Universal Truckload Services, Inc. — Q3 2013 Form 10-Q
Period: 13 weeks ended September 28, 2013; year-to-date means 39 weeks ended September 28, 2013. The filing issuer is Universal Truckload Services, Inc., although the request metadata names Universal Logistics Holdings, Inc.
Business context
The company provides transportation, value-added logistics and intermodal services across the United States, Mexico and Canada. Its asset-light model uses agents, owner-operators and third-party carriers; its reportable segments are transportation and logistics. The prior-year comparison reflects LINC Logistics Company on a retrospectively restated, common-control basis following its October 2012 acquisition.
Key financial results
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Revenue | $261.7m | $256.9m | $773.9m | $777.9m |
| Operating income | $22.5m | $18.9m | $65.4m | $55.5m |
| Operating margin | 8.6% | 7.4% | 8.4% | 7.1% |
| Net income | $13.7m | $15.1m | $39.3m | $45.2m |
| Diluted EPS | $0.46 | $0.50 | $1.30 | $1.51 |
| Operating cash flow | Not stated separately | Not stated separately | $36.3m | $57.6m |
| Capital expenditures | Not stated separately | Not stated separately | $11.1m | $20.0m |
Q3 revenue grew 1.9%, while operating income rose 19.0%; net income fell 8.7%, mainly reflecting higher income tax expense and lower non-operating gains. For the 39 weeks, revenue declined 0.5%, operating income increased 17.7%, and net income decreased 13.2%. The effective tax rate was 36.1% in Q3 and 37.3% year to date, versus 22.2% and 18.6% in the respective 2012 periods; 2012 LINC results benefited from its former S corporation tax status.
At September 28, 2013, cash was $5.5m, marketable securities were $10.6m, total assets were $335.2m, and shareholders’ equity was $95.2m. Total debt was $124.0m, down from $146.0m at December 31, 2012. Current assets were $182.8m and current liabilities $100.0m. The company reported compliance with debt covenants; no letters of credit were outstanding. It had $42.0m drawn on its $110m revolver, with $87.4m of eligible receivables available for borrowing under the borrowing-base calculation. Its separate securities-backed UBS facility was undrawn, with stated maximum availability of $5.1m.
Material changes and management commentary
- Q3 logistics-segment revenue increased 16.9% to $80.0m and operating income rose 37.5% to $15.4m. Transportation-segment revenue declined 3.6% to $181.6m; operating income was broadly unchanged at $8.3m. Year to date, logistics revenue rose 12.0% and operating income 31.8%, while transportation revenue fell 5.4% and operating income declined modestly.
- Transportation load counts were lower: about 154,000 in Q3 versus 169,000, and 464,000 year to date versus 515,000. Management cited lower volumes in government, metals, building products and brokerage, partly offset by improving wind-energy, automotive and oil-and-gas activity. Transportation revenue per loaded mile excluding fuel surcharges rose slightly in Q3 but slipped year to date.
- Value-added services expanded to 43 locations from 40, contributing to revenue growth but also higher staffing needs; average headcount was up 16.6% in Q3 year over year. Intermodal revenue grew 5.9% in Q3 and 16.9% year to date, despite fewer loads.
- Operating margin improved as purchased transportation and equipment rent fell as a share of revenue, reflecting a greater contribution from value-added and intermodal services. Direct personnel costs rose as a share of revenue, and other operating expenses also increased as a share.
- Operating cash flow declined year over year, with management attributing pressure to working-capital changes, including higher receivables and lower accounts payable and accruals. Cash flow included payment of a litigated claim exceeding insurance limits.
Outlook, risks and unusual items
- Management expected 2013 capital expenditures, excluding acquisitions, of 2%–3% of operating revenue. It stated that operating cash flow, working capital and available borrowings should fund operating needs, capital commitments and dividends for at least 12 months, assuming current profitability continues. No earnings or revenue guidance was provided.
- The board adopted a dividend policy anticipating $0.28 per share annually, subject to quarterly approval and contractual restrictions. The company paid $0.07 per share in the period and declared another $0.07 dividend after quarter-end.
- Seasonality, cyclicality and weather are key risks. Automotive plant shutdowns typically reduce third-quarter value-added demand; winter conditions and hurricane-season disruption can affect transportation activity. The company also cited customer/project launches or terminations and industrial demand as factors that may affect results.
- The company reported ordinary-course claims and litigation and said their resolution was not expected to materially affect its financial position, results or cash flows. About 48.7% of employees in the U.S., Mexico and Canada were covered by collective bargaining agreements.
- Significant control-related disclosure: KPMG, the prior auditor, advised the company it was reconsidering whether material weaknesses in internal control over financial reporting existed as of December 31, 2012. The company said it was reviewing the matter with KPMG. This disclosure warrants particular attention; the filing does not state a final conclusion.
- Available-for-sale equity securities had $1.2m fair value in a cumulative loss position; management considered the impairment temporary but warned that further market declines could lead to impairment charges. The company also disclosed substantial related-party dealings, including $37.6m of affiliate-provided services year to date.
Important facts for investors to verify
- What conclusion followed from KPMG’s review of potential 2012 internal-control material weaknesses, and were any weaknesses identified or remediated?
- Whether transportation volumes and profitability stabilized, and whether logistics growth can continue without disproportionate increases in labor and operating costs.
- How much borrowing capacity was actually available under the receivables-based revolver, given the distinction between facility size and borrowing-base availability.
- Whether working-capital needs, claims payments and cash conversion improved after the reporting date.
- Whether related-party charges and arrangements remain on terms management considers reasonable, and whether securities losses or other claims require future charges.