Universal Logistics Holdings, Inc. — Q2 2017 Form 10-Q
Business context and period. Universal is an asset-light transportation and logistics provider operating in the U.S., Mexico, Canada and Colombia. It offers truckload, brokerage, intermodal, dedicated and value-added services. The quarter covered 13 weeks ended July 1, 2017; year-to-date (YTD) figures cover 26 weeks. Comparatives are the periods ended July 2, 2016. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Revenue | $305.2 | $276.8 | $589.6 | $537.2 |
| Operating income | $6.4 | $16.8 | $15.6 | $30.7 |
| Operating margin | 2.1% | 6.1% | 2.6% | 5.7% |
| Net income | $2.7 | $9.0 | $7.1 | $16.5 |
| Diluted EPS | $0.10 | $0.32 | $0.25 | $0.58 |
| Operating cash flow | — | — | $47.0 | $46.1 |
| Capital expenditures | — | — | $33.3 | $46.1 |
Q2 revenue rose 10.3%, but operating income fell about 62% and net income about 70% year over year. YTD revenue rose 9.8%, while operating income fell about 49% and net income about 57%. Operating cash flow less capital expenditures was approximately $13.7 million YTD, versus roughly break-even in the prior-year period.
Balance sheet and liquidity
- At July 1, cash and cash equivalents were $2.0 million and marketable securities were $14.1 million. Current assets were $221.6 million against current liabilities of $178.8 million.
- Total debt was approximately $250.2 million net of unamortized issuance costs; management reported borrowings of $251.7 million, down from $262.8 million at December 31, 2016. YTD debt repayments exceeded borrowings by about $11.2 million.
- Available borrowing was $28.4 million under the ABL facility and $13.2 million under the Westport facility; the securities-backed margin line had up to $6.8 million available and no balance outstanding. The company reported compliance with facility covenants.
- YTD dividends paid were $4.0 million. The board declared a further $0.07-per-share quarterly dividend, expected to be paid August 17, 2017.
Material changes and management commentary
- Growth reflected customer vehicle-program ramp-ups, higher fuel surcharges and stronger steel, metals and energy markets. Q2 value-added revenue grew 16.8% and brokerage revenue grew 14.5%.
- Profitability was pressured by an approximately $8 million loss in Mexican value-added operations and extended launch costs at a major value-added operation. Management also cited increased personnel and operating costs.
- Q2 logistics-segment operating results swung to a $2.5 million loss from $10.6 million income a year earlier; transportation-segment operating income increased to $8.5 million from $6.9 million. YTD logistics operating income was $1.7 million versus $19.2 million.
- Q2 insurance and claims expense increased $5.0 million to $9.5 million, mainly from scrap- and service-related claims at a value-added operation. YTD expense increased $6.7 million to $15.4 million for the same stated reason.
- Management expects 2017 capital expenditures, excluding acquisitions, to be 3%–4% of operating revenue and stated that operating cash flow, working capital and borrowing availability should cover needs and mandatory debt repayments for at least the next 12 months, assuming continued profitability. No earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Litigation: On July 21, 2017, a jury awarded Universal $1.9 million on its freight-charge claim and awarded the defendant approximately $5.7 million on a counterclaim. Universal estimated possible financial exposure at $0–$3.8 million, was awaiting final judgment and assessing post-trial and appeal options. The company said the outcome was not expected to materially adversely affect it.
- Operating and seasonal risks: Management described scheduled customer plant shutdowns in July and August, holiday shutdowns, adverse weather, and demand fluctuations as potential sources of lower activity or margins. The filing states that 24% of employees covered by collective bargaining agreements were subject to contracts expiring in 2017.
- Related parties: Affiliate-provided services and costs totaled $40.6 million YTD, including $29.5 million for insurance and employee benefit plans. Amounts due to affiliates were $9.7 million at quarter-end.
- Accounting and commitments: The company expected lease-standard adoption to result in material right-of-use assets and lease liabilities; it had disclosed $72.1 million of operating lease obligations at December 31, 2016. Adoption of the new revenue standard was not expected to have a material impact based on its analysis to date.
- The company reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors or market risk.
Important facts for investors to verify
- Whether Mexican value-added losses, launch costs and elevated claims expense improve, and whether logistics-segment profitability recovers.
- The final judgment and any appeal or accounting consequences in the Dalton litigation, including whether exposure falls within the disclosed $0–$3.8 million range.
- Debt, interest expense, facility availability and covenant compliance, particularly if profitability or working capital weakens.
- Execution of the stated 2017 capital-spending plan and the cash-flow assumptions supporting liquidity and dividends.
- The scale of related-party purchases and insurance arrangements, and the eventual balance-sheet impact of lease-accounting adoption.