Hub Group, Inc. — Q2 2013 Form 10-Q
Business and period: Quarterly report for the three and six months ended June 30, 2013. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $836.7 | $778.3 | $1,605.7 | $1,518.2 |
| Gross margin | $95.5 | $87.4 | $182.8 | $171.1 |
| Operating income | $30.5 | $27.9 | $55.2 | $50.4 |
| Net income | $18.6 | $17.0 | $34.0 | $30.6 |
| Diluted EPS | $0.50 | $0.46 | $0.92 | $0.82 |
| Gross margin as a share of revenue | 11.4% | 11.2% | 11.4% | 11.3% |
| Operating income as a share of revenue | 3.6% | 3.6% | 3.4% | 3.3% |
Cash flow and liquidity: First-half operating cash flow was $34.4 million, versus $26.1 million a year earlier. Accounts receivable used $45.6 million of cash, partly offset by a $30.7 million increase in accounts payable. Investing activities used $37.8 million, including $39.2 million of capital expenditures; financing activities provided $4.7 million. Cash ended June at $72.0 million, compared with $70.8 million at year-end 2012.
Total debt was $9.1 million, newly incurred in 2013 to finance 80 tractors at fixed rates of 1.9%–2.0%. The company reported $45.8 million of available revolving credit, $4.2 million in standby letters of credit, and compliance with debt covenants. Capital lease obligations were $22.1 million. Management said cash, operating cash flow and available borrowing capacity should cover needs for at least the next 12 months.
Changes and operating drivers
- Q2 revenue rose 7.5% year over year; first-half revenue rose 5.8%. Q2 gross margin increased 9.3%, while first-half gross margin increased 6.8%.
- Logistics was a key growth area: Q2 consolidated logistics revenue increased to $142.2 million from $110.4 million; first-half logistics revenue rose to $250.5 million from $214.1 million. Management attributed growth primarily to new and existing customers.
- Q2 Hub intermodal loads increased 2.3%; management cited improved street operations, modest price increases and greater use of Comtrak for drayage. Comtrak handled 66% of Hub’s drayage in the quarter versus 63% a year earlier.
- Q2 salaries and benefits rose to $35.0 million from $31.4 million, principally due to higher bonuses and headcount-related costs. General and administrative expense increased to $14.7 million from $12.7 million, including higher consulting costs.
- Management reported first-half net income growth primarily from higher gross margin. First-half diluted EPS also benefited from fewer diluted shares.
Outlook, risks and unusual items
- Management expected 2013 capital expenditures of $105–$115 million, including $30–$32 million for a new headquarters, approximately $61 million for containers, $9 million for tractors, and most of the remainder for technology. First-half capital expenditures were $39.2 million.
- Following Pennsylvania tax-law changes enacted July 9, 2013, the company revised its expected full-year effective tax rate to 38.5%.
- The quarter included approximately $1.0 million of professional fees for an unsuccessful acquisition.
- Hub entered into container purchase commitments: approximately $16.7 million for 1,500 containers and $29.0 million for 2,529 containers. It also exercised purchase options on 200 leased containers; related purchases totaling approximately $14.8 million were expected as leases expired during 2013.
- Owner-operator tractor lease guarantees had maximum potential exposure of $44.7 million, with a recorded liability of approximately $0.8 million. The company reported no material defaults or potential material defaults.
- A proposed California class action alleges Comtrak misclassified truck drivers and violated labor laws. The company said it could not reasonably estimate any possible loss. It did not believe its other ordinary-course litigation would materially affect financial position or results.
- Key disclosed risks include economic and competitive conditions, railroad service and relationships, transportation capacity and vendor costs, fuel prices, customer and agent concentration, labor and regulatory changes, driver recruitment, cyber threats, and information technology performance. The company also noted exposure to interest-rate changes; it had no significant foreign-currency exposure and no derivatives outstanding.
Important facts for investors to verify
- Whether revenue and margin growth—particularly in logistics—continues, and how intermodal volume, pricing, fuel and vendor costs affect margins.
- Actual 2013 capital spending versus the $105–$115 million outlook, and the timing and returns from container, tractor, headquarters and technology investments.
- Receivables and working-capital trends, given the substantial first-half cash use from accounts receivable.
- Developments in the Comtrak California driver litigation and any change in the company’s ability to estimate potential exposure.
- Progress on owner-operator lease guarantees, container commitments, debt repayment and continued compliance with credit covenants.
- Customer concentration: Hub’s top 50 customers represented approximately 63% of Hub segment first-half revenue; Mode’s top 20 represented approximately 38% of Mode segment revenue.