Hub Group, Inc. — Q2 2019 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2019. Hub provides intermodal, truck brokerage, logistics and dedicated transportation services. Results are from continuing operations unless noted. The 2018 comparison includes Mode Transportation as discontinued operations; CaseStack, acquired in December 2018, is included in 2019 results but not in the reported 2018 periods. Interim results may be affected by seasonality.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $921.2 million | $894.7 million | $1,854.2 million | $1,732.1 million |
| Gross margin | $132.7 million; 14.4% | $101.0 million; 11.3% | $260.0 million; 14.0% | $192.0 million; 11.1% |
| Operating income | $40.7 million; 4.4% of revenue | $25.4 million; 2.8% | $76.3 million; 4.1% | $41.9 million; 2.4% |
| Income from continuing operations | $29.2 million | $17.2 million | $53.1 million | $28.2 million |
| Net income | $29.2 million | $22.1 million | $53.1 million | $38.2 million |
| Diluted EPS from continuing operations | $0.87 | $0.51 | $1.58 | $0.84 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $135.3 million | $97.6 million |
Revenue by business line: Q2 intermodal $542.9 million (+0.9%), truck brokerage $107.1 million (-6.8%), logistics $193.5 million (+15.3%) and dedicated $77.7 million (+5.2%). For the first half, intermodal revenue was $1,078.9 million (+4.5%), truck brokerage $224.7 million (-4.4%), logistics $396.7 million (+20.1%) and dedicated $153.8 million (+14.6%).
Balance sheet and liquidity at June 30, 2019: Cash and cash equivalents were $149.9 million, total assets $1.930 billion and stockholders’ equity $1.033 billion. Debt totaled $297.8 million, including $98.6 million current and $199.2 million long-term, compared with $330.8 million at December 31, 2018. Operating and finance lease liabilities totaled approximately $40.2 million. The company had no revolver borrowings, $29.7 million of letters of credit and $320.3 million of available borrowing capacity under its $350 million facility; it reported compliance with debt covenants.
Cash flows, first half: Operating activities provided $135.3 million; investing activities used $2.3 million; financing activities used $44.5 million. Cash increased by $88.4 million to $149.9 million. Investing cash flow included $19.4 million received from the 2018 Mode disposition and $7.7 million of equipment-sale proceeds, offsetting some of $28.7 million of capital expenditures. Financing included $51.3 million of debt repayments, $18.3 million of debt proceeds and $7.3 million of treasury-share purchases.
Material changes versus the prior comparable period
- Q2 revenue grew 3.0%, while gross margin increased 31.4% and operating income increased 60.3%. For the first half, revenue grew 7.0%, gross margin 35.4% and operating income 82.0%.
- Management attributed margin improvement to yield management, pricing, operational improvements and CaseStack’s contribution. Q2 intermodal volume declined 7.2%; first-half volume declined 4.3%. Truck brokerage handled more loads, but lower fuel, price and mix reduced reported revenue, partly reflecting CaseStack’s LTL business mix.
- Operating expenses rose, including salaries and benefits and general and administrative expenses, reflecting CaseStack, higher compensation/professional services and, in 2019 comparisons, the absence of a $3.6 million favorable contingent-consideration adjustment recorded in 2018. CaseStack-related intangible amortization also increased depreciation and amortization.
- Q2 2018 net income included $4.9 million from discontinued operations; first-half 2018 included $10.0 million. Continuing-operations earnings provide the more comparable operating measure.
- Cash rose substantially from year-end, helped by operating cash generation and receipt of the Mode disposition receivable. Debt declined by $33.0 million from year-end. The company adopted lease accounting ASC 842 in 2019 and recognized $39.2 million of right-of-use assets and $40.2 million of lease liabilities at June 30.
Outlook, commentary, risks and unusual items
- Management said cash, operating cash flows and available revolver capacity should be sufficient for cash needs for at least the next 12 months. Estimated 2019 capital expenditures were $100–$110 million; $28.7 million had been spent in the first half.
- Management expected a 2019 full-year effective tax rate of 25.0%–26.0%. It also expected cash taxes to be significantly higher than in 2018, while remaining below tax expense due to depreciation-related timing differences.
- No full-year revenue, earnings or EPS guidance is stated in the supplied filing text.
- Risks identified include market growth and competition, railroad and carrier capacity/service and cost changes, driver recruitment and worker-classification disputes, customer concentration or financial deterioration, fuel and interest-rate movements, regulation, cyber and IT risks, insurance costs, and trade barriers. The top 50 customers represented about 67% of Q2 revenue.
- The company disclosed three putative California driver class-action matters and the Robles and Adame proceedings. It could not estimate a reasonably possible loss range for the three newer matters; management did not consider the pending loss contingencies likely to materially affect overall results after existing accruals, while noting outcomes could be material in an individual period. In Robles, 96% of California drivers had accepted settlement offers as of June 30, 2019.
- The board authorized up to $100 million of share repurchases on May 28, 2019. Hub repurchased 181,811 shares for approximately $7.3 million through June 30, and reported an additional 444,509 shares purchased in July for $17.7 million.
Important facts for investors to verify
- How much of revenue and margin growth reflects CaseStack acquisition effects versus organic performance, and how CaseStack performs against integration expectations.
- Whether intermodal volume weakness, customer losses in logistics, and pricing or mix pressures in brokerage persist.
- Whether improved gross margins can be sustained as transportation, rail, drayage, equipment and driver costs change.
- Actual capital spending, cash taxes, debt repayments and share repurchases against management’s stated expectations and available liquidity.
- Developments, potential exposure and accrual adequacy in the California driver litigation and other legal matters.