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Universal has strong revenue and profits, but margins are squeezed

Universal Logistics had strong revenue and earnings numbers in the fourth quarter of 2017, and for the full year, but the question of the company’s margins was the first query asked in a conference call Friday with investors and analysts.

The numbers reported by Universal were strong across the board. Fourth quarter revenue was $24.4 million on operating revenue of $314 million, which the company said was a record high. However, the net income figure was boosted by the impact of changes in the federal corporate income tax.

For the full year, net income for Universal was $28.15 million, compared to $24.24 million a year before. But the $11 million provision for income taxes was what put the 2017 numbers above the 2016. Before the income tax impact, 2017 net income was $17.14 million, compared to $39.4 million the prior year. The 2016 net income figure was adjusted down approximately $15.1 million because of the income tax changes, putting the final figure less than 2017. A full breakdown of Universal’s earnings report can be found here.

But even as revenues have increased, margins have not. For example, operating income in the transportation segment was $12.2 million in the fourth quarter of 2015. In the fourth quarter of 2017, it was $7.3 million, and that was up from the $5 million posted in the fourth quarter of 2016. Logistics has slid from $12.2 million in the fourth quarter of 2015 to $4.2 million in the fourth quarter of 2017, but that was a jump up from the $3.1 million in the corresponding quarter of 2016.

CEO Jeff Rogers, when asked about the margins on the conference call, said he believed that the brokerage business at Universal would help the company’s margins rebound. “Brokerage is just getting better and better, because it’s becoming a larger piece and the margins there are at 5%, and that’s what we’re looking for,” he said.

The margin compression has been brought about to a large degree by issues with the operations of the Linc Logistics acquisition of 2012, which Rogers referred to on the call as “legacy Linc.” “I don’t expect legacy Linc to get back to their historical margins, because the market is just so different,” he said. “The way we interact with customers in that business is different and a lot of it has to do with the real-estate play and who is holding the real-estate,  us versus the customer and the margins you can make on that. What we would be happy with and what we’re really trying to work to is to get that business back to plus 10% margins. And they haven’t been there for two years.”

The reference to the brokerage business—part of the transportation segment at Universal—was an acknowledgement of what Rogers said earlier in the call. Universal’s brokerage revenue was up 47.7% in the quarter compared to the corresponding quarter of 2016, with load counts up 17.4% and revenue per load up 32.6%. “Our standalone brokerage business executed extremely well in a difficult environment and delivered its best ever financial performance in the fourth quarter,” Rogers said during the call. The almost 50% growth in the business’ revenue was a sign, Rogers said, “(that) shows how difficult it is for us and others to find capacity.”

The earnings call was the first for Universal since it acquired Chicago-based Fore Transportation earlier this month for approximately $35 million. In the call, Rogers said he was optimistic for improved performance by Universal’s intermodal team in Chicago, “where we did not have a footprint.” “Fore brings a list of blue chip customers that are eager to grow in our existing market, and our legacy customers are eager to grow in Chicago,” he said. The Fore acquisition gives Universal at 28-acre terminal near Chicago adjacent to Canadian National rail.

Universal’s transportation sector includes dedicated, intermodal, truckload, forwarding and brokerage sectors. It also has a logistics division, and has a significant footprint with the automotive sector as a key customer.  Rogers reiterated earlier company goals of diversification into other sectors.

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