Hub Group, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. Hub Group is an asset-light freight transportation manager with two reporting segments, Hub and Mode, offering intermodal, truck brokerage and logistics services. Financial amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $3,373.9 million | $3,124.1 million |
| Gross margin | $371.0 million (11.0% of revenue) | $356.1 million (11.4%) |
| Operating income | $113.7 million (3.4% of revenue) | $112.4 million (3.6%) |
| Income before taxes | $112.6 million | $111.3 million |
| Net income | $69.1 million | $68.0 million |
| Diluted EPS | $1.87 | $1.83 |
| Cash from operating activities | $117.4 million | $92.9 million |
| Capital expenditures | $110.9 million | $56.9 million |
- Revenue rose 8.0%; gross margin rose 4.2%, while gross margin as a share of revenue declined 0.4 percentage points. Transportation costs were 89.0% of revenue, versus 88.6%.
- Intermodal generated 64% of 2013 revenue, compared with 65% in 2012; truck brokerage generated 19%, compared with 21%.
- Hub segment revenue increased 8.7% to $2.60 billion; Mode revenue increased 5.5% to $823.2 million. Hub logistics revenue grew 38%, primarily from new customers; Mode intermodal revenue grew 10%, mainly on higher volume. Mode truck brokerage revenue declined 2%.
- At December 31, cash and cash equivalents were $69.0 million, current assets $486.0 million, and current liabilities $321.3 million. Total assets were $1.048 billion and stockholders’ equity $561.5 million.
- Balance-sheet debt included $8.2 million of equipment notes and capital lease liabilities of $20.9 million; current portions were $1.8 million of debt and $2.4 million of capital leases. The revolving facility had $44.8 million available, net of letters of credit, and the company reported compliance with its covenants.
Fourth-quarter results and comparison
For the quarter ended December 31, 2013, revenue was $885.3 million, gross margin $95.1 million, operating income $27.3 million, net income $16.5 million and diluted EPS $0.45. Compared with fourth-quarter 2012, revenue increased from $801.0 million and gross margin from $93.4 million, while operating income declined from $31.6 million, net income from $18.8 million and diluted EPS from $0.51.
Management commentary, outlook and notable items
- Management attributed annual revenue growth to higher volumes and logistics customer growth. Gross-margin pressure reflected higher transportation costs and unfavorable business mix; truck brokerage margin weakened, while intermodal and logistics margins increased.
- A $2.9 million fourth-quarter impairment was recorded after the company decided to retire the Comtrak name and rebrand the operation as Hub Group Trucking. No goodwill impairment was recorded.
- Operating cash flow funded much of the year’s spending, including $110.9 million of capital expenditures: $59 million for containers, $26 million for the new headquarters, and $14 million for tractors and trailers. Management estimated 2014 capital expenditures of $60–$80 million, excluding any new container purchases, and had not decided on a container order.
- Management expected 2014 depreciation and amortization to rise by $2.0–$2.5 million and interest expense to increase with planned equipment financing. It estimated a 2014 effective tax rate of 38.8%. The filing does not provide revenue or earnings guidance.
- The credit facility was amended in December 2013, extending its term to December 2018 and reducing rates and commitment fees; maximum unsecured borrowing capacity remained $50 million. In January 2014, the company agreed to finance approximately $25.4 million of tractors with five-year secured debt at 1.87%–1.93%.
- Key risks include reliance on railroads and intermodal demand, constrained drayage and trucking capacity, driver shortages, equipment availability, transportation-cost increases that may not be passed to customers, customer and Mode-agent retention, economic cyclicality, cybersecurity and regulation of independent contractors.
- A California class-action complaint alleges Comtrak misclassified certain drivers as independent contractors. Proceedings were stayed, and the company could not reasonably estimate any potential loss. Management stated other ordinary-course litigation was not expected to materially affect results.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Investor verification priorities
- Assess whether revenue growth can translate into improved gross and operating margins after the 2013 margin-rate decline.
- Verify the return and utilization of the sharp increase in capital spending, including container and tractor purchases, and the resulting financing needs.
- Track rail service, drayage and driver capacity, vendor cost changes, and the company’s ability to pass those costs through to customers.
- Monitor the California driver-classification litigation, potential regulatory changes, and any resulting contingent liabilities.
- Review 2014 spending, equipment financing, tax-rate assumptions and any subsequent guidance or container-purchase decisions.