Hub Group, Inc. — 2015 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015, compared with the same 2014 periods. Dollar amounts below are in millions unless stated otherwise. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments. Financial statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $899.9 | $913.4 | $2,635.3 | $2,655.8 |
| Gross margin | $105.1 | $93.2 | $295.9 | $280.5 |
| Gross margin as % of revenue | 11.7% | 10.2% | 11.2% | 10.6% |
| Operating income | $33.4 | $7.7 | $81.7 | $59.1 |
| Net income | $19.8 | $4.5 | $48.6 | $35.2 |
| Diluted earnings per share | $0.55 | $0.12 | $1.35 | $0.96 |
| Operating cash flow | — | — | $132.8 | $58.6 |
Q3 operating margin was 3.7%, versus 0.8% a year earlier; nine-month operating margin was 3.1%, versus 2.2%. Q3 and nine-month revenue declined about 1.5% and 0.8%, respectively, while gross margin and earnings improved.
Balance sheet and liquidity at September 30, 2015: Cash and cash equivalents were $183.5 million; current assets $629.5 million and current liabilities $394.5 million (current ratio approximately 1.60). Equipment-note debt totaled $106.6 million, including $25.9 million current and $80.7 million long term. The company reported $42.9 million of available revolving credit and compliance with debt covenants. Cash exceeded equipment-note debt by approximately $76.9 million, before capital leases. Total assets were $1,281.0 million.
Cash flows for the first nine months: Operating activities provided $132.8 million; investing activities used $40.0 million, including $41.0 million of capital expenditures; financing activities used $18.9 million. Cash increased $73.8 million to $183.5 million. Operating cash flow improved by $74.2 million year over year, primarily due to timing of customer payments and use of prepaid taxes.
Changes versus prior comparable periods
- Q3 Hub Group revenue fell 1.5%, but gross margin rose 12.7% and net income increased to $19.8 million from $4.5 million. The prior-year quarter included $10.3 million of California driver settlement and conversion costs and an $11.9 million software impairment; neither charge recurred in 2015. Improved segment margins also contributed to the increase.
- For the first nine months, revenue declined slightly while gross margin increased 5.5%, operating income increased to $81.7 million from $59.1 million, and net income rose to $48.6 million from $35.2 million. The absence of the prior-year driver and software charges benefited the comparison.
- Q3 Hub segment gross margin increased to $74.5 million from $64.1 million; Mode gross margin increased to $30.6 million from $29.1 million. Companywide Q3 revenue was pressured by lower fuel revenue and weaker logistics and Mode truck-brokerage revenue. Intermodal volume increased 3.5% in Hub and 5.6% in Mode.
- Q3 salaries and benefits increased to $36.4 million from $30.9 million, primarily reflecting bonuses, merit increases and higher headcount. Other expense also increased, partly due to currency translation losses and higher interest on equipment debt.
Outlook, commentary and risks
- Management expected 2015 capital expenditures of $85 million to $95 million. Through September, capital expenditures were $41.0 million. The company had contracted to acquire 300 tractors for approximately $43.4 million and 1,000 containers for $10.5 million, with remaining deliveries expected by year-end and November, respectively.
- Management said cash, operating cash flows and available credit should meet cash needs for at least the next 12 months. It expected a fourth-quarter effective tax rate of approximately 37.5%.
- Management cited margin initiatives including improved load matching, reduced empty miles and drayage costs, better accessorial-cost recovery, pricing and use of a load-acceptance optimization tool. It also noted first-quarter 2015 West Coast port slowdown and rail-service issues affected operations.
- Key disclosed business risks include rail and trucking capacity or service changes, vendor-cost increases, competition, fuel-price fluctuations, customer or agent concentration, driver recruitment and classification-related regulatory or legal costs, cyber and technology risks, insurance and labor costs, and economic weakness. The filing reported no material change to previously disclosed risk factors.
- California driver-classification litigation remains unresolved. The company said it could not reasonably estimate a possible loss or range of loss. In the Robles matter, 93% of California drivers had accepted individual settlement offers as of September 30, 2015; a separate California PAGA action was filed in August. In the Lubinski matter, Illinois-law claims were dismissed with prejudice, but the plaintiff appealed; remaining claims were unresolved.
- Maximum potential exposure under driver tractor-lease guarantees was approximately $16.0 million, with an estimated fair-value liability of about $0.2 million; the company reported no material defaults. The board’s $75 million share-repurchase authorization expired December 31, 2015; $28.2 million remained available at September 30. Treasury-stock purchases were $28.8 million during the first nine months.
Important facts for investors to verify
- How much of earnings improvement reflects recurring margin and operating performance versus the absence of the 2014 settlement and software-impairment charges.
- Whether higher intermodal volumes and improved yields can offset lower fuel revenue, logistics customer losses, and pressure in truck brokerage.
- Updates on the California and Illinois driver-related litigation, including potential exposure, settlement developments and appeal outcomes.
- Actual 2015 capital expenditures, tractor and container deliveries, and related debt and lease obligations.
- Working-capital cash-flow effects and continued availability under the credit facility, alongside debt covenant compliance.