Hub Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments. Comparisons below are with Q1 2016 unless noted.
Financial performance
- Revenue: $893.4 million, up 10.9%. Hub segment revenue rose 10.1% to $677.1 million; Mode revenue rose 15.8% to $241.9 million, before intersegment eliminations.
- Profitability: Gross margin fell 6.3% to $101.6 million, and gross margin as a share of revenue declined to 11.4% from 13.4%. Operating income decreased 40.4% to $17.2 million; net income fell 42.5% to $10.3 million. Diluted EPS was $0.31 versus $0.51.
- Segment margins: Hub operating income declined to $11.6 million from $22.5 million; Mode operating income declined to $5.6 million from $6.3 million. Hub gross margin fell to $71.8 million from $79.2 million, while Mode gross margin increased slightly to $29.8 million from $29.2 million.
- Cash flow: Operating cash flow was $47.7 million versus $50.3 million. Investing cash outflow was $5.5 million, including $6.6 million of capital expenditures. Financing cash outflow was $15.7 million, principally debt repayments of $11.8 million. Cash increased $26.6 million to $154.0 million.
- Liquidity and debt: At March 31, cash was $154.0 million and total long-term debt, including current maturities, was $148.9 million, down from $160.7 million at year-end. Available revolver borrowings were $37.3 million; $12.7 million of letters of credit were outstanding. The company reported compliance with debt covenants.
Changes and management commentary
- Revenue growth came from truck brokerage and logistics expansion, including new customers; Hub intermodal revenue rose 3%, supported by 1% volume growth and higher fuel revenue, but lower customer pricing and unfavorable mix offset gains.
- Transportation costs rose 13.5%, faster than revenue, reflecting higher purchased transportation costs, rail and fuel costs, and business volumes. Management attributed the lower gross margin primarily to Hub intermodal pricing and rail-cost pressure; margins also weakened across Mode’s business lines.
- General and administrative expense increased to $20.8 million from $16.6 million. Hub’s increase included $2.0 million of IT costs and $1.0 million of due-diligence costs related to potential acquisitions.
- Management cited margin-enhancement work including reducing empty miles and drayage costs, improving accessorial-cost recovery, and reviewing low-contribution freight.
Outlook, risks and contingencies
- Management expects cash, operating cash flow and available credit to meet cash needs for at least the next 12 months. Estimated 2017 capital expenditures are $90 million to $100 million.
- The company committed to purchase 4,000 53-foot containers for an expected total of approximately $40 million; about 1,500 had been received by the report date. It was discussing deferring some production if market conditions remained soft and expected to finance the equipment with secured fixed-rate debt.
- Management expects an effective tax rate of 38.5% to 39.0% for the remainder of 2017. The Q1 effective rate was 37.0%, partly reflecting a stock-compensation tax benefit. No revenue or earnings guidance is provided in the filing.
- Key stated risks include economic and freight-market cyclicality, inability to pass through higher rail or trucking costs, competition and pricing pressure, customer concentration or financial distress, capacity and equipment availability, driver classification and labor issues, and cybersecurity and technology risks. Hub’s top 50 customers represented 66% of Hub segment revenue; Mode’s top 20 represented 41% of Mode revenue.
- California driver-classification and Illinois owner-operator lawsuits remained unresolved. The company stated it could not reasonably estimate a possible loss or range of loss, if any, from the remaining claims. In the Robles matter, 93% of California drivers had accepted settlement offers; related litigation and appeals continued. Owner-operator tractor lease guarantees had maximum potential exposure of approximately $1.0 million, with no material defaults reported.
- The company identified economic downturn and cyclical fluctuations as a risk-factor update. It said other risk factors had no material changes during the quarter.
Important facts for investors to verify
- Whether Hub can stabilize gross margins as rail, fuel and other transportation costs rise, and whether pricing and mix improve.
- Whether growth in brokerage and logistics produces sustainable margins, given the segment-level margin declines.
- Execution and funding of the $90–$100 million 2017 capital-expenditure plan and approximately $40 million container commitment, including any production deferrals.
- Developments and potential exposure in the Robles, Adame and Lubinski litigation; the filing provides no clear estimate of possible losses.
- Customer concentration, available revolver capacity, debt repayments and compliance with covenants as business conditions change.