Hub Group, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Financial statement amounts below are in millions except per-share data. Mode Transportation results are included from its April 1, 2011 acquisition, so reported growth includes a material acquisition effect.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $760.4 | $478.4 | $2,005.5 | $1,353.8 |
| Gross margin | $86.7 | $57.4 | $228.8 | $156.8 |
| Operating income | $26.6 | $20.7 | $67.3 | $50.7 |
| Net income | $16.3 | $12.6 | $41.2 | $30.9 |
| Diluted EPS | $0.44 | $0.34 | $1.11 | $0.83 |
- Q3 revenue rose 58.9%, gross margin 51.1%, and net income 29.0%. For the nine months, revenue rose 48.1%, gross margin 45.9%, and net income approximately 33%.
- Gross margin was 11.4% of revenue in both 2011 periods, versus 12.0% in Q3 2010 and 11.6% for the 2010 nine-month period. Operating margin was 3.5% in Q3 2011 versus 4.3%; nine-month operating margin was 3.4% versus 3.8%.
- Q3 Hub segment revenue increased 17.2% to $560.8 million; Mode contributed $206.0 million. Hub intermodal loads rose 10% in the quarter. Hub truck-brokerage loads fell 12%, partly offset by higher fuel, price and mix; logistics growth was attributed primarily to new customers.
- Nine-month Hub segment revenue increased 18.7% to $1.61 billion; Mode contributed $407.7 million. Hub intermodal loads rose 12%; truck-brokerage loads declined 10%, while logistics revenue grew 40.0%.
Cash, liquidity and obligations
- Operating cash flow for the first nine months was $46.2 million, compared with $27.3 million in 2010. Investing used $118.1 million, including $83.1 million for acquisitions and $35.4 million of property and equipment purchases. Financing used $0.6 million.
- Cash and cash equivalents were $42.7 million at September 30, 2011, down from $115.1 million at year-end 2010. Trade receivables increased to $343.6 million from $185.9 million; management noted the Mode acquisition and higher Hub sales as contributing factors.
- The amended revolving credit facility provides up to $50 million, matures in March 2014, and bears interest at LIBOR plus 1.75%. The company reported $47.4 million of unused availability, $2.6 million of outstanding letters of credit, and compliance with covenants. No material revolver borrowing balance is specified in the filing text.
- A 10-year capital lease for 3,126 chassis added a net lease liability of $26.3 million. Future undiscounted lease payments total $31.7 million. Management said cash, operating cash flow and available borrowing capacity should meet needs for at least the next 12 months.
Changes, outlook and risks
- Mode was acquired April 1 for a final purchase price of $82.2 million. The acquisition added a second reportable segment and increased goodwill and intangible assets. Management cited complementary services, greater scale and access to small and midsize customers as strategic benefits.
- Acquisition and integration costs were $2.8 million for the nine months. Third-quarter restructuring charges were approximately $0.7 million; the September 30 restructuring accrual was $0.8 million. Management expected approximately $1.2 million of technology integration costs in Q4 2011.
- Management expected 2011 capital expenditures of $59–$61 million, including approximately $49 million for containers, $8 million primarily for technology and $2 million for a Memphis office addition. The company had received 2,676 containers and expected another 1,324 in Q4.
- Risks highlighted include economic conditions, competition, railroad service and capacity, vendor costs, fuel prices, customer concentration and credit quality, driver and agent retention, regulation, cybersecurity, information technology, and successful integration of acquisitions. Hub’s top 50 customers represented about 62% of Hub segment revenue; Mode’s top 20 represented about 39% of its six-month segment revenue.
- Potential maximum exposure under tractor lease guarantees was $16.8 million; the recorded liability was approximately $0.3 million. Management did not expect existing litigation to materially adversely affect financial position or results. The company also reported a $2.5 million asset acquisition of Challenge Transport on October 3, 2011.
Investor verification priorities
- Separate organic Hub growth from Mode’s contribution, and verify comparable pro forma results and Mode’s margins and integration progress.
- Monitor gross-margin and operating-margin trends, particularly in truck brokerage and logistics, alongside load volumes and pricing/fuel mix.
- Track receivables, working-capital cash conversion, and whether management achieves its capital expenditure and integration-cost expectations.
- Review capital-lease commitments, guarantee exposure, credit-facility availability and covenant headroom, and customer concentration.
- Confirm final purchase accounting for Mode and Challenge Transport and assess the restructuring reserve and other acquisition-related charges.