Hub Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Dollar amounts are in millions, except per-share data. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments. Mode was acquired on April 1, 2011, so the reported Q1 2011 comparison does not include Mode.
Financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $739.9 | $485.4 |
| Gross margin | $83.7 (11.3%) | $57.3 (11.8%) |
| Operating income | $22.5 (3.0%) | $16.8 (3.5%) |
| Net income | $13.7 | $10.5 |
| Diluted EPS | $0.37 | $0.28 |
| Operating cash flow | $22.8 | $25.5 |
| Capital expenditures | $17.0 | $4.9 |
Revenue increased 52.4%, primarily reflecting the inclusion of Mode, which contributed $187.2 million. Hub segment revenue rose 16.0% to $563.2 million. Intermodal revenue grew 20% on 15% higher loads and a 5% increase from fuel, price and mix; logistics revenue rose 23%, mainly from existing-customer growth. Truck brokerage revenue declined 6%.
Gross margin increased 46.1%, but gross margin rate fell to 11.3% from 11.8%. Management attributed Hub’s lower margin rate mainly to higher-than-expected carrier and fuel costs affecting intermodal yield and lower logistics yield as a greater mix of business was transactional rather than management-fee based. Operating margin also declined. Net income rose 30.1%, reflecting higher Hub operating income and Mode’s inclusion.
Liquidity, debt and cash flow
- Cash was $52.7 million at March 31, 2012, versus $49.1 million at December 31, 2011. Current assets were $427.9 million and current liabilities $276.1 million.
- Operating cash flow was $22.8 million, down from $25.5 million a year earlier. The filing says Mode’s greater difference between days sales outstanding and days payable outstanding negatively affected operating cash flow.
- Investing cash outflow was $17.1 million, principally for land for the new headquarters, technology, containers and leasehold improvements. Financing cash outflow was $2.1 million, including $1.7 million for treasury stock and $0.5 million in capital lease payments.
- The company reported $47.4 million of unused availability under its revolving credit line, $2.6 million of outstanding letters of credit, and compliance with debt covenants. Total capital lease liabilities were about $25.1 million; the filing does not state a drawn balance on the revolving line.
- Management said cash, operating cash flow and available credit were expected to be sufficient for at least the next 12 months.
Outlook, risks and notable items
- Management expected 2012 capital expenditures of $60–$70 million, including $20–$30 million for the two-year headquarters project and approximately $24 million for containers.
- Equipment purchase contracts covered 1,000 containers for approximately $11 million, with expected delivery June–October 2012. A subsequent April 20 contract covered another 1,000 containers for approximately $12 million, expected July–September 2012.
- Owner-operator tractor lease guarantees had a maximum potential exposure of $32.4 million, up from $24.0 million at year-end; the recorded liability was approximately $0.7 million. The company reported no material defaults or potential material defaults.
- The remaining restructuring accrual was $0.3 million. Facility closures and personnel changes were expected to be completed by mid-2012.
- Management cited risks including economic and market conditions, railroad relationships and service, transportation capacity and vendor costs, fuel prices, competition, customer or Mode-agent losses, recruiting and retention, regulation, cybersecurity and technology, and integration of Mode. The company is exposed to interest-rate changes on its credit line.
- Management stated that litigation arising in the ordinary course of business was not expected to materially adversely affect financial position or results. Disclosure controls were judged effective; Mode integration and related internal-control evaluation were ongoing.
Important facts for investors to verify
- Assess underlying growth and margin trends using comparable periods that include Mode, rather than relying on the reported year-over-year revenue increase alone; Q1 2011 pro forma revenue including Mode was $663.7 million.
- Track Hub intermodal and logistics yields, carrier and fuel cost recovery, and the continued decline in truck brokerage revenue and margin.
- Monitor working-capital effects from Mode, operating cash flow, and the funding and timing of the planned $60–$70 million capital program.
- Review container commitments, capital lease obligations, credit-line availability and covenant compliance, and potential exposure under owner-operator guarantees.
- Evaluate progress on Mode integration, restructuring completion and the customer and agent concentrations disclosed for each segment.