Hub Group, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2017. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments. Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $924.5 | $855.6 | $1,818.0 | $1,661.4 |
| Gross margin | $101.3 | $114.5 | $202.9 | $222.9 |
| Gross margin as % of revenue | 11.0% | 13.4% | 11.2% | 13.4% |
| Operating income | $16.6 | $34.3 | $33.8 | $63.1 |
| Net income | $9.5 | $20.7 | $19.9 | $38.6 |
| Diluted EPS | $0.29 | $0.61 | $0.60 | $1.12 |
- Revenue and mix: Q2 revenue rose 8.1%; six-month revenue rose 9.4%. Growth reflected higher truck brokerage and logistics activity, fuel revenue, and new customers. Q2 Hub intermodal revenue grew 3%, truck brokerage 26%, and logistics 17%; Mode revenue increased 4.8%.
- Margins and earnings: Gross margin fell 11.5% in Q2 and 9.0% for the six-month period, as transportation costs grew faster than revenue. Management cited rail and fuel cost increases, lower customer prices, tight truck capacity, customer mix, and start-up costs for new logistics business. Q2 operating margin was 1.8%, versus 4.0% a year earlier.
- Costs: Six-month G&A increased to $40.9 million from $32.7 million, including higher IT consulting and professional services and acquisition-related costs. The filing reports approximately $1.5 million of Estenson acquisition costs incurred before closing.
- Cash flow: Six-month cash from operations was $63.1 million, down from $72.4 million. Investing used $27.2 million, including $29.6 million of capital expenditures. Financing used $11.7 million. Cash increased by $24.3 million to $151.7 million.
- Debt and liquidity: At June 30, total long-term debt, including its current portion, was $153.7 million; capital lease obligations totaled $11.9 million. Unused available borrowing under the then-existing revolving line was $36.5 million, and the company reported compliance with debt covenants. Current assets were $619.3 million and current liabilities $402.4 million.
Material changes and subsequent events
- Compared with the first half of 2016, revenue increased, but gross margin, operating income, net income, and diluted EPS declined. Lower earnings chiefly reflected margin compression and higher operating expenses.
- On July 1, 2017, Hub Group Trucking acquired Estenson Logistics for approximately $286 million, including contingent earn-out consideration capped at $6 million. Hub Group assumed $114 million of Estenson debt, paid $111 million in cash, and borrowed $55 million under a new credit line. Initial purchase accounting was incomplete at the filing date.
- Also on July 1, the company entered a new $350 million credit agreement. It includes leverage and interest-coverage covenants; the filing describes a maximum leverage ratio of 3.00-to-1.00, with a temporary 3.25-to-1.00 limit after certain qualifying acquisitions.
Outlook, risks, and contingencies
- Management expected full-year capital expenditures of $85–$95 million, primarily for containers and technology, and expected to finance container purchases with debt. The company had received 1,500 of 4,000 containers committed for purchase; the expected total purchase price was approximately $40 million, with some production potentially deferred if market conditions remained soft.
- Management stated that cash, operating cash flow, and available borrowing were expected to cover cash needs for at least the next 12 months. It expected quarterly interest expense going forward of approximately $2.4 million, reflecting acquisition and financing changes.
- Management expected a full-year effective tax rate of 38.8%–39.3%. The filing provides no revenue or earnings guidance.
- Key business risks include transportation capacity and vendor costs, rail service and pricing, competitive pressure, customer concentration and credit quality, driver/owner-operator classification and labor issues, cyber risk, and successful integration of Estenson.
- Robles, Adame, and other driver-related matters remained relevant. The company stated it could not reasonably estimate possible loss, if any, from remaining unresolved claims. It did not believe other litigation would materially adversely affect its financial position or results.
- The company said there were no material changes to previously disclosed risk factors. Disclosure controls were judged effective as of June 30, 2017.
Important facts for investors to verify
- Whether Hub Group can restore margins as rail, fuel, and purchased transportation costs evolve and new business ramps up.
- Estenson’s final purchase accounting, post-close operating contribution, assumed debt, and any earn-out payment.
- Actual leverage, covenant headroom, borrowing needs, and interest expense under the new credit agreement.
- Capital spending and container delivery levels versus the $85–$95 million annual estimate, including any deferrals.
- Developments and potential exposure in the unresolved driver classification and related litigation.
- How adoption of revenue-recognition and lease accounting standards will affect reported results and disclosures; the filing said the revenue standard was not expected to have a material financial-statement impact beyond disclosures, while lease impacts remained under evaluation.