Hub Group, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 24, 2017. Hub Group is an asset-light freight transportation management company with Hub and Mode segments, providing intermodal, truck brokerage and logistics services across North America.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $3,572.8 million | $3,525.6 million | +1.3% |
| Gross margin | $454.8 million; 12.7% of revenue | $412.7 million; 11.7% | +10.2% |
| Operating income | $123.8 million; 3.5% of revenue | $117.0 million; 3.3% | +5.8% |
| Net income | $74.8 million | $70.9 million | +5.4% |
| Diluted EPS | $2.20 | $1.97 | +11.7% |
| Operating cash flow | $102.5 million | $171.7 million | Down $69.2 million |
- Revenue growth reflected higher volumes. Intermodal revenue was nearly flat at $2.19 billion; truck brokerage rose 4.6% to $698.5 million and logistics rose 3.5% to $683.2 million.
- Gross margin improved across both segments. Management cited pricing, improved accessorial management, lower drayage costs, better purchasing and customer mix. Transportation costs were 87.3% of revenue, down from 88.3%.
- Operating expenses rose to $331.0 million from $295.7 million. Salaries and benefits increased to $180.5 million, including higher headcount, merit increases and bonuses; G&A increased to $68.6 million, including higher technology and legal costs.
- Income tax expense was $46.6 million; the effective tax rate increased to 38.4% from 36.4%. Other expense declined to $2.4 million, helped by foreign currency translation gains versus losses in 2015.
- At year-end, cash was $127.4 million, total assets $1.36 billion and stockholders’ equity $628.2 million. Debt was $160.7 million in equipment notes, including $45.2 million current, plus $13.3 million net capital lease liability. The $50 million revolving facility had $38.2 million available; the company reported covenant compliance.
- Receivables rose to $473.6 million from $380.0 million. Management attributed weaker operating cash flow principally to higher days sales outstanding from extended customer payment terms, partly offset by slower vendor payments.
Quarterly context and material changes
- Fourth-quarter 2016 revenue was $978.6 million versus $890.3 million in Q4 2015, while operating income declined to $30.8 million from $35.3 million and net income to $18.2 million from $22.4 million. Diluted EPS was $0.55 versus $0.63.
- FY 2016 capital expenditures were $107.4 million, including $59 million for containers and $15 million for land. Investing cash outflow was $105.3 million.
- The company repurchased $100 million of stock under a completed authorization, buying 2.67 million shares at an average $37.42 per share. Cash declined by $80.3 million during the year.
- Compared with FY 2015, FY 2016 revenue and profit increased, but operating cash flow fell sharply; salaries and benefits and G&A grew faster than revenue. The prior-year comparison is also affected by FY 2014 charges of $10.3 million for driver settlements and $11.9 million for a software impairment; neither was recorded in 2015 or 2016.
Outlook, risks and contingencies
- Management expected 2017 capital expenditures of $155–$165 million, including delivery of 4,000 containers (with 800 planned retirements), 100–150 tractors, headquarters expansion and technology investment. Financing for equipment purchases had not been decided.
- Management estimated a 2017 effective tax rate of 38%–39%, subject to possible federal tax reform, and expected interest expense to increase due to debt financing of 2016 equipment purchases.
- The planned headquarters addition was expected to be completed in 2018; estimated building and related furniture cost was $35–$40 million, in addition to $14.9 million paid for adjacent land in December 2016.
- Management identified rail service and pricing, economic cycles, carrier and driver capacity, fuel and vendor costs, customer concentration, independent-contractor classification, insurance claims, cybersecurity and successful implementation of Oracle Transportation Management as significant risks. OTM implementation was scheduled to begin in 2017, with rollout in 2018–2019.
- Pending driver-classification litigation included Robles, Adame and Lubinski matters. The company stated it could not reasonably estimate possible loss or range of loss for remaining unresolved claims. It reported no belief that other routine litigation would materially adversely affect results or financial position.
- Hub relied on intermodal for 61% of revenue; its largest 20 customers represented approximately 38% of consolidated revenue. No individual customer exceeded 10% of revenue.
- Management said liquidity was sufficient for at least the next 12 months. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Most important facts for investors to verify
- Whether elevated receivables and customer payment terms reverse, and how operating cash flow develops relative to earnings.
- Whether gross-margin gains persist as rail, drayage, trucking, fuel and labor costs change—and whether higher costs can be passed through.
- Execution, cost and customer-service effects of the OTM technology implementation and planned 2017–2019 capital spending.
- Debt and liquidity needs after equipment purchases, scheduled debt payments, share repurchases and headquarters construction.
- Developments in driver-classification litigation and any resulting liabilities or changes to the owner-operator model.
- Q4 earnings softness despite revenue growth, including the causes of lower operating income, net income and EPS year over year.