Universal Truckload Services, Inc. — 2013 Form 10-K
Period: Fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. The registrant named in the filing is Universal Truckload Services, Inc., which differs from the company name in the request metadata.
Business context
The company provides transportation, value-added logistics and intermodal services across the United States, Mexico and Canada. Its asset-light model relies substantially on independent agents, owner-operators and third-party carriers. In December 2013, it acquired Westport for approximately $123.0 million in cash, expanding warehousing, component distribution and machining services. Prior periods reflect LINC as if consolidated because the 2012 transaction was between entities under common control.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $1,033.5 million | $1,037.0 million |
| Operating income | $84.5 million | $69.2 million |
| Operating margin | 8.2% | 6.7% |
| Net income | $50.6 million | $47.7 million |
| Diluted EPS | $1.68 | $1.59 |
| Adjusted EBITDA (non-GAAP) | $104.9 million | $97.6 million |
| Operating cash flow | $57.6 million | $70.4 million |
| Capital expenditures | $17.0 million | $29.6 million |
| Cash and cash equivalents at year-end | $10.2 million | $2.6 million |
| Total debt at year-end | $237.5 million | $146.0 million |
Revenue was nearly flat, while operating income rose about 22%. Transportation revenue declined $34.7 million, partly offset by growth in value-added services ($20.1 million) and intermodal services ($11.0 million). Logistics-segment operating income increased to $58.7 million from $49.5 million; transportation-segment operating income fell to $28.5 million from $30.6 million. Revenue mix shifted toward value-added and intermodal work, and purchased transportation expense declined as a share of revenue to 54.2% from 57.1%.
Net income comparisons are affected by LINC’s former S-corporation tax status: the 2012 effective tax rate was 29.8%, versus 37.5% in 2013. The company reported a 4.9% net margin in 2013, compared with 4.6% in 2012. Adjusted EBITDA and adjusted operating income are non-GAAP measures; the filing cautions they should not be viewed as substitutes for GAAP results or cash flow.
Fourth-quarter results and material changes
Fourth-quarter 2013 revenue was $259.5 million, versus $259.1 million a year earlier. Operating income was $19.1 million, compared with $13.6 million; net income was $11.3 million, compared with $2.5 million; diluted EPS was $0.38, compared with $0.08. The prior-year quarter included a higher tax provision related to LINC’s tax-status change, limiting the usefulness of the net-income comparison.
Westport’s acquisition was funded partly with new borrowing. The company recorded $56.6 million of goodwill and $57.8 million of acquired intangible assets in the preliminary purchase-price allocation. Westport’s results were included only from the December 19 acquisition date.
Liquidity, debt and outlook
At year-end, current assets were $203.4 million and current liabilities were $101.0 million. The amended credit agreement provided facilities totaling up to $300 million; $237.5 million was drawn at year-end. Debt bears floating rates, is secured by substantially all assets subject to exceptions, and is subject to leverage and fixed-charge coverage covenants. The company reported compliance with covenants. A 100-basis-point increase in interest rates on year-end variable-rate debt would increase annual interest expense by approximately $2.37 million, assuming debt levels were unchanged.
Management expected operating cash flow, working capital and available borrowings to fund operating and capital needs for at least 12 months, assuming continued profitability. No specific revenue or earnings guidance was provided. For 2014, excluding acquisitions, management expected capital expenditures of 2%–3% of revenue. The board’s dividend policy anticipated $0.28 per share annually, subject to quarterly board approval; $0.14 per share was paid in 2013.
Risks, contingencies and governance
- Customer and industry concentration: automotive customers generated 33.8% of 2013 revenue; General Motors accounted for about 12.4%, and the top ten customers accounted for 41.1%.
- Dependence on agents and owner-operators creates retention and capacity risks. Approximately 82% of tractors and 50% of trailers used were owner-operator provided.
- Debt increased substantially following the Westport acquisition; floating rates, covenant requirements and acquisition integration are important risks.
- The company self-insures or retains significant exposure for certain claims. Year-end insurance and claims liabilities were $22.7 million, with $15.8 million covered by insurance, though settlement timing was uncertain.
- A January 2014 Chrysler lawsuit and a February cross-claim concern allegedly stolen containers and alleged negligence. Insurance coverage had not been determined, and the filing said the claims were too early-stage to estimate outcomes.
- The Moroun family held approximately 77.8% of shares at year-end, limiting public shareholders’ influence. The company also reported $48.5 million of costs for services and transactions with affiliates in 2013.
- Management said prior material weaknesses related to LINC controls had been remediated. Westport, acquired late in 2013, was excluded from the year-end internal-control assessment; management and the auditor reported effective controls for the assessed scope. The financial-statement and internal-control audit opinions were unqualified.
Important facts for investors to verify
- Whether Westport’s expected contribution and integration benefits materialize, and how the acquisition affects leverage and cash generation.
- Whether transportation volumes recover and value-added/intermodal growth offsets continued weakness in transactional freight.
- Debt availability, covenant headroom, floating-rate exposure and the capacity to sustain dividends while servicing debt.
- Customer concentration and retention of major customers, agents and owner-operators.
- Resolution, insurance coverage and potential financial impact of the Chrysler-related litigation.
- How Westport’s controls are incorporated into the company’s 2014 internal-control assessment.