Hub Group, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Hub Group is an asset-light freight transportation manager with Hub and Mode segments, providing intermodal, truck brokerage and logistics services. Intermodal accounted for 62% of revenue in 2015, and no single customer represented more than 10% of consolidated revenue.
Financial highlights
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $3,525.6 million | $3,571.1 million |
| Gross margin | $412.7 million; 11.7% of revenue | $370.4 million; 10.4% |
| Operating income | $117.0 million; 3.3% of revenue | $83.9 million; 2.4% |
| Net income | $70.9 million | $51.6 million |
| Diluted EPS | $1.97 | $1.40 |
| Operating cash flow | $171.7 million | $98.5 million |
| Capital expenditures | $83.0 million | $119.2 million |
Revenue declined 1.3%, primarily because of lower fuel revenue. Transportation costs fell 2.7% and to 88.3% of revenue from 89.6%, supporting stronger gross margin. Net income rose 37.6%; diluted EPS rose 40.7%. The effective tax rate was 36.4%, versus 37.0%.
Fourth quarter: Revenue was $890.3 million versus $915.4 million in Q4 2014; gross margin was $116.8 million versus $89.9 million; operating income was $35.3 million versus $24.8 million; net income was $22.4 million versus $16.4 million; diluted EPS was $0.63 versus $0.45.
Balance sheet and liquidity
At year-end, cash and cash equivalents were $207.7 million, current assets $624.6 million and current liabilities $358.7 million. Total assets were $1,301.1 million and stockholders’ equity $647.8 million. Equipment-note debt totaled $133.3 million, including $32.4 million current; capital lease liabilities totaled $15.9 million. The company reported $41.8 million of available revolving credit, $8.2 million of letters of credit and compliance with debt covenants. Management said available cash, operating cash flow and borrowing capacity should meet needs for at least 12 months.
Changes, outlook and risks
- Hub segment revenue declined 1.6%; Mode revenue was nearly flat, down 0.3%. Hub intermodal volume increased 3%, and Mode intermodal volume increased 8%; lower fuel revenue weighed on reported sales. Hub logistics revenue fell 6%, partly after customer losses and insourcing.
- Gross margin improved in all three service lines in Hub and across Mode, reflecting pricing, mix, cost management and improved yields. Salaries and benefits increased to $158.9 million from $136.5 million, partly due to higher bonuses and staffing.
- FY2014 included $10.3 million of driver settlement and related costs and an $11.9 million software impairment; neither charge recurred in 2015. Management also cited higher interest expense and a $2.3 million increase in foreign-currency translation losses in 2015.
- For 2016, management estimated capital expenditures of $25–$30 million if containers and tractors are financed with operating leases, or $62–$73 million if financed with debt. It planned purchases of 3,300–4,000 containers and about 50 tractors. The company had also committed to buy 1,000 containers for approximately $9 million, expected for delivery in February–April 2016.
- Management estimated a 2016 effective tax rate of 37%–38%, expected higher interest expense due to equipment debt, and did not expect the unusually large 2015 currency translation loss to recur. The filing gives no numerical revenue or earnings guidance.
- Hub Group Trucking closed its Los Angeles terminal on January 29, 2016, expecting improved gross margin and approximately $1.5 million of shutdown costs in Q1 2016. It also expected $1.5–$2.0 million of Q1 severance costs.
- Key risks include dependence on rail service and intermodal demand, driver and carrier capacity, transportation-cost pass-through, customer and Mode agent retention, independent-contractor classification, cyber and technology disruptions, and economic cyclicality. Pending driver-classification lawsuits include Robles, Adame and Lubinski; the company said it could not reasonably estimate potential loss or range of loss for unresolved claims. An appeal concerning potential antidumping duties on Chinese-made containers was pending after the ITC declined to impose duties.
Important facts for investors to verify
- Whether improved gross margin and operating income can be sustained despite lower reported revenue and continued cost pressures.
- Actual 2016 equipment spending and financing choice, resulting debt, and cash-flow impact.
- Progress and financial exposure from driver-classification litigation and changes in owner-operator availability.
- Whether the Los Angeles closure delivers expected savings and whether planned severance and shutdown costs remain within estimates.
- Rail service, intermodal volumes, customer retention and any outcome of the container-duty appeal.
- The filing reports unqualified audit opinions on the financial statements and internal controls; review the full notes for debt terms, legal matters and cash-flow working-capital effects.