UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended October 1, 2016

or

For the transition period from                      to                     .

Commission File Number: 0-51142

 

UNIVERSAL LOGISTICS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

12755 E. Nine Mile Road

Warren, Michigan 48089

(Address, including Zip Code of Principal Executive Offices)

(586) 920-0100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒   No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ☒   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐   No  ☒

The number of shares of the registrant’s common stock, no par value, outstanding as of November 1, 2016, was 28,412,746.

 

 

 

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PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

 

UNIVERSAL LOGISTICS HOLDINGS, INC.

Unaudited Consolidated Balance Sheets

(In thousands, except share data)

 

See accompanying notes to consolidated financial statements.

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Unaudited Consolidated Statements of Income

(In thousands, except per share data)

 

 

See accompanying notes to consolidated financial statements.

 

 

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Unaudited Consolidated Statements of Comprehensive Income

(In thousands)

 

 

See accompanying notes to consolidated financial statements.

 

 

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Unaudited Consolidated Statements of Cash Flows

(In thousands)

 

 

See accompanying notes to consolidated financial statements.

 

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The accompanying unaudited consolidated financial statements of Universal Logistics Holdings, Inc., formerly known as Universal Truckload Services, Inc., and its wholly-owned subsidiaries (“we”, “us”, “our”, “Universal”, or “the Company”), have been prepared by the Company’s management. In the opinion of management, the unaudited consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the consolidated financial statements as of December 31, 2015 and 2014 and for each of the years in the three-year period ended December 31, 2015 included in the Company’s Form 10-K filed with the Securities and Exchange Commission. The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates.

Our fiscal year ends on December 31 and consists of four quarters, each with thirteen weeks.

Certain immaterial reclassifications have been made to the prior financial statements in order for them to conform to the October 1, 2016 presentation.  Such reclassifications had no impact on previously reported net income.

 

 

We may, from time to time, invest cash in excess of our current needs in marketable securities, much of which is held in equity securities, which are actively traded on public exchanges.  It is our philosophy to minimize the risk of capital loss without foregoing the potential for capital appreciation through investing in value-and-income oriented investments.  However, holding equity securities subjects us to fluctuations in the market value of our investment portfolio based on current market prices, and a decline in market prices or other unstable market conditions could cause a loss in the value of our marketable securities classified as available-for-sale.

At October 1, 2016 and December 31, 2015, marketable securities, all of which are available-for-sale, consist of common and preferred stocks.  Marketable securities are carried at fair value, with unrealized gains and losses, net of related income taxes, reported as accumulated other comprehensive income, except for losses from impairments which are determined to be other-than-temporary.  Realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in the determination of net income and are included in other non-operating income (expense), at which time the average cost basis of these securities are adjusted to fair value.  Fair values are based on quoted market prices at the reporting date.  Interest and dividends on available-for-sale securities are included in other non-operating income (expense).

The cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of available-for-sale securities by type were as follows (in thousands):

 

 

Included in equity securities at October 1, 2016 are securities with a fair value of $3.1 million with a cumulative loss position of $0.8 million, the impairment of which we consider to be temporary.  We consider several factors in our determination as to whether declines in value are judged to be temporary or other-than-temporary, including the severity and duration of the decline, the financial condition and near-term prospects of the specific issuers and the industries in which they operate, and our intent and ability to hold these securities.  We may incur future impairment charges if declines in market values continue and/or worsen and impairments are no longer considered temporary.

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

The fair value and gross unrealized holding losses of our marketable securities that are not deemed to be other-than-temporarily impaired aggregated by type and length of time they have been in a continuous unrealized loss position were as follows (in thousands):

 

 

Our portfolio of equity securities in a continuous loss position, the impairment of which we consider to be temporary, consists primarily of common stocks in the oil and gas, banking, communications, and transportation industries.  The fair value and unrealized losses are distributed in 29 publicly traded companies, with no single industry or company representing a material or concentrated unrealized loss.  We have evaluated the near-term prospects of the various industries, as well as the specific issuers within our portfolio, in relation to the severity and duration of the impairments, and based on that evaluation, as well as our ability and intent to hold these investments for a reasonable period of time to allow for a recovery of fair value, we do not consider these investments to be other-than-temporarily impaired at October 1, 2016.

 

 

Accrued expenses and other current liabilities is comprised of the following (in thousands):

 

 

 

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

Debt is comprised of the following (in thousands):

 

December 2015 Debt Refinancing

On December 23, 2015, Universal and certain of its wholly-owned subsidiaries entered into a combination of secured and unsecured loans with certain lenders.   The Company undertook the action as part of its ongoing organizational streamlining efforts to better align sources of capital used in its asset-light businesses and to fix a portion of its variable interest rate bearing debt. Upon closing, the Company and subsidiaries involved borrowed approximately $234.9  million to pay off existing indebtedness, to terminate its previous syndicated Comerica Bank Revolving Credit and Term Loan Agreement, and to pay fees and expenses associated with the new credit agreements.

At October 1, 2016 and December 31, 2015, long-term debt and current maturities of long-term debt are presented net of debt issuance cost totaling $1.7 million and $1.5 million, respectively, in our Consolidated Balance Sheets.

PNC $120 million Revolving Credit Facility

Universal Truckload, Inc., Universal Dedicated, Inc., Mason Dixon Intermodal, Inc., Logistics Insight Corp., Universal Logistics Solutions International, Inc., Universal Specialized, Inc., Cavalry Logistics, LLC and Universal Management Services, Inc., (each a wholly-owned subsidiary of the Company, a “Borrowing Subsidiary” and, collectively, the “Borrowing Subsidiaries”) entered into a Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”) to provide for a revolving credit facility of up to $120 million (which amount may be increased by up to $30 million upon request).  Borrowings under the revolving credit facility may be made until, and mature on, December 23, 2020.

To support daily borrowing and other operating requirements, the revolving credit facility contains a $10.2 million Swing Loan sub-facility and provides for $3.0 million in letters of credit.  There were no amounts outstanding under the Swing Loan sub-facility at October 1, 2016 and December 31, 2015, and no letters of credit were issued against the line.

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

Borrowings under the Revolving Credit and Security Agreement bear interest at LIBOR or a base rate, plus an applicable margin for each.  The applicable margin fluctuates based on the Borrowing Subsidiaries’ quarterly average excess availability, as defined in the Revolving Credit and Security Agreement.  Interest on the unpaid balance of all base rate advances is payable quarterly in arrears on the first day of each calendar quarter.  Interest on the unpaid balance of each LIBOR based advance of the revolving credit facility is payable on the last day of the applicable LIBOR interest period.  At October 1, 2016, interest on a $58.0 million LIBOR rate advance accrued at 2.03% based on 30-day LIBOR plus 1.50%, and interest on a $2.7 million domestic rate advance accrued at 4.0% based on PNC’s prime rate plus 0.50%.

The Revolving Credit and Security Agreement includes customary affirmative and negative covenants and events of default, as well as financial covenants requiring a minimum fixed charge coverage ratio to be maintained after a triggering event, as defined in the Revolving Credit and Security Agreement.  The Revolving Credit and Security Agreement also includes customary mandatory prepayments provisions and is subject to an unused revolving credit line fee of 0.25%.  At October 1, 2016, we were in compliance with the debt covenants.

As security for all indebtedness pursuant to the Revolving Credit and Security Agreement, PNC was granted a first priority perfected security interest in cash, deposits and accounts receivable of the Borrowing Subsidiaries and selected other assets. At October 1, 2016, our $60.7 million revolver advance was secured by, among other assets, net eligible accounts receivable totaling $98.5 million.  At October 1, 2016, availability, as defined in the Revolving Credit and Security Agreement, was $28.0 million.

Key Equipment Credit Agreement

LGSI Equipment of Indiana, LLC, a wholly-owned subsidiary of the Company (the “Equipment Borrowing Subsidiary”), entered into a Master Security Agreement and five Promissory Notes (collectively the “Equipment Credit Agreement”) with Key Equipment Finance, a division of KeyBank National Association (“KeyBank”).  Under the Equipment Credit Agreement, the Equipment Borrowing Subsidiary borrowed approximately $83.6 million.  The promissory notes are being paid in 60 monthly installments, including interest, beginning on January 23, 2016 and bear interest at a fixed rate of 3.75%.

Additionally, all obligations under the Equipment Credit Agreement are guaranteed by Universal Dedicated, Inc., Logistics Insight Corp., Universal Truckload, Inc., Universal Specialized, Inc. and Mason Dixon Intermodal, Inc. (each a wholly-owned subsidiary of the Company) in connection with each subsidiary’s lease of equipment.  The Equipment Credit Agreement also includes financial covenants requiring the Equipment Borrowing Subsidiary to maintain a ratio of operating cash flow to fixed charges of not less than 1.1:1, as defined in the agreement.  At October 1, 2016, we were in compliance with the debt covenants.

As security for all indebtedness pursuant to the Equipment Credit Agreement, KeyBank was granted liens on selected titled vehicles of the Equipment Borrowing Subsidiary set forth on various collateral schedules.  The Equipment Borrowing Subsidiary may sell or dispose of equipment secured under the Equipment Credit Agreement provided the disposed equipment is replaced with acceptable equipment as collateral, if we pay down of a portion of the loan plus breakage charges and handling charges, as defined in the promissory notes, or if KeyBank, at its option, releases the equipment without pay down or pre-payment. At October 1, 2016, the aggregate principal outstanding pursuant to the five promissory notes totaled $68.4 million.

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

Comerica Syndicated Credit Facility

Westport Axle Corp., a wholly-owned subsidiary of the Company (“Westport”), entered into a Revolving Credit and Term Loan Agreement (the “Credit Agreement”), with and among the lenders party thereto and Comerica Bank, as administrative agent, arranger and documentation agent, providing for aggregate borrowing facilities of up to $60 million.  The Credit Agreement consists of a $40 million term loan and a $20 million revolving credit facility.  Borrowings under the term loan were advanced on December 23, 2015 and mature on December 23, 2020.  The term loan shall be repaid in 20 equal quarterly installments of $1.5 million over five years beginning March 1, 2016, with the remaining balance due at maturity.   Borrowings under the revolving credit facility may be made until, and mature on, December 23, 2020.

Borrowings under the Credit Agreement bear interest at LIBOR or a base rate, plus an applicable margin for each.  The applicable margin fluctuates based on Westport’s total debt to EBITDA ratio, as defined in the Credit Agreement.  At October 1, 2016, interest on the $35.5 million term loan accrued at 3.02% based on 30-day LIBOR plus 2.50%, and interest on the $1.0 million LIBOR rate revolving credit advance accrued at 2.52% based on 30-day LIBOR plus 2.00%.

To support daily borrowing and other operating requirements, the revolving credit facility contains a $4.0 million Swing Line sub-facility and provides for $2.0 million in letters of credit.  Swing Line borrowings incur interest at either the base rate plus the applicable margin or, alternatively, at a quoted rate offered by Comerica Bank in its sole discretion.  There were no amounts outstanding under the Swing Line at October 1, 2016 and December 31, 2015, and no letters of credit were issued against the line.

Interest on the unpaid balance of all revolving credit facility and swing line base rate advances is payable quarterly in arrears commencing on March 1, 2016, and on the first day of each June, September, December and March thereafter.  Interest on the unpaid balance of each Eurodollar-based advance of the revolving credit facility is payable on the last day of the applicable Eurodollar interest period.  Interest on the unpaid balance of each quoted rate based advance of the swing line is payable on the last day of the applicable quoted rate interest period.

Interest on the unpaid principal of all term loan base rate advances is payable quarterly in arrears commencing on January 1, 2016, and on the first day of each April, July, October and January thereafter.  Interest on the unpaid principal of each Eurodollar-based advance of the term loan is payable on the last day of the applicable Eurodollar interest period.

The revolving credit facility is subject to a facility fee, which is payable quarterly in arrears, of either 0.25% or 0.50%, depending on Westport’s ratio of total debt to EBITDA.  Other than in connection with Eurodollar-based advances or quoted rate advances that are paid off and terminated prior to an applicable interest period, there are no premiums or penalties resulting from prepayment.  Borrowings outstanding at any time under the revolving credit facility are limited to the value of eligible accounts receivable and inventory of Westport, pursuant to a monthly borrowing base certificate.  At October 1, 2016, our $1.0 million revolver advance was secured by, among other assets, net eligible accounts receivable and inventory of $10.5 million and $6.5 million, respectively.  At October 1, 2016, availability, as defined in the Credit Agreement, was $11.5 million.

The Credit Agreement requires Westport to repay the borrowings made under the term loan and the revolving credit facility as follows: 50% (which percentage shall be reduced to zero subject to Westport attaining a certain leverage ratio) of Westport’s annual excess cash flow, as defined; 100% of the net cash proceeds if we sell Westport’s machining division; 50% of net proceeds from certain equity issuances; 100% of proceeds from the issuance of certain indebtedness; and 100% of net proceeds from the sale of certain assets, insurance and condemnation proceeds.

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

As security for all indebtedness pursuant to the syndicated Credit Agreement, Comerica Bank, as lead arranger, was granted first perfected security interest on all of Westport’s tangible and intangible property and in assets acquired in the future.  The Company also pledged 100% of its equity interest in Westport.  The Credit Agreement also contains a “springing” guaranty requiring the Company to guarantee the indebtedness under certain events, as defined in the Credit Agreement and guarantee.

The Credit Agreement includes financial covenants requiring Westport to maintain a minimum fixed charge coverage ratio, minimum quarterly EBITDA amounts, as defined in the Credit Agreement, and a maximum debt to EBITDA ratio, as well as customary affirmative and negative covenants and events of default.  At October 1, 2016, Westport was in compliance with the debt covenants.

Flagstar $40 million Unsecured Term Loan

The Company entered into a Loan and Financing Agreement (the “Loan Agreement”) with Flagstar Bank, F.S.B. (“Flagstar”) to provide for a $40.0 million unsecured term loan. Proceeds of the unsecured term loan were advanced on December 23, 2015, and the outstanding principal balance was due on or before July 15, 2016.   Borrowings under the unsecured term loan bore interest at LIBOR, plus 3.5%, and interest on the unpaid balance was payable monthly commencing on February 1, 2016.  On June 21, 2016, UTSI Finance, Inc. (“UTSI Finance”), a wholly-owned subsidiary of the Company, borrowed approximately $32.8 million to refinance a portion of the Company’s existing indebtedness with Flagstar pursuant to the $40 million unsecured term loan. At October 1, 2016, the outstanding principal balance was $0.

Real Estate Notes  

On June 21, 2016, UTSI Finance, entered into a Loan and Financing Agreement with Flagstar, along with ten accompanying promissory notes and commercial mortgages (collectively, the “Real Estate Credit Agreement”).  Under the Real Estate Credit Agreement, UTSI Finance borrowed approximately $32.8 million to refinance a portion of the Company’s existing indebtedness with Flagstar pursuant to its $40 million unsecured term loan.  The promissory notes bear interest at a rate of LIBOR plus 2.25%, and will be repaid in consecutive monthly installment payments of principal and accrued interest beginning July 1, 2016. The promissory notes are due on or before June 30, 2026.  

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

As security for all indebtedness pursuant to the Real Estate Credit Agreement, Flagstar was granted first mortgages and assignment of leases on specific parcels of real estate and improvements included in the collateral pool, as defined in the agreement.  Except for obligations subject to interest rate swap agreements with Flagstar, as defined in the Real Estate Credit Agreement, UTSI Finance may prepay all or a portion of the loans, plus applicable breakage charges and fees.  

On September 6, 2016, UTSI Finance entered into an additional loan and financing agreement with Flagstar, along with a promissory note and commercial mortgage (collectively, the “Secured Note”). Under the Secured Note, Flagstar loaned UTSI Finance $19.0 million in order to repay a portion of an unsecured promissory note in the principal amount of $22.5 million dated August 8, 2016 (the “Unsecured Note”) issued to an affiliate, Crown Enterprises, Inc. (“Crown”), in connection with the purchase of a terminal. The Unsecured Note is payable in 120 monthly payments of principal and accrued interest starting September 15, 2016, and bears interest at a fixed rate of 3.5% per annum.  UTSI Finance may prepay the Unsecured Note at any time, in whole or in part, without premium or penalty.  As of October 1, 2016, the remaining principal balance on the Unsecured Note with Crown was approximately $2.7 million, and such amount is due on or before August 15, 2026.  See Note 6 for additional information pertaining to the terminal purchase.  

The Secured Note bears interest at a rate of LIBOR plus 2.25%, and will be repaid in consecutive monthly installment payments of principal and accrued interest beginning October 1, 2016. The Secured Note matures on September 5, 2026. UTSI Finance granted to Flagstar a first priority mortgage on the terminal pursuant to the mortgage as security under the Secured Note. Except for obligations subject to any interest rate swap agreement, UTSI Finance may prepay all or a portion of the Secured Note, plus applicable breakage charges and fees.

The Flagstar real estate notes contain customary affirmative and negative covenants and events of default, and requires UTSI Finance to maintain a debt service coverage ratio of not less than 1.02:1.   The first test for compliance is due after the fourth quarter of 2016.  As of October 1, 2016, the aggregate principal outstanding pursuant to all Flagstar real estate notes was $50.9 million and interest accrued at 2.71%.

Equipment Notes

During the thirty-nine weeks ended October 1, 2016, a wholly-owned subsidiary of the Company entered into installment obligations totaling approximately $33.6 million for the purpose of purchasing revenue equipment. The promissory notes will be repaid in 60 monthly installments at interest rates ranging from 3.24% to 3.69%. At October 1, 2016, the aggregate principal outstanding pursuant to the promissory notes totaled $31.4 million.

UBS Secured Borrowing Facility

We also maintain a secured borrowing facility at UBS Financial Services, Inc., or UBS, using our marketable securities as collateral for the short-term line of credit.  The line of credit bears an interest rate equal to LIBOR plus 1.10% (effective rate of 1.63% at October 1, 2016), and interest is adjusted and billed monthly.  No principal payments are due on the borrowing; however, the line of credit is callable at any time.  The amount available under the line of credit is based on a percentage of the market value of the underlying securities.  If the equity value in the account falls below the minimum requirement, we must restore the equity value, or UBS may call the line of credit.  At both October 1, 2016 and December 31, 2015, there were no amounts outstanding under the line of credit, and the maximum available borrowings were $7.3 million and $7.4 million, respectively.  

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

Swap Agreements

The Company is party to two forward interest rate swap agreements that qualify for hedge accounting. The swap agreements were executed to fix a portion of the interest rates on its variable rate debt that have a combined notional amount of $15.7 million at October 1, 2016. Under the swap agreements, the Company receives interest at the one-month LIBOR rate plus 2.25%, and pays a fixed rate. The March 2016 forward swap (swap A) is effective October 2016, has a rate of 4.16% (amortizing notional amount of $10.0 million) and expires July 2026, and the March 2016 forward swap (swap B) is effective October 2016, has a rate of 3.83% (amortizing notional amount of $5.7 million) and expires May 2022.  The Company is also party to a third interest rate swap agreement that qualifies for hedge accounting.  The swap agreement was executed to fix a portion of its variable rate debt with a notional amount of $12.0 million and expires February 2018 (swap C).  Under swap C, the Company receives interest at the one-month LIBOR rate, and pays a fixed rate of 0.78%.  The fair value of the three swap agreements was a liability of $0.6 million at October 1, 2016. Since these swap agreements qualify for hedge accounting, the changes in fair value are recorded in other comprehensive income (loss), net of tax. See Note 5 for additional information pertaining to interest rate swaps.    

 

 

FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date and expanded disclosures with respect to fair value measurements.

FASB ASC Topic 820 also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

We have segregated all financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the tables below (in thousands):

 

 

 

The valuation techniques used to measure fair value for the items in the tables above are as follows:

Our revolving credit and term loan agreements, and real estate promissory notes with PNC, Comerica Bank and Flagstar consist of variable rate borrowings.  We categorize borrowings under these credit agreements as Level 2 in the fair value hierarchy.  The carrying value of these borrowings approximate fair value because the applicable interest rates are adjusted frequently based on short-term market rates.

For our equipment and real estate promissory notes with fixed rates, the fair values are estimated using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements. We categorize borrowings under these credit agreements as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of these promissory notes at October 1, 2016 is summarized as follows:

 

 

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

Through December 31, 2004, we were a wholly-owned subsidiary of CenTra, Inc. On December 31, 2004, CenTra distributed all of our common stock to the shareholders of CenTra.  Subsequent to our initial public offering in 2005, our majority shareholders retained and continue to hold a controlling interest in Universal.  In the normal course of business, CenTra and affiliates of CenTra provide administrative support services to us, including legal, human resources, tax, and IT infrastructure services.  The cost of these services is based on the actual or estimated utilization of the specific service.

In addition to the administrative support services described above, we purchase other services from affiliates. Following is a schedule of cost incurred for services provided by affiliates for the thirteen weeks and thirty-nine ended October 1, 2016 and September 26, 2015 (in thousands):

 

CenTra charges us for the direct variable cost of maintenance, fueling and other operational support costs for services delivered at their trucking terminals that are geographically remote from our own facilities.  Such activities are billed when incurred, paid on a routine basis, and reflect actual labor utilization, repair parts costs or quantities of fuel purchased.  In connection with our transportation services, we also pay tolls and other fees for international bridge crossings to certain related entities which are under common control with CenTra.  

A significant number of our transportation and logistics service operations are located at facilities leased from affiliates.  At 31 facilities, occupancy is based on either month-to-month or contractual, multi-year lease arrangements which are billed and paid monthly.  Leasing properties provided by an affiliate that owns a substantial commercial property portfolio affords us significant operating flexibility.  However, we are not limited to such arrangements.  

We purchase workers’ compensation, property and casualty, cargo, warehousing and other general liability insurance from an insurance company controlled by our majority shareholders.  Our employee health care benefits and 401(k) programs are also provided by this affiliate.

Other services from affiliates, including leased real estate, insurance and employee benefit plans, and contracted transportation services, are delivered to us on a per-transaction-basis or pursuant to separate contractual arrangements provided in the ordinary course of business.  At October 1, 2016 and December 31, 2015, amounts due to affiliates related to such services were $6.6 million and $3.4 million, respectively.  In our Consolidated Balance Sheets, we record our insured claims liability and the related recovery from an affiliate insurance provider in insurance and claims, and other receivables.  At October 1, 2016 and December 31, 2015, there were $7.7 million and $11.5 million, respectively, included in each of these accounts for insured claims.  

We used an affiliate to provide real property improvements to us totaling $1.0 million during the thirty-nine weeks ended October 1, 2016, and also purchased $1.4 million of wheels and tires for new trailering equipment and an additional $0.2 million in revenue equipment components from an affiliate during the same period.  During the thirty-nine weeks ended September 26, 2015, we purchased used snow removal equipment from an affiliate for $18,000.

On August 8, 2016, the Company entered into and closed on a purchase agreement with a subsidiary of CenTra, Crown Enterprises, Inc. (the “Seller”), for a multi-building, cross-dock logistics terminal located in Romulus, Michigan. The purchase price, which was established by an independent third party appraisal, was $22.5 million payable pursuant to a promissory note with the Seller. As of October 1, 2016, the remaining principal balance on the note was $2.7 million, and such amount is due on or before August 15, 2026.  See Note 4 for additional information pertaining to the note with the Seller.

 

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

We periodically use the law firm of Sullivan Hincks & Conway to provide us legal services.  Daniel C. Sullivan, a member of our Board, is a partner at Sullivan Hincks & Conway.  Not included in the table above are amounts paid for legal services during the thirty-nine weeks ended September 26, 2015 of $1,400.  No amounts were paid for legal services during the thirteen weeks or thirty-nine weeks ended October 1, 2016, or during the thirteen weeks ended September 26, 2015.

Services provided by Universal to Affiliates

We may assist our affiliates with selected transportation and logistics services in connection with their specific customer contracts or purchase orders.  Following is a schedule of services provided to affiliates for the thirteen weeks and thirty-nine weeks ended October 1, 2016 and September 26, 2015 (in thousands):

 

At October 1, 2016 and December 31, 2015, amounts due from affiliates were $2.8 million and $1.9 million, respectively.

 

 

Comprehensive income includes the following (in thousands):

 

 

 

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

On April 23, 2014, our Board of Directors adopted the 2014 Amended and Restated Stock Incentive Plan, or the Plan. The Plan was approved by our shareholders at the 2014 Annual Meeting and became effective as of the date it was adopted by the Board of Directors. The Plan replaced our 2004 Stock Incentive Plan and carried forward the shares of common stock that remained available for issuance under the 2004 Stock Incentive Plan. The grants may be made in the form of stock options, restricted stock bonuses, restricted stock purchase rights, stock appreciation rights, phantom stock units, restricted stock units or unrestricted common stock. A grantee’s vesting may be accelerated under certain conditions, including retirement. Restricted stock awards currently outstanding under the 2004 Stock Incentive Plan will remain outstanding in accordance with the terms of that plan.

On December 23, 2015, the Company granted 50,000 shares of restricted stock to certain of its employees. The restricted stock grants have a grant date fair value of $14.93 per share, based on the closing price of the Company’s stock, of which 25% vested immediately, and an additional 25% will vest in three equal increments on each December 20 in 2016, 2017 and 2018.

On March 5, 2015, the Company granted an additional 10,000 shares of restricted stock to its Chief Executive Officer. The restricted stock grants vested 25% on March 5, 2015, and an additional 25% will vest on each anniversary of the grant through March 5, 2018, subject to continued employment with the Company.  On April 29, 2015, the Company granted an additional 20,000 shares of restricted stock to the Chief Executive Officer. These restricted stock grants vested 25% on April 29, 2015, and an additional 25% will vest in three equal increments on each March 5 in 2016, 2017 and 2018.  On February 24, 2016, the Company granted and additional 10,000 shares of restricted stock to the Chief Executive Officer. These restricted stock grants vested 25% on February 24, 2016, and an additional 25% will vest in three equal increments on each March 5 in 2017, 2018 and 2019.

On December 20, 2012, the Company granted 178,137 shares of restricted stock to certain of its employees.  The restricted stock grants vested 20% on December 20, 2012, and an additional 20% will vest on each anniversary of the grant through December 20, 2016, subject to continued employment with the Company.

The following table summarizes the status of the Company’s non-vested shares and related information for the period indicated:

 

 

During the thirty-nine weeks ended October 1, 2016 and September 26, 2015, the total grant date fair value of vested shares recognized as compensation costs was $0.3 million and $0.2 million respectively.  As of October 1, 2016, there was approximately $1.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements.  That cost is expected to be recognized on a straight-line basis over the remaining vesting period.  As a result, the Company expects to recognize stock-based compensation expense of $0.2 million during the remainder of 2016, and $0.4 million, $0.4 million, and $0.1 million in 2017, 2018, and 2019, respectively.

 

Basic earnings per common share amounts are based on the weighted average number of common shares outstanding, excluding outstanding non-vested restricted stock.  Diluted earnings per common share include dilutive common stock equivalents determined by the treasury stock method.   In each of the thirteen weeks and thirty-nine weeks ended October 1, 2016, there were no weighted average non-vested shares of restricted stock included in the denominator for the calculation of diluted earnings per share.  For the thirteen weeks and thirty-nine weeks ended September 26, 2015, there were 177 and 3,502 weighted average non-vested shares of restricted stock included in the denominator for the calculation of diluted earnings per share, respectively.

In each of the thirteen weeks and thirty-nine weeks ended October 1, 2016, 68,225 shares of non-vested restricted stock were excluded from the calculation of diluted earnings per share because such shares were anti-dilutive.  No shares were excluded from the calculation of diluted earnings per share for the thirteen weeks or thirty-nine weeks ended September 26, 2015.  

 

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

On July 28, 2016, our Board of Directors declared a quarterly cash dividend of $0.07 per share of common stock, payable to shareholders of record at the close of business on August 8, 2016 and paid on August 18, 2016.  Declaration of future cash dividends is subject to final determination by the Board of Directors each quarter after its review of our financial condition, results of operations, capital requirements, any legal or contractual restrictions on the payment of dividends and other factors the Board of Directors deems relevant.

 

 

We report our financial results in two reportable segments, the transportation segment and the logistics segment, based on the nature of the underlying customer commitment and the types of investments required to support these commitments.  This presentation reflects the manner in which management evaluates our operating segments, including an evaluation of economic characteristics and applicable aggregation criteria.  

Operations aggregated in our transportation segment are associated with individual freight shipments coordinated by our agents, company-managed terminals and specialized services operations.  In contrast, operations aggregated in our logistics segment deliver value-added services or transportation services to specific customers on a dedicated basis, generally pursuant to contract terms of one year or longer.  Other non-reportable operating segments are comprised of the Company’s subsidiaries that provide support services to other subsidiaries and to owner-operators, including shop maintenance and equipment leasing.  

The following tables summarize information about our reportable segments as of and for the thirteen week and thirty-nine week periods ended October 1, 2016 and September 26, 2015 (in thousands):

 

 

 

 

 

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

Our principal commitments relate to long-term real estate leases and payment obligations to equipment vendors.

We are involved in certain claims and pending litigation arising from the ordinary conduct of business. We also provide accruals for claims within our self-insured retention amounts. Based on the knowledge of the facts, and in certain cases, opinions of outside counsel, in the Company’s opinion the resolution of these claims and pending litigation will not have a material effect on our financial position, results of operations or cash flows.

At October 1, 2016, approximately 28% of our employees in the United States, Canada and Colombia, and 94% of our employees in Mexico are subject to collective bargaining agreements that are renegotiated periodically, less than 1% of which are subject to contracts that expire in 2016.  

 

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provided new accounting guidance related to revenue recognition. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price;  (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance was originally effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. Early adoption was originally not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. In July 2015, the FASB voted to delay of the effective date of the new standard by one year.  As a result of the delay, the revenue recognition standard will be effective for public companies in 2018, with early adoption permitted.  We are evaluating the effect, if any, that adopting this new accounting standard will have on our consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest, which is intended to simplify the presentation of debt issuance costs.  ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs would not be affected by the amendments in this update.  The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2015 for public companies.  On January 1, 2016, the Company adopted this ASU on a retrospective basis.  Adoption resulted in a reclassification in the Company’s current prepaid expenses and other, and noncurrent other assets in its consolidated balance sheet as of December 31, 2015 of $0.3 million and $1.2 million, respectively. The corresponding decreases were in the net presentation of the Company’s debt liability to the current portions of long-term debt and noncurrent long-term debt, respectively.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which is intended to simplify the presentation of deferred income taxes.  The ASU requires that deferred income tax liabilities and assets be classified as noncurrent in a classified balance sheet.  The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies.  The Company has early adopted this ASU effective January 1, 2016 on a retrospective basis. As a result of the adoption, the Company reclassified $6.3 million of current deferred tax assets to noncurrent deferred income tax liabilities, and additional $0.1 million of current deferred tax assets to noncurrent deferred assets to conform to the current year presentation.

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other things, the ASU requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The amendments are to be applied by means of a cumulative-effect adjustment to the balance sheet and are effective for interim and annual periods beginning after December 15, 2017. With certain exceptions, early adoption is not permitted. We are evaluating the effect that adopting this new accounting standard will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases. The objective of the new standard is to establish principles for lessees and lessors to report information about the amount, timing, and uncertainty of cash flows arising from a lease.  The ASU will require a lessee to recognize the assets and liabilities that arise from leases, including operating leases. Under the new requirements, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and the right-of-use asset representing the right to the underlying asset for the lease term. For leases with a term of 12 months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendment is permitted. We are evaluating the effect that adopting this new accounting standard will have on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation. The ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect that adopting this standard will have on the Company’s financial condition, results of operations, or cash flows.

 

On October 27, 2016, our Board of Directors declared a quarterly cash dividend of $0.07 per share of common stock, payable to shareholders of record at the close of business on November 7, 2016 and expected to be paid on November 17, 2016.  Declaration of future cash dividends is subject to final determination by the Board of Directors each quarter after its review of our financial condition, results of operations, capital requirements, any legal or contractual restrictions on the payment of dividends and other factors the Board of Directors deems relevant.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Some of the statements and assumptions in this Form 10-Q are forward-looking statements. These statements identify prospective information. Important factors could cause actual results to differ, possibly materially, from those in the forward-looking statements. In some cases you can identify forward-looking statements by words such as “anticipate,” “believe,” “could,” “estimate,” “plan,” “intend,” “may,” “should,” “will” and “would” or other similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. The factors listed in the section captioned “Risk Factors” in Item 1A in our Form 10-K for the year ended December 31, 2015, as well as any other cautionary language in that Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

Forward-looking statements speak only as of the date the statements are made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.

Overview

We are a leading asset-light provider of customized transportation and logistics solutions throughout the United States and in Mexico, Canada and Colombia. We offer our customers a broad array of services across their entire supply chain, including transportation, value-added, and intermodal services.

We provide a comprehensive suite of transportation and logistics solutions that allow our customers and clients to reduce costs and manage their global supply chains more efficiently. We market our services through a direct sales and marketing network focused on selling our portfolio of services to large customers in specific industry sectors, through a network of agents who solicit freight business directly from shippers, and through company-managed facilities and full-service freight forwarding and customs house brokerage offices. We believe our asset-light business model is highly scalable and will continue to support our growth with comparatively modest capital expenditure requirements. Our asset-light model, combined with a disciplined approach to contract structuring and pricing, creates a highly flexible cost structure that allows us to expand and contract quickly in response to changes in demand from our customers. 

We generate substantially all of our revenues through fees charged to customers for the transportation of freight and for the customized logistics services we provide. We also derive revenue from fuel surcharges, where separately identifiable, loading and unloading activities, equipment detention, container management and storage and other related services. Operations aggregated in our transportation segment are associated with individual freight shipments coordinated by our agents, company-managed terminals and specialized services operations. In contrast, operations aggregated in our logistics segment deliver value-added services and transportation services to specific customers on a dedicated basis, generally pursuant to contract terms of one year or longer. Our segments are distinguished by the amount of forward visibility we have in regards to pricing and volumes, and also by the extent to which we dedicate resources and company-owned equipment.

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015 and the unaudited Consolidated Financial Statements and related notes contained in this quarterly report on Form 10-Q.

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Operating Revenues

We broadly group our services into the following categories: transportation services, value-added services and intermodal services. Our intermodal services and transportation services associated with individual freight shipments coordinated by our agents and company-managed terminals are aggregated into our reportable transportation segment, while our value-added services and transportation services to specific customers on a dedicated basis make up our logistics segment. The following table sets forth operating revenues resulting from each of these categories for the thirteen weeks and thirty-nine weeks ended October 1, 2016 and September 26, 2015, presented as a percentage of total operating revenues:

 

Results of Operations

The following table sets forth items derived from our consolidated statements of income for the thirteen weeks and thirty-nine weeks ended October 1, 2016 and September 26, 2015, presented as a percentage of operating revenues:

 

 

Thirteen Weeks Ended October 1, 2016 Compared to Thirteen Weeks Ended September 26, 2015

 

Operating revenues. Operating revenues for the thirteen weeks ended October 1, 2016 decreased by $12.7 million, or 4.5%, to $271.5 million from $284.2 million during the same period last year. Included in operating revenues are fuel surcharges, where separately identifiable, of $13.3 million for the thirteen weeks ended October 1, 2016, which compares to $18.4 million for the thirteen weeks ended September 26, 2015.  Revenues from our transportation segment decreased $17.3 million, or 9.2%, and income from operations decreased $3.5 million, or 43.4% compared to the same period last year.  The transportation segment experienced a decrease primarily due to decreases in fuel surcharges and weakness in our energy and domestic steel markets, both of which adversely impacted our flatbed operations.  In our logistics segment, revenues increased $3.9 million, or 4.0%, over the same period last year; however, income from operations decreased $4.8 million, or 47.1%, to $5.4 million. Operating margin in our logistics segment was 5.3% during the third quarter of 2016 compared to the 10.4% achieved during the third quarter 2015.  Operating losses attributable to value-added operations supporting the heavy-truck market totaled $0.6 million during the third quarter of 2016 compared to $3.5 million of operating income earned during the same period last year.  

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Overall, the decrease in consolidated operating revenues is the result of a $14.5 million decrease in our transportation services and a $1.8 million decrease in intermodal services, partially offset by a $3.6 million increase in our value-added services. Included in transportation services during the thirteen weeks ended October 1, 2016, were $9.8 million in separately identifiable fuel surcharges compared to $13.1 million in the same period last year.   For the thirteen weeks ended October 1, 2016, our operating revenue per loaded mile, excluding fuel surcharges, decreased to $2.31 from $2.54 during the same period last year primarily due to a weak pricing environment.  However, the number of transportation service loads increased 2.7% to 154,700 during the thirteen weeks ended October 1, 2016 from 150,668 in the same period last year.  

Value-added services increased by 5.3% to $72.0 million during the thirteen weeks ended October 1, 2016 compared to $68.4 million during the same period last year.  Overall, value-added services increased despite an $8.7 million decrease in value-added services supporting the heavy-truck market. At October 1, 2016, we provided value-added services at 47 locations compared to 48 at September 26, 2015; however, the scope of services provided at several locations has broadened.  

The $1.8 million decrease in revenues from our intermodal operations during the thirteen weeks ended October 1, 2016, was primarily due to a decrease in fuel surcharges of $1.8 million.  For the thirteen weeks ended October 1, 2016, our operating revenue per load, excluding fuel surcharges, was $354 compared to $350 for the same period last year. The number of intermodal loads increased to 85,367 during the thirteen weeks ended October 1, 2016, compared to 84,720 during the same period last year.

Purchased transportation and equipment rent. Purchased transportation and equipment rental costs for the thirteen weeks ended October 1, 2016 decreased by $14.9 million, or 10.2%, to $131.8 million from $146.7 million during the same period last year. The absolute decrease was primarily due to decreases in our operating revenues from transportation and intermodal services. Purchased transportation and equipment rent generally increases or decreases in proportion to the revenues generated through owner-operators and other third party providers, and is generally correlated with changes in demand for transportation and intermodal services.  Combined, transportation and intermodal service revenues decreased 7.6% to $199.5 million for the thirteen weeks ended October 1, 2016 compared to $215.8 million for the thirteen weeks ended September 26, 2015.  As a percentage of operating revenues, purchased transportation and equipment rent decreased to 48.6% for the thirteen weeks ended October 1, 2016 from 51.6% during the same period last year.  Transportation and intermodal services revenues combined totaled 73.5% of total operating revenues during the third quarter of 2016, compared to 75.9% in the same period last year.

Direct personnel and related benefits. Direct personnel and related benefit costs for the thirteen weeks ended October 1, 2016 increased by $11.2 million, or 20.7%, to $65.3 million compared to $54.1 million during the same period last year. Trends in these expenses are generally correlated with changes in operating facilities and headcount requirements and, therefore, increase and decrease with the level of demand for our value-added services and staffing needs of our operations. The absolute increase is primarily attributable to higher than normal labor costs as we launch new value-added programs.  As a percentage of operating revenues, personnel and related benefits expenses increased to 24.0% for the thirteen weeks ended October 1, 2016, compared to 19.0% for the thirteen weeks ended September 26, 2015. The percentage is derived on an aggregate basis from both existing and new programs, and from customer operations at various stages in their lifecycles. Individual operations may be impacted by additional production shifts or by overtime at selected operations. While generalizations about the impact of personnel and related benefits costs as a percentage of total operating revenues are difficult, we manage compensation and staffing levels, including the use of contract labor, to maintain target economics based on near-term projections of demand for our services. We expect over time these costs to return to historical levels.  

Commission expense. Commission expense for the thirteen weeks ended October 1, 2016 decreased by $1.5 million, or 15.5%, to $8.2 million from $9.7 million for the thirteen weeks ended September 26, 2015. The absolute decrease was primarily due to decreases in our operating revenues from transportation and intermodal services. Commission expense generally increases or decreases in proportion to our transportation and intermodal revenues, excluding where we generate a higher proportion of our revenues at company-managed terminals.  As a percentage of operating revenues, commission expense decreased to 3.0% for the thirteen weeks ended October 1, 2016 compared to 3.4% during the same period last year. As a percentage of operating revenues, the decrease in commission expense is due to a shift in the mix of revenues generated by company-managed locations and in value-added services, where no commissions are paid.  

Operating expenses (exclusive of items shown separately). Operating expenses decreased $0.5 million, or 2.0%, to $25.0 million for the thirteen weeks ended October 1, 2016, compared to $25.5 million for the thirteen weeks ended September 26, 2015. As a percentage of operating revenues, operating expenses increased to 9.2% for the thirteen weeks ended October 1, 2016 from 9.0% during the same period last year. These expenses include items such as fuel, maintenance, cost of materials, communications, utilities and other general expenses, and generally relate to fluctuations in customer demand. The absolute decrease in such operating expenses was primarily attributable to decreases in repair and maintenance of $0.9 million, highway use and fuel taxes totaling $0.5 million, fuel expense on company-owned equipment of $0.3 million, and an additional $0.2 million in other operating expenses. These decreases were partially offset by an increase in plate and permit expense totaling $1.4 million.

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Occupancy expense. Occupancy expense for the thirteen weeks ended October 1, 2016 increased by $1.3 million, or 19.4%, to $8.0 million from $6.7 million for the thirteen weeks ended September 26, 2015.  As a percentage of operating revenues, occupancy expense increased to 3.0% for the thirteen weeks ended October 1, 2016 compared to 2.4% for the thirteen weeks ended September 26, 2015.  At October 1, 2016, the Company leased 29 value-added service locations compared to 31 at September 26, 2015. While the number of leased facilities declined, the absolute increase in occupancy expense is due to the enlarged scale of several operations supporting the expanded scope of customer requirements.  

Selling, general and administrative. Selling, general and administrative expense for the thirteen weeks ended October 1, 2016 decreased by $0.4 million, or 4.2%, to $9.1 million from $9.5 million for the thirteen weeks ended September 26, 2015. As a percentage of operating revenues, selling, general and administrative expense held consistent at 3.3% in each of the thirteen weeks ended October 1, 2016 and September 26, 2015.  The absolute decrease was primarily due to decreases in bad debt expense totaling $0.3 million, and in salaries, wages and benefits of $0.2 million.  Minor fluctuations in other expense categories reflect our efforts to maintain stable overhead expenditures while expanding the business.  

Insurance and claims. Insurance and claims expense for the thirteen weeks ended October 1, 2016 decreased by $1.6 million, or 24.2%, to $5.0 million from $6.6 million for the thirteen weeks ended September 26, 2015. As a percentage of operating revenues, insurance and claims decreased to 1.8% for the thirteen weeks ended October 1, 2016 from 2.3% for the thirteen weeks ended September 26, 2015. The absolute decrease was primarily the result of a decrease in auto liability insurance premiums and claims expense of $1.8 million. This decrease was partially offset by an increase in cargo and service claims expense of $0.1 million.

Depreciation and amortization. Depreciation and amortization expense for the thirteen weeks ended October 1, 2016 increased by $0.6 million to $9.1 million from $8.5 million for the thirteen weeks ended September 26, 2015. The increase is primarily the result of increases in capital investments throughout 2016 compared to historic trends.  This increase was partially offset by decreases in certain other intangible assets becoming fully amortized.  

Interest expense, net. Net interest expense was $2.1 million for each of the thirteen weeks ended October 1, 2016 and September 26, 2015.  At October 1, 2016 we had outstanding borrowings totaling $250.6 million compared to $245.9 million at September 26, 2015.

Other non-operating income.  Other non-operating income was $0.2 million for the thirteen weeks ended October 1, 2016 compared to $0.1 million for the same period last year, both of which consisted primarily of gains on the sales of marketable securities.

Provision for income taxes. Provision for income taxes for the thirteen weeks ended October 1, 2016 was $3.1 million compared to $5.8 million for the thirteen weeks ended September 26, 2015, based on effective tax rates of 38.5% and 38.4%, respectively.  

 

Thirty-nine Weeks Ended October 1, 2016 Compared to Thirty-nine Weeks Ended September 26, 2015

 

Operating revenues. Operating revenues for the thirty-nine weeks ended October 1, 2016 decreased by $34.1 million, or 4.0%, to $808.7 million from $842.8 million for the thirty-nine weeks ended September 26, 2015. Included in operating revenues are fuel surcharges, where separately identifiable, of $37.8 million for the thirty-nine weeks ended October 1, 2016, which compares to $59.5 million for the thirty-nine weeks ended September 26, 2015.  Revenues from our transportation segment decreased $46.4 million, or 8.5%, and income from operations decreased $6.2 million, or 26.3%, compared to the same period last year. Operating revenues declined due to several factors including a decline in fuel surcharges and a slowdown in key markets including steel and metals and energy. Operating margin in our transportation segment decreased to 3.5% compared to 4.3% during the same period last year. In our logistics segment, revenues increased $11.3 million, or 3.8%, over the same period last year, while income from operations decreased $7.1 million, or 22.5%, to $24.5 million. The decrease in operating income in our logistics segment is primarily the result of higher than expected launch costs at new value-added operations, and a slow-down in our operations supporting the heavy-truck market.  For the thirty-nine weeks ended October 1, 2016, operating income attributable to operations supporting heavy-truck totaled $2.7 million compared to $11.2 million during the same period this year.  

Overall, the decrease in consolidated operating revenues is primarily the result of a decrease in our transportation services of $42.4 million and a decrease in our intermodal services of $3.7 million. The decrease in transportation services was primarily the result of decreases in pricing, which was partially offset by an increase in the number of transportation loads hauled. For the thirty-nine weeks ended October 1, 2016, our operating revenue per loaded mile, excluding fuel surcharges, decreased to $2.26 from $2.48 for thirty-nine weeks ended September 26, 2015, while the number of transportation loads hauled increased 1.8% to 461,337 during the thirty-nine weeks ended October 1, 2016 from 453,353 in the same period last year.  

Value-added services increased by 5.6% to $225.7 million during the thirty-nine weeks ended October 1, 2016, compared to $213.7 million during the same period last year. The increase of $12.0 million in total value-added services includes a $20.1 million decline in value-added services supporting the heavy-truck market. At October 1, 2016, we provided value-added services at 47 locations compared to 48 at September 26, 2015; however, the scope of services provided as several locations has broadened.

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Revenues from our intermodal operations decreased due to a decline in fuel surcharges, which were partially offset by increases in operating revenue per load and in the number of loads hauled. Fuel surcharges declined $6.0 million, while operating revenue per load, excluding fuel surcharges, for the thirty-nine weeks ended October 1, 2016 increased to $353 from $347 for the thirty-nine weeks ended September 26, 2015, and the number of intermodal loads hauled increased to 252,563 for the thirty-nine weeks ended October 1, 2016, compared to 224,286 during the same period last year.  

Purchased transportation and equipment rent. Purchased transportation and equipment rental costs for the thirty-nine weeks ended October 1, 2016 decreased by $42.4 million, or 9.9%, to $385.5 million from $427.9 million for the thirty-nine weeks ended September 26, 2015. Purchased transportation and equipment rent generally increases or decreases in proportion to the revenues generated through owner-operators and other third party providers, and is generally correlated with changes in demand for transportation and intermodal services. Combined, transportation and intermodal revenues decreased 7.3% to $583.0 million for the thirty-nine weeks ended October 1, 2016 compared to $629.1 million during the same period last year. As a percentage of operating revenues, purchased transportation and equipment rent decreased to 47.7% for the thirty-nine weeks ended October 1, 2016 from 50.8% for the thirty-nine weeks ended September 26, 2015. This decrease was primarily due to a shift in the mix of service revenues.  Transportation and intermodal revenues combined totaled 72.1% of total operating revenues during the thirty-nine weeks ended October 1, 2016, compared to 74.6% in the same period last year.

Direct personnel and related benefits. Direct personnel and related benefit costs for the thirty-nine weeks ended October 1, 2016 increased by $35.2 million, or 22.1%, to $194.6 million compared to $159.4 million for the thirty-nine weeks ended September 26, 2015. Trends in these expenses are generally correlated with changes in operating facilities and headcount requirements and, therefore, increase and decrease with the level of demand for our value-added services and staffing needs of our operations. The absolute increase is primarily attributable to higher than normal labor costs as we launch new value-added programs.  As a percentage of operating revenues, personnel and related benefits expenses increased to 24.1% for the thirty-nine weeks ended October 1, 2016, compared to 18.9% during the same period last year. The percentage is derived on an aggregate basis from both existing and new programs, and from customer operations at various stages in their lifecycles. Individual operations may be impacted by additional production shifts or by overtime at selected operations. While generalizations about the impact of personnel and related benefits costs as a percentage of total operating revenues are difficult, we manage compensation and staffing levels, including the use of contract labor, to maintain target economics based on near-term projections of demand for our services. We expect over time these costs to return to historical levels.

Commission expense. Commission expense for the thirty-nine weeks ended October 1, 2016 decreased by $3.3 million, or 11.8%, to $24.7 million from $28.0 million during the same period last year. The absolute decrease was primarily due to the decrease in our operating revenues from transportation and intermodal services. Commission expense generally increases or decreases in proportion to our transportation and intermodal revenues, excluding where we generate a higher proportion of our revenues at company-managed terminals.  As a percentage of operating revenues, commission expense decreased to 3.1% for the thirty-nine weeks ended October 1, 2016 compared to 3.3% for the thirty-nine weeks ended September 26, 2015. As a percentage of operating revenues, the decrease in commission expense is due to a shift in the mix of revenues generated by company-managed locations and in value-added services where no commissions are paid.  

Operating expenses (exclusive of items shown separately). Operating expenses decreased $9.1 million, or 11.2%, to $72.5 million for the thirty-nine weeks ended October 1, 2016, compared to $81.6 million for the thirty-nine weeks ended September 26, 2015. As a percentage of operating revenues, operating expenses decreased to 9.0% for the thirty-nine weeks ended October 1, 2016 from 9.7% for the thirty-nine weeks ended September 26, 2015. These expenses include items such as fuel, maintenance, cost of materials, communications, utilities and other general expenses, and generally relate to fluctuations in customer demand. The decrease in operating expenses was primarily due to decreases in fuel expense on company-owned equipment totaling $4.4 million, $3.8 million in repair and maintenance expense, and $0.8 million in highway use and fuel taxes.

Occupancy expense. Occupancy expense for the thirty-nine weeks ended October 1, 2016 increased by $3.6 million, or 17.8%, to $23.8 million from $20.2 million for the thirty-nine weeks ended September 26, 2015.  As a percentage of operating revenues, occupancy expense increased to 2.9% for the thirty-nine weeks ended October 1, 2016 compared to 2.4% for the thirty-nine weeks ended September 26, 2015. At October 1, 2016, the Company leased 29 value-added service locations compared to 31 at September 26, 2015. While the number of leased facilities declined, the absolute increase in occupancy expense is due to the enlarged scale of several operations supporting the expanded scope of customer requirements.  

Selling, general and administrative. Selling, general and administrative expense for the thirty-nine weeks ended October 1, 2016 decreased by $1.1 million, or 4.0%, to $26.6 million from $27.7 million for the thirty-nine weeks ended September 26, 2015. As a percentage of operating revenues, selling, general and administrative expense held consistent at 3.3% for each of the thirty-nine weeks ended October 1, 2016 and September 26, 2015.  The absolute decrease was primarily due to decreases in professional services of $0.8 million and in bad debt expense totaling $0.6 million. These decreases were partially offset by an increase in salaries, wages and benefits of $0.4 million. Minor fluctuations in other expense categories reflect our efforts to maintain stable overhead expenditures while expanding the business.  

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Insurance and claims. Insurance and claims expense for the thirty-nine weeks ended October 1, 2016 decreased by $3.0 million, or 18.1%, to $13.6 million from $16.6 million for the thirty-nine weeks ended September 26, 2015. As a percentage of operating revenues, insurance and claims decreased to 1.7% for the thirty-nine weeks ended October 1, 2016 from 2.0% for the thirty-nine weeks ended September 26, 2015. The absolute decrease was primarily the result of decreases in our auto liability insurance premiums and claims expense of $2.4 million and in our cargo and service claims expense of $0.6 million.

Depreciation and amortization. Depreciation and amortization expense for the thirty-nine weeks ended October 1, 2016 increased by $0.4 million, or 1.5%, to $26.8 million from $26.4 million for the thirty-nine weeks ended September 26, 2015. The increase is primarily the result of increased capital investments throughout 2016, which was partially offset by certain other intangible assets becoming fully amortized.

Interest expense, net. Net interest expense was $6.2 million for the thirty-nine weeks ended October 1, 2016 compared to $5.8 million for the thirty-nine weeks ended September 26, 2015.  The increase is primarily the result of higher outstanding debt during the period.  At October 1, 2016 we had outstanding borrowings totaling $250.6 million compared to $245.9 million at September 26, 2015.

Other non-operating income. Other non-operating income was $0.4 million for the thirty-nine weeks ended October 1, 2016 compared to $0.8 million for the same period last year, both of which consisted primarily of gains on the sales of marketable securities.  

Provision for income taxes. Provision for income taxes for the thirty-nine weeks ended October 1, 2016 was $13.5 million compared to $19.2 million for the thirty-nine weeks ended September 26, 2015, based on effective tax rate of 38.5% in each of the periods.  

Liquidity and Capital Resources

 

Our primary sources of liquidity are (1) funds generated by operations; (2) our availability to borrow under our $120 million revolving credit facility with PNC Bank, under our $20 million revolving credit facility with Comerica Bank, on margin against our marketable securities held at UBS, and from installment notes; and (3) proceeds from the sales of marketable securities. Additionally, our $120 million revolving credit facility includes an accordion feature which would allow us to increase availability by up to $30 million upon our request.  

We employ an asset-light operating strategy which we believe lowers our capital expenditure requirements. In general, our facilities used in our value-added services are leased on terms that are either substantially matched to our customer’s contracts, are month-to-month or are provided to us by our customers. We also utilize owner-operators and third-party carriers to provide a significant portion of our transportation and specialized services. A significant portion of the tractors and trailers used in our business are provided by our owner-operators. In addition, our use of agents reduces our overall need for large terminals. As a result, our capital expenditure requirements are limited in comparison to most large transportation and logistics service providers, which maintain significant properties and sizable fleets of owned tractors and trailers.

During the thirty-nine weeks ended October 1, 2016, our capital expenditures totaled $82.3 million, including $3.7 million in non-cash additions. These expenditures primarily consisted of transportation equipment, strategic real estate and investments in support of our value-added service operations. Our asset-light business model depends somewhat on the customized solutions we implement for specific customers.  As a result, our capital expenditures will depend on specific new contracts and the overall age and condition of our owned transportation equipment. Through the end of 2016, exclusive of acquisitions of businesses, we expect our capital expenditures to be in the range of $22 million to $26 million. The anticipated amount is somewhat higher than our historical trends.  We expect to make these capital expenditures for the acquisition of transportation equipment to support our more dynamic approach to fleet management and to support our new and existing value-added service operations.

We have a cash dividend policy which anticipates a total annual dividend of $0.28 per share of common stock, payable in quarterly increments of $0.07 per share of common stock.  We paid $0.21 per common share, or $6.0 million, during the thirty-nine week period ended October 1, 2016.  On October 27, 2016, our Board of Directors declared a quarterly cash dividend of $0.07 per share of common stock, which is payable to shareholders of record at the close of business on November 7, 2016 and is expected to be paid on November 17, 2016.  Declarations of future cash dividends are subject to final determination by the Board of Directors each quarter after its review of our financial condition, results of operations, capital requirements, any legal or contractual restrictions on the payment of dividends and other factors the Board of Directors deems relevant.

We expect that our cash flow from operations, working capital and available borrowings will be sufficient to meet our capital commitments, to fund our operational needs for at least the next twelve months, and to fund mandatory debt repayments. Based on the availability of borrowings under our credit facilities, against our marketable security portfolio and other financing sources, and assuming the continuation of our current level of profitability, we do not expect that we will experience any liquidity constraints in the foreseeable future.

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We continue to evaluate business development opportunities, including potential acquisitions that fit our strategic plans. There can be no assurance that we will identify any opportunities that fit our strategic plans or will be able to execute any such opportunities on terms acceptable to us.  Depending on prospective consideration to be paid for an acquisition, any such opportunities would be financed first from available cash and cash equivalents and availability of borrowings under our credit facilities.

Revolving Credit, Promissory Notes and Term Loan Agreements

On December 23, 2015, Universal and certain of its U.S. wholly-owned subsidiaries entered into a combination of secured and unsecured loans with certain lenders.  The loans consisted of a $120 million revolving credit facility with PNC Bank (the “PNC Facility”), five equipment promissory notes with Key Equipment Finance totaling $83.6 million (the “Key Equipment Notes”), a $60 million revolving credit and term loan agreement with Comerica Bank (the “Comerica Facility”), and a $40 million unsecured term loan with Flagstar Bank (the “Flagstar Loan”).  Upon closing, the Company and subsidiaries involved borrowed approximately $234.9 million to pay off existing indebtedness, and terminate its previous Revolving Credit and Term Loan Agreement with Comerica Bank, and to pay fees and expenses associated with the new credit agreements.

Borrowings under the PNC Facility may be made by certain U.S. subsidiary borrowers until, and mature on, December 23, 2020.  Outstanding borrowings bear interest at LIBOR or a base rate, plus an applicable margin for each.  The applicable margin fluctuates based on the borrowing subsidiaries’ quarterly average excess availability, as defined in the PNC Facility.  Upon request, the PNC Facility may be increased by up to $30 million and provides for up to $3 million in letters of credit.  As security for all indebtedness pursuant to the PNC facility, PNC Bank was granted a first priority perfected security interest in cash, deposits and accounts receivable of the borrowing subsidiaries and selected other assets. The credit facility includes customary affirmative and negative covenants and events of default, as well as financial covenants requiring a minimum fixed charge coverage ratio to be maintained after a triggering event, as defined in the PNC Facility. The PNC Facility also includes customary mandatory prepayments provisions. At October 1, 2016, our $60.7 million revolver advance was secured by, among other assets, net eligible accounts receivable totaling $98.5 million. We did not have any letters of credit issued against the credit facility, and $28.0 million was available for borrowing.  

The Key Equipment Notes refinanced a substantial portion of our transportation equipment by one of our wholly-owned subsidiaries.  As security for all indebtedness pursuant to the Key Equipment Notes, Key Equipment Finance was granted liens on selected titled vehicles.  Additionally, the obligations under the Key Equipment Notes are guaranteed by certain wholly-owned operating subsidiaries of the Company in connection with each such subsidiary’s lease of equipment. The Key Equipment Notes also include financial covenants requiring the borrowing subsidiary to maintain a ratio of operating cash flow to fixed charges of not less than 1.1:1, as defined in the agreement. At October 1, 2016, the outstanding balance on the Key Equipment Notes totaled $68.4 million. The Key Equipment Notes are payable in 60 monthly installments and bear interest at a fixed rate of 3.75%.

The Comerica Facility provides for aggregate borrowing facilities of up to $60 million to our Westport Axle Corporation subsidiary.  The Comerica Facility consists of a $40 million term loan and a $20 million revolver. Additionally, the Comerica Facility provides for up to $2 million in letters of credit.  Borrowings under the term loan were advanced on December 23, 2015 and mature on December 23, 2020. The term loan must be repaid in 20 equal quarterly installments of $1.5 million over five years beginning March 1, 2016, with any remaining balance due at maturity. Borrowings under the revolving credit facility may be made until, and mature on, December 23, 2020.  Borrowings under the Comerica Facility bear interest at LIBOR or a base rate, plus an applicable margin for each. The applicable margin fluctuates based on Westport’s total debt to EBITDA ratio, as defined in the Comerica Facility.

The Comerica Facility requires us to repay the borrowings as follows: 50% (which percentage shall be reduced to 0% subject to Westport attaining a certain leverage ratio) of Westport’s annual excess cash flow, as defined; 100% of the net cash proceeds if we sell Westport’s machining division; 50% of net proceeds from certain equity issuances; 100% of proceeds from the issuance of certain indebtedness; and 100% of net proceeds from the sale of certain assets, insurance and condemnation proceeds.

As security for all indebtedness under the Comerica Facility, Westport granted a first perfected security interest on all of its tangible and intangible property and in assets acquired in the future.  The Company also pledged 100% of its equity interest in Westport.  The Comerica Facility also contains a “springing” guaranty requiring the Company to guarantee the indebtedness under certain events, as defined in the Comerica Facility. The Comerica Facility includes financial covenants requiring Westport to maintain a minimum fixed charge coverage ratio, minimum quarterly EBITDA amounts, as defined in the credit agreement, and a maximum debt to EBITDA ratio, as well as customary affirmative and negative covenants and events of default.  At October 1, 2016, there were no letters of credit issued under the Comerica Facility, and the outstanding balance was $36.5 million.  At October 1, 2016, our $1.0 million revolver advance was secured by, among other assets, net eligible accounts receivable and inventory totaling $10.5 million and $6.5 million, respectively. At October 1, 2016, availability, as defined in the Comerica Facility, was $11.5 million.

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Proceeds of the $40 million Flagstar Loan were advanced on December 23, 2015, and the outstanding principal balance was due on or before July 15, 2016. Borrowings under the Flagstar Loan bore interest at LIBOR, plus 3.5%, and interest on the unpaid balance was payable monthly commencing on February 1, 2016. On June 21, 2016, a wholly-owned subsidiary of the Company, entered into a Loan and Financing Agreement with Flagstar, along with ten accompanying promissory notes and commercial mortgages (collectively, the “Real Estate Credit Agreement”) totaling approximately $32.8 million to refinance a portion of the Company’s existing indebtedness with Flagstar pursuant to the $40 million unsecured term loan.  The promissory notes bear interest at a rate of LIBOR plus 2.25%, and will be repaid in consecutive monthly installment payments, plus interest, beginning July 1, 2016.  The promissory notes are due on or before June 30, 2026.  At October 1, 2016, the aggregate principal outstanding pursuant to the ten promissory notes was $32.0 million and the unsecured term loan was fully repaid.

As security for all indebtedness pursuant to the Real Estate Credit Agreement, Flagstar Bank (“Flagstar”) was granted first mortgages and assignment of leases on specific parcels of real estate and improvements included in the collateral pool, as defined in the agreement.  Except for obligations subject to interest rate swap agreements with Flagstar, as defined in the Real Estate Credit Agreement, UTSI Finance may prepay all or a portion of the loans, plus applicable breakage charges and fees.  The Real Estate Credit Agreement also contains customary affirmative and negative covenants and events of default, and requires UTSI Finance to maintain a debt service coverage ratio of not less than 1.02:1, as defined in the Real Estate Credit Agreement.  The first test for compliance is due after the fourth quarter of 2016. 

During the thirty-nine weeks ended October 1, 2016, a wholly-owned subsidiary of the Company entered into installment obligations totaling approximately $33.6 million for the purpose of purchasing revenue equipment.  The promissory notes will be repaid in 60 monthly installments at interest rates ranging from 3.24% to 3.69%.  At October 1, 2016, the aggregate principal outstanding balance pursuant to the promissory notes totaled $31.4 million.

On August 8, 2016, a wholly-owned subsidiary of the Company entered into an unsecured promissory note (the “Unsecured Note”) with an affiliate for the purchase of a multi-building, cross-dock logistics terminal in the principal amount of $22,500,000. The Unsecured Note is payable in 120 monthly payments of principal and accrued interest starting September 15, 2016, and it bears interest at a fixed rate of 3.5% per annum. On September 6, 2016, the subsidiary entered into a loan and financing agreement (the “Loan Agreement”) with Flagstar, along with a promissory note (the “Secured Note”) and commercial mortgage to repay a portion of the Unsecured Note. As of October 1, 2016, the remaining principal balance on the Unsecured Note was approximately $2.7 million, and such amount is due on or before August 15, 2026.  The Secured Note bears interest at a rate of LIBOR plus 2.25%, and will be repaid in consecutive monthly installment payments of principal and accrued interest beginning October 1, 2016. The subsidiary granted to Flagstar a first priority mortgage on the terminal as security for the subsidiary’s obligations under the Loan Agreement. Except for obligations subject to any interest rate swap agreement, the Company may prepay all or a portion of the Secured Note, plus applicable breakage charges and fees. The Loan Agreement also contains customary affirmative and negative covenants and events of default, and requires the subsidiary to maintain a debt service coverage ratio of not less than 1.02:1. As of October 1, 2016, the remaining principal balance on the Secured Note was approximately $19.0 million, and such amount is due on or before September 5, 2026.

Secured Line of Credit

 

The Company maintains a secured borrowing facility at UBS Financial Services, Inc., or UBS, using its marketable securities as collateral for the short-term line of credit.  The line of credit bears an interest rate equal to LIBOR plus 1.10%, and interest is adjusted and billed monthly.  No principal payments are due on the borrowing; however, the line of credit is callable at any time.  The amount available under the line of credit is based on a percentage of the market value of the underlying securities.  If the equity value in the account falls below the minimum requirement, the Company must restore the equity value, or UBS may call the line of credit.  As of October 1, 2016, there was no outstanding balance under the line of credit, and the maximum available borrowings against the line of credit were $7.3 million.  

 

Discussion of Cash Flows

 

At October 1, 2016, we had cash and cash equivalents of $1.5 million compared to $12.9 million at December 31, 2015.  Net cash provided by operating activities was $60.9 million and $3.9 million was provided by financing activities, while we used $76.1 million in investing activities.  

 

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The $60.9 million in net cash provided by operations was primarily attributable to $21.5 million of net income, which reflects non-cash depreciation and amortization, losses on the sales of property and equipment, amortization of debt issuance costs, stock-based compensation, provisions for doubtful accounts and a change in deferred income taxes totaling $28.0 million, net.  Net cash provided by operating activities also reflects an aggregate decrease in net working capital totaling $11.4 million.   The aggregate decrease in working capital is primarily the result of an increase in trade accounts payable outstanding at the end of the period.  This decrease was partially offset by a decline in other long-term liabilities and an increase in trade and other accounts receivable and in prepaid income taxes, prepaid expenses and other assets.  Affiliate transactions increased net cash provided by operating activities during the thirty-nine weeks ended October 1, 2016 by $2.2 million.  The increase consisted of an increase in accounts payable to affiliates of approximately $3.1 million, which was partially offset by an increase in accounts receivable from affiliates of approximately $0.9 million.

The $76.1 million in net cash used in investing activities consisted of $78.7 million for capital expenditures, which was partially offset by $2.2 million in proceeds from the sale of property and equipment.  

Financing activities provided $3.9 million in net cash. We had outstanding borrowings totaling $250.6 million at October 1, 2016 compared to $234.9 million at December 31, 2015.  During the thirty-nine weeks ended October 1, 2016, cash borrowings totaled $225.8 million and we made $213.8 million of principal repayments. We also paid cash dividends of $6.0 million and made $1.8 million in payments on capital lease obligations.  

Off Balance Sheet Arrangements

None.

Critical Accounting Policies

A summary of critical accounting policies is presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies," of our Form 10-K for the year ended December 31, 2015. There have been no changes in our accounting policies during the thirteen weeks ended October 1, 2016.

Seasonality

Generally, demand for our value-added services delivered to existing customers increases during the second calendar quarter of each year as a result of the automotive industry’s spring selling season and decreases during the third quarter of each year due to the impact of scheduled OEM customer plant shutdowns in July and August for vacations and changeovers in production lines for new model years. Our value-added services business is also impacted in the fourth quarter by plant shutdowns during the December holiday period.  Prolonged adverse weather conditions, particularly in winter months, can also adversely impact margins due to productivity declines and related challenges meeting customer service requirements.

Additionally, our transportation services business, excluding dedicated transportation tied to specific customer supply chains, is generally impacted by decreased activity during the post-holiday winter season and, in certain states during hurricane season, because some shippers reduce their shipments and inclement weather impedes trucking operations or underlying customer demand.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have not been any material changes to the Company’s market risk during the thirteen weeks ended October 1, 2016. For additional information, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to paragraph (b) of Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as amended (or the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 1, 2016, our disclosure controls and procedures were effective in causing the material information required to be disclosed in the reports that it files or submits under the Exchange Act (i) to be recorded, processed, summarized and reported, to the extent applicable, within the time periods required for us to meet the Securities and Exchange Commission’s (or SEC) filing deadlines for these reports specified in the SEC’s rules and forms and (ii) to be accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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Internal Controls

There have been no changes in our internal controls over financial reporting during the thirteen weeks ended October 1, 2016 identified in connection with our evaluation that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The nature of our business routinely results in litigation incidental to the ordinary course of our business, primarily involving claims for personal injury and property damage incurred in the transportation of freight. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, we believe all such litigation is adequately covered by insurance or otherwise reserved for and that adverse results in one or more of those cases would not have a materially adverse effect on our financial condition, operating results or cash flows.

ITEM 1A: RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in Item 1A to Part 1 of our Form 10-K for the fiscal year ended December 31, 2015.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On June 30, 2014, the Company announced that it had been authorized to purchase up to 800,000 shares of its Common Stock from time to time in the open market.  There have not been any purchases of shares under this authorization.  The Company did, however, acquire 1,600 shares for $24,000 pursuant to its right of first refusal under a restricted stock bonus award agreement during the third fiscal quarter of 2016.  

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

None.

 

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ITEM 6: EXHIBITS

The exhibits listed on the Exhibit Index are furnished as part of this quarterly report on Form 10-Q.

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

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