Hub Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparison is with Q1 2017 unless noted. Hub Group provides intermodal, truck brokerage, logistics and dedicated transportation services through its Hub and Mode segments. Results are unaudited. The July 2017 Estenson Logistics acquisition, now Hub Group Dedicated (HGD), affects period comparability.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $1,096.0 million | $892.8 million | Up 22.8% |
| Gross margin | $122.8 million; 11.2% of revenue | $101.6 million; 11.4% | Margin rate down 0.2 percentage points |
| Operating income | $23.1 million | $17.2 million | Operating margin 2.1%, versus 1.9% |
| Net income | $16.2 million | $10.3 million | Up primarily on higher margin and lower taxes |
| Diluted EPS | $0.48 | $0.31 | Up from prior-year quarter |
| Operating cash flow | $33.2 million | $47.7 million | Down $14.5 million |
| Capital expenditures | $22.2 million | $6.6 million | Higher equipment and technology spending |
Revenue growth reflected higher intermodal fuel revenue, pricing and volume; growth in truck brokerage and logistics; and HGD dedicated revenue of $60.4 million. Hub segment revenue rose 22.9% to $831.6 million; Mode revenue rose 19.0% to $287.9 million. Hub intermodal volume increased 5.5%, while Hub truck brokerage loads declined 0.7% despite higher fuel, mix and pricing.
Transportation costs increased 23.0% to $973.2 million. Purchased transportation costs were $835.1 million and equipment- and driver-related costs were $138.1 million. Management cited rail, fuel and third-party carrier cost increases, as well as higher volumes and HGD costs. Hub gross margin improved, but Mode margin rate declined to 11.3% from 12.3%; Hub logistics margin rate also weakened due to tighter truck capacity, customer mix and a customer liquidation.
Balance sheet, liquidity and debt
- At March 31, 2018, cash and cash equivalents were $17.9 million, down from $28.6 million at year-end 2017. Current assets were $627.3 million and current liabilities $492.8 million.
- Total debt was $274.6 million, including $30.0 million outstanding on a $350 million revolving credit facility. Available revolver borrowings were $298.8 million after letters of credit; the company was in compliance with debt covenants.
- Long-term debt, excluding current portion, was $194.6 million. Total debt declined from $292.1 million at December 31, 2017.
- Cash used in financing was $22.1 million, including $34.3 million of debt repayments, partly offset by $16.8 million of new debt proceeds. Management said cash, operating cash flow and available borrowings should meet needs for at least 12 months.
Outlook, risks and notable matters
- Management forecast 2018 capital expenditures of $190 million to $210 million, including $160 million to $170 million for equipment and $30 million to $40 million for technology. It expects additional container, tractor and trailer purchases to be financed with debt.
- Management expected a 24.5% to 25.5% effective tax rate for the remainder of 2018. Q1’s 23.0% rate reflected the U.S. Tax Cuts and Jobs Act; tax accounting remained provisional and subject to refinement.
- Key operating risks include rail service and pricing, trucking and drayage capacity and costs, fuel prices, competition, customer losses or financial deterioration, driver and agent recruitment and classification, labor actions, regulation, cybersecurity and integration of acquisitions.
- Customer concentration is notable: Hub’s top 50 customers generated 67.6% of Hub segment revenue; Mode’s top 20 accounted for 40% of Mode revenue.
- California driver-classification litigation remains outstanding. In the Adame matter, the court denied a motion to dismiss and defendants filed a petition for writ of mandate on March 27, 2018. In Robles, the parties awaited a ruling on plaintiffs’ clarification/reconsideration motion; the company reported that 96% of California drivers had accepted settlement offers by year-end 2017.
- ASC 606 was adopted January 1, 2018; management said segment revenue was not significantly affected. Excluding certain transaction taxes from revenue reduced both revenue and transportation costs by $0.7 million in Q1 2017 under the new presentation.
- Disclosure controls were assessed as effective at quarter-end. The company was continuing to integrate HGD’s processes, employees, technology and operations.
Important facts for investors to verify
- Whether revenue growth and margin performance persist as rail, fuel, drayage and carrier costs change, particularly in logistics and Mode.
- Whether operating cash flow can support the planned capital spending and additional debt-financed equipment purchases.
- The realized profitability and integration progress of HGD, including its contribution to Hub’s costs and results.
- Updates on California driver litigation and any related financial exposure; the filing does not provide a clear estimate of potential loss.
- Final tax effects of the Tax Cuts and Jobs Act and the impact of adopting the new lease standard in 2019.