Universal Logistics Holdings, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Universal provides transportation and logistics services in the U.S., Mexico, Canada and Colombia. This unaudited report covers the 13 weeks and 26 weeks ended June 29, 2019; comparisons are with the periods ended June 30, 2018. Amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $383.2 | $365.9 | $760.6 | $701.0 |
| Operating income | $30.7 | $26.3 | $57.2 | $43.4 |
| Operating margin | 8.0% | 7.2% | 7.5% | 6.2% |
| Net income | $20.0 | $17.7 | $37.3 | $28.1 |
| Net margin | 5.2% | 4.8% | 4.9% | 4.0% |
| Diluted EPS | $0.70 | $0.62 | $1.31 | $0.99 |
- Q2 revenue rose 4.7% and net income rose 13.0%; first-half revenue increased 8.5% and net income increased 32.6%.
- First-half operating cash flow was $91.8, versus $43.4 a year earlier. Capital expenditures were $25.1; cash used in investing was $45.9, including $22.5 for an acquisition and related obligations. Cash used in financing was $45.4, including $28.1 of net repayments on revolving and margin facilities, other debt payments, and $9.1 of dividends.
- At June 29, cash was $6.5 and marketable securities were $9.6. Current assets were $265.2 and current liabilities $251.1. Gross debt was $366.8; the company reported $147.0 available on its revolving facility and was in compliance with debt covenants.
- Total assets were $928.2 and shareholders’ equity $237.4. Operating lease liabilities totaled $87.4, including $26.3 current; lease obligations are distinct from reported debt.
Performance changes and drivers
- Intermodal revenue rose 71% in Q2 to $93.9 and 82% in the first half to $185.0. Acquisitions contributed $41.5 in Q2 and $82.1 in the first half; intermodal load volumes also grew substantially.
- Truckload revenue declined 21.5% in Q2 and 18.3% in the first half, principally reflecting fewer loads. Brokerage revenue fell 3.4% in Q2 but rose 2.7% in the first half; lower revenue per load was partly offset by higher loads.
- Value-added revenue was down 1.0% in Q2 and 0.7% in the first half. Passenger-vehicle operations were affected by plant shutdowns and reduced production during ramp-up; heavy-truck-related operations grew.
- Q2 operating margin improved as purchased transportation and equipment rent fell to 46.5% of revenue from 48.7%, partly due to a greater intermodal mix. Higher personnel, occupancy, general and administrative, and depreciation and amortization costs offset some of the benefit. First-half operating margin also improved.
- Interest expense increased to $4.1 in Q2 and $8.5 in the first half, reflecting higher borrowings than in the year-earlier periods. The company reported $366.8 of outstanding borrowings at June 29, compared with $273.4 at June 30, 2018; debt had declined from $403.2 at December 31, 2018.
Outlook, risks and unusual items
- Management expects 2019 capital expenditures, excluding acquisitions, of 5%–6% of operating revenue for the remainder of the year. It expects operating cash flow, working capital and available borrowing capacity to fund needs and mandatory debt repayments for at least the next 12 months, assuming current profitability continues. No earnings or revenue guidance is provided.
- Management describes demand seasonality: automotive-related value-added activity typically increases in Q2 and may weaken in Q3 due to customer plant shutdowns; weather and transportation demand can also affect activity and margins.
- A jury verdict against subsidiary Universal Am-Can was $54.2, with only $1.0 of stated insurance coverage. The company is appealing and enforcement is stayed. It estimated possible exposure of $18.2–$53.2 before advances, recorded an $18.2 liability estimate, and stated a $7.0 advance is an offset. The outcome could materially affect financial condition, results and cash flows.
- A separate appealed judgment against the company has an estimated exposure range of $0–$5.7; the recorded liability estimate is $1.8. Enforcement is stayed. The company says other ordinary-course claims are not expected to have a material effect, while noting uninsured or excess claims could be harmful.
- Michael’s Cartage was acquired April 22, 2019 for a stated cash purchase price of $22.0, subject to adjustments; purchase accounting remained preliminary. The acquisition added goodwill and identifiable intangible assets.
- Adoption of lease accounting on January 1, 2019 added a right-of-use asset and lease liabilities to the balance sheet; management said adoption did not materially affect results or cash flows. The company also disclosed substantial related-party dealings, including affiliate insurance, services and facility leases.
- After quarter-end, the board declared quarterly dividends of $0.105 per share and authorized a Dutch auction tender offer for up to 300,000 shares at $21–$24 per share, with possible additional repurchases subject to limitations. The offer was expected to be funded with cash and revolving borrowings.
Important facts for investors to verify
- How much of revenue and operating-income growth is attributable to acquisitions versus underlying operating performance, particularly in intermodal services.
- Truckload load and rate trends, and whether passenger-vehicle shutdowns or heavy-truck demand materially change in subsequent quarters.
- Debt reduction, interest costs, covenant headroom and liquidity after the tender offer, dividends, capital spending and any further acquisitions.
- Final Michael’s Cartage purchase accounting and the effect of acquired intangibles and goodwill on future amortization and impairment exposure.
- Developments in the two appeals, the treatment of the $7.0 advance against the accident-case liability, and adequacy of reserves for litigation and insurance claims.
- Affiliate transactions and lease commitments, including the terms and ongoing costs of arrangements with entities controlled by the company’s controlling shareholders.