Universal Logistics Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: The 13-week quarter ended July 1, 2023, compared with the quarter ended July 2, 2022; six-month comparisons are for the 26 weeks ended on those dates. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Business context
Universal provides transportation and logistics services in the U.S., Canada, Mexico and Colombia. Its businesses include contract logistics (dedicated and value-added services), intermodal, trucking and company-managed brokerage. Revenue also includes truckload and brokerage services.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Operating revenue | $412.6 | $527.2 | $850.0 | $1,051.0 |
| Operating income | $36.4 | $64.7 | $74.6 | $122.5 |
| Operating margin | 8.8% | 12.3% | 8.8% | 11.7% |
| Net income | $23.6 | $44.7 | $48.4 | $86.7 |
| Diluted EPS | $0.90 | $1.69 | $1.84 | $3.25 |
| Operating cash flow | — | $105.0 | $69.3 | |
| Capital expenditures | — | $79.8 | $37.5 |
Q2 net margin was 5.7%, compared with 8.5% a year earlier. First-half net margin was 5.7%, compared with 8.2%. Net interest expense was $5.1 million in Q2 and $10.1 million in the first half, up from $3.9 million and $6.4 million, respectively, reflecting higher rates despite lower borrowings.
At July 1, 2023, cash was $65.0 million and marketable securities were $10.1 million. Total debt was approximately $382.0 million, including $70.0 million classified as current; debt at December 31, 2022 was $382.9 million. The company reported $400 million available on its revolving facility and $10 million on the UACL revolver. Working capital was $161.6 million.
Changes versus prior comparable periods
- Q2 revenue fell 21.7% and operating income fell 43.7%; first-half revenue fell 19.1% and operating income fell 39.1%.
- Intermodal was the largest source of deterioration: Q2 revenue fell 41.6% and the segment reported a $0.2 million operating loss, versus $21.4 million income a year earlier. Loads and revenue per load excluding fuel surcharges declined 22.6% and 15.3%, respectively.
- Company-managed brokerage revenue fell 46.3% in Q2, with a $0.8 million segment operating loss versus $4.2 million income. Trucking revenue declined 23.7%; its operating margin fell to 5.4% from 9.0%.
- Contract logistics was comparatively resilient: Q2 revenue rose 0.7%, operating income rose 11.4%, and operating margin improved to 15.7% from 14.2%. The company managed 68 value-added programs, versus 64.
- Lower revenue and a mix shift away from transactional transportation reduced purchased transportation and equipment rent to 33.9% of Q2 revenue from 43.1%. However, direct personnel costs rose 8.9% and reached 33.5% of revenue, partly due to more employee drivers in California intermodal operations.
- Comparisons were affected by prior-year items: Q2 2022 included a $3.0 million favorable auto-claims settlement credit and $9.7 million of additional depreciation from an estimate change. First-half 2023 included a $1.2 million charge for an auto liability settlement above policy limits.
Cash, debt, outlook and risks
- Operating cash flow was $105.0 million in the first half; capital expenditures were $79.8 million. Cash increased $17.8 million from year-end to $65.0 million.
- Management expects 2023 capital expenditures, excluding business acquisitions, of approximately $235 million: $110 million for equipment and $125 million for strategic real estate. It cited equipment purchases, customer operations and terminal expansion as uses. No revenue or earnings forecast is provided.
- On July 7, 2023, the company completed an $80 million purchase of a Compton, California terminal, funded with cash and borrowings under its existing line of credit. This occurred after quarter-end.
- Management said available liquidity and capital sources should support operations for the next 12 months, while warning that persistent inflation or weaker operating cash flow could require additional financing. Inflation in interest, equipment, maintenance and labor costs may pressure results.
- The UACL credit agreement required a $2 million equity cure to satisfy its fixed-charge coverage covenant at July 1; after applying the cure, the company reported compliance. The company reported compliance with the other stated debt covenants.
- Interest-rate exposure is partly hedged by a swap with a $88.3 million amortizing notional amount and a 2.88% fixed payment rate; its fair value was a $3.2 million asset.
- Ordinary-course claims and litigation were not expected by management to materially affect results, but uninsured claims or amounts exceeding reserves could be materially adverse. About 32% of employees were covered by collective bargaining agreements; the filing states that contracts covering 18% were due to expire in 2023.
- Management noted seasonal effects, including automotive plant shutdowns in the third quarter and winter weather and post-holiday freight patterns. It reported no material change in previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the steep declines in intermodal and brokerage volumes, pricing and accessorial revenue persist, and whether those segments return to profitability.
- How the $80 million Compton terminal purchase affects debt, liquidity and the full-year capital-spending plan.
- The sustainability of operating cash flow and the company’s ability to fund planned capital expenditures while maintaining dividends.
- UACL covenant compliance and the implications of the $2 million equity cure, as well as sensitivity to variable interest rates.
- Claims development, self-insurance reserves and the impact of labor negotiations or expiring collective bargaining agreements.
- Related-party exposure: companies controlled by the controlling shareholder supplied $51.9 million of services in the first half, including insurance, rent and operating support; review pricing, governance and payment balances.