Hub Group, Inc. — Q3 2020 Form 10-Q
Business and period: Hub Group provides intermodal, logistics, truck brokerage and dedicated transportation services. This unaudited filing covers the three and nine months ended September 30, 2020, compared with the same periods in 2019. Amounts below are in millions unless noted.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $924.8 | $913.3 | $2,542.9 | $2,767.4 |
| Gross margin | $108.0; 11.7% | $135.2; 14.8% | $319.9; 12.6% | $395.2; 14.3% |
| Operating income | $33.9; 3.7% | $37.2; 4.1% | $74.7; 3.0% | $113.6; 4.1% |
| Net income | $24.8 | $26.1 | $51.2 | $79.2 |
| Diluted EPS | $0.74 | $0.78 | $1.53 | $2.36 |
| Operating cash flow | Not separately presented for quarter | $122.7 | $128.7 |
- Q3 revenue increased 1.3%, but gross margin fell 20.1% and net income fell 5.1%. Transportation costs rose 5.0%, faster than revenue; transportation costs were 88.3% of Q3 revenue versus 85.2% a year earlier.
- For the first nine months, revenue declined 8.1%, gross margin declined 19.1%, and net income declined 35.4%. Transportation costs were 87.4% of revenue versus 85.7%.
- Q3 revenue by business line: intermodal $559.8 (+3.8%), logistics $175.9 (-7.2%), truck brokerage $120.0 (+9.5%), and dedicated $69.2 (-7.5%). Nine-month revenue was $1,515.8, $522.9, $304.7 and $199.6, respectively; all four lines declined year over year.
- Management attributed margin pressure to lower pricing, higher rail and purchased transportation costs, repositioning costs, lost business and higher insurance and repair costs. Lower salaries and benefits and general and administrative expenses partly offset the gross-margin decline. Q3 salaries and benefits fell to $45.6 from $59.8; G&A fell to $20.8 from $30.9.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $185.3, versus $168.7 at December 31, 2019. Current assets were $753.5 and current liabilities $542.7.
- Total debt was $236.0, including $87.0 current and $149.0 long term, compared with $281.6 at year-end 2019. The company had $317.4 of unused and available borrowings and $32.6 of standby letters of credit; it was in compliance with debt covenants.
- Nine-month operating cash flow was $122.7; investing cash use was $54.1, including $55.4 of capital expenditures; financing cash use was $52.0. Cash flow from operations decreased $6.0 year over year, with working-capital changes including a $105.9 use of cash from accounts receivable.
- Hub borrowed $100 million under its credit agreement in March as a precaution amid COVID-19 uncertainty and repaid it in June. Management said cash, operating cash flows and available credit should be sufficient for at least the next 12 months.
Outlook, risks and unusual items
- For Q4 2020, management expected high-single-digit intermodal volume growth. It expected logistics, truck brokerage and dedicated revenue to decline because earlier customer losses were not yet fully offset by new business. Management noted continued gross-margin pressure from lower pricing, repositioning, rail and other transportation costs, and higher insurance expense.
- Management projected a 24.0%–25.0% effective tax rate for full-year 2020 and estimated remaining-2020 capital expenditures of $70–$75 million, primarily for containers, tractors and technology, funded with cash and debt.
- COVID-19 is identified as a material and uncertain risk to demand, customers’ financial health and collections, operations, staffing, cybersecurity and liquidity. Hub donated refrigerated trailers with a carrying value of $5.6 million in the first nine months; the donation was recorded as expense.
- A $4.8 million settlement of California driver-classification claims was recorded in Q3 2019 and remained subject to final court approval. The company also disclosed other driver-related litigation; management did not expect pending matters, after accruals, to materially affect overall results, though outcomes in any period could be material.
- The company implemented a new ERP system in its Dedicated division during Q3, resulting in process and control changes; management said it was monitoring related controls. Disclosure controls were concluded to be effective at quarter-end.
Important facts for investors to verify
- Whether the anticipated Q4 intermodal volume growth and recovery of lost business in other lines materialized, and how pricing and transportation costs affected margins.
- Whether customer credit quality, receivables collection and working capital improved or worsened amid COVID-19 conditions.
- Actual capital spending, debt levels and liquidity relative to management’s stated outlook, including the effect of equipment purchases.
- Final court approval and payment status of the $4.8 million settlement, plus developments in other driver-related claims.
- Whether ERP-related control changes operated effectively and whether COVID-19 or other risks materially changed the company’s outlook.