Universal Logistics Holdings Inc (ULH) 2013 Q3 法說會逐字稿

Hello and welcome to Universal Truckload Services Incorporated third-quarter 2013 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

During the course of this call, management may make forward-looking statements based on their best view of business as seen today. Statements that are forward-looking relate to Universal's business objectives or expectations and can be identified by the use of words such as belief, expect, anticipate and project. Such statements are subject to uncertainties and risks and actual results could differ materially from those expectations.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your hosts Mr. Scott Wolfe, Chief Executive Officer, Mr. Don Cochran, President, and Mr. Dave Crittenden, Chief Financial Officer for Universal Truckload Services. Thank you. Mr. Wolfe, you may begin your conference.

Thank you. Good morning, everyone, and on behalf of the entire Universal team, welcome and thank you for joining us for this Universal Truckload Services Incorporated third-quarter earnings conference call.

For the third quarter, we navigated a changing landscape, including general macroeconomic issues, the government sequester and shutdown, which eventually impacted our government opportunities and indirectly affected the demand on certain industrial sectors. Our general economy has continued to grow at a slow pace.

Certain industries, like automotive, have actually performed very well and contributed to our overall growth. We have seen SAAR volumes peak in this quarter, reaching projections of 16.1 million units in August, and which are expected to remain strong after kind of falling back slightly in September.

Continuing from the second quarter, our industrial sectors have remained soft, but with a few bright spots. Our second largest sector, steel and metals, were down 4%, but were offset almost entirely by the building materials sector, which was up 11%.

Another growing bright spot is alternative energy, which has come back strong this quarter, and although not the same as last year, they are growing steadily.

Value-added services continued at a better-than-expected growth trajectory, with an increase of 16.3% over the same period last year. Meanwhile, in the intermodal business, growth slowed to a more normalized pace of up 6% over the third quarter of 2012.

Our largest revenue category is transportation services, which was down 2.1% compared to the third quarter of 2012. Overall, transportation has been fighting a headwind of general economic uncertainty, intensified threats of a government shutdown and then ultimately the actual shutdown itself. Don will shed much more color on the transportation segment in a few minutes.

Despite those headwinds, total revenue for Universal was up 1.9% compared to the third quarter of 2012. David will share with you our financial performance in more detail later.

As stated, our financial business has continued to perform well -- our value-added business. I'm sorry. The key customer business continues to perform despite the slowing economy. Operationally, we successfully launched one new and two expansion programs in this quarter.

One industrial customer chose to in-source some employees and production at one of their facilities during the next quarter. However, we will continue to support this customer with our systems and technology, which is necessary for them to achieve their goals.

A program for our aerospace customer was a casualty of the government sequester, and we will be discontinuing the operation that we had with them in the fourth quarter. We did a great job for this customer, and when the time comes around, we will be there to support them in the future.

We also have two commercial contracts coming up in 2014, an annually renewable contract that we have held with our second largest customer since 2001, and a multiyear contract with another domestic OEM that we have maintained for 15 years.

As an update to the labor side, we have one labor contract remaining, which is winding toward conclusion in November. As we finalize these commitments, we continue to direct our attention to new organic growth opportunities and acquisitions.

Speaking briefly about acquisitions, we continue to work on several opportunities of various sizes that fit our strategic plan, build geographical or business segments and add new customers.

We are continuously promoting the Universal brand with our customers, our agents and contractors and supporting them with ever-expanding services as we continue to enhance our market development efforts.

From an enterprise sales structure, we have brought in several great people, covering some key geographical positions in our sales organization. The sales lead generation process is already enhancing our pipeline opportunities. We have two positions remaining open, one in Chicago and one in the Pacific Northwest that we just recently added.

Lastly, it was a pleasure to be honored again by several journals, having been selected among Fortune Magazine's Top 100 fastest-growing companies, as Inbound Logistics' 2013 Top 100 truckers in September and a Top 50 Truckload Carrier in the Journal of Commerce. Such recognition is always appreciated by us.

And now I will turn the conversation over to Don to discuss their -- truckload transportation. Don?

Thank you, Scott, and thank you all for tuning in today. Transportation services started slow this year, but has improved sequentially as the general economy did. Q1 was down 10% over 2012, Q2 was down 6.3% and Q3 was down 2.1%, in total, lagging 2012 revenue by 6.1%.

As Scott said, we have seen mixed results by industry and customer, some having terrific years while others have not been so fortunate. One area of consistent growth is the automotive sector. Truckload services has increased by about 2% this year.

And our energy sector has improved. The energy sector that is focused on oil and natural gas is up 38% year over year. Our wind energy business has finally returned after a very barren first half of the year, with revenue down 35% for the full year, and it is quickly returning as we go through the year. Q3 still remains 10% below 2012 levels. Additionally, we see some general economic optimism as building materials grew 11.3% year over year.

As the year has progressed, our government services sector is down over 30% compared to the full year last year -- three quarters last year. Our Q1 revenue was down -- excuse me -- our Q1 revenue was a little over $2 million, Q2 was right at $2 million and the third quarter is about $1.3 million.

Several factors come into play. In Q1 and Q2 of 2012, there was substantial equipment returning from Iraq. We don't have that in 2013. The government sequester and DoD budget constraints have had an impact, especially in Q2 and Q3. There have been no significant events involving services performed for FEMA. We will continue to look at similar projects, though, and replace this revenue as we can. We also expect that we will stay prepared for FEMA activity should it materialize.

On a measurement of load activity, we see average rate per mile flat year over year. And in terms of activity, load hauled in our brokerage operation fell significantly, and our brokerage revenue is down by about 17%. Actual load counts in the transportation sector are down, but include changes in the traditional mix and are affected by different lengths of haul in the dedicated sectors as well. Margin has improved on brokerage since much of that decline comes from the low-margin operations eliminated in 2012.

As a summary, we believe the current trends are stable but hold no great volume increases. With 31% of the transportation services being our industrial flatbed business, we will be monitoring the progress of our industrial customers closely to see that we are prepared for any economic rebound. Our truck count is up a bit and our turnover rate is below the industry average. The new hours of service regulation has not had a significant impact, primarily because of our shorter average length of haul.

Another bright spot has been the intermodal operations. Year to date, revenue is up 17% through Q3. Included in that were increases in domestic intermodal and the international drayage operation that is the core of our intermodal business.

The pace of the increase has softened from 31% in Q1 to 15% in Q2, and in Q3 it was 6%. Q1 included a lot of short-term project business, as did Q2.

Universal is vastly more diversified than it was in the past, with greater services to offer and a larger customer base, and we look forward to freeing up that value with our expanded enterprise sales effort.

At this time, I will turn the program over to David Crittenden, and he will discuss our financial results in more detail.

Thank you, Don. Good morning and thank you to everyone listening this morning. As Scott commented in last night's earnings announcement and Don just described, Universal's third-quarter financial performance broadly met our expectations despite a mixed business environment for some of our largest customers. I will touch on some financial highlights, and look forward to answer your specific questions at the conclusion of this call.

For the third quarter ended September 28, we reported net income of $13.7 million and income from operations totaling $22.4 million on revenues of $261.7 million. Our aggregate operating revenues in the quarter were modestly higher than last year's third quarter, when we recognized aggregate revenue of $256.9 million.

However, while transportation services demand has slowly improved and Universal's intermodal services growth momentum has tapered off, our value-added services maintained its double-digit pace in the third quarter, primarily due to strong demand in late August and September. Scott commented on a couple of the specific programs among our automotive customers that account for this growth, but he also mentioned a couple of business losses that will impact coming quarters.

As reported, Universal's third-quarter 2013 earnings per share, both basic and diluted, was $0.46, which appears to be in line with published analyst estimates. On a reported basis, this compares to $0.50 per share in the third quarter of 2012. However, the more relevant third-quarter 2012 comparison is to $0.40 per basic and diluted share, when the pro forma tax impact of the LINC acquisition last October 1 is properly considered.

Universal's per-share performance is largely the result of a 22.9% increase in income from operations, with some assistance from a slightly lower effective tax rate due to adjustments taken in the third quarter.

On a pro forma basis, our earnings per share for the first nine months totaled $1.30 per share on a diluted basis, compared to a pro forma $1.14 per share through September last year, a 14% increase. Therefore, despite modest aggregate top-line growth, the continued growth in our logistics segment and general margin improvements across all of our businesses continue to favorably impact the bottom line.

Scott and Don commented on the current environment and demand for the three service categories for which we separately report revenue, and also our near-term expectations for more moderate growth. Here, I will highlight our financial performance by reference to segment reporting detail appearing on page 6 of our press release, which we incorporated into our earnings announcement for the first time.

In these numbers, Universal's aggregate profit increase is largely explained by trends in the logistics segment, where our contracts with large customers involved delivery of value-added services or dedicated truckload transportation. Revenues from these businesses increased $11.6 million or 17% to $80 million in the third quarter. We operated at 43 facilities on average as of September 28 compared to 40 locations a year ago.

Our average headcount, which is significantly impacted by growth in value-added services delivered either inside our facility or our customers' facilities, increased by 16.6%.

Strikingly (inaudible) given historical softness in the third quarter, logistics segment operating income expressed as a percentage of revenue increased from 16.4% in the third quarter of 2012 to 19.3% in the most recent quarter. While we are very pleased with this improvement, which is driven by the operating characteristics of individual customer contracts and programs, we do expect significant [modulation] of margin improvements, especially in light of our sober views about customer demand in the next few quarters.

In our transportation segment, which includes the transactional truckload transportation, intermodal operations, brokerage and specialized services, aggregate revenues declined 3.6% in the quarter compared to last year's comparable third quarter. More favorably, though, income from operations in the segment increased 1.2% and operating margins improved 20 basis points.

Revenues from our transportation services, including our brokerage activities which Don described, did decline, but this trend was offset by a modest uptick in margin improvements elsewhere.

A comparative analysis of our consolidated income statement shows that when calculated as a percentage of revenue, our cost to purchase transportation and commissions continues the trends we have commented on in the previous two conference calls this year. Specifically, our purchase transportation expense expressed as a percentage of revenue has declined and personnel costs and operating expenses increased as our revenue mix shifts toward value-added services.

Turning now to a summary of Universal's consolidated balance sheet. At September 28, we reported $5.5 million of cash and borrowings outstanding stood at $124 million. Our working capital trends are generally stable and reflected growth in our individual business units, except that we did conclude and pay a litigated claim that exceeded insurance limits in Q3 for which we have maintained an appropriate reserve, limiting the impact on current results for the quarter.

At $5.6 million, Q3 capital expenditures continue to run lower than we typically expect, but this trend is expected to reverse in the next few quarters when we plan purchases, primarily for tractors and trailers, that will move us back to our typical range of 2% to 3% of revenues.

During the quarter, we paid our first regular quarterly dividend and continued to reduce debt outstanding. And you will be able to review all the details on those items when we file our 10-Q around November 6.

As we have highlighted all year, we are focused on coordinating capital planning actions with anticipated capital requirements and corporate development opportunities. We are actively reviewing several acquisition targets, and so we want to be prepared with adequate financing resources or prospects for resources should opportunities arise.

As mentioned three months ago, the SEC affirmed the effectiveness of our shelf registration back in May. The shelf permits us to offer securities to the public totaling $350 million and it also registers up to 6.5 million shares of secondary shares held collectively by our larger shareholders, which allows us to consider strategies to improve liquidity in UACL, which we do believe will benefit all Universal shareholders.

On August 21, we concluded a secondary equity offering on behalf of one of our principal shareholders that included a small primary issuance of 25,000 additional shares of UACL by the Company. I would encourage you to read details of the transaction in our 10-Q, but let me just clarify here that primary proceeds to Universal, net of the customary underwriting discounts, were used to pay expenses associated with the transaction and are directly reflected as an adjustment to equity in our balance sheet.

We are just a few weeks past the one-year anniversary of [all our] investment in LINC, Universal's last major acquisition. During that time, we have made great strides in refining our customer strategies, enhancing our marketing efforts and streamlining our operations to continue to deliver the highest possible service delivery to our business customers.

While Scott and Don can be justly proud of the growth and development of Universal this year with a focus on our market development and operating successes, I want to take just a second to commend the back office team that helped propel our Company forward. Without fanfare, our administrative and systems colleagues have worked diligently to bring together two separate organizations. Even today, these people are hard at work migrating our accounting to the next generation of our ERP system, which will only enhance our ability to grow Universal in an intelligent and thoughtful way. I am very grateful for their efforts.

And I will stop with that. We appreciate the chance to hear from our listeners and to answer your questions directly, so Ryan, could you please open the lines up at this time?

Certainly. (Operator Instructions). Todd Fowler, KeyBanc Capital Markets.

Great, thanks. Good morning, everyone.

Good morning, Todd.

Scott, I wanted to start with value-added services, and I guess a little bit more color of what happened here in the quarter. The revenue growth of 16% was stronger, I think, than what we talked about in the last call, the 10% to 12%. So I am curious if that was driven by customer-specific volumes or kind of what drove the performance here.

And then I wanted to follow up on a couple of your comments about what to expect going into the fourth quarter and probably into 2014.

Okay. You have already answered literally a portion of the question in the fact that certainly we had increased volume, specifically in two areas. Automotive, where there were a lot of production schedule changes, new product introduction, and that certainly drove the desire of our customer to get product to market; hence, the production schedule changes. And then continuing customer requests for added services, services that we are really asked to take over on a short-term basis. And most of those are -- we will call them pleasant surprises that take place.

On the retail side of the business, also some impact. Supply chain demographic changes caused our customer to reevaluate the material flow through the supply chain, and that created an opportunity where more material was processed through our facilities. And generally, those are the answers to the question relative to that piece of it.

And so when you see an environment like this, where there is what I would call kind of opportunistic work, I mean, is that something that really drives the margins that we saw here in the quarter? And is that the reason why we should expect the moderations in the margins going forward?

Partially -- I will say it that way. Certainly, the opportunities on the schedule change, you have all your resources are in play. Typically then you are put into an overtime type of level, where a lot of your fixed costs, supervision costs, those kinds of things have already been covered in incremental costing. So any incremental change that has an enhanced return to it.

Okay. And then I guess, Scott, as far as the comments going forward, I think you said that you have got some new business coming online, you have got some expanded programs. But then it also sounds like you are losing some business.

I guess any help that you can provide as far as how we should think about the revenue growth rate into the fourth quarter. And then if you could comment on -- initial comments on to 2014 that could be helpful as well.

I can address the fourth quarter. We will be impacted because of the loss of the two pieces of business that we talked about. One will be winding down. One will have an impact in the month of November and December, specifically.

The other thing that will drive some lower increased percentages, so to speak, is the fact that in the Christmas period of 2013, there will be one additional day of downtime over the same timeframe in 2012, and that will impact certainly the broader automotive.

Todd, this is David. I would also just add that the [two], value-added timing is really important on it. And one of the situations was one of our more profitable value-added businesses, and the other situation was one of our less valuable, less profitable value-added operations.

So depending on kind of the actual timing of that, that is going to impact both the top line and the margin that we ultimately see. So it is just a little bit difficult for us to predict right now where that (technical difficulty), but we appreciate your question.

Well, I guess can you put some numbers around, I mean, the magnitude of these contracts on an annual basis. And if it is a little bit unclear as far as when it is actually going to roll off in the fourth quarter, I guess give us an idea of what to expect into 2014.

I guess I have to answer it this way, Todd. We will grow -- the fourth quarter of 2013 will have a growth percentage over the fourth quarter of 2012. Our belief is that that will be somewhere in the 8% to 10% range, but we will still have growth in the fourth quarter. And 2014, really can't talk about at this juncture.

Okay, no, that is fair enough, and that certainly helps. I guess shifting gears to the transportation side of the business, Don, if I understand your comments correctly, I mean, it sounds like certain pockets of the business are strong and they are offset by other pockets of the business that are weak. But when I look at the load count declining on a year-over-year basis, it definitely feels like the weakness is outweighing the strength in some of the other areas.

I guess if you can give -- you gave the numbers from the government revenue on a quarterly basis year-to-date. Do you have what the comparisons were last year on the government side, to get a sense of what the fall-off there would be?

I don't have that on a percentage basis. I'm sorry. I should have thought -- about 30% -- 36% is the year-to-date number. And it went down progressively. We were fairly short in the first quarter because of the lack of the materials brought back from Iraq. So it has been down each quarter, but significantly more so in the third.

So the 36% is the year-to-date decline in the government revenue?

Right.

Okay. That puts some context on that. And then I guess just thinking about moving into the fourth quarter on the transportation side, it sounds like the alternative energy or the energy business remains strong. I guess how should we think about the revenue trends or the volume trends sequentially, based on kind of the visibility that you have on transportation?

Well, we think the rate of increase will continue in the wind energy piece. So I don't know that we will ever be at the 2012 run rate. That was a terrific year and a lot of people were trying to get ahead of the tax incentive being canceled.

So as we go forward, it will be better for the full year. And I am guessing that the first quarter will be soft still compared to the third and second quarters. So the seasonality will play into that.

So taking the wind out of it, we do feel there is lots of opportunities in the rest of the energy sector, and perhaps that is even more encouraging, in that lots of drilling and pipeline work is going on and we have got lots of angles to continue to grow that business.

Regular freight moving on a standard flatbed is our biggest concern. We are a part of the general economic relevance of a 2% GDP. It affects industry -- heavy industry more so than it does other parts of the industry. And so we are interested in watching that closely.

Okay. That makes sense. And I guess the last one that I have -- this might be for David and it might be for Scott. But I guess now being a year into the LINC acquisition, as you are looking forward, I guess, do you see more opportunities internally from a synergy standpoint? Or if you can give maybe an update on how you are thinking about the synergies from the acquisition, some of the cross-selling opportunities, some of the branding. And then also anything that has come up on the cost side where you think you can gain more efficiencies as you have done some of the back-office integration and those sorts of things. Thanks.

I will talk on the back-office portion of it first. I think although we have had an outstanding quarter in terms of margin, and I would like to be able to tell everyone that we are going to continue to get 200 basis point improvements year over year, that is not sustainable.

Don't model that. Okay.

Don't model that. Maybe 10 or 20 on a year-over-year basis, if you are really good and that is just kind of operating back-office things. Yes, we are seeing some scale. We do still have some opportunities to bring maybe some remote administrative functions to the extent they exist in our organization into the main office.

I think we look at some of our acquisitions with real intense scrutiny to try and see where we can leverage our back-office here. And that was part of the reason why my comment on like our ERP system. We have been doing a lot of things already this year, kind of Phase 1, to make sure we have the back office behind to support the growth of the Company.

We are now -- I had a conversation in the room I am in right now about an hour ago with some folks, saying, okay, we have achieved our objective for 2013. What are we going to do for 2014 in the area of process improvement and things like that?

There is no headline, but it is just kind of continued streamlining around specific business processes that will continue to improve the way we process information. Don and Scott and I yesterday were involved in a review of some of the areas of technology that support our businesses, and were getting a very critical view to a vision of how technology supports our Company over the next several years, both our inside folks and our outside folks. So we do have that.

We are also intently interested -- obviously, in this environment, it is important in this day and age to be focused on controls and things like that, and that is something we are giving a lot of attention to as well, to make sure that we are best-in-class in those areas.

So from a back-office perspective, we have done a lot. There is not of headlines going forward about what we are working on. But we have a continuous improvement philosophy here that is really important that we are going to continue to pursue.

We have worked through various opportunities on the purchasing leveraging side. If you looked closely at our 8-K, you will see the somber announcement that Bob Sigler, who was working through the end of this year, is now leaving the Company, as anticipated. But Bob worked a lot of those projects this year and he now gets to enjoy the rewards of his labor. So we are kind of past that cycle as well.

In terms of enterprise sales, Scott, if you just want to talk about synergies of LINC.

Well, synergy works both ways. It's working -- what we are seeing are substantially amount of leads and opportunities that are being generated by the salesforce, including both the transportation segment and the value-added piece. We are seeing major bids with multiple truckload lanes and multiple opportunities.

And from a synergy perspective, when we are looking at those opportunities, we are looking at them from both a traditional transactional perspective, as well as a more dedicated opportunity as well that would help us get better utilization of equipment and facilities and those types of things, all of which are major goals for us to do.

The sales pipeline is growing. We are seeing many more opportunities, and that is certainly because we are expanding the salesforce. And the quality of individuals that we are bringing in are quite an opportunity for us. Again, we have identified the Northwest, which we originally didn't put a lot a focus on, but now we think that that is an area that we have to concentrate more on.

So it is an evolving process. The speed of opportunity of growth, I think, is very substantial and I'm very pleased so far with the opportunity that we are being presented.

Okay. I really appreciate all the time this morning. Thanks a lot.

Thank you.

Chris Wetherbee, Citi.

Hi, thanks. Good morning, guys.

Good morning.

Maybe just a clarification question. David, I think you mentioned -- you talked a little bit about margins in the segments, and I just want to make sure I caught it. Did you give VAS margin for the third quarter? I just wanted to make sure I didn't miss that.

I spoke to the segment margins, and they are also kind of laid out -- you can calculate them by reference to the segment detail that is in the press release.

And when you think about sort of the changes that you see in the business -- I know you mentioned that expansion probably or that performance might be a little bit more temperate than the very good results you have been able to perform so far -- is it a fair assumption that value-added, given some of the puts and takes of contracts, probably sees a bit of a stepdown in the rate of growth as you move into the fourth quarter? Is that the right way to be thinking about this?

Well, we have a couple of new opportunities. When I say that -- we have some expansion opportunities that we have not yet turned on. Those won't be turned on until probably mid-December to mid-January. Those opportunities, I think, will kind of -- I anticipate a kind of flattening. When I say that, I expect to be able to have good margin rate in the value-added business, well-maintained, with minimal if any loss.

Okay. That is helpful. And I guess sort of bigger picture, when you start to put together the segments and the puts and takes for fourth quarter, revenue growth rates roughly in line with what we saw in the third quarter? I know you kind of have highlighted where you think value-added trends. I guess I am just kind of curious, when you take a step back and look at the broader business, is that a roughly fair assumption? I am also trying to make sure I have a handle on seasonality as well.

Yes, Scott, I think earlier as a response to Todd Fowler, had suggested value-added services was more of an 8% to 10% growth rate, as opposed to the 10% to 12%. We really want to be sober and cautious here.

The way we think about it, Chris, is if you walk forward from where we are at, the things we know about are one business that a customer is taking in-house and one business that -- a great customer with great margins is taking away from us due to the sequester and having nothing to do with our performance. So that is a good customer relationship that we could see come back.

So we had an excellent second quarter in value-added services. You and several of your peers gave us a high expectation for the third quarter, that is traditionally a soft quarter for us in that portion of our business, specifically where our automotive customers are concerned. We were very pleased to see in very late August and September certain things aligned that allowed us to meet our expectations and your expectations.

But when we walk forward to the fourth quarter, we have got specific programs. And some of these programs involved are $5 million to $10 million worth of annualized revenue, with the level of value-added service margin. So if they get subtracted from our results -- or added to our results in the case of the new concepts that Scott just mentioned -- that can move the needle.

The value-added side of our business is not transactional. You really have to kind of look at it in a very lumpy way. And so we are thoughtful when we tell you 8% to 10%, but we beg your forgiveness if we are off by a little bit.

Sure. And I guess my question was maybe a little bit more broadly, as you put together transportation, value-added and intermodal; I think that is sort of the way I was thinking about it. Clearly on the value-added you have the puts and takes I think you guys had clearly identified. So I think that was taking a look at the entire book of business to try to get a rough sense on growth rates sequentially. But I think I have that. I think that is helpful.

To your point on the lumpiness of the pipeline, when you think about value-added and you are looking at what you are working on currently from a bid perspective or an indication of interest perspective, is there any thoughts you can give us -- I know you want to talk about 2014 maybe in the future a little bit -- but I guess I wanted to get a rough sense of what the pipeline looks like for value-added right now.

We kind of categorize our pipeline by percentage of opportunity relative to what we think we can win. And if looking at the top 25 opportunities that we see that are rated at a potential 50% when ranked, we have in the pipeline in excess of $57 million of opportunity, and it is opportunity.

Okay, that is very helpful. I will leave it there. Thanks very much for the time, guys. I appreciate it.

Thank you, Chris.

Tom Albrecht, BB&T Capital Markets.

Hey, guys, thanks for the time. I have got a bunch of little questions and a couple of bigger ones. First off, David, what are you thinking about for the tax rate? It has kind of be-bopped around all this year. Like a regular expense.

The third quarter, we actually -- we had maybe a couple hundred basis improvement due to some return of provision issues and some finalization of issues in connection with the LINC transaction. Which, because Universal is a multistate organization -- and that was true prior to October of last year and it has been -- and LINC Logistics certainly was as well -- there are -- we have (inaudible) sophisticated instead of complex.

But we have a lot of state allocation issues because of the nature of our business. And transportation is treated one way and value-added is treated another. We had -- a variety of things in the course of completing the annual return in the third quarter were adjusted -- state tax rates, deferred adjustments, things like that.

I would expect us to move back into that range in the fourth quarter on a quarterly basis, of more the 38.5%, not as high as 39%, but that kind of a normalized rate. And the third quarter -- I don't know what -- the first and second quarter was bouncing around, I think the third quarter just we picked up a little bit.

Right. Okay, that's helpful. And then I was a little surprised -- depreciation and amortization declined about $300,000 sequentially. I mean, with an asset-light business, I would think it would be kind of just steady. Should we think about $4.7 million for the next couple quarters?

I am looking at about a $200,000 change, and it will depend a little bit on the time of -- in my comments on CapEx -- we have underspent this year. And so when we look at our CapEx, a very large proportion of it is rolling stock. And so when things kind of hit the end of their useful life, that can create a little bit of lumpiness too.

But I actually anticipate that it will bounce back up -- if we hit the spending that we have talked about internally and reviewed with our Board for the fourth quarter and the first quarter of next year.

Okay. And so I want to clarify, the 8% to 10%, Scott, that you gave, was sort of a growth rate for revenues only at VAS, right?

That's correct.

And so we have been close to seeing transportation revenues level out. I am not clear based upon some of your earlier comments whether we can expect transportation to be flat to up still -- or finally, or still down a little bit.

I'm not sure I can give you a better answer than you just spit out, Tom. Honestly, I think it is going to be flat to down -- not down much. You have to recall that this time last year, we had a huge FEMA event in the Northeast. We were also winding down energy -- wind energy. So those two pieces are a big impact.

I don't know that we can make up for that, because our fourth quarter was stronger than we expected last year. So I am going to have to say, best case flat, maybe down a little.

Okay. And then I know in the second-quarter conference call you said that wind energy had gotten back to about $5 million. And this was all just kind of thinking out loud, but you speculated that wind might be as much as $10 million in the third and fourth quarter. Did you attain that level for revenues and is that still your thought for the fourth quarter potentially?

If you can give me a second, Tom, I think I have got that number with me. But it did improve sequentially. The wind business is all centered on one basic area. The largest of the customers is General Electric, but we do lots of things for General Electric. So just a broad overlook is it was probably down -- it was actually about $7.7 million in the third quarter, and that compares to last year being down about 10%. So does that make some answer? It is gaining speed.

Yes.

Down 10% in the third quarter, but we don't expect that momentum to pick up a great deal.

Okay. And then just on the intermodal numbers, I know there was project work in the first and second quarters, and you had warned that that wasn't going to be there. I don't know whether to be excited about the revenue per load being up about 18% year over year at almost 380, or whether to be more concerned that down 7.5% on the load is the way I need to think about it.

The intermodal numbers are based primarily on the drayage business. So we dray both domestic and international, but we were pretty good in the international area. We saw our domestic a little bit softer, just simply because we cater to the steamship lines and so forth, the international trade.

Right. So probably a good revenue per load in Q4, but probably off on a total volume basis, is that kind of what you are saying?

It will continue to come down. I mean, fourth quarter is always pretty good for international trade. It tails off right about this time of year, when the Christmas inbound season is done, which is about to happen. So it will look better, but not by a whole lot.

Okay. And then the last question -- I think this is what we are all kind of wondering about -- because now we have lapped about a full year and got good year-over-year numbers and all that. The year-ago quarter was -- on a fully-taxed basis, excluding all the acquisition expenses, et cetera, was about $0.42. You just did $0.46.

I think what we are trying to figure out is do you expect growth year over year in earnings, and do you even expect growth sequentially from that $0.46 number?

I think the fourth quarter is the first directly comparable quarter to the fourth quarter of last year, where the taxes are the same, the purchase accounting is the same. So for the first time, it's an apples-to-apples comparison and I don't have to use the word pro forma.

Tom, this is going to sound cheeky, and I apologize. There were some fourth-quarter charges related to the acquisition that I don't have in front of me to calculate that, and what the impact of that is on an EPS basis. But if you ignore that, I think based on what we said in terms of continued growth of the value-added services, kind of flat to modestly down on the transportation services and Don's comments on intermodal, I think you can figure out where we think EPS is going to go, ignoring some adjustment relative to the acquisition, outside the ordinary course adjustments. Does that help?

Well, you are dealing with a dangerous crew of analysts so --

I hear you.

I guess I am just trying to figure out -- I mean, does that sound like down sequentially maybe -- forget about the year ago?

Down sequentially from the third quarter?

Yes.

I think the relevant comparison is to the fourth quarter of a year ago.

Well, right, but I mean, that is a weird quarter, so --

What I will tell you is -- I think you can -- I just don't have it. I would like to be able to answer your question a little bit more clearly. I don't have in front of me the fourth quarter adjustment. But it was published, it is in the information. If I had 15 minutes -- and I will after the call -- to try and answer your question for myself. But that information is available.

And what I think I am telling you is the core underlying business on a straight-line basis is expected to be better quarter over prior year quarter. I just don't -- in my head can't calculate for you the after-tax impact of the cost of the one-time adjustments in the fourth quarter of last year. So I don't want to get out ahead of myself in terms of just a straight EPS to EPS comparison.

Okay, all right. I may end up calling you a little bit -- I think everybody -- really, this is not an analyst trap question. It is more we all are enjoying the story, but we don't want to necessarily go out with a dumb number, because we are all still learning this business.

No, fair enough. And a guy I used to work for trained me well that I don't say things that I don't know the answer to on conference calls. But I do know that the fourth-quarter adjustment number is published, and you can divide 30 million shares into that number on an after-tax basis. And that is the only adjustment to my comment.

Okay. I will get off and get back in the queue. Thank you.

Thank you, Tom.

John Larkin, Stifel.

Good morning, gentlemen. Thanks for taking my call. I had a question about the way the data is presented in the press release, just out of curiosity more so than anything else. There is really good operating data on transportation services, value-added services and intermodal. Yet the segment performance data in terms of what I would call revenue and operating income is broken down into transportation and logistics. Could you sort of map us between the three categories of operating data and the two categories of financial data?

Great question. I would love to be able to answer it. We internally manage and review our information according to the three service categories in a way that is relevant to the various business units. Because we operate a lot of business units.

We provide and are really compelled to provide the segment information that we do as a tip of the hat to GAAP requirements, but we don't actually map them across that way. We understand the question. We appreciate why it is asked. We don't manage the businesses that way, and so the level of detail is just not available in that form between those businesses.

So I hope we have made it clear, John, that when we talk about the transportation segment, that includes our transportation services -- our transactional transportation services, our intermodal services, our brokerage services our specialized services, which is the air, ocean, ground stuff. It does not include the dedicated truckload stuff; that is included in the logistics segment.

So for us the definition of logistics is where we have a contracted commitment with a customer for some expected level of supply.

Okay. Is there a pretty direct one-to-one mapping between value-added services and the logistics segment?

Logistics includes value-added services in its entirety and the dedicated portion of the transportation services.

Okay. That is clear. That is all I was really looking for there. So thank you for that.

In talking about kind of conceptually what 2014 and 2015 might offer, one of the -- actually the only transborder railroad has talked many times about new auto plants opening up down in Mexico, I think one shortly and then maybe three or four next year. Are those plants going to have any element of outsourced activity logistics-wise that could be an opportunity for LINC? And how does the opening of those plants correspond to any bidding process that might be involved? In other words, do they bid the logistics piece out a year in advance, six months in advance? How would that work when it comes to a new plant like that?

John, it's Scott. It kind of -- it has various buckets to it. And when I say that, some of the operations, the value-added operations that are already active with our customers will get benefit of those plants in itself. In other words, from a consolidation perspective, transportation perspective, the addition of those plants has an automatic growth feature in the value-added side.

Looking at -- we will call it plant-specific, dedicated, off-site operations, typically those will come out for bid in a six- to eight-month lead time prior to a plant opening. They will conceptually address it, and then put it out for bid about eight months ahead, try to award it six months ahead so that you can do the training, the hiring, asset allocation, all the things you would need to support it. So that lead time, again, is in the six to eight month preproduction.

Okay. That gives us a sense for the timetables, and that is very helpful. I appreciate that.

Another question I have regards kind of the competitive landscape. My sense has been -- and correct me if I am wrong on this -- that LINC has some capabilities that are fairly unique. There are some small, single-digit number of players out there that have kind of this capability.

As the more transactional brokerage business seems to be getting a little bit saturated, beginning to see some of those companies move into more of a logistics management, transportation management, outsourcing kind of a role, have you felt any competitive pressure from some of these brokers that are growing up and perhaps pushing into logistics?

Into the logistics segment? No.

Okay.

Really haven't felt any pressure.

That is encouraging. And then lastly, on the transportation side, it looks like the margins there are somewhere in the 4% to 5% range, and seem to be pretty steady, given the variable cost model. The other big player in the space has margins that are maybe 200 or 300 basis points better historically.

Is there any reason -- based on sort of the model within the Universal owner-operator or agent side of the business, is there any reason why you couldn't move sort of over time in that direction? Is it going to take more volume? Are there cost or efficiency pieces that need to be put into place? Help us understand how margins on the owner-operator or agent side may evolve here over the next, say, I don't know, 2 to 5 years, something like that.

John, our plan really is to continue to work on that. We did a lot of acquisition work and growth, where sometimes we brought businesses in that were a bit of a fixer-up project for us. And as we've matured, you will notice we have really not done any of those in the last 14 months.

What we are doing is trying to make them perform better. And in many cases, some of them as we did in 2012, we shed some very low-margin brokerage. We are also working on improving the margins on some of the other agent-based businesses. And in some cases, we will try to change the growth prospects by giving them a better supply of potential customers with our enterprise sales group.

So long-term, we think we can improve that margin year over year. It will get better. It will be hard to just simply have a great growth pattern there because we will shed some of that less profitable business and replace it with some other things. But yes, we will continue to drive that down.

That's great color. Thanks, Don.

Kelly Dougherty, Macquarie.

Hi guys, it's actually Matt Frankel on for Kelly this morning. Thanks for taking the question.

I'm curious -- just to piggyback off what you were just talking about in terms of potential M&A. We have heard a lot of chatter in the industry and very recently. It seems to be activity -- potential activity seems to be picking up, in addition to what is out there publicly already in the transport space. So I am curious, to the degree that you are looking at things as you mentioned, what part of the business are you most interested in from an acquisition perspective?

We are looking at our full level of services; in other words, transportation, intermodal and logistics. We are looking at acquisitions that could help grow or support growth for all of those.

We would certainly move slightly towards a value-added services aspect of the business because of certainly the margin accretion that it can generate. But we are looking to expand from a geographical perspective, new customer base opportunities, and any of those services that would provide are potential M&A activities for us.

I have talked to Kelly before about this too, and we always talk about something that will bring a new customer or a new vertical market to us, a new geography. And we are very interested in Mexico because that is a very large market that has got its own kind of logistics and transportation opportunities.

And we are seeing -- some of Scott's comments earlier -- as you might imagine, a lot of the ideas that you are talking to and a lot of the chatter -- that is a great word for it -- we are certainly very aware of. And people give us good ideas, they give us bad ideas. We are actively looking at things, small, medium and large, but they do fit some criteria that we have established in the areas of vertical geographies and service extensions.

Got you. But would you say there is some competition out there for things? I mean, is it tending to heat up from a valuation perspective? Just curious (multiple speakers) --

We are very sensitive and we speak to our Board about things like how does a strategic buyer like Universal compare? A lot of the assets that you are talking about are in the hands of sponsors that can drive pricing and process. One of the things that that makes us conclude is, well, we can -- I had a comment earlier about operating synergy or back-office synergy.

That comment is in the context of we can perhaps bring value to a deal, depending on what the characteristics are, that a sponsored sale might not have, or a PE buyer might not be able to leverage that. So that is one of the areas where we can distinguish ourselves, in an area where pricing is hot and partially, obviously, being driven by relatively inexpensive capital.

Got you. One other thing I wanted to bring up was the liquidity of the stock. And so you obviously have a shelf out there. I am curious generally in terms of timing when you guys think you might take something off that shelf, whether it be in the next six months more likely than the next -- or the back half of next year. I am just -- broadly speaking, is that something you are in a hurry to work on or is that something that is going to take a couple of years?

I think I would say that we are opportunistic. Our current principle shareholders are very much buy, build and grow. They recognize the liquidity of the shares; that is why the shelf is out there. I won't claim that the 25,000 shares that the Company just sold is a huge amount. But the secondary that was part of that was obviously, we think, a signal of the willingness to do that.

But I will also tell you that one scenario -- and this is only a scenario -- would be the chance to do a liquidity event in connection with an acquisition, for example. So those are the kinds of things. We don't have -- the Board has not established a specific plan that says our public float is [good] today and we want it to be that two years from now. We do not have that plan in place.

But we have conversations all the time about the types of things that might allow us to continue to work towards that -- the public float question.

Got it. And one last question and I will jump off. In terms of the business mix, you guys obviously touched on auto and government and metals. Do those three remain the largest sectors for you guys, or has the mix changed at all over the last quarter or two?

No, the vertical market mix is still as you describe, not significant shifts.

Okay, got it. Thank you.

Scott Group, Wolfe Research.

Hey, thanks. Good morning, guys. Sorry to go back to it. I just want to follow up on the contracts and kind of the 8% to 10% revenue growth in value-added for fourth quarter. Did I hear right? So one of the customers is going away kind of in the back half of the quarter. And when is the other customer that is winding down, when is that wind-down happening?

One, which I will call the significant transition, where they are absorbing directly employees and putting them into their operation, will start in the first week of November.

The aerospace side of it will be a wind-down starting again in November, with a target of being completed in the first half of January -- [24th January].

And just to extend that, on the first customer, it is the largest operation that they are bringing in-house, but it is one of three operations that we actually deliver to that customer in two different states.

Okay. So two follow-ups to that point. If both of these customers were to be gone kind of the beginning of the quarter, do you have a sense of the revenue would be -- would it still be up or not? Just helpful when we think about kind of a run rate basis to when we start building out 2014. So that is one question.

And then the second one, to your point, David, that it is one of three. Have they given any indication on the other two what they may do with that and when those potentially come up for renewal?

I will answer the last question first. No; in fact, we have negotiated and been awarded a two-year extension on the other two operations.

Okay, great. Good.

And I don't have a number in front of me to address your question on the first one, but I am just looking at something real quickly. It might be $3 million -- $3 million, $4 million on a quarterly basis.

For both of them for the full quarter, you are saying (multiple speakers)?

No, I am speaking of the one customer. I can't speak to the other one. I might be able to --.

Regarding the impact on (multiple speakers) --

On the fourth quarter, I have got --

Roughly, I think in the fourth quarter, it would be roughly 2.3, 2.4 roughly (multiple speakers).

For the other one -- are we talking about the other one?

I am talking about the (multiple speakers).

Okay.

Sorry, I missed that.

We are working on it for you.

Okay. I can follow-up off-line -- I am happy to follow up off-line.

And maybe while you are looking for it, just the last question. The $57 million of opportunity that you mentioned, Scott, how does that compare -- that pipeline, how would that compare with six months ago or a year ago? I just don't know if that is good pipeline or bad pipeline.

I would tell you it is a much-improved pipeline.

Okay, great. All right. So if you have those numbers, great, now. If not, I am happy to get them off-line. Thank you guys, appreciate it.

Thank you.

We have no further questions in the queue.

Well, again, thank you for your interest in Universal Truckload Services. Certainly appreciate your participation in today's call. We wish you a good day and a great weekend. Take care. Bye.

This concludes today's conference call. You may now disconnect.