Hub Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in millions except per-share data. Hub Group provides intermodal, logistics, truck brokerage and dedicated transportation services.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $779.2 | $921.2 | $1,618.1 | $1,854.2 |
| Gross margin | $107.2 (13.8%) | $132.7 (14.4%) | $211.8 (13.1%) | $260.0 (14.0%) |
| Operating income | $21.0 (2.7%) | $40.7 (4.4%) | $40.7 (2.5%) | $76.3 (4.1%) |
| Net income | $13.2 | $29.2 | $26.4 | $53.1 |
| Diluted EPS | $0.39 | $0.87 | $0.79 | $1.58 |
| Operating cash flow | Not separately reported for the quarter | $111.5 | $135.3 |
Material changes and drivers
- Q2 revenue declined 15.4% year over year; first-half revenue fell 12.7%. Revenue declined in every business line. Q2 intermodal revenue fell 15.1%, logistics 15.4%, truck brokerage 19.1% and dedicated 12.3%.
- Management cited COVID-19-related soft customer demand, lower volumes and fuel revenue, lower pricing, and competitive conditions. Intermodal also faced rail cost increases. Dedicated results reflected previously exited business.
- Gross margin fell 19.2% in Q2 and 18.5% for the first half. Q2 gross margin rate decreased to 13.8%, principally because of weaker intermodal pricing and rail costs. Logistics, brokerage and dedicated margin rates improved, supported by operating initiatives and business mix, but did not offset declines elsewhere.
- Q2 operating income declined 48.5%; first-half operating income declined 46.6%. Lower salaries and benefits partially offset reduced gross margin. General and administrative expense increased, including COVID-19 relief trailer donations and higher professional-services costs.
- First-half operating cash flow was $111.5 million, down from $135.3 million. Investing used $48.8 million, including $49.3 million of capital expenditures; financing used $28.3 million. Cash increased to $203.2 million from $168.7 million at year-end.
Liquidity, debt and capital
- At June 30, cash was $203.2 million and total debt was $258.8 million, comprising $90.9 million current and $167.9 million long-term. The company had $317.4 million of unused and available borrowings under its $350 million unsecured credit agreement, which matures July 1, 2022; letters of credit were $32.6 million.
- Hub borrowed $100 million under the credit agreement in March as a precautionary measure and repaid it in June. It reported compliance with debt covenants and believes cash, operating cash flow and available borrowings will meet needs for at least 12 months.
- First-half capital expenditures were $49.3 million, including $19.4 million for a headquarters-campus building, $13.0 million for containers and $9.1 million for trailers. Management estimated remaining-2020 capital expenditures of $65–$75 million, funded with cash and debt.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. Management expected intermodal gross margin to decline from Q2 levels due to lower pricing and higher rail costs. It expected logistics, brokerage and dedicated revenue to decline from Q2 levels because of lost customers and softness among existing customers, partly offset by new-customer revenue.
- COVID-19 was identified as a material risk to demand, customers’ ability to pay, operations and financial results. Other cited risks include freight-market conditions, competition, rail and carrier capacity or costs, driver availability and classification, customer concentration, fuel and interest rates, cyber risks and legal claims. The top 50 customers represented about 67% of first-half revenue.
- Hub donated refrigerated trailers with a carrying value of approximately $5.4 million in Q2 and $5.6 million in the first half for COVID-19 relief; related G&A expense was $5.7 million in Q2 and $5.9 million in the first half. The company also reported $3.3 million of first-half severance expense.
- Management expected a 2020 effective tax rate of 24.5%–25.5%. The CARES Act and similar state provisions deferred $11 million of income taxes until July 2020; payroll tax deferrals were $1 million through Q2, with total 2020 deferrals expected at $5–$8 million.
- A $4.8 million settlement in the Robles and Adame driver matters was recorded in Q3 2019 and remained subject to final court approval. The company said other pending claims were not expected to have a material adverse effect after existing accruals, while noting outcomes could be material in a particular period.
Key facts for investors to verify
- Whether demand, volumes and pricing recover or further weaken, especially in intermodal and customer sectors affected by COVID-19.
- Whether expected post-Q2 revenue and intermodal margin declines materialize, and whether margin initiatives can offset them.
- Customer credit quality, receivable collections and any changes to the credit-loss allowance.
- Execution and funding of planned second-half capital spending, and continued covenant compliance and borrowing availability.
- Final court approval and payment timing for the $4.8 million driver-case settlement, plus developments in other labor litigation.