Universal Logistics Holdings, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Universal provides transportation and logistics services in the United States, Mexico, Canada and Colombia. Its offerings include truckload, brokerage, intermodal, dedicated and value-added services. The company completed four acquisitions in 2018—Fore Transportation, Southern Counties Express, Specialized Rail Service and Container Connection—to expand intermodal and harbor-drayage capabilities. Acquired businesses contributed $70.9 million of 2018 revenue and $5.1 million of operating income.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Operating revenue | $1,461.7 | $1,216.7 |
| Income from operations | $83.8 | $25.2 |
| Operating margin | 5.7% | 2.1% |
| Net income | $52.2 | $28.2 |
| Diluted EPS | $1.84 | $0.99 |
| Operating cash flow | $94.9 | $83.8 |
| Capital expenditures | $66.6 | $63.4 |
| Cash and cash equivalents at year-end | $5.7 | $1.7 |
| Total debt at year-end | $403.2 | $249.2 |
Revenue rose 20.1%, operating income more than tripled, and net income increased 85.3%. Management reported adjusted EBITDA of $147.4 million versus $90.9 million and adjusted operating margin of 6.3% versus 3.5%; these are non-GAAP measures. FY 2018 included $9.0 million of litigation charges, compared with $17.4 million in 2017. The 2017 tax benefit of $18.2 million from the Tax Cuts and Jobs Act makes the year-over-year net-income comparison less directly comparable.
Revenue mix shifted toward brokerage and intermodal: brokerage revenue was $367.6 million, up 32.1%; intermodal was $251.1 million, up 63.3%, including acquisition contributions. Value-added revenue rose 5.1% to $408.2 million, while truckload revenue increased 3.6% to $313.8 million. Transportation-segment operating income increased to $51.6 million from $14.5 million; logistics-segment operating income increased to $31.1 million from $10.6 million.
Operating activities generated $94.9 million of cash. Investing used $229.2 million, including $173.6 million for acquisitions; financing provided $138.8 million. The $350 million secured credit facility comprises a $150 million term loan and $200 million revolver, maturing in 2023. At year-end, $119.4 million was available under the revolver, and the company reported compliance with its covenants. Current debt maturities were $51.9 million. The company expected operating cash flow, working capital and available borrowings to cover needs and mandatory debt payments for at least the next 12 months.
Material changes, outlook and risks
- Operating conditions: Management cited strong transportation pricing, heavy-truck program activity and higher fuel surcharges as revenue drivers. Separately identified fuel surcharges were $85.1 million, up from $59.5 million. Purchased transportation and equipment rent rose to 49.0% of revenue from 47.5%, partly because brokerage—typically a higher purchased-transportation-cost service—grew as a share of the mix.
- Expenses and financing: Net interest expense increased to $14.6 million from $9.4 million amid higher borrowings and variable interest rates. The company had $277.0 million of variable-rate debt; it estimated a 100-basis-point rate increase would add about $2.3 million in annual interest expense, assuming debt levels stayed constant.
- Outlook: No revenue or earnings guidance was provided. Management expected 2019 capital expenditures, excluding acquisitions, of 4%–5% of operating revenue. The regular annual dividend policy was $0.42 per share; the board declared an additional $0.11 special dividend in February 2019.
- Legal contingencies: An appealed Illinois verdict against a subsidiary was $54.2 million, with insurance coverage limited to $1.0 million. The company estimated possible exposure of $18.2–$53.2 million, recorded an $18.2 million liability and made a $7.0 million advance in 2018. A separate appealed judgment had estimated exposure of up to $5.7 million, with $1.8 million accrued. A multi-fatality accident was settled for $9.0 million in 2018. Ford’s indemnity claims against subsidiaries were dismissed with prejudice.
- Concentration and execution risks: Automotive customers accounted for 36% of revenue from customers generating over $100,000 annually; General Motors represented about 13% of total revenue, and the top 10 customers represented 39%. Driver shortages, competitive pricing, fuel costs, labor relations, claims and insurance, acquisition integration, and cybersecurity are identified risks.
- Governance and related parties: The Moroun family owned approximately 71% of common stock and controlled the company. Related-party operating costs were $78.4 million in 2018, including insurance and employee benefits, rent and administrative services. BDO gave unqualified opinions on the financial statements and internal controls; management’s internal-control assessment excluded the four acquired businesses, which are to be included in the 2019 assessment.
- Accounting and unusual items: The company adopted revenue-recognition guidance in 2018, changing transportation revenue recognition from delivery to over-time; the reported effect included a $1.2 million increase in 2018 net income. The new lease standard was scheduled for adoption in 2019 and was expected to materially increase reported assets and liabilities; disclosed operating lease obligations were $59.4 million. Marketable equity securities fell to $9.3 million from $15.1 million, with a $1.8 million unrealized loss recognized in 2018 earnings.
Important facts for investors to verify
- Review debt repayment terms, variable-rate exposure, covenant headroom and the effect of acquisition financing on cash generation.
- Track the appeals and ultimate resolution of the Illinois and Dalton litigation, alongside self-insured claims and insurance recoveries.
- Assess whether acquisition contributions, heavy-truck demand and transportation pricing can be sustained, and whether brokerage mix continues to pressure purchased-transportation costs.
- Monitor customer and automotive concentration, driver availability, labor-contract negotiations and related-party transactions.
- Confirm the 2019 lease-accounting impact, integration of acquired-company controls, and actual capital expenditures and dividends against management’s stated plans.