Universal Logistics Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: 13 and 26 weeks ended June 30, 2018; comparisons are to periods ended July 1, 2017. Amounts below are in millions unless otherwise stated.
Business context and results
Universal provides asset-light transportation and logistics services across truckload, brokerage, intermodal, dedicated and value-added operations. It reports transportation and logistics segments.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $365.9 | $305.2 | $701.0 | $589.6 |
| Operating income | $26.3 | $6.4 | $43.4 | $15.6 |
| Operating margin | 7.2% | 2.1% | 6.2% | 2.6% |
| Net income | $17.7 | $2.7 | $28.1 | $7.1 |
| Diluted EPS | $0.62 | $0.10 | $0.99 | $0.25 |
| Net margin | 4.8% | 0.9% | 4.0% | 1.2% |
Financial position, cash flow and liquidity
- First-half operating cash flow was $43.4, down from $47.0 a year earlier. Capital expenditures were $31.6 and the Fore acquisition used $35.1; investing cash outflow totaled $62.8.
- Financing provided $19.1, including net borrowings. Cash was $1.7 at June 30, essentially unchanged from year-end. Marketable securities were $12.5.
- Debt was $272.2 net of issuance costs on the balance sheet; management reported outstanding borrowings of $273.4. Current debt was $51.6. ABL and Westport facilities had $48.9 and $16.5 available, respectively; the margin facility had $1.3 available. The company reported compliance with debt covenants.
- Total assets were $687.9 and shareholders’ equity was $192.8. Current assets were $269.1 versus current liabilities of $236.1.
- Cash dividends paid in the first half were $5.0; declared dividends were $0.105 per share quarterly.
Material changes and management commentary
- Q2 revenue increased 19.9%; first-half revenue increased 18.9%. Brokerage growth was particularly strong: Q2 revenue rose 43.0%, with higher average revenue per load and more loads. Intermodal revenue rose 41.9%, including $9.0 from Fore; value-added revenue increased 6.6%.
- Management attributed the sharp profit improvement to higher revenue and better margins in multiple transportation operations, improved value-added performance, and a return to profitability in Mexican value-added operations. Logistics segment Q2 operating income was $15.0 versus a $2.5 loss; transportation segment operating income was $10.3 versus $8.5.
- Purchased transportation and equipment rent rose to 48.7% of Q2 revenue from 46.7%, reflecting a greater brokerage mix and higher third-party capacity rates. Lower insurance and claims expense also supported margins, including favorable claims outcomes and a revised auto-liability premium basis.
- Fore was acquired February 1 for $35.1 cash, funded partly through approximately $31.3 of borrowing. It added $9.0 of Q2 intermodal revenue and $14.9 for the first half; purchase accounting remains preliminary.
- First-half operating cash flow was affected by higher receivables associated with revenue growth and a $5.6 net cash outflow from affiliate balances.
Outlook, risks and unusual items
- No earnings or revenue forecast was provided. Management expects full-year 2018 capital expenditures, excluding acquisitions, to equal 4%–5% of operating revenue. It expects cash flow, working capital and available borrowing to cover operations, commitments and mandatory debt repayments for at least 12 months, assuming current profitability continues.
- Management anticipates a regular annual dividend of $0.42 per share and said the board intends to evaluate a possible special dividend beginning in Q1 2019, potentially returning up to 40% of prior-year net income. Future dividends remain subject to board approval.
- Seasonality is relevant: value-added activity typically rises in Q2 and weakens in Q3 due to customer plant shutdowns; weather and transportation demand can also affect operations.
- Material litigation exposure includes the Denton verdict, with an estimated net exposure of $18.2–$53.2 and an $18.2 accrual; the company is appealing. In the Dalton matter, estimated exposure is $0–$5.7 with a $1.8 accrual, also under appeal. A Ford indemnity action has estimated net exposure of $0–$73, with no accrual; a motion to dismiss was set for October 2018. The company cautioned that outcomes could materially affect results or financial condition.
- Adoption of the new revenue standard added approximately $0.45 to first-half net income compared with prior accounting; management said the overall effect was not material. Fair-value changes on equity securities now flow through earnings. The company expects the 2019 lease standard to result in material right-of-use assets and lease liabilities; disclosed operating lease obligations were $71.8 at year-end 2017.
- Management reported effective disclosure controls and no material change in internal controls over financial reporting.
Investor verification points
- Assess whether operating-margin gains are sustainable, particularly given rising purchased transportation costs and reliance on improved claims experience.
- Track receivables, working-capital conversion and cash generation against acquisition and capital-spending needs.
- Review debt balances, facility availability, variable-rate exposure and covenant headroom.
- Monitor appeals and developments in the Denton, Dalton and Ford matters, including potential changes to recorded accruals.
- Verify Fore’s subsequent contribution and final purchase-price allocation, and the expected balance-sheet impact of lease-standard adoption.