UNIVERSAL LOGISTICS HOLDINGS, INC. 10-Q

ITEM 1: FINANCIAL STATEMENTS UNIVERSAL LOGISTICS HOLDINGS, INC. Unaudited Consolidated Balance Sheets (In thousands, except share data) July 2, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 14,683 $ 13,932 Marketable securities 8,237 8,031 Accounts receivable – net of allowance for doubtful accounts of $ 11,667 and $ 7,841 , respectively 400,017 341,398 Other receivables 24,636 26,318 Prepaid expenses and other 33,613 30,209 Due from affiliates 1,443 807 Total current assets 482,629 420,695 Property and equipment – net of accumulated depreciation of $ 356,211 and $ 333,833 , respectively 343,729 345,583 Operating lease right-of-use asset 106,149 105,859 Goodwill 170,730 170,730 Intangible assets – net of accumulated amortization of $ 114,586 and $ 107,461 , respectively 81,224 88,349 Deferred income taxes 2,060 2,060 Other assets 4,945 4,215 Total assets $ 1,191,466 $ 1,137,491 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 118,650 $ 117,837 Current portion of long-term debt 52,448 61,160 Current portion of operating lease liabilities 28,259 24,566 Accrued expenses and other current liabilities 43,953 43,627 Insurance and claims 39,770 43,357 Due to affiliates 14,232 17,839 Income taxes payable 10,539 4,323 Total current liabilities 307,851 312,709 Long-term liabilities: Long-term debt, net of current portion 362,868 366,188 Operating lease liabilities, net of current portion 83,584 85,984 Deferred income taxes 61,250 61,250 Other long-term liabilities 8,946 9,150 Total long-term liabilities 516,648 522,572 Shareholders' equity: Common stock, no par value. Authorized 100,000,000 shares; 30,995,734 and 30,986,702 shares issued; 26,277,549 and 26,919,455 shares outstanding, respectively 30,995 30,988 Paid-in capital 4,794 4,639 Treasury stock, at cost; 4,718,185 and 4,067,247 shares, respectively ( 96,690 ) ( 82,385 ) Retained earnings 437,182 356,071 Accumulated other comprehensive (loss): Interest rate swaps, net of income taxes of $( 193 ) and $( 60 ), respectively ( 567 ) ( 178 ) Foreign currency translation adjustments ( 8,747 ) ( 6,925 ) Total shareholders’ equity 366,967 302,210 Total liabilities and shareholders’ equity $ 1,191,466 $ 1,137,491 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 Twenty-six Weeks Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Operating revenues: Truckload services $ 61,061 $ 58,880 $ 118,544 $ 118,582 Brokerage services 101,929 102,532 209,101 199,451 Intermodal services 156,865 106,601 314,478 210,318 Dedicated services 79,452 50,396 154,938 98,357 Value-added services 127,875 104,374 253,982 211,307 Total operating revenues 527,182 422,783 1,051,043 838,015 Operating expenses: Purchased transportation and equipment rent 227,215 198,031 459,346 387,363 Direct personnel and related benefits 127,334 111,000 264,002 218,552 Operating supplies and expenses 46,027 32,713 88,151 69,805 Commission expense 10,757 8,570 20,780 15,894 Occupancy expense 10,001 9,389 20,196 17,569 General and administrative 11,541 9,693 21,603 18,869 Insurance and claims 2,598 5,735 11,180 12,070 Depreciation and amortization 27,058 16,339 43,286 35,424 Total operating expenses 462,531 391,470 928,544 775,546 Income from operations 64,651 31,313 122,499 62,469 Interest income 6 14 6 32 Interest expense ( 3,925 ) ( 2,940 ) ( 6,358 ) ( 6,121 ) Other non-operating income (expense) ( 823 ) 6,079 130 7,085 Income before income taxes 59,909 34,466 116,277 63,465 Income tax expense 15,210 8,862 29,570 16,205 Net income $ 44,699 $ 25,604 $ 86,707 $ 47,260 Earnings per common share: Basic $ 1.69 $ 0.95 $ 3.25 $ 1.76 Diluted $ 1.69 $ 0.95 $ 3.25 $ 1.75 Weighted average number of common shares outstanding: Basic 26,453 26,919 26,660 26,918 Diluted 26,468 26,936 26,668 26,933 Dividends declared per common share $ 0.105 $ 0.105 $ 0.210 $ 0.210 See accompanying notes to consolidated financial statements. 3 UNIVERSAL LOGISTICS HOLDINGS, INC. Unaudited Consolidated Statements of Comprehensive Income (In thousands) Thirteen Weeks Ended Twenty-six Weeks Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Net Income $ 44,699 $ 25,604 $ 86,707 $ 47,260 Other comprehensive income (loss): Unrealized changes in fair value of interest rate swaps, net of income taxes of $( 215 ), $ 2 , $( 133 ) and $ 35 , respectively ( 630 ) 30 ( 389 ) 163 Foreign currency translation adjustments 1,012 ( 666 ) ( 1,822 ) 401 Total other comprehensive income (loss) 382 ( 636 ) ( 2,211 ) 564 Total comprehensive income $ 45,081 $ 24,968 $ 84,496 $ 47,824 See accompanying notes to consolidated financial statements. 4 UNIVERSAL LOGISTICS HOLDINGS, INC. Unaudited Consolidated Statements of Cash Flows (In thousands) Twenty-six Weeks Ended July 2, 2022 July 3, 2021 Cash flows from operating activities: Net income $ 86,707 $ 47,260 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 43,286 35,424 Noncash lease expense 14,337 12,873 Gain on marketable equity securities ( 92 ) ( 1,384 ) Gain on disposal of property and equipment ( 2,743 ) ( 721 ) Amortization of debt issuance costs 207 240 Write-off of debt issuance costs 583 — Stock-based compensation 162 162 Provision for doubtful accounts 5,501 2,597 Deferred income taxes 133 ( 21 ) Change in assets and liabilities: Trade and other accounts receivable ( 64,438 ) ( 32,999 ) Prepaid expenses and other assets ( 4,424 ) ( 2,460 ) Principal reduction in operating lease liabilities ( 13,085 ) ( 12,232 ) Accounts payable, accrued expenses and other current liabilities, insurance and claims, and income taxes payable 8,154 7,637 Due to/from affiliates, net ( 4,243 ) ( 2,916 ) Other long-term liabilities ( 727 ) ( 4 ) Net cash provided by operating activities 69,318 53,456 Cash flows from investing activities: Capital expenditures ( 37,544 ) ( 16,941 ) Proceeds from the sale of property and equipment 5,567 3,878 Purchases of marketable securities ( 114 ) ( 114 ) Proceeds from sale of marketable securities — 117 Net cash used in investing activities ( 32,091 ) ( 13,060 ) Cash flows from financing activities: Proceeds from borrowing - revolving debt 262,065 191,947 Repayments of debt - revolving debt ( 274,828 ) ( 192,820 ) Proceeds from borrowing - term debt 193,926 3,946 Repayments of debt - term debt ( 192,262 ) ( 31,276 ) Dividends paid ( 8,422 ) ( 8,480 ) Capitalized financing costs ( 1,723 ) — Purchases of treasury stock ( 14,305 ) — Net cash used in financing activities ( 35,549 ) ( 36,683 ) Effect of exchange rate changes on cash and cash equivalents ( 927 ) 622 Net increase in cash 751 4,335 Cash and cash equivalents – beginning of period 13,932 8,763 Cash and cash equivalents – end of period $ 14,683 $ 13,098 Supplemental cash flow information: Cash paid for interest $ 5,638 $ 5,993 Cash paid for income taxes $ 23,368 $ 22,909 See accompanying notes to consolidated financial statements. 5 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, 2020 $ 30,981 $ 4,484 $ ( 82,385 ) $ 293,643 $ ( 7,150 ) $ 239,573 Net income — — — 21,656 — 21,656 Comprehensive income — — — — 1,200 1,200 Dividends ($ 0.105 per share) — — — ( 2,865 ) — ( 2,865 ) Stock based compensation 7 155 — — 162 Balances - April 3, 2021 30,988 4,639 ( 82,385 ) 312,434 ( 5,950 ) 259,726 Net income — — — 25,604 — 25,604 Comprehensive income — — — — ( 636 ) ( 636 ) Dividends ($ 0.105 per share) — — — ( 2,786 ) — ( 2,786 ) Balances – July 3, 2021 $ 30,988 $ 4,639 $ ( 82,385 ) $ 335,252 $ ( 6,586 ) $ 281,908 Balances – December 31, 2021 $ 30,988 $ 4,639 $ ( 82,385 ) $ 356,071 $ ( 7,103 ) $ 302,210 Net income — — — 42,008 — 42,008 Comprehensive income — — — — ( 2,593 ) ( 2,593 ) Purchases of treasury stock — — ( 5,254 ) — — ( 5,254 ) Dividends ($ 0.105 per share) — — — ( 2,819 ) — ( 2,819 ) Stock based compensation 7 155 — — — 162 Balances - April 2, 2022 30,995 4,794 ( 87,639 ) 395,260 ( 9,696 ) 333,714 Net income — — — 44,699 — 44,699 Comprehensive income — — — — 382 382 Purchases of treasury stock — — ( 9,051 ) — — ( 9,051 ) Dividends ($ 0.105 per share) — — — ( 2,777 ) — ( 2,777 ) Balances – July 2, 2022 $ 30,995 $ 4,794 $ ( 96,690 ) $ 437,182 $ ( 9,314 ) $ 366,967 See accompanying notes to consolidated financial statements. 6 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements (1) Basis of Presentation The accompanying unaudited consolidated financial statements of Universal Logistics Holdings, Inc. and its wholly-owned subsidiaries (“Universal”) have been prepared by the Company’s management. In these notes, the terms “us,” “we,” “our,” or the “Company” refer to Universal and its consolidated subsidiaries. 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, 2021 and 2020 and for each of the years in the three-year period ended December 31, 2021 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. In June 2022, the Company made a change in an accounting estimate to revise the estimated useful life and salvage values of certain equipment. The change resulted in additional depreciation expense of $ 9.7 million recorded during the thirteen weeks and twenty-six weeks ended July 2, 2022 ($ 7.2 million net of tax, or $ 0.27 per basic and diluted share). 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. 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 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. The Company is evaluating the new guidance but does not expect it to have a material impact on our consolidated financial statements. 7 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (3) Revenue Recognition Universal is a holding company that owns subsidiaries engaged in providing customized transportation and logistics services. For financial reporting, we broadly group the services provided by Universal’s consolidated subsidiaries 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): July 2, 2022 December 31, 2021 Prepaid expenses and other - contract assets $ 1,930 $ 2,023 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. 8 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 7. The following table sets forth market value, cost basis, and unrealized gains on equity securities (in thousands): July 2, 2022 December 31, 2021 Fair value $ 8,237 $ 8,031 Cost basis 6,540 6,426 Unrealized gain $ 1,697 $ 1,605 The following table sets forth the gross unrealized gains and losses on the Company’s marketable securities (in thousands): July 2, 2022 December 31, 2021 Gross unrealized gains $ 2,624 $ 2,574 Gross unrealized losses ( 927 ) ( 969 ) Net unrealized gains $ 1,697 $ 1,605 The following table shows the Company’s net realized gains (losses) on marketable equity securities (in thousands): Thirteen weeks ended Twenty-six weeks ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Realized gain Sale proceeds $ — $ — $ — $ 117 Cost basis of securities sold — — — 92 Realized gain $ — $ — $ — $ 25 Realized gain, net of taxes $ — $ — $ — $ 19 The Company did no t sell marketable equity securities during the thirteen-week or twenty-six week periods ended July 2, 2022, or in the thirteen-week period ended July 3, 2021. During the thirteen-week and twenty-six week periods ended July 2, 2022, our marketable equity securities portfolio experienced a net unrealized pre-tax gain (loss) in market value of approximately $( 857,000 ) and $ 92,000 , respectively, which was reported in other non-operating income (expense) for the period. During the thirteen-week and twenty-six week periods ended July 3, 2021, our marketable equity securities portfolio experienced a net unrealized pre-tax gain (loss) in market value of approximately $ 385,000 and $ 1,359,000 , respectively, which was reported in other non-operating income (expense) for the period. 9 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued ( 5 ) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities are comprised of the following (in thousands): July 2, 2022 December 31, 2021 Accrued payroll $ 15,953 $ 13,645 Accrued payroll taxes 7,316 7,132 Driver escrow liabilities 3,776 3,754 Legal settlements and claims 9,350 9,350 Commissions, other taxes and other 7,558 9,746 Total $ 43,953 $ 43,627 ( 6 ) Debt Debt is comprised of the following (in thousands): Interest Rates at July 2, 2022 July 2, 2022 December 31, 2021 Outstanding Debt: Revolving Credit Facility (1) 3.29 % $ 150,494 $ 163,257 Equipment Financing (2) 2.25% to 5.13% 104,254 103,298 Real Estate Facility (3) 3.65 % 162,594 — Margin Facility (4) 2.89 % — — Debt paid upon refinancing: Term Loan (1) (3) NA — 120,000 Real Estate Notes (3) NA — 41,887 Unamortized debt issuance costs ( 2,026 ) ( 1,094 ) 415,316 427,348 Less current portion of long-term debt 52,448 61,160 Total long-term debt, net of current portion $ 362,868 $ 366,188 (1) Our Revolving Credit Facility provides for maximum borrowings of $ 350 million in the form of a $ 200 million revolver, and it previously included a $ 150 million term loan. Borrowings under the Revolving Credit Facility may be made until and mature on November 26, 2023 , and they bear interest at LIBOR or a base rate plus an applicable margin for each based the Company’s leverage ratio. The t erm loan proceeds were advanced on November 27, 2018 , and on April 29, 2022 , the Company repaid in full its then outstanding balance on the term loan. The Revolving Credit Facility is secured by a first priority pledge of the capital stock of applicable subsidiaries, as well as first priority perfected security interests in cash, deposits, accounts receivable, and selected other assets of the applicable borrowers. The Revolving Credit Facility 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 July 2, 2022, we were in compliance with all covenants under the facility, and $ 49.5 million was available for borrowing on the revolver . 10 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued ( 6 ) Debt – continued (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, are generally payable in 60 monthly installments and bear interest at fixed rates ranging from 2.25 % to 5.13 %. (3) Our Real Estate Facility provides for a $ 165.4 million term loan, the full amount of which was advanced on April 29, 2022. The Company used the facility’s proceeds to repay the outstanding balances under the term loan portion of the Revolving Credit Facility and certain other Real Estate Financing obligations. The facility matures on April 29, 2032 . Obligations under the facility are secured by first-priority mortgages on specific parcels of real estate owned by the Company, including all land and real property improvements, and first-priority assignments of rents and related leases of the loan parties. The credit agreement includes customary affirmative and negative covenants, and principal and interest are payable on the facility on a monthly basis, based on an annual amortization of 10 %. The facility bears interest at Term SOFR , plus an applicable margin equal to 2.12 %. At July 2, 2022, we were in compliance with all covenants under the facility. (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 July 2, 2022, the maximum available borrowings under the line of credit were $ 4.6 million. The Company is also party to an interest rate swap agreement that qualifies for hedge accounting. The Company executed the swap agreement to fix a portion of the interest rate on its variable rate debt. Under the swap agreement, the Company receives interest at Term SOFR and pays a fixed rate of 2.88 %. The swap agreement has an effective date of April 29, 2022, a maturity date of April 30, 2027 , and an amortizing notional amount of $ 98.3 million. At July 2, 2022, the fair value of the swap agreement was a liability of $ 0.8 million. Since the swap agreement qualifies for hedge accounting, the changes in fair value are recorded in other comprehensive income (loss), net of tax. See Note 7 for additional information pertaining to interest rate swaps. ( 7 ) 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. 11 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued ( 7 ) Fair Value Measurements and Disclosures – 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): July 2, 2022 Level 1 Level 2 Level 3 Fair Value Measurement Assets Cash equivalents $ 14 $ — $ — $ 14 Marketable securities 8,237 — — 8,237 Total $ 8,251 $ — $ — $ 8,251 Liabilities Interest rate swaps $ — $ 760 $ — $ 760 Total $ — $ 760 $ — $ 760 December 31, 2021 Level 1 Level 2 Level 3 Fair Value Measurement Assets Cash equivalents $ 10 $ — $ — $ 10 Marketable securities 8,031 — — 8,031 Total $ 8,041 $ — $ — $ 8,041 Liabilities Interest rate swaps $ — $ 238 $ — $ 238 Total $ — $ 238 $ — $ 238 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 Revolving Credit Facility and our Real Estate Facility 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 July 2, 2022 is summarized as follows: Carrying Value Estimated Fair Value Equipment promissory notes $ 104,254 $ 102,330 We have not elected the fair value option for any of our financial instruments. 12 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (8) Leases ASU 2016-02, Leases, requires 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 July 2, 2022, 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 July 2, 2022, 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. The following table summarizes our lease costs for the thirteen weeks and twenty-six weeks ended July 2, 2022 and July 3, 2021 (in thousands): Thirteen weeks ended July 2, 2022 With Affiliates With Third Parties Total Lease cost Operating lease cost $ 2,371 $ 6,214 $ 8,585 Short-term lease cost 630 2,195 2,825 Variable lease cost 221 784 1,005 Sublease income - ( 28 ) ( 28 ) Total lease cost $ 3,222 $ 9,165 $ 12,387 Thirteen weeks ended July 3, 2021 With Affiliates With Third Parties Total Lease cost Operating lease cost $ 2,514 $ 5,840 $ 8,354 Short-term lease cost 26 2,840 2,866 Variable lease cost 210 799 1,009 Sublease income - ( 265 ) ( 265 ) Total lease cost $ 2,750 $ 9,214 $ 11,964 13 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (8) Leases – continued Twenty-six weeks ended July 2, 2022 With Affiliates With Third Parties Total Lease cost Operating lease cost $ 4,723 $ 12,492 $ 17,215 Short-term lease cost 1,277 6,435 7,712 Variable lease cost 415 1,691 2,106 Sublease income - ( 113 ) ( 113 ) Total lease cost $ 6,415 $ 20,505 $ 26,920 Twenty-six weeks ended July 3, 2021 With Affiliates With Third Parties Total Lease cost Operating lease cost $ 5,041 $ 11,642 $ 16,683 Short-term lease cost 27 3,996 4,023 Variable lease cost 420 1,388 1,808 Sublease income - ( 1,024 ) ( 1,024 ) Total lease cost $ 5,488 $ 16,002 $ 21,490 The following table summarizes other lease related information as of and for the twenty-six week periods ended July 2, 2022 and July 3, 2021 (in thousands): July 2, 2022 With Affiliates With Third Parties Total Other information Cash paid for amounts included in the measurement of operating leases $ 4,559 $ 11,265 $ 15,824 Right-of-use assets obtained in exchange for new operating lease liabilities $ 545 $ 15,493 $ 16,038 Right-of-use assets change due to lease termination $ - $ ( 1,370 ) $ ( 1,370 ) Weighted-average remaining lease term (in years) 5.3 4.0 4.4 Weighted-average discount rate 6.6 % 4.7 % 5.4 % July 3, 2021 With Affiliates With Third Parties Total Other information Cash paid for amounts included in the measurement of operating leases $ 4,831 $ 11,310 $ 16,141 Right-of-use assets obtained in exchange for new operating lease liabilities $ 3,526 $ 12,880 $ 16,406 Weighted-average remaining lease term (in years) 5.8 4.7 5.1 Weighted-average discount rate 7.1 % 5.6 % 6.1 % 14 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (8) Leases – continued Future minimum lease payments under these operating leases as of July 2, 2022, are as follows (in thousands): With Affiliates With Third Parties Total 2022 (remaining) $ 4,533 $ 12,526 $ 17,059 2023 8,550 22,435 30,985 2024 8,413 18,275 26,688 2025 6,854 15,326 22,180 2026 4,387 12,960 17,347 Thereafter 9,116 4,210 13,326 Total required lease payments $ 41,853 $ 85,732 $ 127,585 Less amounts representing interest ( 15,742 ) Present value of lease liabilities $ 111,843 ( 9 ) Transactions with Affiliates In the ordinary course of business, affiliated companies that are owned or controlled by our controlling shareholder, Matthew T. Moroun, provide certain supplementary administrative support services to Universal, including legal, human resources, tax, IT infrastructure and other requested services. Universal’s audit committee reviews and approves related party transactions with affiliates that involve Universal or its consolidated subsidiaries. The cost of such services is based on the actual or estimated utilization of the specific service. Universal also purchases other services from companies owned or controlled by our controlling shareholder. Following is a schedule of costs incurred and included in operating expenses for services provided by affiliates for the thirteen weeks and twenty-six weeks ended July 2, 2022 and July 3, 2021, respectively (in thousands): Thirteen weeks ended Twenty-six weeks ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Insurance $ 17,334 $ 11,807 $ 34,831 $ 23,303 Real estate rent and related costs 2,981 3,357 6,079 6,271 Administrative support services 1,112 1,882 2,294 1,997 Truck fuel, maintenance and other operating costs 2,010 233 3,080 411 Contracted transportation services 369 10 689 19 Total $ 23,806 $ 17,289 $ 46,973 $ 32,001 We pay 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. We lease 32 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 8, “Leases” for further information regarding the cost of leased properties. We purchase employee medical, workers’ compensation, property and casualty, cargo, warehousing and other general liability insurance from an insurance company controlled by our controlling shareholder. In our Consolidated Balance Sheets, we record our insured claims liability and the related recovery in insurance and claims, and other receivables. At July 2, 2022 and December 31, 2021, there were $ 19.2 million and $ 20.4 million, respectively, included in each of these accounts for insured claims. 15 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (9) Transactions with Affiliates - continued 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 July 2, 2022 and December 31, 2021, amounts due to affiliates were $ 14.2 million and $ 17.8 million, respectively. 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 twenty-six weeks ended July 2, 2022 and July 3, 2021 (in thousands): Thirteen weeks ended Twenty-six weeks ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Contracted transportation services $ 447 $ 209 $ 602 $ 258 Facilities and related support 60 - 120 - Total $ 507 $ 209 $ 722 $ 258 At July 2, 2022 and December 31, 2021, amounts due from affiliates were $ 1.4 million and $ 0.8 million, respectively. In June 2022, we executed a real estate contract with an affiliate to acquire a multi-building, office complex located in Warren, Michigan for $ 8.3 million. The purchase price was established by an independent third party appraisal. The Company made an initial deposit of $ 200,000 , and the balance of the purchase price is due at closing, which is expected to occur in the third quarter of 2022. In May 2022, we sold an inactive Mexican subsidiary to an affiliate for approximately $ 0.1 million. The purchase price was based on the book value of the net assets sold in the transaction, and as such, no gain or loss was recorded. On May 13, 2022, the Company commenced a “Dutch auction” tender offer to repurchase up to 100,000 shares of the Company’s outstanding common stock at a price of not greater than $ 28.00 nor less than $ 25.00 per share. Following the expiration of the tender offer on June 15, 2022 , we accepted 164,189 shares, including 64,189 oversubscribed shares tendered, of our common stock for purchase at $ 28.00 per share, for a total purchase price of approximately $ 4.6 million, excluding fees and expenses related to the offer. The total number of shares purchased in the tender offer includes 5,000 shares tendered by a director of the Company, Mr. H.E. “Scott” Wolfe. We paid for the accepted shares with available cash and funds borrowed under our existing line of credit. ( 1 0 ) 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. In May 2022, the Company’s shareholders approved an amendment to the Plan to increase the number of shares of common stock authorized for issuance by 200,000 shares. 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 September 9, 2021, the Company granted 2,355 shares of restricted stock to an employee of the Company. The restricted stock award has a fair value of $ 20.46 per share, based on the closing price of the Company’s stock on the grant date. The shares will vest in five equal increments on each August 9 in 2022, 2023, 2024, 2025 and 2026, subject to continued employment with the Company 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. 16 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (10) Stock Based Compensation - continued On February 20, 2019, the Company granted 44,500 shares of restricted stock to certain of its employees, including 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 vest in four equal increments on each February 20 in 2020, 2021, 2022 and 2023. 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, 2022 81,105 $ 19.60 Granted — $ - Vested ( 6,875 ) $ 23.56 Forfeited — $ - Balance at July 2, 2022 74,230 $ 19.24 In each of the twenty-six week periods ended July 2, 2022 and July 3, 2021, the total grant date fair value of vested shares recognized as compensation costs was $ 0.2 million. As of July 2, 2022, there was approximately $ 1.4 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 2023, $ 0.4 million in each 2024 and 2026, and $ 0.2 million in each 2027 and 2028. ( 1 1 ) 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 and twenty-six weeks ended July 2, 2022, there were 14,554 and 8,247 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 and twenty-six weeks ended July 3, 2021, 16,704 and 15,689 weighted average non-vested shares of restricted stock, respectively, were included in the denominator for the calculation of diluted earnings per share. In the thirteen weeks and twenty-six weeks ended July 2, 2022, we excluded 0 and 6,875 shares, respectively, of non-vested restricted stock from the calculation of diluted earnings per share because such shares were anti-dilutive. No such shares were excluded from the calculation of diluted earnings per share during the thirteen weeks or twenty-six weeks ended July 3, 2021. (1 2 ) Dividends On May 5, 2022 , our Board of Directors declared a cash dividend of $ 0.105 per share of common stock, payable on July 5, 2022 to shareholders of record at the close of business on June 6, 2022 . 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. 17 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (1 3 ) Segment Reporting We report our financial results in four distinct reportable segments: contract logistics, intermodal, trucking, and company-managed brokerage, which are based primarily on the services each segment provides. 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 contract logistics segment deliver value-added and/or dedicated transportation services to support in-bound logistics to original equipment manufacturers (OEMs) and major retailers on a contractual basis, generally pursuant to terms of one year or longer. Our intermodal segment is associated with local and regional drayage moves coordinated by company-managed terminals using a mix of owner-operators, company equipment and third-party capacity providers (broker carriers). Operations aggregated in our trucking segment are associated with individual freight shipments coordinated primarily by our agents using a mix of owner-operators, company equipment and broker carriers. Our company-managed brokerage segment provides for the pick-up and delivery of individual freight shipments using broker carriers, coordinated by our company-managed operations. Other non-reportable segments are comprised of the Company’s subsidiaries that provide support services to other subsidiaries. Separate balance sheets are not prepared by segment, and we do not provide asset information by segment to the chief operating decision maker. The following tables summarize information about our reportable segments for the thirteen week and twenty-six week periods ended July 2, 2022 and July 3, 2021 (in thousands): Operating Revenues Thirteen weeks ended Twenty-six weeks ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Contract logistics $ 207,327 $ 154,770 $ 408,920 $ 309,664 Intermodal 156,865 106,601 314,478 210,318 Trucking 106,545 99,778 204,030 194,678 Company-managed brokerage 55,119 60,431 120,325 121,537 Other 1,326 1,203 3,290 1,818 Total operating revenues $ 527,182 $ 422,783 $ 1,051,043 $ 838,015 Eliminated Inter-segment Revenues Thirteen weeks ended Twenty-six weeks ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Contract logistics $ 1,500 $ 92 $ 3,219 $ 379 Intermodal 2,594 1,308 6,054 2,385 Trucking 51 7,095 116 12,551 Company-managed brokerage 956 443 1,834 980 Total eliminated inter-segment revenues $ 5,101 $ 8,938 $ 11,223 $ 16,295 Income from Operations Thirteen weeks ended Twenty-six weeks ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Contract logistics $ 29,425 $ 15,946 $ 52,900 $ 32,766 Intermodal 21,368 6,152 44,378 14,646 Trucking 9,611 6,482 17,030 11,672 Company-managed brokerage 4,155 2,445 8,018 2,886 Other 92 288 173 499 Total income from operations $ 64,651 $ 31,313 $ 122,499 $ 62,469 18 UNIVERSAL LOGISTICS HOLDINGS, INC. Notes to Unaudited Consolidated Financial Statements - Continued (1 4 ) Commitments and Contingencies Commitments Our principal commitments relate to long-term real estate leases and payment obligations to equipment vendors. Legal Proceedings The Company is involved from time to time in claims, proceedings, and litigation, including the matters described in Item 16 of Part II, “Financial Statements and Supplementary Data — Note 16 — Commitments and Contingencies” of our 2021 Annual Report on Form 10-K and in Item 1 of Part I, “Financial Statements — Note 14 — Commitments and Contingencies” of our Quarterly Report on Form 10-Q for the Period Ended April 2, 2022, as supplemented by the following: On August 4, 2022, the Company reached a Non-Board Settlement Agreement (the “Settlement Agreement”) with the International Brotherhood of Teamsters resolving the previously disclosed National Labor Relations Board charges from March 2021 and January 2022. Pursuant to the terms of the Settlement Agreement, the Company is required to, among other things, reinstate certain terminated drivers and compensate them for back pay totaling approximately $ 2.8 million, for which the Company has an accrued liability. 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 July 2, 2022, approximately 38 % of our employees in the United States, Canada and Colombia, and 78 % of our employees in Mexico were subject to collective bargaining agreements that are renegotiated periodically, less than 1 % of which are subject to contracts that expire in 2022. (1 5 ) Subsequent Events On July 28, 2022 , our Board of Directors declared the regular quarterly cash dividend of $ 0.105 per share of common stock, payable to shareholders of record at the close of business on September 5, 2022 and is expected to be paid on October 3, 2022 . 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. 19