Hub Group, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited consolidated financial statements; amounts below are in millions unless stated otherwise. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments. Mode was acquired on April 1, 2011, making first-half year-over-year comparisons less comparable.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $778.3 | $751.2 | $1,518.2 | $1,236.6 |
| Gross margin | $87.4 | $84.7 | $171.1 | $142.0 |
| Operating income | $27.9 | $23.9 | $50.4 | $40.7 |
| Net income | $17.0 | $14.4 | $30.6 | $24.9 |
| Diluted EPS | $0.46 | $0.39 | $0.82 | $0.67 |
- Q2 revenue rose 3.6%, gross margin 3.1%, operating income 16.4% and net income 17.8% year over year. Six-month reported revenue increased 22.8%, reflecting Mode ownership for six months in 2012 versus three months in 2011.
- Consolidated gross margin was 11.2% of revenue in Q2 versus 11.3% a year earlier; the six-month margin was 11.3% versus 11.5%. Operating margin was 3.6% in Q2 and 3.3% for the first half.
- Q2 Hub segment revenue grew 6.3%; intermodal revenue increased 9% with loads up 9%, logistics revenue grew 13%, and truck brokerage revenue declined 11%. Mode revenue was nearly flat, up 0.5%. Hub cited increased intermodal volume and margin contributions from pricing, equipment turns and in-house drayage, offset by lower yields; truck brokerage faced competition and muted market demand.
- For the first half, Hub intermodal revenue grew 14% with loads up 12%; truck brokerage revenue fell 8%, while logistics revenue increased 18%. Hub gross margin as a share of segment revenue fell to 10.9% from 11.5%, attributed to carrier and fuel cost increases affecting intermodal yield and a shift toward transactional logistics work.
Cash flow, liquidity and obligations
- First-half cash from operations was $26.1, versus $10.0 in 2011. Management cited net income of $30.6 and noncash adjustments of $18.5, partly offset by a $23.0 net use from changes in operating assets and liabilities. The filing says Mode’s larger gap between days payable and days sales outstanding has weighed on operating cash flows.
- Investing cash use was $20.7, including $21.0 of property and equipment purchases; financing cash use was $2.3. Cash increased $3.1 to $52.2 at June 30.
- Current assets were $451.4 and current liabilities $276.7. The company reported $47.4 of available borrowing under its revolving credit line, $2.6 of outstanding letters of credit, and compliance with debt covenants. It said cash, operating cash flow and available credit should cover needs for at least 12 months.
- Capital lease obligations totaled $24.6, including $2.3 current and $22.3 noncurrent. The filing reports no material defaults on owner-operator tractor lease guarantees; maximum potential guarantee exposure was approximately $40.0, with an estimated fair-value liability of $0.8.
Outlook, risks and unusual items
- Management expected 2012 capital expenditures of $60–$70, including $20–$30 for a two-year headquarters project, approximately $26 for containers, $2 for refrigerated-trailer replacements and most of the remainder for technology. The filing also disclosed a $24.1 container purchase contract, with deliveries expected July–October 2012.
- Key risks include market and economic conditions; railroad relationships, service and capacity; competition and vendor-cost changes; fuel prices; customer or Mode-agent concentration and loss; recruiting and retaining employees, agents, drivers and owner-operators; cyber and information-technology risks; regulation, labor issues and insurance costs. Hub’s top 50 customers accounted for approximately 62% of Hub segment first-half revenue; Mode’s top 20 represented approximately 38% of Mode revenue.
- Restructuring accruals declined to $0.05 at June 30 from $0.6 at year-end, mainly due to payments and estimate changes. Management said it did not expect litigation to materially adversely affect financial position or results. Forward-looking statements are subject to risk, and the company disclaimed an obligation to update them.
- Disclosure controls were assessed as effective at June 30. Management continued to evaluate internal controls while integrating Mode.
Important facts for investors to verify
- Assess underlying first-half growth against the Mode-acquisition-adjusted comparison: the filing’s 2011 pro forma results were revenue of $1,414.9, net income of $25.7 and diluted EPS of $0.69; management cautions these are not necessarily actual results had the acquisition occurred earlier.
- Track whether Hub’s intermodal and logistics yields recover after the reported margin pressure, and whether truck brokerage performance improves in a competitive market.
- Monitor conversion of earnings into operating cash, working-capital effects from Mode, and execution and funding of the planned capital program.
- Review potential exposure from the $40.0 maximum owner-operator lease guarantees, customer concentration and the company’s reliance on railroad and transportation vendors.