Universal Logistics Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2018; comparable period ended April 1, 2017. Unaudited consolidated results. Universal provides transportation and logistics services in the U.S., Mexico, Canada and Colombia.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $335.1 million | $284.4 million | +17.8% |
| Operating income | $17.1 million | $9.2 million | +86.5% |
| Operating margin | 5.1% | 3.2% | +1.9 percentage points |
| Net income | $10.4 million | $4.3 million | +141.7% |
| Diluted EPS | $0.37 | $0.15 | +$0.22 |
| Net margin | 3.1% | 1.5% | +1.6 percentage points |
| Operating cash flow | $16.1 million | $25.8 million | Down $9.7 million |
Revenue rose across all service categories. Brokerage grew 34.8%, intermodal 29.8%, dedicated 12.8%, value-added 11.7%, and truckload 8.0%. Transportation-segment operating income was $10.1 million, versus $6.4 million; logistics-segment operating income was $7.4 million, versus $4.2 million.
Purchased transportation and equipment rent increased to $162.0 million and 48.3% of revenue from $131.2 million and 46.1%. Management attributed the higher ratio to greater brokerage mix and higher third-party capacity rates. Personnel costs fell to 25.6% of revenue from 26.6%; operating supplies, occupancy, and insurance and claims also declined as a share of revenue. Income tax expense was $3.7 million, with a 26.3% effective rate versus 38.3%.
At March 31, cash was $2.1 million, marketable securities $11.9 million, and total assets $662.5 million. Debt outstanding was reported as $272.3 million, versus $249.2 million at December 31, 2017; balance-sheet debt, net of issuance costs, was $271.0 million. Current debt was $48.2 million. The company reported $41.1 million available under its ABL facility and $14.3 million under Westport’s facility; only $0.7 million remained available under its margin line. It was in compliance with debt covenants.
Operating cash flow was lower year over year, primarily reflecting higher receivables and a $7.3 million net cash outflow from affiliate balances. Investing used $38.2 million, including $34.9 million for the Fore acquisition and $7.3 million in capital expenditures. Financing provided $20.9 million. Cash ended the quarter at $2.1 million.
Material changes and notable items
- On February 1, Universal acquired Fore Transportation and affiliates for approximately $35.1 million. Fore contributed $5.9 million of quarterly intermodal revenue after acquisition. The preliminary purchase allocation included $10.3 million of goodwill and $11.7 million of intangible assets.
- Revenue growth included higher rates and volumes in brokerage and intermodal. Truckload loads fell 8.3% while average revenue per load excluding fuel surcharges rose 15.2%. Management said heavy-truck-related operations supported value-added growth.
- Universal adopted ASC 606 on January 1, 2018. Transportation revenue recognition moved from delivery to over-time recognition for in-transit services. Adoption increased Q1 net income by $0.2 million compared with prior guidance, and management said the effect was not material overall.
- Adoption of ASU 2016-01 moved approximately $3.8 million of accumulated equity-security gains from other comprehensive income to retained earnings; current-period fair-value changes are recorded in net income. The portfolio recorded approximately $0.6 million of unrealized holding losses in Q1.
Outlook, risks and contingencies
- Management expects cash flow, working capital and available borrowings to fund operations, capital commitments and mandatory debt payments for at least the next 12 months, assuming continued profitability. This is not a guarantee.
- Excluding acquisitions, expected capital expenditures for the remainder of 2018 are 4%–5% of operating revenue. No specific revenue or earnings forecast is provided.
- The annual regular dividend policy increased to $0.42 per share, payable in quarterly installments of $0.105. The Board also intends to consider a special dividend beginning in Q1 2019, potentially returning up to 40% of prior-year net income; future dividends remain subject to Board approval.
- In the Denton litigation, a $54.2 million jury verdict is under post-trial challenge. The company estimates net exposure of $18.2–$53.2 million and accrued $18.2 million.
- In the Dalton matter, the company estimates exposure of $0–$5.7 million, accrued $1.8 million, and plans to appeal. In a separate Ford indemnity action connected to a $76 million underlying verdict, estimated net exposure is $0–$73 million; no accrual was recorded. The company says the outcome could materially affect its financial position, results and cash flows.
- Management cited seasonality in automotive and heavy-truck production, plant shutdowns, winter weather and post-holiday freight activity. It also noted variable-rate debt exposure and potential earnings volatility from uninsured or underestimated claims. The company disclosed no material change to previously reported risk factors.
Important facts for investors to verify
- Whether margin improvement is sustainable given the higher purchased-transportation cost ratio and reliance on third-party capacity.
- Fore’s post-acquisition contribution, integration, and final purchase-price allocation.
- Receivables, working-capital needs, cash generation, and remaining borrowing capacity after the acquisition.
- Developments in the Denton, Dalton and Ford matters, including recorded reserves, insurance coverage and potential cash exposure.
- Capital spending against the stated 4%–5% revenue range, and whether the proposed regular and potential special dividends remain supportable.