Universal Logistics Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 29, 2018; comparisons are with periods ended September 30, 2017. Amounts below are in millions unless stated otherwise. The company provides asset-light transportation and logistics services, reported in transportation and logistics segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Revenue | $374.3 | $313.0 | $1,075.3 | $902.6 |
| Operating income (loss) | $22.5 | $(3.5) | $65.9 | $12.1 |
| Net income (loss) | $15.1 | $(3.3) | $43.2 | $3.8 |
| Diluted EPS | $0.53 | $(0.12) | $1.52 | $0.13 |
| Operating margin | 6.0% | (1.1)% | 6.1% | 1.3% |
| Net margin | 4.0% | (1.1)% | 4.0% | 0.4% |
| Cash from operating activities | — | $73.9 | $70.4 |
Revenue and operating drivers
- Q3 revenue rose 19.6%; year-to-date revenue rose 19.1%. Growth was led by brokerage and intermodal, with contributions from the Fore Transportation and Southern Counties acquisitions.
- Q3 brokerage revenue increased 34.8% and intermodal revenue 68.0%; truckload revenue declined 3.1%, reflecting fewer loads, partly offset by higher revenue per load. Value-added revenue increased 3.0%.
- Year-to-date transportation segment operating income increased to $32.3 million from $7.2 million; logistics segment operating income rose to $33.0 million from $6.4 million. Management cited stronger performance in several value-added operations.
- Q3 operating results benefited from the absence of $17.4 million of prior-year legal-related charges. Higher Q3 purchased transportation costs as a share of revenue (49.8% versus 49.0%) reflected greater brokerage mix and higher third-party capacity rates.
Cash, debt and liquidity
- At September 29, cash was $2.5 million, marketable securities $10.4 million, and current assets $274.4 million versus current liabilities of $270.3 million.
- Debt carrying value was $329.3 million, including $85.0 million current and $244.3 million long-term, compared with $248.0 million at December 31, 2017. Management reported borrowings of $330.4 million. Interest expense increased as borrowings and variable interest rates rose.
- Operating cash flow of $73.9 million was offset by $145.3 million used in investing, including $100.8 million for acquisitions and $54.2 million of capital expenditures. Financing provided $71.4 million; cash ended at $2.5 million.
- At quarter-end, $38.3 million was available under the amended credit facility and $16.7 million under the Westport facility; the company reported covenant compliance. Management said operating cash flow, working capital and available borrowing capacity should meet needs and mandatory repayments for at least 12 months, assuming current profitability continues.
Material changes, outlook and notable items
- Acquisitions: Acquired Fore Transportation for $35.1 million in February and Southern Counties Express for $65.7 million in August. The acquired businesses contributed $33.7 million revenue and $4.6 million operating income during the 39-week period. On October 12, the company acquired Specialized Rail Service for about $12.3 million and purchased a related Utah terminal for about $3.0 million.
- Capital spending and dividends: For the remainder of 2018, excluding acquisitions, management expected capital expenditures of 3%–4% of operating revenue. The stated regular annual dividend policy was $0.42 per share, paid quarterly; the board also intended to evaluate a possible special dividend of up to 40% of prior-year net income, beginning in Q1 2019. Any future dividend remains subject to board approval.
- Accounting: Adoption of the new revenue standard changed transportation-service revenue recognition from delivery-based to recognition over time; the reported 39-week adoption adjustment increased net income by $0.8 million. The company expected the lease standard, effective January 1, 2019, to create material right-of-use assets and lease liabilities; it had disclosed $71.8 million of operating lease obligations at December 31, 2017.
- Legal and claims exposure: The Denton matter had a $54.2 million jury verdict, with company-estimated net exposure of $18.2–$53.2 million; $18.2 million was accrued, and enforcement was stayed pending appeal. A separate Dalton matter had estimated exposure of $0–$5.7 million, with $1.8 million accrued and appeal pending. A third-quarter multi-fatality accident had estimated net exposure of $2–$9 million, with $2 million accrued; mediation was scheduled for Q4. Outcomes could exceed estimates and materially affect results or cash flows.
- Ford’s $76 million indemnification claim against subsidiaries was dismissed with prejudice on November 5, 2018, after the reporting date. Management reported no material change in previously disclosed risk factors and no off-balance-sheet arrangements.
- Management identified seasonality from automotive plant shutdowns, winter weather and post-holiday shipping activity. No specific earnings or revenue forecast was provided.
Important facts for investors to verify
- How much revenue and operating improvement reflects acquisitions, fuel surcharges, pricing and volume, versus underlying organic performance.
- Whether the rise in debt, interest costs and working-capital demands remains manageable alongside planned capital spending and dividends.
- Developments in the Denton, Dalton and multi-fatality accident matters, including accrual adequacy, insurance coverage and potential cash exposure.
- The integration and performance of the 2018 and October 2018 acquisitions, and the resulting goodwill, intangible amortization and financing burden.
- The eventual balance-sheet impact of lease-standard adoption and the board’s decisions on regular and potential special dividends.