Universal Logistics Holdings, Inc. — Q3 2016 Form 10-Q
Business and period. The company provides transportation, value-added logistics and intermodal services in the U.S., Mexico, Canada and Colombia. This unaudited report covers the 13 weeks ended October 1, 2016, and year-to-date results for the 39 weeks ended that date; comparisons are to periods ended September 26, 2015. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Revenue | $271.5 | $284.2 | $808.7 | $842.8 |
| Operating income | $10.0 | $16.9 | $40.7 | $54.9 |
| Operating margin | 3.7% | 6.0% | 5.0% | 6.5% |
| Net income | $5.0 | $9.2 | $21.5 | $30.7 |
| Basic and diluted EPS | $0.18 | $0.32 | $0.76 | $1.04 |
| Net margin | 1.8% | 3.3% | 2.7% | 3.6% |
- Revenue mix: Q3 transportation services were $163.6, value-added services $72.0 and intermodal services $36.0. Transportation revenue declined 8.2% year over year; value-added revenue rose 5.2%; intermodal revenue fell 4.6%.
- Margins and costs: Q3 direct personnel costs rose 20.7% to $65.3, and increased to 24.0% of revenue from 19.0%, primarily due to higher-than-normal labor costs launching new value-added programs. Purchased transportation and equipment rent fell 10.2% to $131.8 and to 48.6% of revenue from 51.6%. YTD personnel costs rose 22.1% to $194.6.
- Cash flow, 39 weeks: Operating cash flow was $60.9 versus $48.5; investing cash outflow was $76.1 versus $13.7; financing cash flow was positive $3.9 versus negative $31.6. Cash capital expenditures were $78.7; total capital additions were $82.3 including $3.7 noncash. Dividends paid were $6.0.
- Liquidity and debt at October 1: Cash was $1.5, marketable securities $13.8, current assets $203.6 and current liabilities $154.8. Outstanding borrowings were $250.6, compared with $234.9 at December 31, 2015; capital lease obligations were $0.2. Availability was $28.0 under the $120 million PNC revolver and $11.5 under the Comerica facility. No UBS secured-line borrowings were outstanding. The company reported compliance with applicable debt covenants.
Material changes and management commentary
- Q3 revenue decreased 4.5%; YTD revenue declined 4.0%. Management attributed the pressure mainly to lower fuel surcharges, weaker energy and domestic steel markets, and lower transportation pricing. Q3 transportation revenue per loaded mile excluding fuel surcharges fell to $2.31 from $2.54, although transportation loads increased 2.7%.
- Transportation segment Q3 revenue fell 9.2% and operating income fell 43.4%. Logistics revenue increased 4.0%, but segment operating income fell 47.1%; its operating margin was 5.3% versus 10.4% a year earlier. Heavy-truck-related value-added operations recorded a Q3 operating loss of $0.6 versus income of $3.5 in Q3 2015.
- YTD logistics revenue rose 3.8%, but operating income declined 22.5%, which management linked to higher-than-expected new-program launch costs and a slowdown in heavy-truck operations. The filing reports heavy-truck operating income of $2.7 versus $11.2, but its comparison wording is unclear.
- Cash fell from $12.9 at year-end to $1.5, while property and equipment increased to $236.5 from $177.2. The company says operating cash flow benefited from a working-capital decrease, primarily higher accounts payable. Debt refinancing and new real estate and equipment financing contributed to the change in debt composition.
Outlook, risks and unusual items
- Management expects capital expenditures of $22–$26 for the remainder of 2016, excluding acquisitions, above historical levels, for transportation equipment and value-added operations. It expects cash flow, working capital and available borrowings to fund operations, capital commitments and mandatory debt repayments for at least 12 months, assuming continued profitability.
- The company anticipates annual dividends of $0.28 per share in quarterly $0.07 installments, subject to Board approval. A $0.07 dividend was declared October 27, 2016, for payment expected November 17.
- Management cites seasonality, including automotive plant shutdowns in Q3 and holiday shutdowns in Q4; winter weather may reduce productivity and margins. Results are also exposed to customer demand, freight pricing, fuel surcharges, labor costs, and equity-market fluctuations in the available-for-sale securities portfolio. Securities with $3.1 fair value were in an unrealized loss position of $0.8, which management considered temporary.
- Real estate notes require a debt service coverage ratio of at least 1.02:1; the first compliance test was due after Q4 2016. Interest-rate swaps had a $0.6 liability and a combined notional amount of $27.7.
- Ordinary-course claims and litigation were not expected by management to materially affect results; the filing states no off-balance-sheet arrangements and no material change in previously disclosed risk factors. The company disclosed material related-party dealings, including $51.3 of affiliate-provided services YTD and a terminal purchase from a controlling-shareholder affiliate for $22.5, financed partly by bank debt and an affiliate note.
Investor verification priorities
- Track whether launch-related labor costs normalize as management expects and whether new value-added programs achieve target economics.
- Assess recovery in transportation pricing, energy and steel markets, and heavy-truck operations; verify the cause and trend of segment operating-income declines.
- Review cash conversion and working-capital sustainability, particularly the contribution from increased accounts payable, alongside elevated capital spending and low cash on hand.
- Monitor debt balances, revolver availability, covenant compliance and the first real-estate debt-service test after Q4 2016.
- Evaluate related-party transactions, affiliate insurance and benefit arrangements, and marketable-security losses; confirm future dividend declarations and capital-spending outcomes.