Hub Group, Inc. — Q1 2023 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2023, compared with Q1 2022. Hub Group provides intermodal, trucking, and logistics services. Beginning in Q1 2023, it reports two segments: Intermodal and Transportation Solutions (ITS) and Logistics; comparative segment results were recast. Interim results may not indicate full-year performance.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $1,152.3 million | $1,298.1 million | Down 11% |
| Operating income | $78.2 million | $115.1 million | Down 32% |
| Operating margin | 6.8% | 8.9% | Down 2.1 percentage points |
| Net income | $61.8 million | $87.5 million | Down 29% |
| Diluted EPS | $1.88 | $2.58 | Down 27% |
| Cash from operating activities | $89.4 million | $80.2 million | Up $9.2 million |
| Capital expenditures | $26.8 million | $30.9 million | Down $4.1 million |
Segment results. ITS revenue was $709.2 million, down 9%; operating income fell to $49.4 million from $85.7 million, and margin declined to 7% from 11%. Intermodal volume fell 12%, partly offset by 3% higher intermodal revenue per load and 5% growth in dedicated revenue. Logistics revenue declined 13% to $469.1 million, while operating income was nearly flat at $28.8 million; its margin improved to 6% from 5%.
Costs and profitability. Purchased transportation and warehousing expense fell 13%, reflecting lower volumes, lower third-party carrier costs, and less outsourced drayage. Salaries and benefits rose to $137.4 million from $128.7 million, and increased to 11.9% of revenue from 9.9%. Depreciation and amortization and insurance and claims also rose as a share of revenue. Interest expense increased to $3.0 million from $1.7 million, mainly due to higher rates. The effective tax rate declined to 19.4% from 22.9%, primarily benefiting from a change in state apportionment methodology.
Liquidity, debt and cash flow
Cash and cash equivalents were $342.6 million at March 31, 2023, versus $286.6 million at year-end 2022; restricted investments were $19.2 million. Total equipment-note debt was $334.1 million, including $97.9 million current, down from $342.5 million at year-end. Cash exceeded reported debt by approximately $8.5 million. The company had no borrowings under its $350 million unsecured credit agreement and reported $306.6 million of available borrowing capacity after letters of credit. It was in compliance with debt covenants.
Operating cash flow increased to $89.4 million, supported by net income and non-cash charges and changes in working capital. Investing activities used $16.6 million, including $26.8 million of capital expenditures, partly offset by equipment-sale proceeds. Financing activities used $16.9 million, including $29.2 million of debt repayments and $20.8 million of new equipment-related borrowing. Cash increased by $55.9 million during the quarter.
Outlook, commentary and risks
Management expects 2023 capital expenditures of $140 million to $150 million, reduced from the prior estimate of $170 million to $190 million, mainly because of lower planned container purchases. The company expects $116 million to $124 million for transportation equipment and $24 million to $26 million for technology and other investments, funded with cash and debt. Management believes available cash, operating cash flow and other financing sources will be sufficient for planned needs over the next twelve months and foreseeable future. The filing provides no specific revenue or earnings guidance.
Management cited inflation, weaker consumer spending, a possible recession, retailer inventory levels, increased transportation capacity, aggressive competitor pricing, and inability to pass through cost increases as potential pressures on 2023 revenue, profitability and cash flow. Other stated risks include customer concentration and loss of major customers, labor and driver availability, rail and carrier capacity or service disruptions, fuel and interest-rate changes, insurance claims, cyber and technology risks, regulation, severe weather, and geopolitical or supply-chain disruption. The top 50 customers generated approximately 63% of Q1 revenue, and one customer exceeded 10%.
The company acquired TAGG Logistics in August 2022; the acquisition added scale and e-commerce capabilities to Logistics and 669 warehouse employees. The company is integrating TAGG’s operations and controls. Management stated that pending claims, including employment-related putative class actions, are not expected to have a material adverse effect overall based on current knowledge, though actual outcomes could be material in a particular period. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether intermodal volumes and ITS operating margins stabilize after the sharp year-over-year decline.
- Whether Logistics yield initiatives and lower purchased-transportation costs can sustain its improved margin amid lower revenue.
- Customer concentration, including the customer contributing more than 10% of quarterly revenue, and the potential impact of customer losses or weaker demand.
- Execution of the reduced $140 million–$150 million capital expenditure plan and its effects on cash, equipment capacity and debt.
- Changes in working capital, equipment-note repayments, interest costs and availability under the credit agreement.
- TAGG integration progress, including operational and internal-control integration, and the resolution or development of pending legal matters.