Universal Logistics Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Thirteen weeks ended July 2, 2016; year-to-date figures cover the twenty-six weeks ended that date. Comparative periods ended June 27, 2015. Amounts are in millions of dollars unless stated otherwise. Universal provides transportation, value-added logistics and intermodal services in the U.S., Mexico, Canada and Colombia.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $276.8 | $295.0 | $537.2 | $558.6 |
| Operating income | $16.8 | $22.9 | $30.7 | $38.0 |
| Operating margin | 6.1% | 7.8% | 5.7% | 6.8% |
| Net income | $9.0 | $13.3 | $16.5 | $21.4 |
| diluted EPS | $0.32 | $0.44 | $0.58 | $0.72 |
Revenue and earnings: Q2 revenue declined 6.2% and first-half revenue declined 3.8% year over year. Q2 transportation services fell to $162.7 million from $180.2 million; value-added services rose to $78.2 million from $75.1 million; intermodal services declined to $35.9 million from $39.8 million. First-half transportation revenue fell $27.9 million, while value-added revenue increased $8.5 million. The filing attributes the pressure chiefly to lower fuel surcharges, weak pricing, and softer energy and steel markets.
Margins and costs: Direct personnel and benefits rose 21.6% in Q2 and 22.9% in the first half, mainly from higher labor costs while launching new value-added awards; management expects these costs to return over time to historical levels. Purchased transportation and equipment rent fell as a percentage of revenue, partly reflecting greater value-added and intermodal mix. Q2 logistics operating margin was 9.9%, below 12.0% a year earlier, but improved sequentially; first-half logistics margin was 9.1% versus 10.6%. Transportation margins also weakened.
Cash flow, debt and liquidity
- First-half operating cash flow was $46.1 million, versus $29.0 million a year earlier. Investing used $44.1 million, including $46.1 million of capital expenditures; financing used $10.5 million.
- Cash and cash equivalents were $4.0 million at July 2, down from $12.9 million at year-end 2015. Marketable securities were $14.3 million. Operating cash flow benefited in part from increased accounts payable.
- Reported outstanding borrowings were $230.4 million, compared with $234.9 million at December 31, 2015 and $221.6 million at June 27, 2015. Balance-sheet debt is presented net of issuance costs. Interest expense increased year over year.
- Available borrowing capacity was $32.2 million under the PNC revolver and $12.4 million under the Comerica revolver; the UBS securities-backed line had $7.4 million available and no balance outstanding. The company reported covenant compliance at quarter-end.
- Management said operating cash flow, working capital and available borrowings should fund operations, capital commitments and mandatory debt payments for at least twelve months, assuming current profitability continues.
Outlook, risks and notable items
- Management expected 2016 capital expenditures, excluding acquisitions, of $55–$65 million, above historical levels, for transportation equipment, value-added operations and property improvements. First-half capital expenditures were $46.1 million.
- The company anticipated annual dividends of $0.28 per share, subject to quarterly Board approval. A $0.07-per-share dividend declared July 28 was expected to be paid August 18, 2016.
- On June 21, the company refinanced approximately $32.8 million of an unsecured Flagstar loan with real-estate-secured notes due by June 30, 2026, bearing interest at LIBOR plus 2.25%. The new facility requires a minimum 1.02:1 debt-service coverage ratio; its first compliance test is after Q4 2016.
- After quarter-end, on August 8, a subsidiary agreed to buy a multi-building logistics terminal in Romulus, Michigan, from a related party for $22.5 million. The price was based on an independent appraisal; a note bears fixed interest of 3.5% and is payable over 120 monthly installments. The Audit Committee approved the transaction.
- Market risks include variable-rate debt, interest-rate swaps, and available-for-sale equity securities. The company reported $4.0 million of securities in a continuous unrealized-loss position and considered the losses temporary, but noted that further market declines could lead to impairment charges.
- The company described ordinary-course claims and litigation as not expected to materially affect financial position, results or cash flows. It reported no material change in previously disclosed risk factors and no off-balance-sheet arrangements. Seasonal risks include customer plant shutdowns and adverse winter weather.
Most important facts for investors to verify
- Whether weak transportation pricing and energy/steel demand continue, and whether higher launch-related labor costs normalize as management expects.
- Whether the $55–$65 million capital expenditure outlook and related borrowing needs affect cash, leverage or dividend capacity.
- Compliance with debt covenants, particularly the real-estate loan’s first debt-service coverage test after Q4 2016, and the availability of revolving credit.
- Terms, financing and related-party governance for the $22.5 million Romulus terminal purchase.
- Potential losses on marketable securities and the effect of interest-rate changes on debt and swaps.