Hub Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $769.0 million | $739.9 million | +3.9% |
| Gross margin | $87.3 million; 11.4% | $83.7 million; 11.3% | +4.3% |
| Operating income | $24.7 million; 3.2% of revenue | $22.5 million; 3.0% | +9.9% |
| Net income | $15.4 million; 2.0% of revenue | $13.7 million; 1.8% | +12.5% |
| Diluted EPS | $0.42 | $0.37 | Up $0.05 |
| Cash from operations | $28.0 million | $22.8 million | +$5.2 million |
Revenue growth was led by Hub: segment revenue rose 5.2% to $592.7 million, while Mode revenue was nearly flat at $187.5 million. Consolidated intermodal revenue increased 5.5% to $503.6 million; truck brokerage declined 1.2% to $157.0 million; logistics rose 4.4% to $108.3 million. Hub said its intermodal increase reflected load growth and price, fuel and mix; logistics growth included new customers. Mode truck brokerage revenue declined 7.5%, offset by growth in its intermodal and logistics businesses.
Gross-margin improvement reflected Hub logistics yield gains, intermodal volume and improved street operations, and brokerage purchasing. Hub reported container utilization about half a day better year over year and performed 66% of its own drayage needs. Mode gross margin was $22.2 million, essentially unchanged, with margin rate easing to 11.8% from 11.9%.
Cash, debt and liquidity
- Cash and cash equivalents were $86.3 million at March 31, 2013, up from $70.8 million at year-end 2012. Restricted investments were $17.4 million.
- Operating cash flow was $28.0 million; investing activities used $8.7 million, including $9.5 million of property and equipment purchases; financing activities used $3.8 million. Cash increased $15.5 million during the quarter.
- Current assets were $484.0 million and current liabilities $291.1 million. The filing reports $45.8 million of unused, available revolving-credit capacity and states the company had no outstanding bank-line borrowings other than letters of credit. Letters of credit totaled $4.2 million; the company was in compliance with debt covenants.
- Capital-lease obligations totaled approximately $22.7 million, including current and non-current portions. The filing does not identify other outstanding funded borrowings.
Changes, outlook and notable items
- Operating income and net income grew faster than revenue, helped by higher gross margin and lower agent fees as a share of revenue. Salaries and benefits were 4.5% of revenue in both periods; general and administrative expenses rose to 1.8% of revenue from 1.7%.
- Management expected 2013 capital expenditures of $95–$105 million, including $30–$32 million for a corporate headquarters expected to be completed by year-end, about $50 million for containers and $9 million for tractors. First-quarter capital expenditures were $9.5 million.
- Management expected a 38.1% effective tax rate for full-year 2013. Q1’s 37.2% rate, versus 38.5%, reflected reinstatement of the federal research credit and settlement of a state tax audit.
- The company contracted to buy 2,529 containers for approximately $29.0 million, with deliveries expected April–October 2013, and 80 tractors for approximately $9.1 million, expected in May. It also planned approximately $15.0 million of purchases of leased containers as leases expire during 2013.
- Owner-operator tractor lease guarantees had maximum potential exposure of $47.2 million, compared with $48.2 million at year-end; the recorded liability was approximately $0.9 million. No material defaults were reported.
- A California class-action complaint alleges Comtrak misclassified certain truck drivers as independent contractors. The company said it could not reasonably estimate any possible loss. It stated that other routine litigation was not expected to materially affect its financial position or results.
- Management cited risks including rail service and capacity, vendor costs, competition, equipment availability, fuel prices, economic conditions, customer concentration, recruiting drivers and agents, regulation, technology and cybersecurity, and insurance costs. It cautioned that interim results may be seasonal and are not necessarily indicative of full-year results. No revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether planned capital spending and equipment deliveries proceed on schedule and within the stated $95–$105 million annual range.
- Developments and potential exposure in the Comtrak driver-classification lawsuit and the owner-operator lease guarantees.
- Whether Hub’s intermodal and logistics margin gains continue, particularly amid customer concentration: the top 50 Hub customers generated about 61% of Hub segment revenue.
- Mode’s flat revenue and lower truck brokerage revenue, and the effect of its customer concentration: the top 20 Mode customers generated about 37% of Mode segment revenue.
- Cash generation, available credit, and the company’s ability to fund investment and other obligations while maintaining covenant compliance.