UNIVERSAL LOGISTICS HOLDINGS, INC. 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Some of the statements and assumptions in this Form 10-Q are forward-looking statements. These statements identify prospective information. Important factors could cause actual results to differ, possibly materially, from those in the forward-looking statements. In some cases you can identify forward-looking statements by words such as “anticipate,” “expect,” “believe,” “targets,” “could,” “estimate,” “plan,” “intend,” “may,” “should,” “will” and “would” or other similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. The factors listed in the section captioned “Risk Factors” in Part I, Item 1A in our Form 10-K for the year ended December 31, 2021 and Part II, Item 1A of this Form 10-Q, as well as any other cautionary language in these filings, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Forward-looking statements speak only as of the date the statements are made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements. Overview Universal Logistics Holdings, Inc. is a holding company that owns subsidiaries engaged in providing a variety of customized transportation and logistics solutions throughout the United States, and in Mexico, Canada and Colombia. Our operating subsidiaries provide customers a broad array of services across their entire supply chain, including truckload, brokerage, intermodal, dedicated and value-added services. Our operating subsidiaries provide a comprehensive suite of transportation and logistics solutions that allow our customers and clients to reduce costs and manage their global supply chains more efficiently. We market our services through a direct sales and marketing network focused on selling our portfolio of services to large customers in specific industry sectors, through a network of agents who solicit freight business directly from shippers, and through company-managed facilities and full-service freight forwarding and customs house brokerage offices. We believe our asset-light business model is highly scalable and will continue to support our growth with comparatively modest capital expenditure requirements. Our asset-light model, combined with a disciplined approach to contract structuring and pricing, creates a highly flexible cost structure that allows us to expand and contract quickly in response to changes in demand from our customers. We generate substantially all of our revenues through fees charged to customers for the transportation of freight and for the customized logistics services we provide. We also derive revenue from fuel surcharges, where separately identifiable, loading and unloading activities, equipment detention, container management and storage and other related services. Operations aggregated in our transportation segment are associated with individual freight shipments coordinated by our agents, company-managed terminals and specialized services operations. In contrast, operations aggregated in our logistics segment deliver value-added services and transportation services to specific customers on a dedicated basis, generally pursuant to contract terms of one year or longer. Our segments are distinguished by the amount of forward visibility we have in regards to pricing and volumes, and also by the extent to which we dedicate resources and Company-owned equipment. The following discussion of the Company’s financial condition and results of operations should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 and the unaudited Consolidated Financial Statements and related notes contained in this Quarterly Report on Form 10-Q. COVID-19 Pandemic The Company remains committed to doing its part to protect its employees, customers, vendors and the general public from the spread of the coronavirus outbreak (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. 20 The ultimate magnitude of COVID-19, including the extent of its impact on the Company’s financial and operating results, which could be material, will be determined by the length of time the pandemic continues, its severity, government regulations imposed in response to the pandemic, and to its general effect on the economy and transportation demand. While operating cash flows may be negatively impacted by the pandemic, the Company believes we will be able to finance our near term needs for working capital over the next twelve months, as well as any planned capital expenditures during such period, with cash balances, cash flows from operations, and loans and extensions of credit under our credit facilities and on margin against our marketable securities. Should the impact of the COVID-19 pandemic last longer than anticipated, and/or our cash flow from operations decline more than expected, we may need to obtain additional financing. The Company’s ability to fund future operating expenses and capital expenditures, as well as its ability to meet future debt service obligations or refinance indebtedness will depend on future operating performance, which will be affected by general economic, financial, and other factors beyond our control. Operating Revenues For financial reporting, we broadly group our services into the following categories: truckload services, brokerage services, intermodal services, dedicated services and value-added services. Our truckload, brokerage and intermodal services associated with individual freight shipments coordinated by our agents and company-managed terminals, while our dedicated and value-added services to specific customers on a contractual basis, generally pursuant to contract terms of one year or longer . The following table sets forth operating revenues resulting from each of these categories for the thirteen weeks and twenty-six weeks ended July 2, 2022 and July 3, 2021, presented as a percentage of total operating revenues: Thirteen Weeks Ended Twenty-six Weeks Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Operating revenues: Truckload services 11.6 % 13.9 % 11.3 % 14.2 % Brokerage services 19.3 24.3 19.9 23.8 Intermodal services 29.8 25.2 29.9 25.1 Dedicated services 15.1 11.9 14.7 11.7 Value-added services 24.2 24.7 24.2 25.2 Total operating revenues 100.0 % 100.0 % 100.0 % 100.0 % Results of Operations The following table sets forth items derived from our consolidated statements of income for the thirteen weeks and twenty-six weeks ended July 2, 2022 and July 3, 2021, presented as a percentage of operating revenues: Thirteen Weeks Ended Twenty-six Weeks Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Operating revenues: 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses: Purchased transportation and equipment rent 43.1 46.8 43.7 46.2 Direct personnel and related benefits 24.2 26.3 25.1 26.1 Operating supplies and expenses 8.7 7.7 8.4 8.3 Commission expense 2.0 2.0 2.0 1.9 Occupancy expense 1.9 2.2 1.9 2.1 General and administrative 2.2 2.3 2.1 2.3 Insurance and claims 0.5 1.4 1.1 1.4 Depreciation and amortization 5.1 3.9 4.1 4.2 Total operating expenses 87.7 92.6 88.3 92.5 Income from operations 12.3 7.4 11.7 7.5 Interest and other non-operating income (expense), net (0.9 ) 0.8 (0.6 ) 0.1 Income before income taxes 11.4 8.2 11.1 7.6 Income tax expense 2.9 2.1 2.9 2.0 Net income 8.5 % 6.1 % 8.2 % 5.6 % 21 Thirteen Weeks Ended July 2, 2022 Compared to Thirteen Weeks Ended July 3, 2021 Operating revenues . Operating revenues for the thirteen weeks ended July 2, 2022 increased $104.4 million, or 24.7%, to $527.2 million from $422.8 million for the thirteen weeks ended July 3, 2021. Included in operating revenues are separately-identified fuel surcharges of $46.1 million for the thirteen weeks ended July 2, 2022 compared to $23.0 million for the thirteen weeks ended July 3, 2021. Consolidated income from operations increased $33.3 million, or 106.5%, to $64.7 million for the second quarter 2022 compared to $31.3 million during the same period last year. Included in second quarter 2022 operating results was a $3.0 million credit to insurance and claims expense resulting from the favorable settlement of certain auto liability claims during the period. During the second quarter 2022, Universal also revised the estimated useful life and salvage value of certain equipment, and these adjustments resulted in additional depreciation expense of $9.7 million during the period. Second quarter 2021 results include a favorable legal settlement which resulted in a $5.7 million pre-tax gain recorded in other non-operating income. In the contract logistics segment, which includes value-added and dedicated services, operating revenues increased $52.6 million, or 34.0%, to $207.3 million in the second quarter 2022 compared to $154.8 million in the previous year. Income from operations in the contract logistics segment increased $13.5 million, or 84.5%, to $29.4 million for the thirteen weeks ended July 2, 2022 compared to $15.9 million in the same period last year. In the second quarter of 2022, Universal managed 64 value-added programs compared to 60 in the prior year period. During the recently completed quarter, dedicated transportation load count decreased slightly by 0.1% to 155,899 from 156,119 in the second quarter 2021. Despite a decline in load count, dedicated transportation revenue grew as the result of new business wins, including a major shuttle operation and repricing existing customer contracts. Also included in dedicated transportation revenue for the second quarter 2022 were $11.0 million in separately identified fuel surcharges, compared to $5.2 million in the same period last year. As a percentage of revenue, operating margin in the contract logistics segment for the second quarter 2022 was 14.2% compared to 10.3% during the same period last year. In the intermodal segment, operating revenues increased $50.3 million to $156.9 million in the second quarter 2022 compared to $106.6 million in the previous year. Intermodal revenues for the thirteen weeks ended July 2, 2022 included $25.2 million in separately identified fuel surcharges, compared to $11.7 million in the same period last year. During the second quarter 2022, Universal moved 145,916 intermodal loads compared to 169,441 in the second quarter 2021, a decrease of 13.9%, while its average operating revenue per load, excluding fuel surcharges increased 42.1% to $696 from $490. Intermodal segment revenues also include accessorial charges such as detention, demurrage and storage which totaled $33.6 million during the second quarter 2022, compared to $15.0 million one year earlier. Income from operations in the intermodal segment increased $15.2 million to $21.4 million for the thirteen weeks ended July 2, 2022 compared to $6.2 million in the second quarter 2021. As a percentage of revenue, operating margin in the intermodal segment for the second quarter 2022 was 13.6%, compared to 5.8% during the same period last year. In the trucking segment, operating revenues increased $6.8 million to $106.5 million in the second quarter 2022 compared to $99.8 million in the prior year period. Included in trucking segment revenues for the second quarter 2022 were $9.9 million in separately identified fuel surcharges compared to $6.0 million during the second quarter 2021. Income from operations in the trucking segment increased $3.1 million to $9.6 million for the second quarter 2022 compared to $6.5 million in the same period last year. During the recently completed quarter, Universal’s average operating revenue per load, excluding fuel surcharges, increased 43.4% to $1,844 from $1,286 in the prior year period; however, this increase was partially offset by a 30.0% decrease in load volumes. During the second quarter 2022, Universal moved 52,986 loads compared to 75,645 during the same period last year. As a percentage of revenue, operating margin in the trucking segment for the second quarter 2022 was 9.0%, compared to 6.5% during the same period last year. Included in the trucking segment’s second quarter 2022 operating results was a $3.0 million credit to insurance and claims expense resulting from the favorable settlement of certain auto liability claims during the period. This credit favorably impacted the trucking segment’s operating margin by 282 basis points. In the company-managed brokerage segment, operating revenues decreased $5.3 million, or 8.8%, to $55.1 million in the thirteen weeks ending July 2, 2022 compared to $60.4 million in the thirteen weeks ending July 3, 2021. During the recently completed quarter, the average operating revenue per load, excluding fuel surcharges, increased 6.8% to $2,006 from $1,879 in the second quarter 2021; however, load volumes fell 26.8% to 22,701 from 31,006. As a percentage of revenue, operating margin for the company-managed brokerage segment was 7.5% for the second quarter 2022 compared to 4.0% in the same period last year. Purchased transportation and equipment rent . Purchased transportation and equipment rental costs for the second quarter 2022 increased $29.2 million, or 14.7%, to $227.2 million from $198.0 million during the same period last year. Purchased transportation and equipment rent generally increases or decreases in proportion to the revenues generated through owner-operators and other third party providers. The increases or decreases are generally correlated with changes in demand for transportation-related services, which includes truckload, brokerage, intermodal and to a lesser extent, dedicated services, which uses a higher mix of company-drivers compared to owner-operators. The absolute increase in purchased transportation and equipment rental costs was primarily the result of an overall increase in transportation-related services. Second quarter 2022 transportation-related service revenues increased 25.4% compared to the second quarter of 2021. As a percentage of operating revenues, purchased transportation and equipment rent expense 22 decreased to 43.1% compared to 46.8% during the same period last year was due to a decrease in the mix of brokerage services revenue, where the cost of transportation is typically higher than our other transportation businesses. As a percentage of total revenues, brokerage services revenue decreased to 19.3% for 2021 compared to 24.3% in the same period last year. Direct personnel and related benefits . Direct personnel and related benefits for the thirteen weeks ended July 2, 2022 increased by $16.3 million, or 14.7%, to $127.3 million compared to $111.0 million during the same period last year. Trends in these expenses are generally correlated with changes in operating facilities and headcount requirements and, therefore, increase and decrease with the level of demand for our staffing needs in our contract logistics segment, which includes value-added services and dedicated transportation. The increase was due to the launch of new business wins and improved volumes experienced at our contract logistics operations during the current quarter. As a percentage of operating revenues, personnel and related benefits decreased to 24.2% for the thirteen weeks ended July 2, 2022, compared to 26.3% for the thirteen weeks ended July 3, 2021. The percentage is derived on an aggregate basis from both existing and new programs, and from customer operations at various stages in their lifecycles. Individual operations may be impacted by additional production shifts or by overtime at selected operations. While generalizations about the impact of personnel and related benefits costs as a percentage of total revenue are difficult, we manage compensation and staffing levels, including the use of contract labor, to maintain target economics based on near-term projections of demand for our services. Operating supplies and expenses . Operating supplies and expenses increased by $13.3 million, or 40.7%, to $46.0 million for the thirteen weeks ended July 2, 2022 compared to $32.7 million for the thirteen weeks ended July 3, 2021. These expenses include items such as fuel, maintenance, cost of materials, communications, utilities and other operating expenses, and generally relate to fluctuations in customer demand. The main elements driving the change were increases of $8.2 million in fuel expense on company tractors, $3.1 million in vehicle and other maintenance, and $2.7 million in bad debt expense. These increases were partially offset by a $1.4 million decrease in professional fees. Commission expense . Commission expense for the second quarter 2022 increased by $2.2 million, or 25.5%, to $10.8 million from $8.6 million for the second quarter 2021. Commission expense increased due to increased revenue in the agency based truckload business. As a percentage of operating revenues, commission expense was unchanged at 2.0%. Occupancy expense . Occupancy expenses increased by $0.6 million, or 6.5%, to $10.0 million for the thirteen weeks ended July 2, 2022. This compares to $9.4 million for the thirteen weeks ended July 3, 2021. The increase was primarily attributable to an increase in building rents. General and administrative . General and administrative expense for the thirteen weeks ended July 2, 2022 increased by $1.8 million to $11.5 million from $9.7 million in the thirteen weeks ended July 3, 2021. The increase was primarily attributable to an increase in salaries, wages, and benefits. As a percentage of operating revenues, general and administrative expense was 2.2% for the second quarter 2022 compared to 2.3% for the second quarter 2021. Insurance and claims . Insurance and claims expense for the second quarter 2022 decreased by $3.1 million to $2.6 million from $5.7 million in the second quarter 2021. As a percentage of operating revenues, insurance and claims decreased to 0.5% for the thirteen weeks ending July 2, 2022 compared to 1.4% for the second quarter 2021. The decrease was attributable to a $3.0 million credit to insurance and claims expense resulting from the favorable settlement of certain auto liability claims during the period. Depreciation and amortization . Depreciation and amortization expense for the thirteen weeks ended July 2, 2022 increased by $10.7 million, or 65.6%, to $27.1 million from $16.3 million for 2021. Depreciation expense increased $10.7 million and amortization expense was unchanged. During the second quarter of 2022, Universal revised the estimated useful life and salvage value of certain equipment, and these adjustments resulted in additional depreciation expense of $9.7 million during the period. Interest expense, net . Net interest expense was $3.9 million for the thirteen weeks ended July 2, 2022 compared to $2.9 million for the thirteen weeks ended July 3, 2021. The increase in net interest expense reflects an increase in interest rates on our outstanding borrowings. As of July 3, 2022, our outstanding borrowings totaled $417.3 million compared to $433.5 million at the same time last year. Other non-operating income (expense) . Other non-operating expense was $0.8 million for the second quarter 2022 compared to other non-operating income of $6.1 million in the prior year. Other non-operating expense for the second quarter 2022 includes a $0.9 million pre-tax holding loss on marketable securities due to changes in fair value recognized in income compared to a $0.4 million gain in the second quarter 2021. Other non-operating income for the second quarter of 2021 includes a $5.7 million pre-tax gain from a favorable legal settlement. 23 Income tax expense . Income tax expense for the second quarter 2022 was $15.2 million, compared to $8.9 million for the second quarter 2021, based on an effective tax rate of 25.4% and 25.7% respectively. The increase in income taxes in 2022 is the result of an increase in taxable income for the thirteen weeks ended July 2, 2022 compared to the thirteen weeks ended July 3, 2021. Twenty-six Weeks Ended July 2, 2022 Compared to Twenty-six Weeks Ended July 3, 2021 Operating revenues . Operating revenues for the twenty-six weeks ended July 2, 2022 increased $213.0 million, or 25.4%, to $1,051.0 million from $838.0 million for the twenty-six weeks ended July 3, 2021. Included in operating revenues are separately-identified fuel surcharges of $80.7 million for the twenty-six weeks ended July 2, 2022 compared to $43.1 million for the twenty-six weeks ended July 3, 2021. Consolidated income from operations increased $60.0 million, or 96.1%, to $122.5 million for the first half 2022 compared to $62.5 million during the same period last year. First half 2022 results include a $3.0 million credit to insurance and claims expense resulting from the favorable settlement of certain auto liability claims during the period as well as $9.7 million in additional depreciation expense due to the revision of the useful life and salvage value of certain equipment. First half 2021 results include a favorable legal settlement which resulted in a $5.7 million pre-tax gain. In the contract logistics segment, which includes value-added and dedicated services, operating revenues increased $99.3 million, or 32.1%, to $408.9 million in the first half 2022 compared to $309.7 million in the previous year. Income from operations in the contract logistics segment increased $20.1 million, or 61.4%, to $52.9 million for the twenty-six weeks ended July 2, 2022 compared to $32.8 million in the same period last year. In the first half of 2022, Universal managed 64 value-added programs compared to 60 in the prior year period. During the first half of 2022, dedicated transportation load count increased 0.5% to 314,118 from 312,494 in the first half 2021. Dedicated transportation also grew as the result of new business wins, including a major shuttle operation, as well as repricing existing customer contracts. Also included in dedicated transportation revenue for the first half 2022 were $19.8 million in separately identified fuel surcharges, compared to $10.1 million in the same period last year. As a percentage of revenue, operating margin in the contract logistics segment for the first half 2022 was 12.9% compared to 10.6% during the same period last year. In the intermodal segment, operating revenues increased $104.2 million to $314.5 million in the first half 2022 compared to $210.3 million in the previous year. Intermodal revenues for the twenty-six weeks ended July 2, 2022 included $43.5 million in separately identified fuel surcharges, compared to $21.9 million in the same period last year. During the first half 2022, Universal moved 300,123 intermodal loads compared to 348,924 in the first half 2021, a decrease of 14.0%, while its average operating revenue per load, excluding fuel surcharges increased 44.2% to $697 from $483. Intermodal segment revenues also include accessorial charges such as detention, demurrage and storage which totaled $69.8 million during the first half 2022, compared to $26.0 million one year earlier. Income from operations in the intermodal segment increased $29.7 million to $44.4 million for the twenty-six weeks ended July 2, 2022 compared to $14.6 million in the first half 2021. As a percentage of revenue, operating margin in the intermodal segment for the first half 2022 was 14.1%, compared to 7.0% during the same period last year. In the trucking segment, operating revenues increased $9.4 million to $204.0 million in the first half 2022 compared to $194.7 million in the prior year period. Included in trucking segment revenues for the first half 2022 were $17.5 million in separately identified fuel surcharges compared to $11.1 million during the first half 2021. Income from operations in the trucking segment increased $5.4 million to $17.0 million for the first half 2022 compared to $11.7 million in the same period last year. During the first half of 2022, Universal’s average operating revenue per load, excluding fuel surcharges, increased 42.5% to $1,804 from $1,266 in the prior year period; however, this increase was partially offset by a 30.0% decrease in load volumes. During the first half 2022, Universal moved 103,846 loads compared to 148,389 during the same period last year. As a percentage of revenue, operating margin in the trucking segment for the first half 2022 was 8.3%, compared to 6.0% during the same period last year. Included in the trucking segment’s first half 2022 operating results was a $3.0 million credit to insurance and claims expense resulting from the favorable settlement of certain auto liability claims during the period. This credit favorably impacted the trucking segment’s operating margin by 147 basis points. In the company-managed brokerage segment, operating revenues decreased $1.2 million, or 1.0%, to $120.3 million in the twenty-six weeks ending July 2, 2022 compared to $121.5 million in the twenty-six weeks ending July 3, 2021. During the first half of 2022, the average operating revenue per load, excluding fuel surcharges, increased 16.0% to $2,094 from $1,806 in the first half 2021; however, load volumes fell 26.0% to 47,311 from 63,891. As a percentage of revenue, operating margin for the company-managed brokerage segment was 6.7% for the first half 2022 compared to 2.4% in the same period last year. Purchased transportation and equipment rent . Purchased transportation and equipment rental costs for the first half 2022 increased $72.0 million, or 18.6%, to $459.3 million from $387.4 million during the same period last year. Purchased transportation and equipment rent generally increases or decreases in proportion to the revenues generated through owner-operators and other third party providers. The increases or decreases are generally correlated with changes in demand for transportation-related services, which includes truckload, brokerage, intermodal and to a lesser extent, dedicated services, which uses a higher mix of company-drivers compared to owner-operators. The absolute increase in purchased transportation and equipment rental costs was primarily the result of an overall increase in transportation-related services. First half 2022 transportation-related service revenues increased 27.2% 24 compared to the first half of 2021. As a percentage of operating revenues, purchased transportation and equipment rent expense decreased to 43.7% compared to 46.2% during the same period last year due to a decrease in the mix of brokerage services revenue, where the cost of transportation is typically higher than our other transportation businesses. As a percentage of total revenues, brokerage services revenue decreased to 19.9% for 2021 compared to 23.8% in the same period last year. Direct personnel and related benefits . Direct personnel and related benefits for the twenty-six weeks ended July 2, 2022 increased by $45.5 million, or 20.8%, to $264.0 million compared to $218.6 million during the same period last year. Trends in these expenses are generally correlated with changes in operating facilities and headcount requirements and, therefore, increase and decrease with the level of demand for our staffing needs in our contract logistics segment, which includes value-added services and dedicated transportation. The increase was due to the launch of new business wins and robust volumes experienced at our contract logistics operations during the first half of 2022. As a percentage of operating revenues, personnel and related benefits decreased to 25.1% for the twenty-six weeks ended July 2, 2022, compared to 26.1% for the twenty-six weeks ended July 3, 2021. The percentage is derived on an aggregate basis from both existing and new programs, and from customer operations at various stages in their lifecycles. Individual operations may be impacted by additional production shifts or by overtime at selected operations. While generalizations about the impact of personnel and related benefits costs as a percentage of total revenue are difficult, we manage compensation and staffing levels, including the use of contract labor, to maintain target economics based on near-term projections of demand for our services. Operating supplies and expenses . Operating supplies and expenses increased by $18.3 million, or 26.3%, to $88.2 million for the twenty-six weeks ended July 2, 2022 compared to $69.8 million for the twenty-six weeks ended July 3, 2021. These expenses include items such as fuel, maintenance, cost of materials, communications, utilities and other operating expenses, and generally relate to fluctuations in customer demand. The main elements driving the change were increases of $16.0 million in fuel expense on company tractors, $3.0 million in vehicle and other maintenance, $2.9 million in bad debt expense, and $1.3 million in professional fees. These increases were partially offset by decreases of $1.9 million in operating supplies and material costs in operations supporting heavy truck programs and $2.0 million in additional gains on sales of property, plant and equipment compared to the same period last year. Commission expense . Commission expense for the first half 2022 increased by $4.9 million, or 30.7%, to $20.8 million from $15.9 million for the first half 2021. Commission expense increased due to increased revenue in the agency based truckload business. As a percentage of operating revenues, commission expense increased to 2.0% for the first half of 2022, compared to 1.9% in the same period last year. Occupancy expense . Occupancy expenses increased by $2.6 million, or 15.0%, to $20.2 million for the twenty-six weeks ended July 2, 2022. This compares to $17.6 million for the twenty-six weeks ended July 3, 2021. The increase was primarily attributable to an increase in building rents. General and administrative . General and administrative expense for the twenty-six weeks ended July 2, 2022 increased by $2.7 million to $21.6 million from $18.9 million in the twenty-six weeks ended July 3, 2021. The increase was primarily attributable to an increase in salaries, wages, and benefits. As a percentage of operating revenues, general and administrative expense was 2.1% for the first half 2022 compared to 2.3% for the first half 2021. Insurance and claims . Insurance and claims expense for the first half 2022 decreased by $0.9 million to $11.2 million from $12.1 million in the first half 2021. As a percentage of operating revenues, insurance and claims decreased to 1.1% for the twenty-six weeks ending July 2, 2022 compared to 1.4% for the first half 2021. The decrease was attributable to a $3.0 million credit to insurance and claims expense resulting from the favorable settlement of certain auto liability claims during the period as well as a $1.5 million decrease in auto liability insurance premiums. The decrease was partially offset by a $3.2 million increase in cargo and service failure claims. Depreciation and amortization . Depreciation and amortization expense for the twenty-six weeks ended July 2, 2022 increased by $7.9 million, or 22.2%, to $43.3 million from $35.4 million for 2021. Depreciation expense increased $7.7 million and amortization expense increased $0.1 million. During the first half of 2022, Universal revised the estimated useful life and salvage value of certain equipment, and these adjustments resulted in additional depreciation expense of $9.7 million during the period. Interest expense, net . Net interest expense was $6.4 million for the twenty-six weeks ended July 2, 2022 compared to $6.1 million for the twenty-six weeks ended July 3, 2021. The increase in net interest expense reflects an increase in interest rates on our outstanding borrowings. As of July 3, 2022, our outstanding borrowings totaled $417.3 million compared to $433.5 million at the same time last year. Other non-operating income (expense) . Other non-operating income was $0.1 million for the first half 2022 compared to $7.1 million in the prior year. Other non-operating income for the first half 2022 includes a $0.1 million pre-tax holding gain on marketable 25 securities due to changes in fair value recognized in income . Other non-operating income for the first half of 2021 includes a $5.7 million pre-tax gain from a favorable legal settlement and a $1.4 million pre-tax holding gain on marketable securities due to changes in fair value recognized in income. Income tax expense . Income tax expense for the first half 2022 was $29.6 million, compared to $16.2 million for the first half 2021, based on an effective tax rate of 25.4% and 25.5% respectively. The increase in income taxes in 2022 is the result of an increase in taxable income for the twenty-six weeks ended July 2, 2022 compared to the twenty-six weeks ended July 3, 2021. Liquidity and Capital Resources Our primary sources of liquidity are funds generated by operations, loans and extensions of credit under our credit facilities, on margin against our marketable securities and from installment notes, and proceeds from the sales of marketable securities. We use secured, asset lending to fund a substantial portion of purchases of tractors, trailers and material handling equipment. We employ an asset-light operating strategy which we believe lowers our capital expenditure requirements. In general, our facilities used in our value-added services are leased on terms that are either substantially matched to our customer’s contracts, are month-to-month or are provided to us by our customers. We also utilize owner-operators and third-party carriers to provide a significant portion of our transportation and specialized services. A significant portion of the tractors and trailers used in our business are provided by our owner-operators. In addition, our use of agents reduces our overall need for large terminals. As a result, our capital expenditure requirements are limited in comparison to most large transportation and logistics service providers, which maintain significant properties and sizable fleets of owned tractors and trailers. During the twenty-six weeks ended July 2, 2022, our capital expenditures totaled $37.5 million. These expenditures primarily consisted of transportation equipment and investments in support of our value-added service operations. Our asset-light business model depends somewhat on the customized solutions we implement for specific customers. As a result, our capital expenditures will depend on specific new contracts and the overall age and condition of our owned transportation equipment. Through the remainder of 2022, exclusive of any acquisitions of businesses and strategic real estate purchases, we expect our capital expenditures to be in the range of 8% to 10% of operating revenues. We expect to make these capital expenditures for the acquisition of transportation equipment, to support our new and existing value-added service operations, for a new administrative office complex to support our growth, and for improvements to our existing terminal yards and container facilities. Due to widespread shortages, production backlogs, and limited availability of transportation equipment during 2021, our 2022 expenditures are projected to be somewhat higher than the customary range of 4% to 5% of our operating revenues. As equipment manufacturers identify and implement solutions enabling them to overcome supply-side constraints, we would expect to return to a normalized level of capital expenditures in future periods. We have a cash dividend policy that anticipates a regular dividend of $0.42 per share of common stock, payable in quarterly increments of $0.105 per share of common stock. After taking into account the regular quarterly dividends made during the year, our Board of Directors also evaluates the potential declaration of an annual special dividend payable in the first quarter of each year. The Board of directors did not declare a special dividend in the first quarter of 2021. On July 28, 2022, our Board of Directors did declare the regular quarterly cash dividend of $0.105 per share of common stock payable October 3, 2022 to shareholders of record at the close of business September 5, 2022. During the year ended December 31, 2021, we paid a total of $0.42 per common share, or $11.3 million. Future dividend policy and the payment of dividends, if any, will be determined by the Board of Directors in light of circumstances then existing, including our earnings, financial condition and other factors deemed relevant by the Board of Directors. 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 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. We paid for the accepted shares with available cash and funds borrowed under our existing line of credit. While operating cash flows may be negatively impacted by a prolonged pandemic, the Company believes we will be able to finance our near term needs for working capital over the next twelve months, as well as any planned capital expenditures during such period, with cash balances, cash flows from operations, and loans and extensions of credit under our credit facilities and on margin against our marketable securities. Should the impact of the COVID-19 pandemic last longer than anticipated, and/or our cash flow from operations decline more than expected, we may need to obtain additional financing. The Company’s ability to fund future operating expenses and capital expenditures, as well as its ability to meet future debt service obligations or refinance indebtedness will depend on future operating performance, which will be affected by general economic, financial, and other factors beyond our control. 26 We continue to evaluate business development opportunities, including potential acquisitions that fit our strategic plans. There can be no assurance that we will identify any opportunities that fit our strategic plans or will be able to execute any such opportunities on terms acceptable to us. Depending on prospective consideration to be paid for an acquisition, any such opportunities would be financed first from available cash and cash equivalents and availability of borrowings under our credit facilities . Revolving Credit, Promissory Notes and Term Loan Agreements Our revolving credit facility (the “Revolving Credit Facility”) provides for a $200 million revolver at a variable rate of interest based on LIBOR or a base rate and matures on November 26, 2023. The Revolving Credit Facility, which is secured by cash, deposits, accounts receivable, and selected other assets of the applicable borrowers, 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. Our Revolving Credit Facility includes an accordion feature which allows us to increase availability by up to $100 million upon our request. At July 2, 2022, we were in compliance with all its covenants, and $49.5 million was available for borrowing. A wholly owned subsidiary issued a series of promissory notes in order to finance transportation equipment (the “Equipment Financing”). The notes issued in connection with the Equipment Financing, which are secured by liens on specific titled vehicles, are generally payable in 60 monthly installments and bear interest at fixed rates ranging from 2.25% to 5.13%. Certain wholly owned subsidiaries entered into a $165.4 million term loan facility to repay outstanding balances under a then-existing term loan and certain other real estate notes (the “Real Estate Facility”). The Real Estate Facility matures on April 29, 2032 and is 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 Real Estate Facility includes customary affirmative and negative covenants, and principal and interest is 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. We also maintain a short-term line of credit secured by our portfolio of marketable securities (the “Margin Facility”). It bears interest at LIBOR plus 1.10%. The amount available under the Margin Facility is based on a percentage of the market value of the underlying securities. We did not have any amounts advanced against the line as of July 2, 2022, and the maximum available borrowings were $4.6 million. Discussion of Cash Flows At July 2, 2022, we had cash and cash equivalents of $14.7 million compared to $13.9 million at December 31, 2021. Operating activities provided $69.3 million in net cash, and we used $32.1 million in financing activities and $35.5 million in investing activities. The $69.3 million in net cash provided by operations was primarily attributed to $86.7 million of net income, which reflects non-cash depreciation and amortization, noncash lease expense, gain on marketable equity securities, gains on equipment sales, amortization and write-off of debt issuance costs, stock-based compensation, and provisions for doubtful accounts totaling $61.4 million, net. Net cash provided by operating activities also reflects an aggregate increase in net working capital totaling $78.8 million. The primary drivers behind the increase in working capital were principal reductions in operating lease liabilities during the period, increases in trade and other accounts receivable and in prepaid expenses and other assets, and decreases in accruals for insurance and claims other long-term liabilities. These were partially offset by increases in trade accounts payable, accrued expenses and other current liabilities, and income taxes payable. Affiliate transactions decreased net cash provided by operating activities by $4.2 million. The decrease in net cash resulted from a decrease in accounts payable to affiliates of $3.6 million and a decrease in accounts receivable from affiliates of $0.6 million. The $32.1 million in net cash used in investing activities consisted of $37.5 million in capital expenditures and $0.1 million in marketable securities purchases. These uses were partially offset by $5.6 million in proceeds from the sale of equipment. We used $35.5 million in financing activities during the twenty-six weeks ended July 2, 2022. During the period we paid cash dividends of $8.4 million, $14.3 million for purchases of common stock and $1.7 million in capitalized financing costs. We had outstanding borrowings totaling $417.3 million at July 2, 2022 compared to $428.4 million at December 31, 2021. During the period we made net repayments on our revolving lines of credit totaling $12.8 million and term loan, and equipment and real estate note payments totaling $192.3 million. We also borrowed $193.9 million during the period to repay outstanding balances under a then-existing term loan and certain other real estate notes, and for new equipment. 27 Off Balance Sheet Arrangements None. Critical Accounting Policies A summary of critical accounting policies is presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies," of our Form 10-K for the year ended December 31, 2021. There have been no changes in our accounting policies during the thirteen weeks ended July 2, 2022. Seasonality Generally, demand for our value-added services delivered to existing customers increases during the second calendar quarter of each year as a result of the automotive industry’s spring selling season. Conversely, such demand generally decreases during the third quarter of each year due to the impact of scheduled OEM customer plant shutdowns in July for vacations and changeovers in production lines for new model years. Our value-added services business is also impacted in the fourth quarter by plant shutdowns during the December holiday period. However, due to the COVID-19 pandemic and its impact on North American automotive manufacturing, we may not experience normal seasonal demand for our services supporting the automotive production and selling cycles during the current year. Our transportation services business is generally impacted by decreased activity during the post-holiday winter season and, in certain states, during hurricane season. At these times, some shippers reduce their shipments, and inclement weather impedes trucking operations or underlying customer demand. Prolonged adverse weather conditions, particularly in winter months, can also adversely impact margins due to productivity declines and related challenges meeting customer service requirements. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have not been any material changes to the Company’s market risk during the thirteen weeks ended July 2, 2022. For additional information, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.