Landstar Q3 EPS misses by 24 cents on $21 million in claims charges

Landstar System reported third-quarter earnings per share of $1.42, missing the consensus estimate by 24 cents after $21 million in unfavorable insurance and claims items wiped out an otherwise strong quarter for the truckload broker. The miss came from $13 million (29 cents per share) in adverse adjustments to claims reserves and $8 million (18 cents per share) in unfavorable developments on two prior-year claims.

"You can look down the P&L and if you skip one line known as insurance and claims, you'd have a lot of good news to write home about," President and CEO Frank Lonegro told analysts on Tuesday's call.

Even with the charges, the result was 20 cents better than the adjusted EPS from a year ago, which had excluded several non-recurring items. Consolidated revenue rose 25% year over year to $1.51 billion, roughly in line with expectations.

What is driving the top line?

Total truck revenue climbed 29% year over year to $1.41 billion, as loads increased 3% and revenue per load jumped 25%. Higher diesel prices and improving truckload pricing drove the yield gain. Revenue per load rose 7.5% from the second quarter.

The strength was broad across equipment types:

• Dry van loads up 6% year over year, with revenue per load up 23%.
• Flatbed loads up 4% year over year, with yield up 29%.
• Elevated demand in heavy-haul, supported by data center construction.

Momentum has carried into October. Total truck loads are up 7% year over year, with revenue per load 29% higher. Both metrics are running slightly above typical seasonal patterns; Landstar normally sees loads and revenue per load each rise about 1% from the third to fourth quarter.

What is happening with capacity?

Landstar has cut its approved carrier list from more than 100,000 in 2022 to nearly 68,000 in the recent quarter, with most reductions in 2023 and 2024 to combat cargo theft and amid deteriorating conditions for owner-operators. The list grew 5% sequentially in the third quarter.

Trucks provided by business capacity owners — the owner-operators who haul almost exclusively for Landstar — rose 165 units sequentially to 8,709, the largest sequential increase since the third quarter of 2021. The count is up another 22 units since quarter-end. BCO truck turnover improved 480 basis points year over year to 26.6%.

Changes in this segment have historically signaled turns in the broader truckload market. BCO revenue per mile, Landstar's preferred pricing metric because it excludes fuel surcharges, was up 23% year over year on dry van and 19% on flatbed. BCO revenue per load rose 10.9% sequentially.

How bad is the insurance problem?

Variable contribution, or net revenue, rose 25% year over year to $212 million, with the margin down 10 basis points to 14%. The adjusted operating margin fell 220 basis points to 30.9% of variable contribution.

Insurance and claims expense climbed $22.3 million year over year to $55.3 million, equal to 9.4% of BCO revenue — up 220 basis points. That compares with guidance of just 3.2% back in 2016, before a spike in nuclear verdicts began moving the line. Notably, Landstar's accident frequency improved again, falling to 0.57 DOT-reportable accidents per million miles through the first nine months of the year.

Landstar's disclosure offers a window into how the industry is absorbing claims costs following the Supreme Court's broker liability ruling. With loads and yields both trending above seasonal norms into the fourth quarter, capacity tightening and pricing power — not claims — look set to shape the next leg of the cycle.