Business context and reporting period
Hub Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company provides intermodal, truck brokerage and logistics services. Results now include two segments: Hub and Mode, acquired April 1, 2011. Mode’s results are included only from April 1, so reported year-over-year growth is not fully comparable.
Key financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $759.7 | $458.1 | $1,245.1 | $875.4 |
| Gross margin | $84.8 | $50.6 | $142.1 | $99.4 |
| Operating income | $23.9 | $15.7 | $40.7 | $30.0 |
| Net income | $14.4 | $9.6 | $24.9 | $18.3 |
| Diluted EPS | $0.39 | $0.26 | $0.67 | $0.49 |
- Q2 revenue rose 65.8% and net income rose 49.4%; six-month revenue rose 42.2% and net income rose 35.8%. These comparisons include Mode only in 2011.
- Gross margin was 11.2% of revenue in Q2 versus 11.0% a year earlier; for the six months it was 11.4% in both periods. Operating margin was approximately 3.1% in Q2 and 3.3% for the six months, below the corresponding 2010 levels.
- Hub’s Q2 revenue increased 22.3%; intermodal loads were up 12%, while truck brokerage loads fell 9%. Management attributed intermodal margin improvement partly to increased company-operated drayage, reduced empty miles and better load matching. Mode generated $201.8 million of Q2 revenue and $22.2 million of gross margin.
- Six-month operating cash flow was $10.0 million, down from $15.0 million. The $62.7 million use of cash from receivables was a major working-capital factor, partly offset by increased payables and accrued expenses.
- Cash and cash equivalents were $18.3 million at June 30, compared with $115.1 million at year-end 2010. Investing activities used $106.0 million, including $90.9 million for acquisitions and $15.3 million for capital expenditures. Current assets were $409.7 million and current liabilities $283.6 million; the current ratio was about 1.44.
- No drawn debt balance is reported on the balance sheet. The amended revolving credit facility provides up to $50.0 million through March 2014; $47.4 million was available at June 30 after outstanding letters of credit. Interest is LIBOR plus 1.75%; the company reported covenant compliance.
Material changes, outlook and risks
- Hub acquired Exel Transportation Services, renamed Mode Transportation, for a preliminary net purchase price of $81.7 million. The company paid $90.1 million net of acquired cash at closing and recorded an $8.4 million expected working-capital refund as a receivable. The purchase-price allocation remains preliminary. The company also purchased certain Domestic Transport assets for $0.7 million.
- Six-month acquisition and integration-related costs were approximately $2.0 million, including due diligence and integration costs; Q2 costs were approximately $0.3 million. Q2 restructuring charges were approximately $0.3 million for severance affecting 31 employees, with $0.2 million unpaid at quarter-end.
- Management expected to collect the $8.4 million Mode working-capital adjustment in Q3 and forecast 2011 capital expenditures of $65–$70 million, including approximately $46 million for containers and the balance primarily for technology. It reported 1,196 containers received and expected another 2,804 by October. Management said cash, operating cash flow and available credit should cover needs for at least twelve months. No earnings or revenue guidance was provided.
- Risks cited include freight-market and economic conditions, competition, railroad service and vendor capacity or cost changes, fuel-price fluctuations, customer concentration and credit quality, regulation, cybersecurity and technology, recruiting and retention, and successful integration of Mode. Hub’s top 50 customers represented about 61% of its six-month segment revenue; Mode’s top 20 represented about 40% of its Q2 segment revenue.
- Management said pending business litigation was not expected to materially harm financial position or results. Maximum exposure under tractor lease guarantees was approximately $11.6 million, with a recorded liability of approximately $0.2 million; no material defaults were reported. Interest-rate changes on the credit line are a market risk.
Important facts for investors to verify
- Final Mode working-capital adjustment, purchase-price allocation and integration performance.
- Whether operating cash flow and receivables collection improve following the substantial cash decline and acquisition spending.
- Capital-expenditure execution, container deliveries and funding needs relative to available credit and covenants.
- Underlying organic growth and margins, separating Hub’s results from the acquired Mode contribution.
- Customer concentration, lease-guarantee exposure, and any changes in litigation or other contingencies.