Hub Group, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are also noted below. Hub Group provides intermodal, truck brokerage, dedicated and logistics services through its Hub and Mode segments.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $4.035 billion | $3.573 billion | +12.9% |
| Gross margin | $457.5 million; 11.3% of revenue | $454.8 million; 12.7% | +0.6% in dollars; margin down 140 basis points |
| Operating income | $96.6 million; 2.4% of revenue | $123.8 million; 3.5% | −22.0% |
| Income before taxes | $90.9 million | $121.4 million | −25.1% |
| Net income | $135.2 million | $74.8 million | +80.7% |
| Diluted EPS | $4.05 | $2.20 | +84.1% |
| Cash from operations | $125.2 million | $102.5 million | +$22.7 million |
- Revenue growth reflected the July 2017 acquisition of Estenson Logistics, operated as Hub Group Dedicated (HGD), and increased truck brokerage and logistics activity. HGD contributed $115.0 million of reported 2017 revenue from the acquisition date.
- Intermodal revenue was 57% of total revenue, down from 61% in 2016. Transportation costs rose to 88.7% of revenue from 87.3%, squeezing gross margin. Management cited rail and fuel cost increases, lower customer pricing, tighter truck capacity, and mix and start-up effects.
- Net income growth was not representative of operating improvement: the Tax Cuts and Jobs Act generated a $75.2 million tax benefit from remeasuring deferred tax balances. The reported income tax benefit was $44.2 million, versus tax expense of $46.6 million in 2016.
- Fourth-quarter revenue was $1.163 billion, gross margin $138.1 million, operating income $41.1 million, and net income $99.9 million. Fourth-quarter diluted EPS was $2.99; the large net income and EPS reflected the tax benefit.
- Cash and cash equivalents were $28.6 million at year-end, versus $127.4 million a year earlier. Current assets were $656.1 million and current liabilities $519.5 million. Operating cash flow was outweighed by $235.1 million of investing outflows, including $165.9 million for the acquisition and $74.5 million in capital expenditures.
- Total debt was $292.1 million, including $45.0 million drawn on the revolving credit line; long-term debt, including capital leases, was reported as $222.5 million. Available revolver capacity was $284.9 million. The company reported compliance with debt covenants.
Material changes and unusual items
- Hub acquired Estenson on July 1, 2017. The transaction’s stated base purchase price was approximately $284.7 million, including $112.7 million of assumed equipment debt; reported total consideration was $172.0 million. The preliminary allocation included $86.5 million of goodwill and $66.4 million of intangible assets. Purchase accounting remained subject to finalization.
- The acquisition was financed in part with a new $350 million unsecured credit agreement and equipment debt. Year-end debt increased from $160.7 million in 2016 to $292.1 million in 2017.
- General and administrative expense increased to $85.2 million from $68.6 million, including acquisition-related costs, IT consulting and professional services, and integration-related spending. Interest expense also rose, primarily due to acquisition and equipment financing.
- The company adopted the new revenue recognition standard on January 1, 2018 using the full retrospective method. Management expected no material financial-statement impact; the principal identified presentation effect was an approximately $3 million reduction in reported revenue for each of 2016 and 2017 from presenting certain transaction taxes net.
Outlook, commentary and risks
- Management estimated 2018 capital expenditures of $150–$170 million, including $120–$130 million for equipment and $30–$40 million for technology. Management expected higher 2018 interest expense and an effective tax rate of approximately 25%.
- Management stated cash, operating cash flow and available credit should fund needs for at least the next 12 months. It also expected cash income-tax payments in 2018 to be significantly below income-tax expense, partly due to accelerated depreciation provisions.
- Key exposures include dependence on railroads and intermodal demand, transportation-cost inflation and competitive pricing, driver and carrier capacity shortages, customer concentration, and service disruption. The 20 largest customers accounted for approximately 39% of 2017 revenue; no single customer exceeded 10%. The filing notes potential capacity effects from the December 2017 electronic logging device mandate.
- Other material risks include independent-contractor classification, insurance and claims costs, cybersecurity and technology implementation, economic cyclicality, and possible changes to trade agreements or tariffs. The company disclosed pending driver-classification litigation, including Robles and Adame; it stated it did not believe the broader litigation would materially adversely affect its financial position or results.
- The Tax Act accounting was provisional at year-end, and the company said it would continue refining its calculations. Management’s financial-control assessment excluded HGD while integration continued; HGD represented 17.8% of total assets and 2.9% of revenue for 2017. The auditor issued unqualified opinions on the financial statements and on internal control over financial reporting within the stated scope.
Important facts for investors to verify
- How much of reported earnings growth is attributable to the one-time tax remeasurement benefit, and what subsequent tax filings or refinements changed the provisional estimate?
- Whether the acquired HGD business meets expectations for margins, cash generation, integration and debt reduction; confirm the final purchase-price allocation and any earn-out outcome.
- Whether Hub can restore gross margin and operating income as transportation costs, customer pricing and capacity conditions change.
- Whether working-capital needs and planned capital spending remain supported by operating cash flow and available credit.
- Developments in driver-classification litigation, recruiting and retention, and the assessment of HGD controls as integration proceeds.