Hub Group, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2015, compared with the same 2014 periods. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $899.5 million | $893.9 million | $1,735.5 million | $1,742.4 million |
| Gross margin | $101.7 million; 11.3% | $98.6 million; 11.0% | $190.9 million; 11.0% | $187.3 million; 10.8% |
| Operating income | $29.5 million | $30.9 million | $48.3 million | $51.4 million |
| Net income | $18.5 million | $18.7 million | $28.7 million | $30.7 million |
| Diluted EPS | $0.51 | $0.51 | $0.80 | $0.84 |
| Operating margin | 3.3% | 3.5% | 2.8% | 3.0% |
For Q2, revenue rose 0.6%, while operating income fell 4.7% and net income fell 1.1%. For the first half, revenue declined 0.4%, operating income 6.1%, and net income 6.4%. Consolidated gross margin improved, but operating expenses rose faster: salaries and benefits increased 9% in Q2, and total costs and expenses increased 6.8%.
Business lines and management explanations. Q2 Hub intermodal volume grew 6% and truck brokerage loads grew 14%; logistics revenue declined 8%, reflecting lost business and a customer bringing some work in-house. Mode revenue increased 1%, with intermodal growth partly offset by lower truck brokerage revenue. Management cited improved gross margin from intermodal and truck brokerage pricing, mix and purchasing, but also higher rail and purchased drayage costs and worse equipment utilization. For the first half, Hub intermodal margin was pressured by West Coast port disruption, rail service issues and the California driver-model transition from contractors to employees.
Cash, debt and liquidity
- Cash and cash equivalents were $156.8 million at June 30, 2015, up from $109.8 million at December 31, 2014. Current assets were $617.0 million and current liabilities $375.8 million.
- First-half operating cash flow was $80.5 million, versus $31.6 million in 2014; management attributed much of the increase to timing of customer payments, use of prepaid taxes and higher accrued expenses. Investing cash outflow was $23.6 million; financing cash outflow was $9.8 million.
- Long-term debt, including its current portion, totaled $99.7 million; capital lease obligations totaled $17.2 million. Available revolving credit was $43.9 million, with $6.1 million in standby letters of credit. The company reported compliance with debt covenants and said cash, operating cash flow and available borrowings should meet needs for at least 12 months.
- First-half capital expenditures were $23.7 million. The company forecast 2015 capital expenditures of $85–$95 million. It also repurchased $13.4 million of treasury stock during the first half.
Outlook, risks and contingencies
- Management expected a full-year effective tax rate of approximately 38%; no earnings or revenue guidance was provided in the supplied filing text.
- A March 2015 contract covers 300 tractors for approximately $43.4 million, with deliveries expected April–September; 51 had been received by June 30. A July contract covers 1,000 containers expected to cost approximately $10.5 million, with deliveries expected September–October. The company intended to finance both purchases with secured fixed-rate debt.
- California and Illinois driver-classification lawsuits remain unresolved. The company said it could not reasonably estimate any possible loss or range of loss. In the California matter, 93% of drivers had accepted individual settlement offers as of July 28, 2015; the company moved to employee drivers in late 2014. The Illinois case awaited a ruling on a motion to dismiss.
- Maximum potential exposure under owner-operator tractor lease guarantees was approximately $19.3 million, with a recorded estimated-default liability of approximately $0.2 million. Management reported no material defaults or potential material defaults.
- Disclosed business risks include rail and truck capacity or service disruptions, vendor-cost changes, fuel and interest-rate movements, customer concentration, driver and agent recruiting and retention, regulation and litigation, cybersecurity, and economic conditions. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether margin improvement can persist while operating expenses grow and first-half operating income and earnings decline.
- Whether utilization, rail service and West Coast network conditions improve, and how the California employee-driver transition affects costs and service.
- How much of the strong first-half operating cash flow reflects sustainable operations versus working-capital timing.
- Final capital spending, tractor and container financing, and resulting debt and lease obligations.
- Developments and potential financial exposure in the driver-classification lawsuits and owner-operator lease guarantees.
- The basis for management’s approximately 38% full-year tax-rate expectation and any subsequent outlook updates.