UNIVERSAL LOGISTICS HOLDINGS, INC. - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2018

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, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 May 7, 2018, was 28,394,892.

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.

2

UNIVERSAL LOGISTICS HOLDINGS, INC.

Unaudited Consolidated Statements of Income

(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

3

UNIVERSAL LOGISTICS HOLDINGS, INC.

Unaudited Consolidated Statements of Comprehensive Income

(In thousands)

See accompanying notes to consolidated financial statements.

4

UNIVERSAL LOGISTICS HOLDINGS, INC.

Unaudited Consolidated Statements of Cash Flows

(In thousands)

See accompanying notes to consolidated financial statements.

5

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

The accompanying unaudited consolidated financial statements of Universal Logistics Holdings, Inc. and its wholly-owned subsidiaries (collectively, “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. All intercompany transactions and balances have been eliminated in consolidation.  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, 2017 and 2016 and for each of the years in the three-year period ended December 31, 2017 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.

The Company made certain immaterial reclassifications to items in its prior financial statements so that their presentation is consistent with the format in the financial statements for the period ended March 31, 2018.  These reclassifications, however, had no effect on reported consolidated net income, comprehensive income, earnings per common share, cash flows, total assets or shareholders’ equity as previously reported.

Recently adopted accounting pronouncements

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, using the modified retrospective transition method with a cumulative adjustment to retained earnings of approximately $0.2 million.  ASU 2014-09 is a comprehensive revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract 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. For our transportation services businesses, which include truckload, brokerage, intermodal and dedicated services, the adoption of the standard changed the timing of revenue recognition from “at delivery” to “over-time” as the performance obligations on the in-transit services are completed.  For our value-added service businesses, the adoption of the standard did not change the timing of revenue recognition.  Due to the Company’s short in-transit period for transportation services, the impact did not have a material impact on its consolidated results of operations, financial position or cash flows. The adoption of ASU 2014-09 required an increase in the level of information disclosed in the Notes to Unaudited Consolidated Financial Statements.  See Note 3 for additional information.

On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, using the modified retrospective method.  Upon adoption, approximately $3.8 million in accumulated changes in the fair market value of the Company’s equity securities that were presented at December 31, 2017 in accumulated other comprehensive income were reclassified to retained earnings. ASU 2016-01 requires, among other things, 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.

On January 1, 2018, the Company prospectively adopted ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, to clarify the definition of a business to assist entities when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The impact of the adoption did not have an impact on its results of operations, financial position or cash flows.

6

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

Recent accounting pronouncements not currently effective

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. This update is effective for annual and interim periods beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of 2019 using a modified retrospective approach. Early adoption is permitted, although we do not plan to adopt early.  We are currently evaluating the effects ASU 2016-02 will have on our consolidated financial statements and related disclosures. As of December 31, 2017, we disclosed approximately $71.8 million in operating lease obligations in Note 9, “Leases” in the Company’s Form 10-K.  We will evaluate those contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard. Upon adoption, we would expect the amount recognized for the right-of-use assets and lease liabilities to be material to the consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which amends existing guidance for reporting comprehensive income to reflect changes resulting from the Tax Cuts and Jobs Act of 2017. The amendment provides the option to reclassify stranded tax effects within accumulated other comprehensive income (AOCI) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recorded. New disclosures will be required upon adoption, including the accounting policy for releasing income tax effects from AOCI, whether reclassification of stranded income tax effects is elected, and information about other income tax effect reclassifications. Although the amendment will become effective for us on January 1, 2019, early adoption is permitted, although we do not plan to early adopt. We are currently evaluating the impact of adopting this standard on our consolidated financial statements and disclosures.

In March 2018, the FASB issued ASU 2018-05, Income Taxes, to clarify the accounting implications of Staff Accounting Bulletin No. 118 ("SAB 118"). SAB 118 provides a measurement period that should not extend beyond one year from December 22, 2017, the date of the enactment of the Tax Cuts and Jobs Act, to complete the accounting under Accounting Standards Codification ("ASC") 740, Income Taxes. As of March 31, 2018, we have not adjusted the provisional estimate recorded at December 31, 2017. We expect to complete our analysis within the measurement period in accordance with SAB 118.

The Company broadly groups its services into the following categories: truckload services, brokerage services, intermodal services, dedicated services and value-added services.

Truckload services include dry van, flatbed, heavy-haul and refrigerated operations. We transport a wide variety of general commodities, including automotive parts, machinery, building materials, paper, food, consumer goods, furniture, steel and other metals on behalf of customers in various industries.

To complement our available capacity, we provide customers freight brokerage services by utilizing third-party transportation providers to move freight.  Brokerage services also include full service domestic and international freight forwarding, and customs brokerage.  

Intermodal services include rail-truck, steamship-truck and support services. Our intermodal support services are primarily short-to-medium distance delivery of rail and steamship containers between the railhead or port and the customer and drayage services.

Dedicated services are primarily provided in support of automotive and retail customers using specialized van equipment.  Dedicated services also include our final mile and ground expedited services.  Our dedicated services are primarily short run or round-trip moves within a defined geographic area.

7

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

Value-added services, which are typically dedicated to individual customer requirements, include material handling, consolidation, sequencing, sub-assembly, cross-dock services, kitting, repacking, warehousing and returnable container management.  Value-added revenues are substantially driven by the level of demand for outsourced logistics services. Major factors that affect value-added service revenue includes changes in manufacturing supply chain requirements and production levels in specific industries, particularly the North American automotive and Class-8 heavy-truck industries.

Revenue is recognized as control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration the Company expects to receive in exchange for its services.

Our transportation services businesses include truckload, brokerage, intermodal and dedicated services.  The adoption of ASU 2014-09 changed the timing of revenue recognition for transportation services from at delivery to over-time as the performance obligations on the in-transit services are completed.  

Transportation services are short-term in nature; agreements governing their provision generally have a term of less than one year. They do not contain significant financing components.  In accordance with ASU 2014-09, the Company recognizes revenue over the period transportation services are provided to the customer, including service performed as of the end of the reporting period for loads currently in transit, in order to recognize the value that is transferred to a customer over the course of the transportation service.

We determine revenue in-transit using the input method, under which revenue is recognized based on the duration of time that has lapsed from the departure date (start of transportation services) to the arrival date (completion of transportation services). Measurement of revenue in transit requires the application of significant judgment. We calculate the estimated percentage of an order’s transit time that is complete at period end, and we apply that percentage of completion to the order’s estimated revenue.

For the Company’s value-added service businesses, the adoption of ASU 2014-09 did not change the timing of revenue recognition.  The contracts in our value-added services businesses are negotiated agreements, which contain both fixed and variable components. The variability of revenues is driven by volumes and transactions, which are known as of an invoice date. Value-added service contracts typically have terms that extend beyond one year, and they do not include financing components.  The timing of revenue recognition for value-added services will remain the same, as we have elected to use the “right to invoice” practical expedient, reflecting that a customer obtains the benefit associated with value-added services as they are provided.

The following table provides information related to contract balances associated with our contracts with customers (in thousands):

We generally receive payment for performance obligations within 45 days of completion of transportation services and 65 days for completion of value-added services. Contract assets in the table above generally relate to revenue in transit at the end of the reporting period. 

Practical expedients

The Company elected to use the following practical expedients that are available under ASC 606: (i) to apply the new revenue standard to a portfolio of contracts (or performance obligations) with similar characteristics, as we reasonably expect that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts; (ii) to recognize commission expense when incurred, which we consider to be a cost to obtain a contract, because the amortization period is less than one year; and (iii) to recognize revenue in the value-added services portfolio in the amount of consideration to which we have a right to invoice, that corresponds directly with the value to the customer of the service completed to date.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

8

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

(3)     Revenue Recognition - continued

In accordance with the new revenue standard requirements, the impact of adoption on our consolidated statement of income and balance sheet was as follows (in thousands):

See also Note 13 for information on revenue reported by segment.  

The Company accounts for its marketable equity securities in accordance with ASC Topic 321 “Investments- Equity Securities.” ASC Topic 321 requires companies to measure equity investments at fair value, with changes in fair value recognized in net income. The Company’s investments in marketable securities consist of equity securities with readily determinable fair values. The cost of securities sold is based on the specific identification method, and interest and dividends on securities are included in non-operating income (expense).

Marketable equity securities are carried at fair value, with gains and losses in fair market value included in the determination of net income beginning January 1, 2018. The fair value of marketable equity securities is determined based on quoted market prices in active markets, as described in Note 8.

The following table sets forth market value, cost, and unrealized gains on equity securities (in thousands):

Prior to the Company’s  adoption of ASU 2016-01 as of January 1, 2018 , unrealized losses in fair market value were presented as a component of Accumulated Other Comprehensive Income in shareholders’ equity; before adoption of this guidance, the Company included in net income only realized gains and losses and declines in value determined to be other-than-temporary on available-for-sale securities. The cost of securities determined to be in an other-than-temporary loss position was required to be presented net of the amount of the other-than-temporary impairment calculated. Subsequent to adoption of ASU 2016-01, cost is no longer presented net of other-than-temporary impairment. The December 31, 2017 cost reflected in the table above was presented net of approximately $424,000 of other-than-temporary impairment.

9

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

The following table sets forth the gross unrealized gains and losses on the Company’s marketable securities (in thousands):

The following table shows the Company’s net realized gains (loss) on marketable equity securities (in thousands):

During the thirteen-week period ended March 31, 2018, our marketable equity securities portfolio experienced a net unrealized pre-tax loss in market value of approximately $647,000, which was reported in other non-operating (expense) income for the period.

10

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

On February 1, 2018, the Company acquired Fore Transportation, Inc. and certain of its affiliates (collectively, “Fore”).  Fore provides comprehensive intermodal solutions, including local and regional drayage services. One of the acquired Fore affiliates owns and leases real property and improvements, including a 28-acre terminal that serves as Fore’s corporate headquarters and its secured trailer and container storage facility for 1,100 units.  The acquisition of Fore strategically enhances our geographic footprint and further diversifies our customer base. The total cash purchase price was $35.1 million. To fund the acquisition, the Company used available cash and borrowed approximately $31.3 million using its margin credit facility, revolving credit facility and secured real estate financing.  

The Company accounted for the acquisition in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed were recorded at their estimated fair value as of February 1, 2018, with the remaining unallocated purchase price recorded as goodwill. The goodwill recorded is included in our transportation segment, and is non-deductible for income tax purposes. The pro forma effect of this acquisition has been omitted, as the effect is immaterial to the Company’s consolidated results of operations, financial position and cash flows. The preliminary allocation of the purchase price is as follows (in thousands):

The intangible assets acquired represent Fore’s acquired customer relationships and a non-competition agreement, that are being amortized over a period of 10 years and five years, respectively.  The Company used the discount cash flow method to estimate the fair value of these acquired intangible assets.  

Fore’s operating results have been included in the Company’s Unaudited Consolidated Statements of Income since February 1, 2018. Included in the Company’s operating results are acquisition related costs of approximately $0.2 million, which are reflected in operating supplies and expenses in the Unaudited Consolidated Statement of Income.

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

11

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

Debt is comprised of the following (in thousands):

(4) The Real Estate Financing consists of a series of promissory notes issued by a wholly-owned subsidiary in order to finance certain real property. The promissory notes, which are secured by first mortgages and assignment of leases on specific parcels of real estate and improvements, include certain affirmative and negative covenants and are generally payable in 120 monthly installments.  Each of the notes bears interest at LIBOR plus 2.25%. At March 31, 2018, we were in compliance with all covenants.

12

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

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:

13

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 our real estate promissory notes 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 promissory notes, 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 this credit agreement as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of these promissory notes at March 31, 2018 is summarized as follows:

We have not elected the fair value option for any of our financial instruments.

14

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

CenTra, Inc., an affiliate of the Company, provides administrative support services to Universal in the ordinary course of business, including legal, human resources, tax, and IT infrastructure and related services.  The cost of these services is based on the actual or estimated utilization of the specific service.

Universal also purchases other services from affiliates. Following is a schedule of costs incurred and included in operating expenses for services provided by affiliates for the thirteen weeks ended March 31, 2018 and April 1, 2017 (in thousands):

We pay CenTra the direct variable cost of maintenance, fueling and other operational support costs for services delivered at our affiliate’s trucking terminals that are geographically remote from our own facilities. Such costs 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 operating locations are located in facilities leased from affiliates.  At 36 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 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 March 31, 2018 and December 31, 2017, amounts due to affiliates were $6.5 million and $12.0 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 March 31, 2018 and December 31, 2017, there were $10.3 million and $10.1 million, respectively, included in each of these accounts for insured claims.  

During the thirteen weeks ended April 1, 2017, we made purchases of used equipment from an affiliate totaling $1.8 million, and also purchased wheels and tires from an affiliate for new trailering equipment totaling $1.1 million during the same period.  There were no such purchases made during the thirteen-week period ended March 31, 2018.

15

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

Services provided by Universal to Affiliates

We periodically assist our affiliates by providing 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 ended March 31, 2018 and April 1, 2017 (in thousands):

At March 31, 2018 and December 31, 2017, amounts due from affiliates were $4.5 million and $2.7 million, respectively.

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.  Restricted stock awards currently outstanding under the 2004 Stock Incentive Plan will remain outstanding in accordance with the terms of that plan. 

On February 22, 2017, February 24, 2016, April 29, 2015 and March 5, 2015, the Company granted 10,000, 10,000, 20,000 and 10,000 shares, respectively, of restricted stock to our Chief Executive Officer.  The restricted stock grants have fair values of $13.45 per share, $15.55 per share, $22.03 per share, and $25.18 per share, respectively, based on the closing price of the Company’s stock on each grant date.  For each award, 25% of the shares vested immediately on the grant dates, and the remaining shares vest in three equal installments with the final vesting of the 2017 award to occur on March 5, 2020, in each case subject to continued employment with the company.  

On December 23, 2015, the Company granted 50,000 shares of restricted stock to certain of its employees, including 10,000 shares to our Chief Financial Officer. 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.

 A grantee’s vesting of restricted stock awards may be accelerated under certain conditions, including retirement.

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

In each of the thirteen-week periods ended March 31, 2018 and April 1, 2017, the total grant date fair value of vested shares recognized as compensation costs was $0.2 million.  As of March 31, 2018, there was approximately $0.3 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 $0.1 million during the remainder of 2018, and $0.1 million in each of 2019 and 2020.

16

UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

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.  For the thirteen weeks ended March 31, 2018 and April 1, 2017, there were 6,750 and 346 weighted average non-vested shares of restricted stock, respectively, included in the denominator for the calculation of diluted earnings per share.

For the thirteen weeks ended April 1, 2017, 35,000 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 ended March 31, 2018.   

On February 21, 2018, our Board of Directors approved an increase in the Company’s annual cash dividend policy from $0.28 per share to $0.42 per share beginning in 2018. The first quarterly installment of $0.105 per share is expected to be declared after the conclusion of the first quarter of 2018. After taking into account the regular quarterly dividends made during the year, the Board of Directors also intends to evaluate the potential declaration of an annual special dividend payable in the first quarter of each year in an effort to return up to 40% of Universal’s net income from the previous fiscal year, beginning in the first quarter of 2019.  

Pursuant to the cash dividend policy in effect until February 21, 2018, the 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 March 5, 2018 and paid on March 15, 2018.  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 period ended March 31, 2018 and April 1, 2017 (in thousands):

17

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.

On October 16, 2017, a jury in state court in Cook County, Illinois rendered a verdict of $54.2 million against Universal Am-Can, Ltd. (“UACL”) in the matter of Denton v. UACL, et al. The litigation relates to a vehicular accident that occurred on February 8, 2011 on I-65 in Rensselaer, Indiana. The accident involved a tractor-trailer being driven by an independent owner-operator of UACL. The driver was braking on the expressway in order to avoid another vehicle being driven the wrong way on the interstate. The truck attempted to avoid the oncoming vehicle and the plaintiff’s vehicle and, in so doing, struck the plaintiff’s vehicle. As a result of the accident, the plaintiff sustained non-life threatening injuries. In connection with the verdict, the jury determined that UACL was responsible for the liability associated with the accident. The verdict included $19.2 million in compensatory damages and $35.0 million in punitive damages against UACL. The insurance coverage available for reimbursement of UACL’s damages underlying the verdict is limited to $1.0 million. We believe the facts and the law do not support the jury’s findings of liability against UACL.  Post-trial motions have been filed seeking a reduction of the verdict or reversal of the judgment.  The Company may further seek to appeal the verdict to the extent the circuit court does not set it aside the judgment as a result of these motions. The Company currently estimates the possible range of financial exposure in the matter, net of insurance coverage, to be between $18.2 and $53.2 million.  Based on the Company’s best estimate of the liability at this time, the Company has recorded an accrued liability for this matter of $18.2 million.  While we cannot predict with any certainty the outcome of this litigation, its ultimate resolution could be significantly different from our estimate and materially affect our financial condition, results of operations and cash flows.

The Company was plaintiff in a lawsuit that was filed on June 11, 2015 against, among others, Dalton Logistics, Inc. (“Dalton”) in the United States District Court for the Southern District of Texas. The Company was seeking approximately $1.9 million in damages from a debtor relating to unpaid freight charges. In response to the filing of the complaint, the shareholders of Dalton filed a counterclaim against the Company alleging that the Company, in connection with certain unrelated negotiations with the defendant, breached an alleged agreement to acquire Dalton.  The respective claims proceeded to trial and, on July 21, 2017, a jury returned two separate verdicts: One in favor of Universal for $1.9 million, and a second in favor of the defendant for approximately $5.7 million. On October 30, 2017, the court entered a judgment against Universal for the $5.7 million, but ignored the $1.9 million jury award in favor of Universal.  The Company believes this ruling was in error and further believes the jury erred in their findings of any damages against Universal, and therefore, the Company plans to appeal both the ruling and the verdict.  The Company currently estimates the possible range of financial exposure in the matter to be between $0 and $5.7 million. Based on the Company’s best estimate of the liability at this time, the Company has recorded an accrued liability for this matter of $1.8 million.  While we cannot predict with any certainty the outcome of this litigation, management does not believe the outcome will have a material adverse effect on our business, financial condition, results of operations or cash flows.

On February 21, 2018, Ford Motor Company (“Ford”) filed suit against two of the Company’s subsidiaries and two related parties in state court in Oakland County, Michigan (the “Indemnity Action”).  The complaint seeks a declaratory judgment that Universal and its co-defendants are required to indemnify Ford for damages sustained by Ford in a wrongful death lawsuit in Clay County, Missouri (the “Underlying Action”).  In February 2018, a jury returned a verdict against Ford in the Underlying Action and awarded the decedent’s estate $76 million in damages.  Universal believes that, under Michigan law and its agreement with Ford, Universal is not required to indemnify Ford for Ford’s own negligence that led to the jury verdict in the Underlying Action.  Additionally, at the time of the incident that is the subject of the Underlying Action, Universal had in place insurance required by Ford providing for up to $3.0 million of coverage from a co-defendant.  The Company currently estimates the possible range of financial exposure in the matter, net of insurance coverage, to be between $0 and $73 million.  Based on our knowledge of the facts associated with the Underlying Action and the Indemnity Action and the opinions of outside counsel, Universal has determined that no accrual is necessary at this time.  While the outcome of the Indemnity Action cannot be predicted with any certainty and management believes the Company will be successful in defending its position, the outcome could have material adverse effect on our business, financial position, results of operations and cash flows.

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UNIVERSAL LOGISTICS HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements - Continued

The Company is involved in certain other 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. However, if we experience claims that are not covered by our insurance or that exceed our estimated claim reserve, it could increase the volatility of our earnings and have a materially adverse effect on our financial condition, results of operations or cash flows.

At March 31, 2018, approximately 26% 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, none of which are subject to contracts that expire in 2018.  

On April 26, 2018, our Board of Directors declared a quarterly cash dividend of $0.105 per share of common stock, payable to shareholders of record at the close of business on May 7, 2018 and expected to be paid on May 17, 2018.  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, 2017, 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 truckload, brokerage, intermodal, dedicated and value-added 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, 2017 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: truckload services, brokerage services, intermodal services, dedicated services and value-added services. Our truckload, brokerage and intermodal services associated with individual freight shipments coordinated by our agents and Company-managed terminals are generally aggregated into our reportable transportation segment, while our dedicated and value-added services to specific customers on a contractual basis make up our logistics segment. The following table sets forth operating revenues resulting from each of these categories for the thirteen weeks ended March 31, 2018 and April 1, 2017, 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 ended March 31, 2018 and April 1, 2017, presented as a percentage of operating revenues:

Thirteen Weeks Ended March 31, 2018 Compared to Thirteen Weeks Ended April 1, 2017

Operating revenues. Operating revenues for the thirteen weeks ended March 31, 2018 increased $50.7 million, or 17.8%, to $335.1 million from $284.4 million for the thirteen weeks ended April 1, 2017. Included in operating revenues are separately-identified fuel surcharges of $18.2 million for the thirteen weeks ended March 31, 2018 compared to $14.5 million for the thirteen weeks ended April 1, 2017.  Revenues from our transportation segment increased $27.7 million, or 15.5%, and income from operations increased $3.8 million, or 59.2%, compared to the same period last year.  The increase in operating income was primarily attributable to increased revenues and improved operating margins in several of our transportation segment businesses.  In our logistics segment, revenues increased $22.9 million, or 21.7%, over the same period last year and income from operations increased $3.2 million, or 77.3%.  The increase in operating income was primarily attributable to improved performance at several valued-added operations, including $2.2 million of additional operating income generated by our operations supporting Class 8 heavy-truck production.  Overall, consolidated income from operations increased $7.9 million, or 86.5%, to $17.1 million during the thirteen week period ended March 31, 2018.

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Operating revenues from truckload services increased $5.7 million to $77.2 million during the thirteen weeks ended March 31, 2018, compared to $71.5 million for the same period last year. Included in truckload revenues for the recently completed quarter were $8.4 million in separately identified fuel surcharges compared to $6.6 million during the same period last year.  The increase in truckload services reflects a 15.2% increase in average operating revenue per load, excluding fuel surcharges.  This increase was partially offset by an 8.3% decrease in the number of loads hauled.  During the thirteen weeks ended March 31, 2018, Universal moved 72,966 loads compared to 79,536 during the same period last year.  

Revenues during the thirteen weeks ended March 31, 2018 from brokerage services increased $20.2 million, or 34.8%, to $78.2 million compared to $58.0 million one year earlier. The growth in brokerage revenues is due to increases in the average operating revenue per load and in the number of loads hauled.  Universal’s average operating revenue per load increased 28.8% to $1,648 per load, up from $1,280 per load one year earlier. The number of brokerage loads hauled in the thirteen weeks March 31, 2018 increased 8.6% to 45,998 compared to 42,358 during the same period last year.  

Intermodal services revenues increased $10.7 million, or 29.8%, to $46.6 million during the thirteen weeks ended March 31, 2018, up from $35.9 million during the same period last year.  Intermodal revenues for the recently completed quarter included $5.9 million of revenues from Fore, which was acquired by Universal on February 1, 2018.  Intermodal revenues during the thirteen weeks ended March 31, 2018 also included $5.0 million in separately identified fuel surcharges, compared to $3.7 million during the same period last year.  The growth is also due to increases in the average operating revenue per load, excluding fuel surcharges, and in the number of loads hauled.  During the thirteen weeks ended March 31, 2018, Universal moved 94,029 intermodal loads, compared to 83,553 loads during the same period last year, an increase of 12.5%, while also increasing its average operating revenue per load, excluding fuel surcharges, by 13.1%.

Operating revenues from dedicated services during the thirteen weeks ended March 31, 2018 increased to $28.1 million compared to $24.9 million one year earlier. Dedicated services revenues included $4.3 million in separately identified fuel surcharges in the thirteen weeks ended March 31, 2018 compared to $3.5 million during the same period last year.  Universal’s average dedicated operating revenue per load, excluding fuel surcharges, increased 14.2% compared to the prior year. This increase was partially offset by a decrease in the number of loads hauled. During the thirteen weeks ended March 31, 2018, Universal moved 50,188 dedicated services loads, compared to 51,996 loads one year earlier.  

Value-added services revenues increased $11.0 million to $105.1 million in the thirteen weeks ended March 31, 2018.  This compares to $94.1 million from value-added services one year earlier.  Operations supporting the heavy-truck market continue to positively impact value-added services, contributing over $6.0 million of incremental revenues in the first quarter 2018.  Overall, revenues from value-added services grew by 11.7% compared to the same period last year.

Purchased transportation and equipment rent. Purchased transportation and equipment rental costs for the thirteen weeks ended March 31, 2018 increased by $30.8 million, or 23.5%, to $162.0 million from $131.2 million for the thirteen weeks ended April 1, 2017. 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 correlated with changes in demand for transportation-related services, which includes truckload, brokerage, intermodal and dedicated services.  The absolute increase in purchased transportation and equipment rental costs was primarily the result of an increase in transportation-related service revenues.  For the thirteen weeks ended March 31, 2018, transportation-related services increased 20.9% compared to the same period last year.  As a percentage of operating revenues, purchased transportation and equipment rent expense increased to 48.3% for the thirteen weeks ended March 31, 2018 from 46.1% during the same period last year.  The increase was primarily attributable to an increase in the mix of brokerage services revenues, which utilize third-party capacity, as well as an increase in the rates paid to acquire this capacity.  

Direct personnel and related benefits. Direct personnel and related benefits expenses for the thirteen weeks ended March 31, 2018 increased by $10.5 million, or 13.9%, to $86.0 million compared to $75.5 million for the thirteen weeks ended April 1, 2017. 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.  As a percentage of operating revenues, personnel and related benefits expenses decreased to 25.6% for the thirteen weeks ended March 31, 2018, compared to 26.6% during the same period last year, reflecting a decrease in the mix of value-added services revenue as a percentage of total operating revenues. The percentage of direct personnel and related benefit expenses 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 revenue 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.

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Operating supplies and expenses.  Operating supplies and expenses decreased by $0.9 million, or 3.1%, to $28.1 million for the thirteen weeks ended March 31, 2018 compared to $29.0 million for the thirteen weeks ended April 1, 2017. As a percentage of operating revenues, operating supplies and expenses decreased to 8.4% for the thirteen weeks ended March 31, 2018 from 10.2% for the thirteen weeks ended April 1, 2017. These expenses include items such as fuel, maintenance, cost of materials, communications, utilities and other operating expenses, and generally relate to fluctuations in customer demand.  The decrease was primarily the result of a $1.8 million decrease in travel and meals costs related to extended implementation and higher than anticipated customer production schedules at value-added programs in 2017.  Additional elements of the decreases included decreases in vehicle maintenance of $0.7 million, utilities of $0.4 million, and $1.0 million in bad debt expense resulting from the recovery of previously written-off customer receivable.  These decreases were partially offset by increases in fuel expense on Company equipment of $0.8 million, $0.4 million in professional service fees, and a $1.7 million increase in operating supplies and material costs in operations supporting heavy-truck.

Commission expense. Commission expense for the thirteen weeks ended March 31, 2018 increased by $1.4 million, or 18.7%, to $8.9 million from $7.5 million for the thirteen weeks ended April 1, 2017. Commission expense generally increases or decreases in proportion to our transportation-related services, except in cases where we generate a higher proportion of our revenues at company-managed terminals where no commissions are paid.  As a percentage of operating revenues, commission expense remained consistent at 2.7% for each of the thirteen week periods ended March 31, 2018 and April 1, 2017.

Occupancy expense.  Occupancy expenses decreased by $0.4million, or 5.1%, to $7.4 million for the thirteen weeks ended March 31, 2018 compared to $7.8 million for the thirteen weeks ended April 1, 2017.  The decrease was primarily attributable to a decrease in building rent as we consolidated facilities for one of our value-added programs.

General and administrative. General and administrative expense remained consistent at $8.0 million in each of the thirteen week periods ended March 31, 2018 and April 1, 2017, reflecting our efforts to maintain stable overhead expenditures while expanding the business. As a percentage of operating revenues, general and administrative expense decreased to 2.4% for the thirteen weeks ended March 31, 2018 from 2.8% for the thirteen weeks ended April 1, 2017.

Insurance and claims. Insurance and claims expense for the thirteen weeks ended March 31, 2018 decreased by $0.4 million, or 6.8%, to $5.5 million from $5.9 million for the thirteen weeks ended April 1, 2017.  As a percentage of operating revenues, insurance and claims decreased to 1.6% for the thirteen weeks ended March 31, 2018 compared to 2.1% for the thirteen weeks ended April 1, 2017. The decrease reflects favorable outcomes in our cargo services claims and saving from our auto liability insurance program whereby, beginning in 2018, premiums are based on mileage compared to a percentage of transportation-related revenues under the prior program.

Depreciation and amortization. Depreciation and amortization expense for the thirteen weeks ended March 31, 2018 increased by $1.9 million, or 18.4%, to $12.2 million from $10.3 million for the thirteen weeks ended April 1, 2017. The increase was primarily due to elevated levels of capital expenditures in recent years.  The increase in depreciation expense was partially offset by reductions in amortization expense as certain intangible assets became fully amortized.

Interest expense, net. Net interest expense was $2.6 million for the thirteen weeks ended March 31, 2018 compared to $2.2 million for the thirteen weeks ended April 1, 2017.  The increase of net interest expense reflects an increase in outstanding borrowings and in interest rates on our variable rate debt.  As of March 31, 2018, our outstanding borrowings were $272.3 million compared to $257.8 million at April 1, 2017.

Other non-operating (expense) income.  Other non-operating expense for the thirteen weeks ended March 31, 2018 was $0.4 million compared to other non-operating income of $0.1 million for the thirteen weeks ended April 1, 2017.  Included in other non-operating expense in the thirteen weeks ended March 31, 2018 were $0.6 million of holding losses on marketable securities due to changes in fair value recognized in income.

Income tax expense. Income tax expense for the thirteen weeks ended March 31, 2018 was $3.7 million compared to $2.7 million for the thirteen weeks ended April 1, 2017, based on an effective tax rate of 26.3% and 38.3%, respectively.   The decrease in the effective tax rate reflects impact of the Tax Cuts and Jobs Act enacted during the fourth quarter of 2017.  

Liquidity and Capital Resources

Our primary sources of liquidity are funds generated by operations, loans and extensions of credit under our credit facilities, on margin against our marketable securities and from installment notes, and proceeds from the sales of marketable securities. We use secured, asset lending to fund a substantial portion of purchases of tractors, trailers and material handling equipment.

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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 thirteen weeks ended March 31, 2018, our capital expenditures totaled $7.3 million. These expenditures primarily consisted of transportation equipment 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 remainder of 2018, exclusive of any acquisitions of businesses, we expect our capital expenditures to be in the range of 4% to 5% of operating revenues. We expect to make these capital expenditures for the acquisition of transportation equipment, to support our new and existing value-added service operations, and for the acquisition of real property and improvements to our existing terminal yard and container facilities.

We have a cash dividend policy that anticipates a total annual dividend of $0.42 per share of common stock, payable in quarterly increments of $0.105 per share of common stock.  We paid $0.28 per common share, or $8.0 million, during the year ended December 31, 2017.  On April 26, 2018, our Board of Directors declared a quarterly cash dividend of $0.105 per share of common stock, which is payable to shareholders of record at the close of business on May 7, 2018 and is expected to be paid on May 17, 2018.  After taking into account the regular quarterly dividends made during the year, the Board of Directors also intends to evaluate the potential declaration of an annual special dividend payable in the first quarter of each year in an effort to return up to 40% of Universal’s net income from the previous fiscal year, beginning in the first quarter of 2019.   Future dividend policy and the payment of dividends, if any, will be determined by the Board of Directors in light of circumstances then existing, including our earnings, financial condition and other factors deemed relevant by the Board of Directors.

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.

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 the 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

Our asset-based loan facility (“ABL Facility”) provides for maximum borrowings of $120 million at a variable rate of interest based on LIBOR or a base rate and matures on December 23, 2020. The ABL Facility, which is secured by cash, deposits and accounts receivable of our borrowing subsidiaries, 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. Interest on base rate advances is payable quarterly, and interest on each LIBOR-based advance is payable on the last day of the applicable interest period. Our ABL Facility includes an accordion feature which allows us to increase availability by up to $30 million upon our request.  At March 31, 2018, we were in compliance with all covenants under the ABL Facility, and $41.1 million was available for borrowing.

One of our wholly-owned subsidiaries, Westport Axle Corporation, has a secured credit facility (the “Westport Facility”) that allows maximum borrowings of $60 million in the form of a $40 million term loan and a $20 million revolver. Borrowings under the Westport Facility, which matures on December 23, 2020, accrue interest at a variable interest rate based on LIBOR or a base rate and are secured by all of Westport’s assets. Universal becomes a guarantor upon the occurrence of certain events specified in the Westport Facility. Borrowings are repaid in part quarterly with the balance due at maturity. Interest on base rate advances is payable quarterly, and interest on each LIBOR-based advance is payable on the last day of the applicable interest period.  The Westport Facility includes customary affirmative and negative covenants and events of default. At March 31, 2018, we were in compliance with all covenants, and $14.3 million was available for borrowing.

A wholly-owned subsidiary issued a series of promissory notes in order to finance transportation equipment (the “Equipment Financing”). The notes issued in connection with the Equipment Financing, which are secured by liens on selected titled vehicles,

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include certain affirmative and negative covenants, are generally payable in 60 monthly installments and bear interest at fixed rates ranging from 3.18% to 4.79%. At March 31, 2018, we were in compliance with all covenants.  

A wholly-owned subsidiary issued a series of promissory notes in order to finance certain purchases of real property (the “Real Estate Financing”). The promissory notes, which are secured by first mortgages and assignment of leases on specific parcels of real estate and improvements, include certain affirmative and negative covenants and are generally payable in 120 monthly installments.  Each of the notes bears interest at LIBOR plus 2.25%. At March 31, 2018, we were in compliance with all covenants.  

We also maintain a short-term line of credit secured by our portfolio of marketable securities (the “Margin Facility”). It bears interest at LIBOR plus 1.10%. The amount available under the Margin Facility is based on a percentage of the market value of the underlying securities. At March 31, 2018, $5.7 million was advanced against the line, and the maximum available borrowings were $0.7 million.

Discussion of Cash Flows

At March 31, 2018, we had cash and cash equivalents of $2.1 million compared to $1.7 million at December 31, 2017.  Operating activities provided $16.1 million in net cash and financing activities provided an additional $20.9 million.  We used $38.2 million in investing activities.  

The $16.1 million in net cash provided by operations was primarily attributed to $10.4 million of net income, which reflects non-cash depreciation and amortization, losses on marketable equity securities, gains on equipment sales, amortization of debt issuance costs, stock-based compensation, provisions for doubtful accounts and a change in deferred income taxes totaling $11.2 million, net.  Net cash provided by operating activities also reflects an aggregate increase in net working capital totaling $4.9 million.   The increase is primarily the result of an increase in trade receivables from higher revenues. An increase in trade accounts payable at the end of the period and a decrease in prepaid income taxes partially offset this increase.  Affiliate transactions also decreased net cash provided by operating activities during the thirteen weeks ended March 31, 2018 by $7.3 million.  The decrease consisted of a decrease in accounts payable to affiliates of $5.5 million, while accounts receivable from affiliates increased $1.8 million.

The $38.2 million in net cash used in investing activities consisted of $7.3 million in capital expenditures and $34.9 million for the acquisition of Fore.  These uses were partially offset by $2.8 million in proceeds from the sales of marketable securities and $1.3 million in proceeds from the sale of equipment.  

Financing activities provided $20.9 million in net cash.  We had outstanding borrowings totaling $272.3 million at March 31, 2018 compared to $249.2 million at December 31, 2017.  We made $88.3 million of principal repayments and borrowed $111.4 million, including $31.3 million to finance the acquisition of Fore and $8.3 million in new equipment notes.  We also paid cash dividends of $2.0 million.  

Off Balance Sheet Arrangements

None.

Critical Accounting Policies

We adopted Accounting Standards Codification ("ASC") Topic 606 Revenue from Contracts with Customers on January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under Topic 606.  Prior amounts were not adjusted and continue to be reported in accordance with the accounting standards in effect for those periods. Changes to our revenue recognition policy under the new standard are discussed in Note 3, Revenue Recognition, to the Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q is incorporated herein by reference.  

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.

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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 March 31, 2018. For additional information, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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 March 31, 2018, 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.

Internal Controls

There have been no changes in our internal controls over financial reporting during the thirteen weeks ended March 31, 2018 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

On October 16, 2017, a jury in state court in Cook County, Illinois rendered a verdict of $54.2 million against Universal Am-Can, Ltd. (“UACL”) in the matter of Denton v. UACL, et al. The litigation relates to a vehicular accident that occurred on February 8, 2011 on I-65 in Rensselaer, Indiana. The accident involved a tractor-trailer being driven by an independent owner-operator of UACL. The driver was braking on the expressway in order to avoid another vehicle being driven the wrong way on the interstate. The truck attempted to avoid the oncoming vehicle and the plaintiff’s vehicle and, in so doing, struck the plaintiff’s vehicle. As a result of the accident, the plaintiff sustained non-life threatening injuries. In connection with the verdict, the jury determined that UACL was responsible for the liability associated with the accident. The verdict included $19.2 million in compensatory damages and $35.0 million in punitive damages against UACL. The insurance coverage available for reimbursement of UACL’s damages underlying the verdict is limited to $1.0 million. We believe the facts and the law do not support the jury’s findings of liability against UACL.  Post-trial motions have been filed seeking a reduction of the verdict or reversal of the judgment.  The Company may further seek to appeal the verdict to the extent the circuit court does not set aside the judgment as a result of these motions. The Company currently estimates the possible range of financial exposure in the matter, net of insurance coverage, to be between $18.2 and $53.2 million.  Based on the Company’s best estimate of the liability at this time, the Company has recorded an accrued liability for this matter of $18.2 million.  While we cannot predict with any certainty the outcome of this litigation, its ultimate resolution could be material to our cash flows and results of operations.

The Company is a plaintiff in a lawsuit that was filed on June 11, 2015 against, among others, Dalton Logistics, Inc. in the United States District Court for the Southern District of Texas. We are seeking approximately $1.9 million in damages from a debtor relating to its unpaid freight charges. In response to our filing of the complaint, the shareholders of Dalton filed a counterclaim against the Company alleging that the Company, in connection with certain unrelated negotiations with the defendant, breached an alleged agreement to acquire Dalton.  The respective claims proceeded to trial and, on July 21, 2017, a jury returned two separate verdicts: One in favor of Universal for $1.9 million, and a second in favor of the defendant for approximately $5.7 million. On October 30, 2017, the court entered a judgment against Universal for the $5.7 million, but ignored the $1.9 million jury award in favor of Universal. The Company believes this ruling was in error and further believes the jury erred in their findings of any damages against Universal, and therefore, the Company plans to appeal both the ruling and the verdict.  The Company currently estimates the possible range of financial exposure in the matter to be between $0 and $5.7 million. Based on the Company’s best estimate of the liability at this time, the Company has recorded an accrued liability for this matter of $1.8 million. While we cannot predict with any certainty the outcome of this litigation, management does not believe the outcome of this matter will have a material adverse effect on our business, financial position, results of operations or cash flows.

On February 21, 2018, Ford Motor Company (“Ford”) filed suit against two of the Company’s subsidiaries and two related parties in state court in Oakland County, Michigan (the “Indemnity Action”).  The complaint seeks a declaratory judgment that Universal and its co-defendants are required to indemnify Ford for damages sustained by Ford in a wrongful death lawsuit in Clay County, Missouri (the “Underlying Action”).  In February 2018, a jury returned a verdict against Ford in the Underlying Action and awarded the decedent’s estate $76 million in damages.  Universal believes that, under Michigan law and its agreement with Ford, Universal is not required to indemnify Ford for Ford’s own negligence that led to the jury verdict in the Underlying Action.  Additionally, at the time of the incident that is the subject of the Underlying Action, Universal had in place insurance required by Ford providing for up to $3.0 million of coverage from a co-defendant.  The Company currently estimates the possible range of financial exposure in the matter, net of insurance coverage, to be between $0 and $73 million.  Based on our knowledge of the facts associated with the Underlying Action and the Indemnity Action and the opinions of its outside counsel, Universal has determined that no accrual is necessary at this time. While the outcome of the Indemnity Action cannot be predicted with any certainty and management believes the Company will be successful in defending its position, the outcome could have material adverse effect on our business, financial position, results of operations and cash flows of the Company.

The Company is involved in certain other 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. However, if we experience claims that are not covered by our insurance or that exceed our estimated claim reserve, it could increase the volatility of our earnings and have a materially adverse effect on our financial condition, results of operations 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, 2017.

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

None.  

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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