Hub Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. Hub Group provides intermodal, truck brokerage, logistics and dedicated transportation services through its Hub and Mode segments.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Revenue | $1,179.1 | $923.6 | $2,275.1 | $1,816.4 |
| Gross margin | $136.2 | $101.3 | $259.0 | $202.9 |
| Gross margin % | 11.6% | 11.0% | 11.4% | 11.2% |
| Operating income | $32.0 | $16.6 | $55.1 | $33.8 |
| Net income | $22.1 | $9.5 | $38.2 | $19.9 |
| Diluted EPS | $0.66 | $0.29 | $1.14 | $0.60 |
- Q2 revenue rose 27.7% year over year; gross margin grew 34.4% and operating income nearly doubled. H1 revenue increased 25.3%, gross margin 27.6%, and operating income 63.2%.
- Q2 operating margin was approximately 2.7% versus 1.8%; H1 was 2.4% versus 1.9%. Net income growth reflected higher margins, partly offset by increased operating and interest expense.
- Q2 consolidated gross margin improved to 11.6%. Hub segment margin improved, while Mode’s gross margin percentage declined to 11.5% from 11.8%. Logistics margins faced pressure from purchased transportation costs and customer mix.
Cash flow, debt and liquidity
- H1 operating cash flow was $97.6 million, up from $63.1 million. Investing cash flow was negative $68.0 million, including $69.3 million of capital expenditures; financing cash flow was negative $31.4 million. Cash decreased $1.8 million to $26.8 million.
- Capital expenditures were $69.3 million, principally for tractors, trailers and technology. Operating cash flow less capital expenditures was approximately $28.4 million.
- At June 30, total long-term debt, including current maturities, was $266.2 million, down from $292.1 million at year-end 2017. Cash was $26.8 million; the company had no revolver borrowings and reported $327.0 million of available borrowing capacity. It was in compliance with debt covenants.
- Current assets were $667.3 million and current liabilities $565.3 million. The filing states management believes cash, operating cash flow and available credit will meet cash needs for at least the next 12 months.
Material changes and management commentary
- Hub revenue rose 26.1% in Q2, supported by intermodal growth, improved pricing and the addition of dedicated services. Intermodal revenue increased 16.5%; truck brokerage revenue increased 10.2% despite 5.4% fewer loads; logistics revenue increased 16.7%.
- Mode revenue rose 29.3% in Q2, with increases across intermodal, truck brokerage and logistics. Segment results are not fully comparable with 2017: Estenson Logistics was acquired July 1, 2017 and now operates as Hub Group Dedicated (HGD); dedicated revenue was $73.9 million in Q2 2018, with no such revenue in Q2 2017.
- Transportation costs rose 26.8% in Q2, driven by rail, fuel, carrier and equipment/driver costs. Hub cited higher driver pay and HGD start-up costs. Average rail transit times were up 0.7 days, negatively affecting results.
- A $3.6 million reduction in the estimated Estenson contingent consideration liability was recorded as a benefit in general and administrative expense and increased operating income. The liability was $1.1 million at June 30.
- The effective tax rate fell to 25.5% in Q2 and 24.5% in H1, primarily reflecting the Tax Cuts and Jobs Act. Management expected a 2018 effective tax rate of 24.5%–25.5%.
- Management estimated full-year 2018 capital expenditures of $200 million–$220 million. The company had substantial equipment orders outstanding, expected to be financed with debt, including tractors, trailers and containers scheduled for delivery during 2018.
- ASC Topic 606 was adopted January 1, 2018. The filing says segment revenues were not significantly affected; the standard excluded certain transaction taxes from revenue, reducing 2017 comparative revenue and transportation costs by $0.9 million for Q2 and $1.6 million for H1.
Risks and contingencies
- Transportation capacity and pricing, rail and drayage costs, fuel, driver availability and costs, customer losses, competition, interest rates, regulation, labor conditions, technology and cybersecurity are among the identified business risks. Hub’s top 50 customers represented about 68% of Hub segment H1 revenue; Mode’s top 20 represented about 39% of Mode segment H1 revenue.
- Legal proceedings include Robles, involving claims concerning California driver classification, and Adame, involving California labor-law/PAGA claims. The company disputes the allegations; 96% of California drivers had accepted settlement offers in the Robles matter by June 30, 2018. The filing does not provide a clear estimate of potential financial exposure.
- Management identified integration of HGD as ongoing. It also added risks associated with potential acquisitions and dispositions, including integration, liabilities and diversion of management resources.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material risk-factor changes were reported other than those described above.
Important facts for investors to verify
- How much of revenue and earnings growth reflects underlying volume, pricing and mix versus the full-period inclusion of HGD and other acquisition-related effects.
- Whether improved consolidated gross margin can persist amid rising rail, fuel, carrier and driver costs, and the reported pressure in logistics yields.
- Delivery, financing and utilization of planned equipment purchases, and progress against the $200 million–$220 million capital expenditure estimate.
- Cash conversion and debt trajectory after capital spending, including availability and covenant terms of the revolving credit facility.
- Developments and potential exposure in the Robles and Adame cases, for which the filing provides no clear quantified loss estimate.
- Final tax accounting under the Tax Cuts and Jobs Act and the expected impact of the planned 2019 lease-accounting adoption.