UNIVERSAL LOGISTICS HOLDINGS, INC. 10-Q

ITEM 1: FINANCIAL STATEMENTS UNIVERSAL LOGISTICS HOLDINGS, INC. Unaudited Consolidated Balance Sheets (In thousands, except share data) October 3, 2020 December 31, 2019 Assets Current assets: Cash and cash equivalents $ 8,677 $ 7,726 Marketable securities 6,699 9,369 Accounts receivable – net of allowance for doubtful accounts of $ 3,442 and $ 2,545 , respectively 248,965 210,534 Other receivables 21,898 19,065 Prepaid expenses and other 25,987 19,676 Due from affiliates 1,476 1,705 Prepaid income taxes 1,479 3,768 Total current assets 315,181 271,843 Property and equipment – net of accumulated depreciation of $ 296,552 and $ 270,062 , respectively 363,449 339,823 Operating lease right-of-use asset 96,205 87,209 Goodwill 170,730 168,451 Intangible assets – net of accumulated amortization of $ 89,788 and $ 78,366 , respectively 106,022 116,111 Deferred income taxes 1,413 1,460 Other assets 3,866 3,100 Total assets $ 1,056,866 $ 987,997 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 110,758 $ 91,909 Current portion of long-term debt 61,244 59,476 Insurance and claims 26,058 27,484 Accrued expenses and other current liabilities 34,869 34,825 Current portion of operating lease liabilities 24,270 23,039 Due to affiliates 16,146 14,842 Total current liabilities 273,345 251,575 Long-term liabilities: Long-term debt, net of current portion 405,351 398,136 Operating lease liabilities, net of current portion 72,504 61,674 Deferred income taxes 71,684 65,692 Other long-term liabilities 6,354 5,703 Total long-term liabilities 555,893 531,205 Shareholders' equity: Common stock, no par value. Authorized 100,000,000 shares; 30,979,827 and 30,970,452 shares issued; 26,918,830 and 27,282,230 shares outstanding, respectively 30,981 30,972 Paid-in capital 4,484 4,298 Treasury stock, at cost; 4,060,997 and 3,688,222 shares, respectively ( 82,247 ) ( 77,247 ) Retained earnings 280,248 251,204 Accumulated other comprehensive (loss): Interest rate swaps, net of income taxes of $( 164 ) and $( 32 ), respectively ( 530 ) ( 105 ) Foreign currency translation adjustments ( 5,308 ) ( 3,905 ) Total shareholders’ equity 227,628 205,217 Total liabilities and shareholders’ equity $ 1,056,866 $ 987,997 See accompanying notes to consolidated financial statements. 2 UNIVERSAL LOGISTICS HOLDINGS, INC. Unaudited Consolidated Statements of Income (In thousands, except per share data) Thirteen Weeks Ended Thirty-nine Weeks Ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Operating revenues: Truckload services $ 52,212 $ 62,615 $ 151,633 $ 193,133 Brokerage services 90,568 94,442 239,249 269,680 Intermodal services 94,543 93,022 287,746 278,043 Dedicated services 39,376 32,730 88,986 105,618 Value-added services 88,289 92,676 237,516 289,593 Total operating revenues 364,988 375,485 1,005,130 1,136,067 Operating expenses: Purchased transportation and equipment rent 177,207 183,902 486,674 539,584 Direct personnel and related benefits 88,881 91,946 243,862 278,763 Operating supplies and expenses 31,001 30,465 78,658 91,972 Commission expense 6,756 7,991 18,950 23,685 Occupancy expense 8,674 8,380 26,489 27,523 General and administrative 8,586 11,435 24,090 30,309 Insurance and claims 4,926 29,912 14,655 41,215 Depreciation and amortization 16,894 18,807 54,942 53,140 Total operating expenses 342,925 382,838 948,320 1,086,191 Income (loss) from operations 22,063 ( 7,353 ) 56,810 49,876 Interest income 13 14 37 57 Interest expense ( 3,518 ) ( 4,091 ) ( 11,188 ) ( 12,602 ) Other non-operating income (expense) ( 494 ) 163 ( 3,289 ) 1,212 Income (loss) before income taxes 18,064 ( 11,267 ) 42,370 38,543 Provision for income taxes 4,486 ( 2,847 ) 10,461 9,694 Net income (loss) $ 13,578 $ ( 8,420 ) $ 31,909 $ 28,849 Earnings per common share: Basic $ 0.50 $ ( 0.30 ) $ 1.18 $ 1.02 Diluted $ 0.50 $ ( 0.30 ) $ 1.18 $ 1.02 Weighted average number of common shares outstanding: Basic 26,919 28,263 27,023 28,342 Diluted 26,922 28,264 27,023 28,343 Dividends declared per common share $ - $ 0.105 $ 0.105 $ 0.315 See accompanying notes to consolidated financial statements. 3 UNIVERSAL LOGISTICS HOLDINGS, INC. Unaudited Consolidated Statements of Comprehensive Income (In thousands) Thirteen Weeks Ended Thirty-nine Weeks Ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Net Income (loss) $ 13,578 $ ( 8,420 ) $ 31,909 $ 28,849 Other comprehensive income (loss): Unrealized changes in fair value of interest rate swaps, net of income taxes of $ 14 , $( 34 ), $( 132 ) and $( 155 ), respectively 46 ( 107 ) ( 425 ) ( 485 ) Foreign currency translation adjustments ( 2,546 ) ( 185 ) ( 1,403 ) 7 Total other comprehensive income (loss) ( 2,500 ) ( 292 ) ( 1,828 ) ( 478 ) Total comprehensive income (loss) $ 11,078 $ ( 8,712 ) $ 30,081 $ 28,371 See accompanying notes to consolidated financial statements. 4 UNIVERSAL LOGISTICS HOLDINGS, INC. Unaudited Consolidated Statements of Cash Flows (In thousands) Thirty-nine Weeks Ended October 3, 2020 September 28, 2019 Cash flows from operating activities: Net income $ 31,909 $ 28,849 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 54,942 53,140 Noncash lease expense 21,972 22,361 Loss (gain) on marketable equity securities 3,031 ( 960 ) Loss (gain) on disposal of property and equipment ( 638 ) 6 Amortization of debt issuance costs 441 439 Stock-based compensation 195 73 Provision for doubtful accounts 2,351 2,157 Deferred income taxes 4,733 ( 1,877 ) Change in assets and liabilities: Trade and other accounts receivable ( 45,695 ) 7,246 Prepaid income taxes, prepaid expenses and other assets ( 4,739 ) 1,236 Principal reduction in operating lease liabilities ( 21,360 ) ( 21,103 ) Accounts payable, accrued expenses and other current liabilities, insurance and claims, and income taxes payable 28,974 36,230 Due to/from affiliates, net 1,534 4,503 Other long-term liabilities 90 ( 324 ) Net cash provided by operating activities 77,740 131,976 Cash flows from investing activities: Capital expenditures ( 72,836 ) ( 60,752 ) Proceeds from the sale of property and equipment 2,978 5,002 Purchases of marketable securities ( 361 ) ( 92 ) Proceeds from sale of marketable securities — 1,246 Acquisition of business ( 1,295 ) ( 22,457 ) Net cash used in investing activities ( 71,514 ) ( 77,053 ) Cash flows from financing activities: Proceeds from borrowing - revolving debt 296,794 214,393 Repayments of debt - revolving debt ( 298,191 ) ( 229,392 ) Proceeds from borrowing - term debt 54,602 45,433 Repayments of debt - term debt ( 44,617 ) ( 44,228 ) Borrowings under margin account 256 — Repayments under margin account ( 256 ) ( 541 ) Capitalized financing costs ( 46 ) — Dividends paid ( 5,731 ) ( 15,042 ) Purchases of treasury stock ( 5,000 ) ( 24,786 ) Net cash used in financing activities ( 2,189 ) ( 54,163 ) Effect of exchange rate changes on cash and cash equivalents ( 3,086 ) ( 2 ) Net increase in cash 951 758 Cash and cash equivalents – beginning of period 7,726 5,727 Cash and cash equivalents – end of period $ 8,677 $ 6,485 See accompanying notes to consolidated financial statements. 5 UNIVERSAL LOGISTICS HOLDINGS , INC. Unaudited Consolidated Statements of Cash Flows - Continued (In thousands) Thirty-nine Weeks Ended October 3, 2020 September 28, 2019 Supplemental cash flow information: Cash paid for interest $ 10,734 $ 11,282 Cash paid for income taxes $ 3,108 $ 11,892 Acquisition of business: Fair value of assets acquired $ — $ 23,981 Liabilities assumed — ( 2,779 ) Payment of acquisition obligations 1,295 1,255 Net cash paid for acquisition of business $ 1,295 $ 22,457 See accompanying notes to consolidated financial statements. 6 UNIVERSAL LOGISTICS HOLDINGS, INC. Unaudited Consolidated Statements of Shareholders’ Equity (In thousands, except per share data) Common stock Paid-in capital Treasury stock Retained earnings Accumulated other comprehensive income (loss) Total Balances – December 31, 2018 $ 30,967 $ 4,230 $ ( 52,462 ) $ 231,525 $ ( 4,961 ) $ 209,299 Net income — — — 17,297 — 17,297 Comprehensive income — — — — 86 86 Dividends paid ($ 0.215 per share) — — — ( 6,101 ) — ( 6,101 ) Stock based compensation 5 68 — — — 73 Balances - March 30, 2019 30,972 4,298 ( 52,462 ) 242,721 ( 4,875 ) 220,654 Net income — — — 19,972 — 19,972 Comprehensive (loss) — — — — ( 272 ) ( 272 ) Dividends paid ($ 0.105 per share) — — — ( 2,981 ) — ( 2,981 ) Balances – June 29, 2019 30,972 4,298 ( 52,462 ) 259,712 ( 5,147 ) 237,373 Net (loss) — — — ( 8,420 ) — ( 8,420 ) Comprehensive income — — — — ( 292 ) ( 292 ) Dividends paid ($ 0.105 per share) — — — ( 2,980 ) — ( 2,980 ) Dividends payable ($ 0.105 per share) — — — ( 2,980 ) — ( 2,980 ) Purchases of treasury stock — — ( 24,786 ) — — ( 24,786 ) Balances – September 28, 2019 $ 30,972 $ 4,298 $ ( 77,248 ) $ 245,332 $ ( 5,439 ) $ 197,915 Balances – December 31, 2019 $ 30,972 $ 4,298 $ ( 77,247 ) $ 251,204 $ ( 4,010 ) $ 205,217 Net income — — — 12,163 — 12,163 Comprehensive (loss) — — — — ( 1,128 ) ( 1,128 ) Dividends paid ($ 0.105 per share) — — — ( 2,865 ) — ( 2,865 ) Stock based compensation 9 186 195 Purchases of treasury stock — — ( 4,919 ) — — ( 4,919 ) Balances - April 4, 2020 30,981 4,484 ( 82,166 ) 260,502 ( 5,138 ) 208,663 Net income — — — 6,168 — 6,168 Comprehensive income — — — — 1,800 1,800 Purchases of treasury stock — — ( 81 ) — — ( 81 ) Balances – July 4, 2020 $ 30,981 $ 4,484 $ ( 82,247 ) $ 266,670 $ ( 3,338 ) $ 216,550 Net income — — — 13,578 — 13,578 Comprehensive (loss) — — — — ( 2,500 ) ( 2,500 ) Balances – October 3, 2020 $ 30,981 $ 4,484 $ ( 82,247 ) $ 280,248 $ ( 5,838 ) $ 227,628 See accompanying notes to consolidated financial statements. 7 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements (1 ) General Basis of Presentation 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, 2019 and 2018 and for each of the years in the three-year period ended December 31, 2019 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. COVID-19 In March of 2020, the World Health Organization declared the coronavirus outbreak (COVID-19) a pandemic. The Company remains committed to doing its part to protect its employees, customers, vendors and the general public from the spread of COVID-19. We will continue to adapt our operations as required to ensure safety while continuing to provide a high level of service to our customers. To mitigate the impact to our business, we implemented numerous cost reduction efforts beginning in the second quarter including furloughing a portion of the direct labor force, requiring employees to take unpaid time-off, restricting travel, reducing discretionary spending, and various other measures. Also during the second quarter we began taking advantage of the cash deferral programs available for payment of employer social security taxes and federal and state income taxes under the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act). The company makes estimates and assumptions that affect reported amounts and disclosures included in its financial statements and accompanying notes and assesses certain accounting matters that require consideration of forecasted financial information. The Company's assumptions about future conditions important to these estimates and assumptions are subject to uncertainty, including the impacts of the COVID-19 pandemic. Although we estimate COVID-19 had the largest impact on our business during the second quarter 2020, we are unable to predict with any certainty the future impact COVID-19 may have on our operational and financial performance. The Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly. (2) Recent Accounting Pronouncements In March 2020, the FASB issued ASU No. 2020-04 (“ASU 2020-04”), Reference Rate Reform (Topic 848): “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022. The Company has evaluated the provisions of this standard and determined that it is applicable to our primary term loan and revolving credit facility, real estate promissory notes and investment margin credit facility. The London Interbank Offered Rate (“LIBOR”) is the basis for interest charges on outstanding borrowings for both our line of credit and investment margin account. The scheduled discontinuation of LIBOR is not expected to materially alter any provisions of either of these debt instruments, except for the identification of a replacement reference rate. The Company has evaluated the new guidance and does not expect it to have a material impact on its financial condition, results of operations, or cash flows. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes.” The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within that reporting period; however, early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements. In June 2016, the FASB issued ASU 2016-13, (“ASU 2016-13”), Accounting for Credit Losses (Topic 326). ASU 2016-13 requires the use of an “expected loss” model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities. The new standard will become effective for us beginning with the first quarter 2023, and is not expected to have a material impact on our consolidated financial statements. 8 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (3) Revenue Recognition The Company broadly groups its services into the following categories: truckload, brokerage, intermodal, dedicated and value-added. We disaggregate these categories and report our service lines separately on the Consolidated Statements of Income. 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. Truckload services also include our final mile and ground expedited services. 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 van equipment. Our dedicated services are primarily short-run or round-trip moves within a defined geographic area. 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. 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. 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 include 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. We have elected to use the “right to invoice” practical expedient to recognize revenue, reflecting that a customer obtains the benefit associated with value-added services as they are provided. 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 following table provides information related to contract balances associated with our contracts with customers (in thousands): October 3, 2020 December 31, 2019 Prepaid expenses and other - contract assets $ 2,367 $ 1,156 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. 9 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (4) Marketable Securities 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 basis 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. 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 basis, and unrealized gains on equity securities (in thousands): October 3, 2020 December 31, 2019 Fair value $ 6,699 $ 9,369 Cost basis 9,730 8,136 Unrealized gain (loss) $ ( 3,031 ) $ 1,233 The following table sets forth the gross unrealized gains and losses on the Company’s marketable securities (in thousands): October 3, 2020 December 31, 2019 Gross unrealized gains $ 90 $ 1,337 Gross unrealized losses ( 3,121 ) ( 104 ) Net unrealized gains (losses) $ ( 3,031 ) $ 1,233 The following table shows the Company’s net realized gains (loss) on marketable equity securities (in thousands): Thirteen weeks ended Thirty-nine weeks ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Realized gain Sale proceeds $ — $ 689 $ — $ 1,246 Cost basis of securities sold — 576 — 1,021 Realized gain $ — $ 113 $ — $ 225 Realized gain, net of taxes $ — $ 84 $ — $ 168 During the thirteen-week and thirty-nine week periods ended October 3, 2020, our marketable equity securities portfolio experienced a net unrealized pre-tax (loss) in market value of approximately $( 497,000 ) and $( 3,031,000 ), respectively, which was reported in other non-operating income (expense) for the period. During the thirteen-week and thirty-nine week periods ended September 28, 2019, our marketable equity securities portfolio experienced a net unrealized pre-tax gain in market value of approximately $ 21,000 and $ 735,000 , respectively, which was reported in other non-operating income (expense) for the period. 10 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued ( 5 ) Goodwill The changes in the carrying amount of goodwill during the thirty-nine weeks ended October 3, 2020 are as follows: Balance as of January 1, 2020 $ 168,451 Purchase accounting adjustments 2,279 Balance as of October 3, 2020 $ 170,730 During the thirty-nine weeks ended October 3, 2020, the Company made purchase accounting adjustments to the preliminary purchase price allocations of the Company’s April 22, 2019 acquisition of Michael’s Cartage and November 5, 2019 acquisition of Roadrunner Intermodal Services, Inc. The adjustments resulted in increases of $ 2.3 million in goodwill and $ 1.3 million in intangible assets, as well as decreases of $ 3.3 million in property and equipment, $ 1.5 million in other assets, $ 2.3 million in current liabilities, and $ 0.2 million in deferred tax liabilities. At October 3, 2020 and December 31, 2019, $ 114.4 million and $ 112.2 million of goodwill was recorded in our transportation segment, respectively. At both October 3, 2020 and December 31, 2019, $ 56.3 million of goodwill was recorded in our logistics segment. During the third quarter we performed our annual goodwill impairment test using a quantitative assessment and found there to be no impairment of goodwill. ( 6 ) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities are comprised of the following (in thousands): October 3, 2020 December 31, 2019 Payroll related items $ 19,545 $ 14,390 Driver escrow liabilities 4,144 5,249 Commissions, taxes and other 11,180 8,238 Legal settlements - 6,948 Total $ 34,869 $ 34,825 11 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued ( 7 ) Debt Debt is comprised of the following (in thousands): Interest Rates at October 3, 2020 October 3, 2020 December 31, 2019 Outstanding Debt: Credit and Security Agreement (1) Term Loan 2.15 % $ 134,062 $ 142,500 Revolver 2.15 % 149,828 151,225 Equipment Financing (2) 2.78% to 5.13% 133,497 128,512 Real Estate Financing (3) 2.00% to 2.40% 50,930 37,492 Margin Facility (4) 1.25 % — — Unamortized debt issuance costs ( 1,722 ) ( 2,117 ) 466,595 457,612 Less current portion of long-term debt 61,244 59,476 Total long-term debt, net of current portion $ 405,351 $ 398,136 (1) Our Credit and Security Agreement (the “Credit Agreement”) provides for maximum borrowings of $ 350 million in the form of a $ 150 million term loan and a $ 200 million revolver. Term loan proceeds were advanced on November 27, 2018 and mature on November 26, 2023 . The term loan will be repaid in consecutive quarterly installments, as defined in the Credit Agreement, commencing March 31, 2019 , with the remaining balance due at maturity. Borrowings under the revolving credit facility may be made until and mature on November 26, 2023 . Borrowings under the Credit Agreement bear interest at LIBOR or a base rate plus an applicable margin for each based the Company’s leverage ratio. The Credit Agreement is secured by a first priority pledge of the capital stock of applicable subsidiaries, as well as first priority perfected security interest in cash, deposits, accounts receivable, and selected other assets of the applicable borrowers. The Credit Agreement includes customary affirmative and negative covenants and events of default, as well as financial covenants requiring minimum fixed charge coverage and leverage ratios, and customary mandatory prepayments provisions. At October 3, 2020, we were in compliance with all covenants under the facility, and $ 50.2 million was available for borrowing on the revolver . (2) Our Equipment Financing consists of a series of promissory notes issued by a wholly owned subsidiary. The equipment notes, which are secured by liens on specific titled vehicles, include certain affirmative and negative covenants, are generally payable in 60 monthly installments and bear interest at fixed rates ranging from 2.78 % to 5.13 %. (3) Our Real Estate Financing consists of a series of promissory notes issued by a wholly owned subsidiary. 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 a variable rate ranging from LIBOR plus 1.85 % to LIBOR plus 2.25 % . At October 3, 2020, we were in compliance with all covenants. (4) Our Margin Facility is a short-term line of credit secured by our portfolio of marketable securities. It bears interest at LIBOR plus 1.10 % . The amount available under the line of credit is based on a percentage of the market value of the underlying securities. At October 3, 2020, the maximum available borrowings under the line of credit were $ 4.7 million. The Company is also party to two interest rate swap agreements that qualify for hedge accounting. The Company executed the swap agreements to fix a portion of the interest rates on its variable rate debt that have a combined notional amount of $ 13.7 million at October 3, 2020. Under the swap agreements, the Company receives interest at the one-month LIBOR rate plus 2.25% and pays a fixed rate. The first swap became effective in October 2016 , has a rate of 4.16 % (amortizing notional amount of $ 10.0 million) and expires in July 2026 . The second swap became effective in October 2016 , has a rate of 3.83 % (amortizing notional amount of $ 3.7 million) and expires in May 2022 . At October 3, 2020, the fair value of the swap agreements was a liability of $ 0.7 million. 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 8 for additional information pertaining to interest rate swaps. 12 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued ( 8 ) Fair Value Measurements and Disclosures 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: • Level 1 — Quoted prices in active markets for identical assets or liabilities. • Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. • Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. 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): October 3, 2020 Level 1 Level 2 Level 3 Fair Value Measurement Assets Cash equivalents $ 4 $ — $ — $ 4 Marketable securities 6,699 — — 6,699 Total $ 6,703 $ — $ — $ 6,703 Liabilities Interest rate swaps $ — $ 694 $ — $ 694 Total $ — $ 694 $ — $ 694 December 31, 2019 Level 1 Level 2 Level 3 Fair Value Measurement Assets Cash equivalents $ 18 $ — $ — $ 18 Marketable securities 9,369 — — 9,369 Total $ 9,387 $ — $ — $ 9,387 Liabilities Interest rate swaps $ — $ 137 $ — $ 137 Total $ — $ 137 $ — $ 137 13 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (8) Fair Value Measurements and Disclosures – continued The valuation techniques used to measure fair value for the items in the tables above are as follows: • Cash equivalents – This category consists of money market funds which are listed as Level 1 assets and measured at fair value based on quoted prices for identical instruments in active markets. • Marketable securities – Marketable securities represent equity securities, which consist of common and preferred stocks, are actively traded on public exchanges and are listed as Level 1 assets. Fair value was measured based on quoted prices for these securities in active markets. • Interest rate swaps – The fair value of our interest rate swaps is determined using a methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. The fair value measurement also incorporates credit valuation adjustments to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk. Our Credit Agreement and our Real Estate Financing consist of variable rate borrowings. We categorize these borrowings 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 Financing, 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 these borrowings as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of these promissory notes at October 3, 2020 is summarized as follows: Carrying Value Estimated Fair Value Equipment promissory notes $ 133,497 $ 134,219 We have not elected the fair value option for any of our financial instruments. ( 9 ) Leases On January 1, 2019, we adopted ASU 2016-02, Leases, which required us to recognize a right-of-use asset and a corresponding lease liability on our balance sheet for most leases classified as operating leases under previous guidance. Right-of-use assets represent our right to use an underlying asset over the lease term and lease liabilities represent the obligation to make lease payments resulting from the lease agreement. We recognize a right-of-use asset and a lease liability on the effective date of a lease agreement. As of October 3, 2020, our obligations under operating lease arrangements primarily related to the rental of office space, warehouses, freight distribution centers, terminal yards and equipment. Our lease obligations typically do not include options to purchase the leased property, nor do they contain residual value guarantees or material restrictive covenants. Options to extend or terminate an agreement are included in the lease term when it becomes reasonably certain the option will be exercised. As of October 3, 2020, we were not reasonably certain of exercising any renewal or termination options, and as such, no adjustments were made to the right-of-use lease assets or corresponding liabilities. We did not separate lease and nonlease components of contracts for purposes of determining the right-of use lease asset and corresponding liability. Variable lease components that do not depend on an index or a rate, and variable nonlease components were also not contemplated in the calculation of the right-of-use asset and corresponding liability. For facility leases, variable lease costs include the costs of common area maintenance, taxes, and insurance for which we pay the lessors an estimate that is adjusted to actual expense on a quarterly or annual basis depending on the underlying contract terms. For equipment leases, variable lease costs may include additional fees associated with using equipment in excess of estimated amounts. Leases with an initial term of 12 months or less, short-term leases, are not recorded on the balance sheet. Lease expense for short-term and long-term operating leases is recognized on a straight-line basis over the lease term. 14 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (9) Leases – continued The following table summarizes our lease costs for the thirteen weeks and thirty-nine weeks ended October 3, 2020 and September 28, 2019, and related information (in thousands): Thirteen weeks ended October 3, 2020 With Affiliates With Third Parties Total Lease cost Operating lease cost $ 2,696 $ 5,825 $ 8,521 Short-term lease cost 80 1,801 1,881 Variable lease cost 41 951 992 Sublease income - ( 1,723 ) ( 1,723 ) Total lease cost $ 2,817 $ 6,854 $ 9,671 Thirteen weeks ended September 28, 2019 With Affiliates With Third Parties Total Lease cost Operating lease cost $ 2,495 $ 6,121 $ 8,616 Short-term lease cost 76 561 637 Variable lease cost 309 384 693 Sublease income - ( 701 ) ( 701 ) Total lease cost $ 2,880 $ 6,365 $ 9,245 Thirty-nine weeks ended October 3, 2020 With Affiliates With Third Parties Total Lease cost Operating lease cost $ 7,966 $ 17,625 $ 25,591 Short-term lease cost 487 4,072 4,559 Variable lease cost 308 2,715 3,023 Sublease income - ( 3,326 ) ( 3,326 ) Total lease cost $ 8,761 $ 21,086 $ 29,847 Thirty-nine weeks ended September 28, 2019 With Affiliates With Third Parties Total Lease cost Operating lease cost $ 8,196 $ 17,395 $ 25,591 Short-term lease cost 370 2,653 3,023 Variable lease cost 607 940 1,547 Sublease income - ( 2,074 ) ( 2,074 ) Total lease cost $ 9,173 $ 18,914 $ 28,087 15 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (9) Leases – continued The following table summarizes other lease related information as of and for the thirty-nine week period ended October 3, 2020 and September 28, 2019 (in thousands): October 3, 2020 With Affiliates With Third Parties Total Other information Cash paid for amounts included in the measurement of operating leases $ 7,719 $ 17,169 $ 24,888 Right-of-use asset change due to lease termination $ - $ ( 1,584 ) $ ( 1,584 ) Right-of-use assets obtained in exchange for new operating lease liabilities $ 15,985 $ 16,984 $ 32,969 Weighted-average remaining lease term (in years) 6.1 4.6 5.2 Weighted-average discount rate 6.7 % 4.5 % 5.5 % September 28, 2019 With Affiliates With Third Parties Total Other information Cash paid for amounts included in the measurement of operating leases $ 8,572 $ 15,711 $ 24,283 Right-of-use asset change due to lease termination $ 3,483 $ 5,500 $ 8,983 Right-of-use assets obtained in exchange for new operating lease liabilities $ - $ - $ - Weighted-average remaining lease term (in years) 5.1 4.3 4.6 Weighted-average discount rate 5.0 % 5.0 % 5.0 % Future minimum lease payments under operating leases as of October 3, 2020, are as follows (in thousands): With Affiliates With Third Parties Total Year one $ 9,926 $ 18,731 $ 28,657 Year two 8,364 12,526 20,890 Year three 7,415 9,233 16,648 Year four 7,318 6,946 14,264 Year five 6,116 6,426 12,542 Thereafter 12,383 8,179 20,562 Total required lease payments $ 51,522 $ 62,041 $ 113,563 Less amounts representing interest ( 16,789 ) Present value of lease liabilities $ 96,774 16 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (10) Transactions with Affiliates CenTra, Inc. (“CenTra”), an affiliate of the Company that is owned by our controlling shareholders, provides administrative support services to Universal in the ordinary course of business, including legal, human resources, tax, IT infrastructure and other requested 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 controlled by CenTra. Following is a schedule of costs incurred and included in operating expenses for services provided by affiliates for the thirteen weeks and thirty-nine weeks ended October 3, 2020 and September 28, 2019, respectively (in thousands): Thirteen weeks ended Thirty-nine weeks ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Administrative support services $ 743 $ 1,852 $ 1,274 $ 3,352 Truck fuel, tolls and maintenance 234 212 644 726 Real estate rent and related costs 4,878 3,629 11,692 8,822 Insurance and employee benefit plans 15,411 8,685 35,918 34,097 Purchased transportation and equipment rent 5 11 17 29 Total $ 21,271 $ 14,389 $ 49,545 $ 47,026 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. We lease 26 facilities from related parties. Our occupancy is based on either month-to-month or contractual, multi-year lease arrangements that are billed and paid monthly. Leasing properties from a related party affords us significant operating flexibility; however, we are not limited to such arrangements. See Note 9, “Leases” for further information regarding the cost of leased properties. 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 October 3, 2020 and December 31, 2019, amounts due to affiliates were $ 16.1 million and $ 14.8 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 3, 2020 and December 31, 2019, there were $ 12.5 million and $ 9.9 million, respectively, included in each of these accounts for insured claims. We purchased wheels and tires from an affiliate during the thirty-nine weeks ended October 3, 2020 totaling $ 618,000 . There were no such purchases made during the thirty-nine weeks ended September 28, 2019. 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 and thirty-nine weeks ended October 3, 2020 and September 28, 2019 (in thousands): Thirteen weeks ended Thirty-nine weeks ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Purchased transportation and equipment rent $ 194 $ 404 $ 550 $ 1,136 Total $ 194 $ 404 $ 550 $ 1,136 At October 3, 2020 and December 31, 2019, amounts due from affiliates were $ 1.5 million and $ 1.7 million, respectively 17 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued ( 1 1 ) Stock Based Compensation On April 23, 2014, our Board of Directors adopted our 2014 Amended and Restated Stock Incentive Plan. The Plan was approved at the 2014 annual meeting of shareholders and became effective as of the date our Board adopted it. The 2014 Plan replaced our 2004 Stock Incentive Plan and carried forward the shares of common stock that remained available for issuance under the 2004 Plan. The grants under the Plan may be made in the form of options, restricted stock awards, restricted stock purchase rights, stock appreciation rights, phantom stock units, restricted stock units or shares of unrestricted common stock. On February 5, 2020, the Company granted 5,000 shares of restricted stock to our Chief Financial Officer. The restricted stock award has a fair value of $ 17.74 per share, based on the closing price of the Company’s stock on the grant date. The shares will vest on February 20, 2024, subject to his continued employment with the Company. On January 10, 2020, the Company granted 60,000 shares of restricted stock to our Chief Executive Officer. The restricted stock award has a fair value of $ 18.82 per share, based on the closing price of the Company’s stock on the grant date. The shares will vest in installments of 20,000 shares on January 10, 2024 and January 10, 2026, and installments of 10,000 shares on January 10, 2027 and January 10, 2028, subject to his continued employment with the Company. On February 20, 2019, the Company granted 44,500 shares of restricted stock to certain of its employees, including 12,000 shares to our then Chief Executive Officer and 10,000 shares to our Chief Financial Officer. The restricted stock awards have a grant date fair value of $ 23.56 per share, based on the closing price of the Company’s stock, and any non-vested shares under the awards will vest in four equal increments on each February 20 in 2021, 2022 and 2023. The non-vested shares granted to our former Chief Executive Officer on February 20, 2019 were forfeited upon his separation from service with the Company on January 10, 2020. 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: Shares Weighted Average Grant Date Fair Value Non-vested at January 1, 2020 42,000 $ 22.96 Granted 65,000 $ 18.74 Vested ( 9,375 ) $ 20.86 Forfeited ( 12,000 ) $ 23.56 Balance at June October 3, 2020 85,625 $ 19.90 In the thirty-nine week periods ended October 3, 2020 and September 28, 2019, the total grant date fair value of vested shares recognized as compensation costs was $ 0.2 million and $ 0.1 million, respectively. As of October 3, 2020, there was approximately $ 1.7 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 in each year of 2021, 2022, and 2023, and $ 0.4 million in 2024, $ 0.3 million in 2026, and $ 0.2 million in each 2027 and 2028. ( 1 2 ) Earnings Per Share 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 October 3, 2020, there were 2,957 weighted average non-vested shares of restricted stock in the denominator for the calculation of diluted earnings per share. For the thirty-nine weeks ended October 3, 2020, no shares of non-vested restricted stock were included in the denominator for the calculation of diluted earnings per share. For the thirteen weeks and thirty-nine weeks ended September 28, 2019, there were 943 and 917 weighted average non-vested shares of restricted stock, respectively, in the denominator for the calculation of diluted earnings per share In the thirteen weeks and thirty-nine weeks ended October 3, 2020, we excluded 20,625 and 85,625 shares of non-vested restricted stock from the calculation of diluted earnings per share because such shares were anti-dilutive. In each of the thirteen weeks and thirty-nine weeks ended September 28, 2019, we excluded 44,500 shares from the calculation of diluted earnings per share because such shares were anti-dilutive. 18 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (1 3 ) Segment Reporting 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 3, 2020 and September 28, 2019 (in thousands): Thirteen weeks ended October 3, 2020 Transportation Logistics Other Total Operating revenues $ 237,065 $ 127,666 $ 257 $ 364,988 Eliminated inter-segment revenues ( 2,107 ) ( 457 ) - ( 2,564 ) Income from operations 10,405 11,572 86 22,063 Total assets 632,378 406,623 17,865 1,056,866 Thirteen weeks ended September 28, 2019 Transportation Logistics Other Total Operating revenues $ 254,129 $ 120,981 $ 375 $ 375,485 Eliminated inter-segment revenues ( 283 ) ( 126 ) - ( 409 ) Income from operations ( 17,224 ) 9,796 75 ( 7,353 ) Total assets 572,238 332,904 29,587 934,729 Thirty-nine weeks ended October 3, 2020 Transportation Logistics Other Total Operating revenues $ 677,569 $ 326,502 $ 1,059 $ 1,005,130 Eliminated inter-segment revenues ( 3,322 ) ( 1,813 ) - ( 5,135 ) Income from operations 32,544 24,012 254 56,810 Total assets 632,378 406,623 17,865 1,056,866 Thirty-nine weeks ended September 28, 2019 Transportation Logistics Other Total Operating revenues $ 752,610 $ 382,541 $ 916 $ 1,136,067 Eliminated inter-segment revenues ( 1,208 ) ( 751 ) - ( 1,959 ) Income from operations 8,601 40,955 320 49,876 Total assets 572,238 332,904 29,587 934,729 (1 4 ) Commitments and Contingencies Our principal commitments relate to long-term real estate leases and payment obligations to equipment vendors. 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 October 3, 2020, approximately 32 % of our employees in the United States, Canada and Colombia, and 87 % of our employees in Mexico were subject to collective bargaining agreements that are renegotiated periodically, none of which are subject to contracts that expire in 2020. 19 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (1 5 ) Subsequent Events Our Board of Directors reinstated Universal’s cash dividend policy, and on October 29, 2020 , declared a cash dividend of $ 0.105 per share of common stock. The dividend is payable to shareholders of record at the close of business on December 7, 2020 and is expected to be paid on January 4, 2021 . 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. 20