Hub Group, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing reports full-year results and selected quarterly data, including the fourth quarter; it is not a standalone Q4 filing. Hub Group is an asset-light multimodal transportation and logistics provider, with continuing operations in intermodal, truck brokerage, dedicated trucking and logistics.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue from continuing operations | $3,683.6 million | $3,123.1 million |
| Gross margin | $445.6 million; 12.1% of revenue | $337.6 million; 10.8% |
| Operating income | $124.9 million; 3.4% of revenue | $72.7 million; 2.3% |
| Income from continuing operations | $87.7 million; diluted EPS $2.61 | $120.0 million; diluted EPS $3.60 |
| Net income, including discontinued operations | $201.7 million; diluted EPS $6.01 | $135.2 million; diluted EPS $4.05 |
| Cash from operating activities | $210.8 million | $125.2 million |
FY2018 revenue increased 17.9%. Intermodal revenue rose 17.3%, reflecting improved pricing, 4.3% higher volume and increased fuel revenue. Truck brokerage revenue rose 3.2%, despite a 2.6% volume decline. Logistics revenue increased 6.5%, and Dedicated revenue rose 154.6%, mainly because 2018 included a full year of Estenson/Dedicated versus six months in 2017.
Gross margin improved as a share of revenue, with intermodal pricing gains a key contributor; higher rail and drayage costs partly offset those gains. Dedicated’s gross margin percentage declined 550 basis points amid higher third-party carrier, temporary-driver, rental-truck and customer start-up costs. Transportation costs were 87.9% of revenue versus 89.2% in 2017.
Continuing-operations net income fell despite higher revenue and operating income, primarily because 2017 included a substantial tax benefit from remeasurement of deferred taxes after the Tax Cuts and Jobs Act. FY2018 tax expense was $29.1 million, or 24.9% of pretax continuing income, versus a $53.1 million benefit in 2017. FY2018 total net income also included a $132.4 million pretax gain on the Mode sale; therefore, total net income is not representative of recurring continuing-operations earnings.
Fourth quarter: Revenue was $1,018.3 million, gross margin $138.6 million, operating income $48.2 million, continuing-operations income $33.7 million and net income $48.9 million. In Q4 2017, revenue was $909.2 million, operating income $35.1 million, continuing-operations income $96.1 million and net income $99.9 million; the prior-year earnings comparison was substantially affected by the tax benefit.
Cash and cash equivalents were $61.4 million at year-end, versus $28.6 million. Current assets were $588.7 million and current liabilities $526.8 million. Total debt was $330.8 million, including $101.7 million current; capital lease liabilities were $7.6 million. The company had no revolver borrowings and $323.0 million of available revolving capacity, including the effect of $27.0 million in letters of credit. It reported compliance with debt covenants. Cash from operations less capital expenditures of $199.8 million was approximately $11.0 million, before acquisitions, asset-sale proceeds and financing flows.
Material changes and unusual items
- Hub sold Mode Transportation on August 31, 2018. The transaction generated $238.5 million cash at closing, a further $19.0 million receivable from contractual adjustments and a reported $132.4 million pretax gain. Mode is presented as discontinued operations for all periods shown.
- Hub acquired CaseStack on December 3, 2018 for $252.1 million in total consideration, including $248.7 million cash and $3.5 million deferred consideration. Its preliminary purchase-price allocation included $165.0 million of goodwill and $75.6 million of intangible assets. The acquired business contributed $20.8 million revenue and $0.7 million operating income after acquisition through year-end.
- Capital expenditures rose to $199.8 million from $74.5 million in 2017, including $96.0 million for tractors, $42.5 million for containers and $26.5 million for technology. Year-end property and equipment increased to $681.9 million.
- Goodwill increased to $483.6 million, largely reflecting CaseStack. CaseStack purchase accounting remained preliminary, and Hub excluded CaseStack from its year-end internal-control assessment while integration continued.
- Hub adopted revenue-recognition guidance retrospectively and early adopted guidance for cloud-computing implementation costs. It reclassified $10.6 million of capitalized implementation costs to other assets.
Outlook, commentary and risks
Management estimated 2019 capital expenditures of $90–$100 million, including $70–$75 million for equipment and $20–$25 million for technology. It expected a 2019 effective tax rate of 25%–26% and higher interest expense, partly because 2018 tractor and container purchases were debt-financed. Management said cash, operating cash flow and available credit should cover needs for at least the next twelve months. Owner-operator recruiting and retention, which had been difficult in 2017 and 2018, was reported as improving in 2019.
Management’s multiyear “Elevate” technology program includes cloud-based Oracle ERP, HCM and transportation-management systems. The company planned to complete deployment of redesigned fleet processes and technology across its terminals by the end of 2019. Management identified implementation delays, cost overruns or system disruption as potential risks.
Key exposures include dependence on rail service and capacity; driver and carrier shortages and rising transportation costs; intense pricing competition; customer concentration (the ten largest customers generated 41% of 2018 revenue); intermodal concentration (60% of revenue); economic cyclicality; fuel, insurance and claims costs; cybersecurity and technology execution; and regulatory or legal changes affecting independent-contractor classification. The Robles and Adame matters concern California driver classification and related labor claims. Hub stated it did not believe its broader ordinary-course litigation would materially affect financial position or results, but litigation outcomes remain uncertain.
Management and the auditor reported effective internal control over financial reporting, with CaseStack excluded from the control assessment. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Reconcile reported net income and EPS to recurring continuing-operations performance, excluding the Mode sale gain and the unusual 2017 tax benefit.
- Track CaseStack’s finalized purchase accounting, integration costs, contribution to growth and returns against the $252.1 million consideration.
- Assess whether intermodal pricing gains can continue to offset rail, drayage, fuel and carrier cost inflation, and whether Dedicated can recover its margin percentage.
- Monitor customer retention and concentration, driver and owner-operator availability, rail service reliability and the company’s ability to pass cost increases through to customers.
- Review debt maturities, equipment-financing needs, planned capital spending and the effect of lease-standard adoption, which management estimated would add $29–$37 million of right-of-use assets and liabilities.
- Follow the Mode adjustment receivable, pending driver-classification litigation and the completion of CaseStack integration and internal-control work.