Hub Group, Inc. — Q1 2015 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2015, compared with the same period in 2014. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments. Results are unaudited; the company cautions that interim results may be affected by seasonality.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $835.9 million | $848.4 million |
| Gross margin | $89.1 million (10.7% of revenue) | $88.7 million (10.5%) |
| Operating income | $18.8 million | $20.5 million |
| Net income | $10.3 million | $12.0 million |
| Diluted EPS | $0.28 | $0.33 |
| Cash from operations | $45.3 million | $18.6 million |
| Capital expenditures | $15.1 million | $33.0 million |
Revenue declined 1.5%, operating income declined 8.3%, and net income declined 14.6% year over year. Gross margin rose 0.4%, while operating expenses increased to $70.3 million from $68.2 million. Higher salaries and benefits and agent fees more than offset lower general and administrative expense. Other expense increased to $2.1 million from $0.6 million, principally due to foreign currency translation losses and higher interest expense. The effective tax rate was 38.3%, versus 39.5%.
Hub segment revenue fell 1.5% to $643.4 million and operating income fell to $13.7 million from $15.9 million. Mode revenue rose 2.2% to $213.5 million and operating income increased to $5.1 million from $4.6 million. Consolidated intermodal revenue declined 2%, truck brokerage revenue increased 1%, and logistics revenue declined 2%.
Liquidity, debt and capital
Cash and cash equivalents were $129.3 million at March 31, 2015, compared with $109.8 million at year-end. Current assets were $587.3 million and current liabilities $368.7 million. Total debt was approximately $98.0 million, including $21.9 million current and $76.1 million long term; capital lease obligations were separately reported. The company had $43.9 million of available revolving credit, $6.1 million in standby letters of credit, and was in compliance with debt covenants.
Operating cash flow increased substantially year over year, reflecting working-capital movements, including the timing of customer payments. Investing used $15.0 million and financing used $10.8 million. Financing included $13.4 million of treasury-stock purchases and $11.5 million of new debt proceeds. The board’s buyback authorization was $75 million through December 31, 2015; $43.6 million remained available at quarter-end.
Material changes, outlook and risks
- Management attributed Hub intermodal margin pressure to West Coast port slowdowns, worsening rail service, network imbalances, and a California driver-model change. Lower utilization cost about $2.5 million, higher storage cost $1.2 million, and reduced loaded miles $0.6 million. A tentative five-year port labor agreement was reached in late February.
- Management expects 2015 capital expenditures of $85–$95 million and a full-year effective tax rate of approximately 38.3%. The company expects cash, operating cash flow and available credit to meet needs for at least the next 12 months.
- In March, Hub Group contracted to purchase 300 Freightliner tractors for approximately $43.4 million, including warranty, with delivery expected April–September 2015; it intends to finance the purchase with secured fixed-rate debt.
- Potential maximum exposure under owner-operator tractor lease guarantees was $22.6 million; the recorded estimated-default liability was approximately $0.3 million. No material defaults were reported.
- Unresolved California driver-classification and Illinois owner-operator lawsuits remain. The company said it cannot reasonably estimate any possible loss or range of loss from the remaining claims. It reported that 92% of California drivers had accepted settlement offers by April 20, 2015, without an admission of liability.
- Disclosed risks include rail service and capacity, vendor costs, competition, fuel prices, customer concentration, labor and contractor regulation, cyber and technology risks, insurance costs, and recruiting and retaining drivers, agents and personnel. Management stated it was evaluating the impact and transition method for the forthcoming revenue-recognition standard.
Important facts for investors to verify
- Whether rail service and port-related operating inefficiencies ease, and whether Hub intermodal margins recover.
- Whether the improved operating cash flow is sustainable, given management’s emphasis on customer-payment timing.
- Execution, financing and returns associated with the planned tractor purchases and 2015 capital spending.
- Developments and potential financial exposure from the unresolved driver-classification litigation and lease guarantees.
- Buyback pace and remaining authorization, alongside debt levels and liquidity needs.