Hub Group, Inc. — Q2 2016 Form 10-Q
Business context and period: The filing reports the three and six months ended June 30, 2016, compared with the same 2015 periods. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $855.6 | $899.5 | $1,661.4 | $1,735.5 |
| Gross margin | $114.5 | $101.7 | $222.9 | $190.9 |
| Operating income | $34.3 | $29.5 | $63.1 | $48.3 |
| Net income | $20.7 | $18.5 | $38.6 | $28.7 |
| Diluted EPS | $0.61 | $0.51 | $1.12 | $0.80 |
- Revenue fell 4.9% in Q2 and 4.3% year to date. Q2 gross margin rose 12.5%; gross margin as a share of revenue improved to 13.4% from 11.3%. Operating margin increased to 4.0% from 3.3%.
- For the first half, operating margin increased to 3.8% from 2.8%. Higher margins and lower other expense more than offset higher operating expenses and income taxes, lifting net income.
- Management attributed revenue pressure mainly to lower fuel-related revenue and weaker Hub volumes/pricing in certain lines. Margin improvement reflected pricing, accessorial recovery, better equipment utilization, lower drayage costs, customer mix, and purchasing efficiencies.
- Operating expenses rose: salaries and benefits were $43.6 million in Q2 (up from $38.8 million), and total costs and expenses were $80.2 million (up from $72.3 million). The six-month effective tax rate was 38.4%, versus 37.1%.
Cash flow, liquidity and debt
- First-half operating cash flow was $72.4 million, down from $80.5 million. Capital expenditures were $25.2 million; investing cash outflow was $24.1 million.
- Financing cash outflow was $91.9 million, including $85.0 million of treasury-stock purchases. Cash declined $43.6 million to $164.2 million from year-end 2015.
- At June 30, total debt was $130.4 million, including $35.4 million current debt; capital lease obligations totaled $14.6 million. The company had $41.8 million of available revolving-credit borrowings, $8.2 million of letters of credit, and was in compliance with debt covenants.
- Management said cash, operating cash flow and available credit should fund needs for at least the next 12 months.
Outlook, risks and contingencies
- Management estimated 2016 capital expenditures of $95–$105 million and expected to purchase 6,000 containers, financed with debt. In Q2 it committed to acquire 4,500 containers for about $43 million, with delivery expected July–November 2016. A subsequent commitment covered 100 trailers for about $3 million.
- Management expected an effective tax rate of approximately 38.3% for full-year 2016 (approximately 38.2% for the remainder of the year, per the quarterly discussion).
- California and Illinois driver/owner-operator classification lawsuits remain unresolved. The company said it could not reasonably estimate possible loss or range of loss. It reported that 93% of California drivers had accepted settlement offers; the Robles court granted the company’s dismissal motion in part and denied it in part in July 2016.
- Principal disclosed risks include rail service and capacity, competition, vendor costs, fuel and interest rates, customer concentration and financial health, driver/agent recruitment and classification, labor, cyberattacks, insurance costs, regulation, and execution/integration of acquisitions. The filing reported no material change to previously disclosed risk factors.
- Hub’s top 50 customers represented about 63% of Hub segment revenue in the first half; Mode’s top 20 accounted for about 39% of Mode segment revenue.
Most important facts to verify
- Whether gross-margin gains and operating efficiencies can continue despite lower revenue, fuel effects, and pricing/mix pressure.
- Execution, financing, and returns on planned container and other capital spending, alongside the $95–$105 million capex estimate.
- Cash generation and liquidity after substantial share repurchases and planned equipment purchases.
- Developments and potential financial exposure in the driver-classification litigation, which the company says cannot currently be estimated.
- Customer concentration, rail/vendor conditions, and the effect of a higher tax rate on full-year earnings.