Hub Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments. Amounts below are in millions of dollars except per-share data.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / prior period |
|---|---|---|
| Revenue | $805.9 | $835.9; down 3.6% |
| Gross margin | $108.4; 13.4% of revenue | $89.1; 10.7% |
| Operating income | $28.8; 3.6% margin | $18.8; 2.3% |
| Net income | $18.0 | $10.3 |
| Diluted EPS | $0.51 | $0.28 |
| Cash from operations | $50.3 | $45.3 |
| Capital expenditures | $4.9 | $15.1 |
- Revenue declines reflected lower fuel-related revenue, weaker truck brokerage price and mix, and lower Hub logistics revenue after losing a customer and amid reduced customer activity. Hub intermodal volume rose 1.0%; Mode intermodal loads rose 8.8%.
- Gross margin improved across all three business lines in Hub, supported by pricing, accessorial management, lower drayage costs, customer mix and purchasing improvements. Mode’s gross margin rose to $29.2 million from $25.9 million.
- Operating expenses increased to $79.5 million from $70.3 million, including higher salaries, agent commissions and general and administrative costs. Other income was $0.1 million versus $2.1 million of expense, mainly reflecting foreign-currency translation gains versus losses a year earlier.
- Cash and cash equivalents were $200.3 million at March 31, down from $207.7 million at year-end. Total debt was $125.2 million, including $32.5 million current and $92.6 million long-term; capital lease obligations were $15.3 million. Available revolver borrowings were $41.8 million, and the company reported compliance with debt covenants.
- Operating cash flow exceeded capital expenditures by approximately $45.4 million. Financing cash outflow was $53.5 million, largely reflecting $42.4 million of treasury-stock purchases and $8.1 million of debt repayment.
Material changes and outlook
- Revenue fell 3.6%, while net income rose about 75% and diluted EPS increased to $0.51. Management attributed earnings improvement primarily to stronger margins and improved other income, partly offset by higher operating expenses.
- The company said cash, operating cash flows and available credit should meet cash needs for at least the next 12 months. It did not provide specific earnings or revenue guidance.
- For 2016, management expected to purchase 4,000 containers. Depending on whether the remaining 2,500 are financed with debt or operating leases, estimated capital expenditures were $70–$80 million or $45–$55 million, respectively. In April, the company also committed to acquire 2,500 additional containers for approximately $24 million, with delivery expected August–October.
- Management expected an effective tax rate of approximately 38% for the rest of 2016. The company cited seasonality and cautioned that interim results are not necessarily indicative of full-year results.
- A $100 million share-repurchase authorization was approved in February 2016. The company repurchased 1.21 million shares for $42.4 million during the quarter; by April 26 it had purchased 1.67 million shares for $60.0 million under the authorization.
Risks, contingencies and unusual items
- Pending driver-classification and employment-related litigation includes the Robles, Adame and Lubinski matters. The company said it could not reasonably estimate a possible loss or range of loss for remaining unresolved claims. It reported that 93% of California drivers had accepted settlement offers in Robles; related proceedings remain pending.
- Hub Group Trucking closed its Southern California operations in early 2016 and changed its California driver model from independent contractors to employees in late 2014. The quarter included $2.0 million of driver pay associated with shutting down the Los Angeles terminal, as well as severance and related costs.
- Owner-operator tractor lease guarantees had maximum potential exposure of $6.2 million at quarter-end; management reported no material defaults. Committed container purchases will add equipment financing or lease obligations.
- Key business risks include rail and carrier service or capacity changes, vendor-cost increases, customer concentration or losses, driver classification and retention, fuel-price fluctuations, cyber and technology risks, and economic conditions.
Important facts for investors to verify
- Whether stronger gross margins can persist as revenue and truck brokerage pricing remain under pressure.
- Container purchase timing, financing choice, and the resulting 2016 capital spending and debt or lease commitments.
- Developments and potential financial exposure in the driver-related lawsuits, for which the company could not estimate a loss range.
- Execution of the repurchase authorization and the effect of buybacks on cash, share count and liquidity.
- Customer concentration: Hub’s top 50 customers represented approximately 63% of Hub segment revenue; Mode’s top 20 represented approximately 39% of Mode segment revenue.