Hub Group, Inc. — Q3 2013 Form 10-Q
Business and period: Unaudited results for the quarter and nine months ended September 30, 2013, compared with the same 2012 periods. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $883.0m | $804.9m | $2,488.6m | $2,323.1m |
| Gross margin | $93.1m | $91.6m | $275.9m | $262.7m |
| Operating income | $31.3m | $30.4m | $86.5m | $80.7m |
| Net income | $18.6m | $18.5m | $52.6m | $49.1m |
| Diluted EPS | $0.50 | $0.50 | $1.42 | $1.32 |
- Revenue rose 9.7% in Q3 and 7.1% year to date; logistics was a key growth driver. Nine-month revenue growth reflected increases in intermodal and logistics, while Mode truck brokerage revenue declined 3%.
- Gross margin rose 1.7% in Q3 and 5.0% year to date, but consolidated gross margin as a share of revenue declined to 10.5% from 11.4% in Q3 and to 11.1% from 11.3% year to date. Q3 operating margin fell to 3.5% from 3.8%; year-to-date operating margin was 3.5% in both periods.
- Q3 net income was nearly flat year over year; year-to-date net income increased 7.1%. The nine-month effective tax rate was 38.6% versus 38.5%; Pennsylvania tax changes increased the Q3 effective rate to 39.9% from 38.5%.
Cash, liquidity and capital
- Nine-month operating cash flow was $81.9m, up from $67.8m. Investing cash outflow was $64.3m, including $66.1m of capital expenditures; financing cash inflow was $3.8m. Cash increased to $92.2m from $70.8m at year-end 2012.
- At September 30, current assets were $539.2m and current liabilities $348.8m, a $190.4m working-capital surplus. Accounts receivable was $408.3m.
- Equipment-note debt was $8.7m, including $1.8m current; the notes carry fixed rates of 1.9%–2.0%. Capital lease liabilities totaled approximately $21.5m. The company reported $45.8m of unused revolving-credit availability, $4.2m in letters of credit, and compliance with debt covenants. No other borrowings under the bank line were outstanding.
- Management said cash, operating cash flow and available credit should meet needs for at least the next 12 months. Q4 2013 capital expenditures were expected to be $40m–$60m, primarily for headquarters completion, containers and technology.
Changes, outlook and risks
- Q3 Hub revenue grew 9.6%; Hub intermodal loads rose 5%, while lower fuel surcharges and unfavorable mix weighed on results. Hub logistics revenue increased 42%, primarily from new customers. Mode revenue rose 8.8%, led by intermodal and logistics.
- Management cited lower yields across Hub’s business lines in Q3; truck brokerage margin was affected by unfavorable traffic mix, including short-haul growth. Year-to-date Hub gross-margin percentage also declined, reflecting lower intermodal and truck-brokerage yields.
- Nine-month G&A included $1.0m of professional fees for an unsuccessful acquisition. Capital expenditures included $15.0m for the new headquarters and $42.7m for containers and transportation equipment. The company had contracted to purchase 4,029 containers for about $45.7m; $25.8m remained to be paid at quarter-end. An October contract for 200 tractors was expected to cost about $25.5m.
- Potential maximum exposure on owner-operator tractor lease guarantees was $42.2m; the recorded estimated-default liability was about $0.8m. The filing reported no material defaults or potential material defaults.
- A proposed California class action alleges Comtrak misclassified drivers as independent contractors and asserts labor-law claims. Proceedings were stayed pending appellate decisions in similar cases; the company said it could not reasonably estimate any potential loss.
- Key risks identified include rail service and capacity, vendor costs, equipment availability, competition, economic conditions, fuel prices, customer or agent losses, driver and agent recruitment, regulation and litigation, cybersecurity, and customer concentration. The top 50 Hub customers represented about 63% of Hub revenue; Mode’s top 20 represented about 36% of Mode revenue for the nine months.
Investor verification points
- Confirm whether revenue growth translates into improved yields and margins, given the decline in Q3 gross-margin and operating-margin percentages.
- Track cash conversion and working-capital demands, particularly accounts receivable, alongside the elevated capital-spending program and equipment commitments.
- Review the California driver-classification case, the lease-guarantee exposure, and any change in potential loss estimates or defaults.
- Monitor the expected completion and total cost of the headquarters project, Q4 capital expenditures, and the new tractor purchase.
- Assess customer and Mode-agent concentration, rail/vendor service and capacity, and the effect of tax changes on the effective rate.