Hub Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Hub Group provides intermodal, truck brokerage, logistics and dedicated trucking services. Results were affected by soft freight demand and the emerging COVID-19 pandemic.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $838.9 million | $933.0 million | Down 10.1% |
| Gross margin | $104.6 million; 12.5% of revenue | $127.3 million; 13.6% | Down 17.8%; margin down 110 bps |
| Operating income | $19.8 million; 2.4% of revenue | $35.6 million; 3.8% | Down 44.5% |
| Net income | $13.2 million | $23.9 million | Down 44.6% |
| Diluted EPS | $0.40 | $0.71 | Down 43.7% |
| Operating cash flow | $40.7 million | $63.4 million | Down $22.8 million |
| Capital expenditures | $25.5 million | $17.1 million | Up $8.4 million |
Revenue declined in all four business lines: intermodal $495.3 million (down 7.6%), truck brokerage $98.0 million (down 16.6%), logistics $183.3 million (down 9.8%) and dedicated $62.3 million (down 18.2%). Gross margin fell across all lines. Intermodal was pressured by lower volume and pricing, higher rail costs and insurance and claims costs; dedicated results reflected exited business, start-up and repair costs, and idle equipment. Brokerage and logistics gross margin as a percentage of revenue improved, supported by operating-model and revenue-management initiatives and CaseStack growth.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $276.9 million at March 31, 2020, up from $168.7 million at year-end 2019. Current assets were $748.9 million and current liabilities $502.8 million.
- Total debt was $378.7 million, compared with $281.6 million at December 31, 2019. Hub drew $100.0 million on its $350 million revolving credit facility in March as a precaution related to COVID-19 uncertainty; it also issued equipment notes.
- Unused and available revolver borrowings were $219.2 million, after $30.8 million in standby letters of credit. The company reported compliance with debt covenants.
- Cash from operations was lower year over year, while investing cash outflow was $25.0 million and financing cash inflow was $92.6 million. Management said cash, operating cash flow and available credit should cover needs for at least the next 12 months.
Outlook, commentary and notable items
- Management anticipated a mid- to high-teens percentage decline in April 2020 revenue versus April 2019 and expected Q2 2020 revenue to decline year over year. It provided no specific full-year earnings or revenue guidance.
- All business lines reported soft customer demand. Management estimated that businesses currently closed represented about 20% of revenue from its top 100 customers. Dedicated home-improvement and general-retail demand partly offset weakness elsewhere; logistics softness was partly offset by CaseStack growth.
- Management planned $50 million to $80 million in capital expenditures for the remainder of 2020, primarily for tractors, trailers, containers and technology, funded with cash and debt. It also expected 2020 cash taxes to exceed income tax expense due to anticipated timing differences.
- Hub increased its allowance for credit losses to $7.8 million from $6.9 million, reflecting deteriorating current and forecast economic conditions, including COVID-19 effects. No material first-quarter write-offs or allowance increases were reported.
- Q1 salaries and benefits included $2.1 million of severance expense. Headcount, excluding drivers, was 1,971 versus 2,247 a year earlier. G&A rose primarily due to professional services, including IT, legal and consulting costs.
- In April, after quarter-end, Hub donated refrigerated trailers with a carrying value of approximately $5.2 million to support COVID-19 response efforts.
- A $4.8 million settlement in principle covering the Robles and Adame driver matters was accrued in Q3 2019 and remained subject to final court approval. Other pending claims include California driver-related litigation; management said existing accruals were not expected to have a material overall effect, though outcomes in any period could be material.
Key risks and facts to verify
- Verify subsequent quarterly disclosures against the April revenue decline expectation and the projected Q2 weakness; the filing emphasizes that pandemic impacts and duration were highly uncertain.
- Monitor customer credit quality, receivable collections and future credit-loss allowances, particularly for customers affected by closures and economic disruption.
- Track debt, revolver availability, covenant compliance and cash generation as operating results weaken and planned capital expenditures continue.
- Check the final court approval and payment timing for the $4.8 million driver-litigation settlement, and any developments in other labor claims.
- Assess whether margin pressure, customer concentration (top 50 customers represented approximately 68% of Q1 revenue), and exposure to freight demand, carrier capacity, rail costs and fuel prices persist.