Universal Logistics Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 30, 2017; comparable periods ended October 1, 2016. Amounts are in millions of dollars unless noted. Universal provides transportation and logistics services in the U.S., Mexico, Canada and Colombia through transportation and logistics segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Revenue | $313.0 | $271.5 | $902.6 | $808.7 |
| Operating income (loss) | $(3.5) | $10.0 | $12.1 | $40.7 |
| Net income (loss) | $(3.3) | $5.0 | $3.8 | $21.5 |
| Diluted EPS | $(0.12) | $0.18 | $0.13 | $0.76 |
| Operating margin | (1.1)% | 3.7% | 1.3% | 5.0% |
| Net margin | (1.1)% | 1.8% | 0.4% | 2.7% |
- Q3 revenue rose 15.3%; nine-month revenue rose 11.6%. Brokerage and value-added services were major growth drivers. Q3 brokerage revenue increased 26.4% and value-added revenue 19.9%; nine-month increases were 19.4% and 16.5%, respectively.
- Operating performance deteriorated despite revenue growth. Q3 included $17.4 million of litigation-related accruals; management also cited lower logistics margins and extended launch costs at key value-added operations. For the nine months, management cited underperforming operations, including Mexican value-added operations it ultimately exited, as well as litigation accruals.
- Q3 insurance and claims expense was $20.6 million versus $4.9 million; nine-month expense was $36.0 million versus $13.6 million. Nine-month direct personnel expense rose 19.3% to $234.4 million, partly reflecting Mexican operations and launch costs. Depreciation and amortization rose 25.7% to $33.7 million for the nine months.
Cash flow, balance sheet and liquidity
- For the first 39 weeks, operating cash flow was $70.4 million, investing cash flow was $(45.1) million and financing cash flow was $(24.5) million. Capital expenditures were $46.7 million; dividends paid were $6.0 million. Cash increased to $2.9 million from $1.8 million at year-end 2016.
- Operating cash flow benefited from working-capital movements, notably higher payables and litigation-related accruals; the increase in receivables from higher revenue was an offset. Cash flow should therefore be assessed alongside the timing and sustainability of these working-capital changes.
- At September 30, current assets were $228.1 million and current liabilities $206.9 million; working capital was approximately $21.3 million and the current ratio approximately 1.10. Marketable securities were $14.6 million, in addition to cash.
- Debt outstanding was $244.9 million, down from $262.8 million at December 31, 2016; reported debt net of issuance costs was $243.5 million. The ABL Facility had $40.5 million available and the Westport Facility $13.7 million; the margin line had $7.0 million available and no borrowings. The company reported covenant compliance across its facilities.
- Nine-month interest expense was $7.3 million versus $6.3 million. Management attributed the increase to higher rates on variable-rate debt. Three swaps had a combined notional amount of $27.7 million and a fair-value asset of approximately $0.2 million.
Outlook, risks and other notable items
- No earnings or revenue guidance was provided. Management expected 2017 capital expenditures, excluding acquisitions, to be 3%–4% of operating revenue and said operating cash flow, working capital and available borrowings should fund needs and mandatory debt payments for at least the next 12 months, assuming current profitability continues.
- Management described a planned annual dividend of $0.28 per share, paid quarterly at $0.07, subject to board approval and the company’s financial condition. A $0.07 dividend was declared after quarter-end.
- A jury verdict entered October 16, 2017 against subsidiary UACL totaled $54.2 million, including $19.2 million compensatory and $35.0 million punitive damages. Available insurance was limited to $1.0 million. The company estimated net exposure of $18.2–$53.2 million, recorded an $18.2 million accrual, and intended to seek post-trial relief and appeal. Management warned ultimate resolution could materially affect cash flows and results.
- In the Dalton Logistics matter, the jury awarded Universal $1.9 million on its freight claim and approximately $5.7 million on the counterclaim against Universal. The company estimated exposure of $0–$3.8 million and accrued $1.8 million; final judgment and post-trial strategy remained pending.
- Seasonality includes typically lower value-added activity in Q3 because of customer plant shutdowns, and potential winter weather and holiday effects. The company reported no material changes to market risks or previously disclosed risk factors. Disclosure controls were deemed effective as of September 30, 2017.
- Upcoming accounting standards: management expected no significant financial-statement impact from the 2018 revenue standard based on preliminary analysis; it expected the lease standard, effective in 2019, to result in material right-of-use assets and lease liabilities. Early adoption of the simplified goodwill impairment standard in Q3 had no financial-statement impact.
Important facts for investors to verify
- Progress and outcome of the UACL verdict motions and appeal, the ultimate loss range, insurance recovery and any required change to the $18.2 million accrual.
- Final judgment and resolution of the Dalton counterclaim, including whether the $1.8 million accrual remains appropriate.
- Whether logistics margins recover after the Mexican program exit and extended launch costs, and whether reported revenue growth converts to operating profit.
- Cash conversion and working-capital quality, particularly the impact of payables and litigation accruals on operating cash flow.
- Debt, available borrowing capacity and covenant compliance, especially as variable-rate interest costs change; also verify capital spending against the stated 3%–4% expectation.