Hub Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Hub Group provides intermodal, truck brokerage, dedicated and logistics services through its Hub and Mode segments. Results include Hub Group Dedicated (HGD), acquired July 1, 2017.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,054.4 | $932.8 | $2,872.3 | $2,594.2 |
| Gross margin | $116.5 | $111.5 | $319.4 | $334.3 |
| Operating income | $21.7 | $29.9 | $55.4 | $93.0 |
| Net income | $15.3 | $17.9 | $35.2 | $56.6 |
| Diluted EPS | $0.46 | $0.54 | $1.06 | $1.66 |
| Gross margin as % of revenue | 11.1% | 11.9% | 11.1% | 12.9% |
| Operating margin as % of revenue | 2.1% | 3.2% | 1.9% | 3.6% |
- Revenue grew 13.0% in Q3 and 10.7% for the first nine months. Q3 Hub segment growth included truck brokerage and logistics, plus $57.9 million of dedicated revenue from HGD. Nine-month Hub truck brokerage and logistics revenue increased 24.2% and 17.3%, respectively.
- Profitability weakened despite revenue growth: gross margin rose 4.5% in Q3 but fell 4.5% year to date. Management cited rail and fuel cost increases, tighter truck capacity, customer mix and new-customer start-up costs. Operating expenses and interest expense also increased.
- Effective tax rates were 22.5% for Q3 and 32.2% year to date, versus 38.4% in both 2016 comparison periods. The lower 2017 rates primarily reflected domestic production activities deductions.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $87.1 million, versus $79.0 million in 2016. Investing cash use was $202.8 million, including $165.9 million of acquisition payments and $39.9 million of capital expenditures. Financing provided $6.8 million. Cash declined by $108.8 million to $18.6 million.
- At September 30, 2017, total debt was $287.1 million, including $73.1 million current and $214.0 million long-term; cash was $18.6 million. These figures exclude capital lease liabilities of $11.2 million.
- The company entered a new $350 million unsecured credit agreement in July to help fund the acquisition. It had $50 million drawn and $286.5 million of unused and available borrowing capacity at quarter-end; $13.5 million of letters of credit were outstanding. The company reported compliance with debt covenants.
- Management said cash, operating cash flow and available credit should meet cash needs for at least the next 12 months. Estimated 2017 capital expenditures were $80–$85 million. Planned equipment purchases include containers and tractors, financed with secured fixed-rate debt.
Acquisition, outlook and risks
- HGD acquired Estenson Logistics on July 1. The preliminary total purchase price was $284.7 million, including $112.7 million of assumed equipment debt; cash paid was $165.9 million. The acquisition added a dedicated fleet and generated preliminary goodwill of $86.3 million and identifiable intangibles of $66.4 million. Purchase-price allocation remained subject to finalization; contingent consideration could be up to $6 million.
- Management expected the effective tax rate for the remainder of 2017 to be 31.5%–32.5% in its Q3 discussion and 32.0%–33.0% in its year-to-date discussion. The filing provides no revenue or EPS guidance.
- Key stated risks include margin pressure from railroad, trucking and drayage costs; capacity and equipment constraints; competition and pricing; customer concentration and customer financial health; driver recruitment and classification; cyber and IT risks; interest rates; and integrating HGD. Hub’s top 50 customers accounted for about 64% of Hub segment revenue for the nine months; Mode’s top 20 represented about 39% of Mode revenue.
- California driver-classification matters remained unresolved, including Robles and Adame; the company said it could not reasonably estimate a possible loss or range of loss. Lubinski was completed after the Sixth Circuit affirmed dismissal and no Supreme Court petition was filed. The company stated other litigation was not expected to materially adversely affect its financial position or results.
- Disclosure controls were deemed effective at quarter-end. Management was still integrating HGD’s processes, employees, technologies and operations and said it would continue evaluating internal controls during integration.
Important facts for investors to verify
- Whether HGD integration delivers expected customer, operating and margin benefits, and whether the acquisition purchase-price allocation changes.
- Whether gross-margin pressure persists, particularly in intermodal, truck brokerage and logistics, and whether cost increases can be recovered through pricing.
- Cash conversion and liquidity as cash balances fell substantially while acquisition and equipment spending increased; also monitor debt, variable-rate exposure and covenant headroom.
- Progress, potential exposure and developments in the remaining driver-classification lawsuits, for which the company could not estimate a loss range.
- Actual capital expenditures and tax rate against management’s estimates; the filing does not provide specific revenue or earnings guidance.