Landstar System Inc. (NASDAQ:LSTR) received half of the receivables due from the US government for disaster relief, which dramatically improved the balance sheet relative to year-end levels. Fundamentals look strong, with the primary concern relating to whether the company will be able to offset a decline in disaster relief revenue given the likelihood of a less severe hurricane impact than was observed in 2005.
Income statement analysis
Sales growth – Sales were down 24 per cent sequentially due partly to normal seasonality but mainly due to the high level of fourth quarter revenues resulting from disaster relief efforts (Landstar is under contract with FEMA to provide logistics services on demand.) On a year/year basis revenues rose 22 per cent. Included in revenue at the global logistics segment for the 2006 and 2005 thirteen week periods were $35,449,000 and $7,300,000, respectively, of revenue related to disaster relief efforts for the storms that impacted the United States.
Unit vs. dollar – Revenue per load was up 9.4 per cent, to $1,580. The increase represented an increase in the revenue per mile from $1.80 to $1.99, partially offset by the average miles per load down 1 per cent.
Seasonality – Typically the fourth quarter is strongest due to the holiday sales season. In addition, the high levels of hurricane activity in 2004 and 2005 resulted in particularly high fourth-quarter seasonality in those years.
· Operating margins were up from 5.7 per cent in Q12005 to 6.8 per cent in Q12006.
· Net margins rose from 3.3 per cent to 4.0 per cent as a result of the higher operating margins.
· Stock options – the company adopted the retrospective method for stock option expense, so both years presented in the 10Q include stock option compensation as an expense.
· Pensions – N/A
· Anomalous tax rates - the provisions for income taxes for the 2006 and 2005 thirteen week periods were approximately 38.8% and 38.9%, respectively, which are higher than the statutory federal income tax rate primarily as a result of state income taxes, the meals and entertainment exclusion and non-deductible stock-based compensation.
Balance sheet analysis
Debt load and maturity schedule – in a single quarter the company reduced long-term debt from $155 million to $92 million due to receipt of receivables due from the US government for disaster relief.
Value of unexercised options – The intrinsic value of outstanding options is $62.5 million, which can be considered the minimum value of the related off-balance sheet liability.
Pension funding – N/A
· Doubtful accounts – the allowance for doubtful accounts grew to $5.4 million from $4.7 at year-end despite a sequential decline in both sales and receivables. The lower bad debt allowance in the previous quarter reflected the high level of sales and receivables related to FEMA disaster relief efforts. Therefore, we believe the higher reserve in the current quarter should not be construed as a sign of lowered credit standards.
Inventory trends [DOH] – N/A
Receivables trends [DSO] – receivables were down by more than 18 per cent sequentially to $437 million, reflecting payments made on receivables due from the government related to disaster relief efforts.
SPEs and other off-balance sheet items - At April 1, 2006, Landstar had $27,219,000 of letters of credit outstanding under the Company’s revolving credit facility and $39,054,000 of letters of credit secured by investments held at the Company’s insurance segment. The short-term investments of $20,496,000 combined with $20,745,000 of the non-current portion of investment grade bonds included in other assets at April 1, 2006, provide collateral for the $39,054,000 of letters of credit issued to guarantee payment of insurance claims.
Composition of marketable securities – Cash on hand was increased $20 million to the normal level of $50 million.
Cash flow analysis
Operating cash flow and net income trends – Net income rose from $16.8 million to $24.3 million year/year in the first quarter. Cash from operations rose much more significantly, from $42.3 million to $97.5 million due to receipt of receivables due from the US government.
Free cash flow and net income trends – On a net basis the company made virtually no capital investment in the quarter and generated $97 million of free cash flow, which was used for debt reduction, restoring cash to normal levels, stock repurchase and dividends.
Capital investment relative to depreciation – Compared to quarterly depreciation of $4 million, the company made new investments of only several hundred thousand (and sold nearly as much existing equipment.) Landstar anticipates acquiring approximately $44,000,000 of operating property during the remainder of the 2006 fiscal year.
Legal issues – a small number of Landstar’s business capacity owners (drivers classified as independent contractors) have sued for employee status. The case is in discovery and there are no reserves established.
Social concerns – none apparent.
Guidance – 16-20 per cent year/year sales growth and $0.42-$0.48 in EPS (including option expense) for the second quarter. Consensus is currently at 17.8 per cent sales growth and $0.46.
Macro-economic factors – the high levels of disaster relief revenue in the previous year create a difficult comparison, but the company has clearly described the relative contribution.
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