Hub Group, Inc. — FY 2011 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2011, not a standalone fourth-quarter filing. Hub Group is an asset-light freight transportation manager providing intermodal, truck brokerage and logistics services. Following its April 1, 2011 acquisition of Exel Transportation Services, renamed Mode Transportation, the company reported Hub and Mode as separate segments. Mode’s results are included for nine months in 2011; comparisons with 2010 are therefore not fully like-for-like.
Financial performance and position
| Metric | FY 2011 | FY 2010 | Change / context |
|---|---|---|---|
| Revenue | $2,751.5 million | $1,833.7 million | Up 50.1%; includes Mode from April |
| Gross margin | $312.5 million; 11.4% | $213.4 million; 11.6% | Up 46.4%; margin rate down 0.2 percentage points |
| Operating income | $94.5 million; 3.4% of revenue | $69.9 million; 3.8% | Up 35.2%; operating margin narrowed |
| Net income | $58.2 million | $43.5 million | Up 33.9% |
| Diluted EPS | $1.57 | $1.16 | Up from prior year |
| Cash from operations | $74.9 million | $37.7 million | Higher, but working-capital needs remained significant |
Intermodal generated 65% of 2011 revenue, versus 70% in 2010; truck brokerage contributed 21%, versus 18%. Hub revenue rose 19.1% to $2.184 billion, led by intermodal growth (loads up 13%) and logistics growth (36%). Mode generated $586.3 million of revenue and $67.9 million of gross margin, with $6.5 million of operating income for its nine-month contribution.
Cash and cash equivalents were $49.1 million at year-end, down from $115.1 million. Total assets were $842.7 million and stockholders’ equity was $438.9 million. The company had no outstanding bank-line borrowings; $47.4 million remained available under its $50 million revolving facility after letters of credit. Capital-lease liabilities were $25.7 million, including $2.2 million current and $23.4 million non-current. Current assets were $415.8 million versus current liabilities of $270.9 million.
Investing cash outflow was $139.8 million, including $85.2 million for acquisitions and $55.0 million of property and equipment purchases. Management attributed some pressure on operating cash flow to Mode’s working-capital timing. Transportation costs were 88.6% of revenue, compared with 88.4% in 2010.
Material changes and unusual items
- Mode was acquired for a final purchase price of $82.2 million. Its reported 2011 results include only April through December; unaudited pro forma revenue was $2.930 billion for 2011 and $2.515 billion for 2010, assuming acquisition from the start of each year.
- Acquisition-related and restructuring costs included $1.7 million of Mode due-diligence costs, approximately $1.6 million of Mode integration and severance costs, and about $1.3 million of restructuring charges. A $0.6 million restructuring accrual remained at year-end.
- Mode revenue presentation was corrected for a customer: previously reported second- and third-quarter revenue was reduced by $8.5 million and $8.2 million, respectively. Gross margin fell by $0.02 million in each quarter; operating income, net income and EPS were unchanged.
- Fourth-quarter 2011 revenue was $762.8 million, gross margin $83.8 million, operating income $27.1 million, net income $17.0 million and diluted EPS $0.46.
- The company reported maximum exposure of approximately $24.0 million under guarantees of certain owner-operator tractor leases; it reported no material defaults and a recorded guarantee liability of about $0.5 million.
Outlook, management commentary and risks
Management provided no specific revenue or earnings growth guidance. It expected 2012 capital expenditures of $50–$60 million, including $20–$30 million for a new headquarters, approximately $13 million for containers and the balance primarily for technology. Management estimated a 2012 effective tax rate of 38.5%, expected agent fees and commissions to rise as Mode was owned for a full year, and anticipated $1.1–$1.5 million of additional depreciation and amortization.
Management highlighted rail service and economic conditions as major influences on revenue growth. Key risks include dependence on railroads and intermodal demand, rail/drayage/trucking capacity and equipment availability, inability to pass vendor cost increases through to customers, customer concentration, loss of Mode agents, independent-contractor classification changes, labor disruption, information-technology or data-security failures, regulatory changes, and acquisition integration. The 20 largest customers represented approximately 34% of 2011 revenue. The company said pending litigation was not expected to materially affect financial position or results.
The revolving facility runs through March 2014, bears interest at LIBOR plus 1.75%, and includes a $300 million minimum net-worth covenant and a maximum 2.0-to-1 cash-flow leverage ratio. Hub Group reported compliance at year-end. The financial-statement audit was unqualified. Management and the auditor excluded Mode from the 2011 internal-control assessment while integration continued; Mode represented 19.3% of assets, 21.3% of revenue and 6.8% of operating income.
Important facts for investors to verify
- Assess underlying organic growth and margins separately from Mode’s nine-month contribution; compare with the disclosed pro forma results and segment data.
- Track gross-margin recovery, especially whether higher transportation, fuel and capacity costs can be passed on to customers.
- Monitor cash conversion, receivables and payables after the acquisition, along with planned capital spending and headquarters construction costs.
- Review capital-lease and other commitments, the $24.0 million maximum tractor-lease guarantee exposure, and compliance with credit-facility covenants.
- Confirm progress integrating Mode’s systems and controls, and monitor agent retention, customer concentration and the corrected quarterly revenue presentation.