Hub Group, Inc. — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; selected quarterly data also provide fourth-quarter results. Hub Group is an asset-light multimodal transportation and logistics provider, with intermodal, truck brokerage, logistics and dedicated trucking operations. The company sold Mode Transportation in August 2018 and acquired CaseStack in December 2018; Mode is reported as discontinued operations.
Financial performance
Amounts are in U.S. dollars; financial figures below are in millions except per-share data.
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $3,668.1 | $3,683.6 | Down 0.4% |
| Gross margin | $521.1 (14.2%) | $445.6 (12.1%) | Up 16.9%; margin +2.1 percentage points |
| Operating income | $152.4 (4.2%) | $124.9 (3.4%) | Up 22.0% |
| Continuing-operations net income | $107.2 | $87.7 | Up 22.2% |
| Diluted EPS, continuing operations | $3.20 | $2.61 | Up 22.6% |
| Net income, including discontinued operations | $107.2 | $201.7 | Down 46.9% |
| Operating cash flow | $254.5 | $210.8 | Up $43.7 |
- Transportation costs were $3,147.0 million, or 85.8% of revenue, compared with $3,238.0 million, or 87.9%, in 2018. Purchased transportation costs fell, while equipment and driver-related costs rose 7.3% to $652.3 million.
- By business line, intermodal revenue was $2,166.4 million (down 2.4%), truck brokerage $433.8 million (down 12.8%), logistics $769.2 million (up 14.2%) and dedicated $298.7 million (up 2.0%). CaseStack contributed to brokerage and logistics growth.
- FY 2019 investing cash outflow was $66.1 million, including $94.8 million in capital expenditures. Financing cash outflow was $81.1 million. Cash and cash equivalents ended the year at $168.7 million, versus $61.4 million.
- At year-end, equipment-note debt totaled $281.6 million, including $94.7 million current and $186.9 million long-term. The company had no revolver borrowings and $318.5 million of available revolving capacity after letters of credit. It reported compliance with debt covenants.
- Current assets were $640.2 million and current liabilities $507.4 million. Adoption of lease accounting added $41.4 million of right-of-use assets and $42.0 million of lease liabilities; operating and finance lease liabilities are separate from the equipment-note debt figures above.
Material changes and unusual items
- Gross-margin improvement reflected better pricing and network optimization in intermodal, yield and purchasing improvements in brokerage, CaseStack contributions, and dedicated operating discipline. Higher rail costs, insurance and claims costs, and lower intermodal volumes partly offset gains.
- General and administrative expense increased to $104.2 million from $81.3 million. Included in 2019 was a $4.8 million settlement accrual for California driver-classification matters; the increase also reflected CaseStack, technology consulting and other costs. The settlement remains subject to final court approval.
- 2018 net income included $114.1 million from discontinued operations, including a $132.4 million gain on the Mode sale before tax. Therefore, the decline in total net income does not indicate a decline in continuing-operations earnings.
- Hub repurchased 626,320 shares for $25.0 million under a $100 million authorization and also spent $4.0 million on shares tendered for employee tax withholding.
- The audit opinion on the financial statements was unqualified; management and the auditor reported effective internal control over financial reporting as of year-end. The auditor identified claims accruals and capitalization of internal-use software costs as critical audit matters.
Fourth-quarter snapshot
For the quarter ended December 31, 2019, revenue was $900.7 million, gross margin $125.9 million, operating income $38.9 million and continuing-operations net income $28.0 million. In fourth-quarter 2018, the respective figures were $1,018.3 million, $138.6 million, $48.2 million and $33.7 million. The filing does not provide a clear explanation isolating the year-over-year fourth-quarter changes from business mix and seasonal effects.
Outlook, risks and contingencies
- Management estimated 2020 capital expenditures of $115–$120 million, including approximately $60 million for equipment, $20–$25 million for technology and about $35 million for the Oak Brook office building. It expected to fund spending with cash and debt.
- Management expected 2020 interest expense to increase because 2019 tractor and container purchases were debt-financed, and estimated a 2020 effective tax rate of 24%–25%. No specific revenue or earnings guidance is provided in the filing.
- Key disclosed risks include dependence on railroads and intermodal demand, driver and carrier capacity, pricing competition, customer concentration, fuel and insurance costs, self-insured claims, regulatory and worker-classification exposure, and execution of the multi-year technology and ERP program.
- The filing identified the coronavirus outbreak and other health concerns as potential risks to trade, supply chains and demand. It was filed February 28, 2020; the filing does not quantify any financial effect.
- Auto and workers’ compensation claims accruals were $20.0 million at year-end, up from $15.1 million. The company noted that actual claim severity or frequency could differ from estimates. It also disclosed ongoing litigation and tax positions; management did not expect pending legal matters, after existing accruals, to materially affect overall results, while acknowledging particular-period outcomes could be material.
Important facts for investors to verify
- Whether intermodal volume and pricing trends improve, given intermodal’s 59% share of 2019 revenue and the reported 7.2% volume decline.
- How much of improved gross margin is sustainable versus attributable to CaseStack, pricing, mix and purchasing changes.
- Progress, costs and operational effects of the ERP and other technology initiatives, including the impact of software capitalization.
- Cash flow and liquidity needs relative to planned 2020 capital spending, equipment-note repayments and expected higher interest expense.
- Final court approval and payment of the $4.8 million driver-classification settlement, along with developments in other worker-classification claims and insurance reserves.