for $15.8 million during the first half. Up to 200,951 shares remained authorized for repurchase at June 30.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Landstar expected to acquire approximately $19 million of operating property during the remainder of fiscal 2012, primarily replacement trailers and IT equipment, through purchases or leases. Management said operating cash flow and available borrowing capacity should support debt service, growth, dividends, share repurchases and working-capital needs.
- Key risks include changes in freight demand, competition, dependence on independent agents and third-party capacity, capacity and fuel-cost pressures, technology disruptions, regulatory changes, and the frequency, severity or unfavorable development of insurance claims.
- Landstar retains substantial per-occurrence exposure for certain commercial trucking, general liability, workers’ compensation and cargo claims. First-half insurance and claims expense included $0.2 million of unfavorable adjustments to prior-year estimates, compared with $1.1 million a year earlier.
- Insurance claims were supported by $45.1 million of letters of credit, collateralized by $50.2 million of investments and cash equivalents. Management reported no material developments in previously disclosed legal proceedings and considered the potential for material losses beyond recorded provisions remote.
- Unusual items affecting period comparisons included higher gains on sales of trailing equipment and lower claims costs; the first-half effective tax rate was 37.6%, down from 38.2%, partly due to tax benefits from employee stock-option share dispositions. Results are subject to normal estimation uncertainty and the interim period is not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether load growth and revenue per load remain durable, particularly in truckload and unsided/platform services.
- Whether higher Truck Brokerage Carrier mix continues to pressure purchased-transportation costs and gross margin.
- Whether receivable collections and operating cash flow sustain the first-half improvement.
- Debt and capital-lease obligations, covenant headroom, and the availability of the revolving facility after letters of credit.
- Future claims development, insurance costs, and any material change in legal or other contingencies.
- Whether planned equipment investment, dividends and remaining share repurchases are funded without materially weakening liquidity.