Hub Group, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2012. Hub Group provides intermodal, truck brokerage and logistics services through two segments: Hub and Mode. Mode was acquired on April 1, 2011, so year-to-date comparisons include Mode for nine months in 2012 versus six months in 2011.
Financial performance
Amounts below are in millions of dollars except per-share data. Year-over-year changes are calculated from reported figures.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $804.9 (+7.0%) | $752.2 | $2,323.1 (+16.8%) | $1,988.8 |
| Gross margin | $91.6 (+5.6%); 11.4% of revenue | $86.7; 11.5% | $262.7 (+14.8%); 11.3% | $228.7; 11.5% |
| Operating income | $30.4 (+13.9%); 3.8% of revenue | $26.6; 3.5% | $80.7 (+19.9%); 3.5% | $67.3; 3.4% |
| Net income | $18.5 (+13.6%) | $16.3 | $49.1 (+19.3%) | $41.2 |
| Diluted EPS | $0.50 | $0.44 | $1.32 | $1.11 |
| Operating cash flow | Not separately provided | Not separately provided | $67.8 | $46.2 |
- Q3 drivers: Hub revenue increased 10.4%, led by intermodal growth of 10.7% and logistics growth of 14.3%; Mode revenue increased 1.1%. Hub’s gross margin rate declined to 10.9% from 11.3%, primarily because of lower intermodal yield. Mode’s gross margin rate rose to 12.2% from 11.7%, including a favorable $0.7 million bad-debt reserve adjustment.
- Nine-month drivers: Hub revenue increased 10.7%; Mode revenue was $581.4 million, up from $391.0 million, largely because 2012 included a full nine months of ownership versus six months in 2011. The company’s reported revenue and earnings growth therefore are not fully comparable on an organic basis.
- Cash flow and investment: Nine-month operating cash flow was $67.8 million. Investing used $34.3 million, including property and equipment purchases of $34.7 million, partly offset by $0.8 million in equipment-sale proceeds. Financing used $3.0 million. Cash increased $30.5 million to $79.6 million.
- Liquidity and obligations: At September 30, cash was $79.6 million, current assets were $502.9 million and current liabilities were $325.5 million. The company reported $47.0 million of unused, available revolver capacity and was in compliance with debt covenants. Capital-lease liabilities totaled $24.0 million, including current and non-current portions; no revolver borrowing balance is stated in the provided filing text.
Material changes and unusual items
- Q3 transportation costs rose 7.2%, slightly faster than revenue; gross margin as a share of revenue edged down 0.1 percentage point. Salaries and benefits declined, while general and administrative expense increased, including higher claims expense and outside-consultant costs.
- For the first nine months, agent fees and commissions increased to $41.1 million from $28.4 million, primarily reflecting the Mode agent-based business model and its inclusion for the full period. Mode acquisition-related costs incurred in 2011 did not recur in 2012.
- Capital expenditures were $34.7 million for the nine months. Management expected full-year 2012 capital expenditures of $55–$60 million, including $15–$20 million for the new headquarters and approximately $28 million for containers and other transportation equipment.
- The company had a $24.1 million equipment purchase commitment for 2,100 containers; 1,729 had been received by quarter-end, with the remainder expected by mid-November 2012.
- Maximum potential exposure under owner-operator tractor lease guarantees increased to $44.7 million from $24.0 million at year-end 2011. The recorded liability was approximately $0.9 million; the company reported no material defaults or potential material defaults.
- Restructuring accruals declined to approximately $0.03 million from $0.6 million at December 31, 2011. The detailed reserve table reports $0.03 million remaining.
Outlook, risks and contingencies
Management stated that cash, operating cash flow and available credit were expected to meet cash needs for at least the next twelve months. The filing provides capital expenditure expectations but no specific revenue or earnings guidance. Management cited seasonality and warned that interim results may not indicate full-year results.
Risks identified include market growth and economic conditions; rail service, capacity, vendor costs and equipment availability; competition; fuel and interest-rate changes; customer concentration and customer credit deterioration; loss of major customers or Mode agents; recruiting and retaining agents, drivers and employees; insurance and claims costs; regulation; cyber and information-technology risks; and integration of acquisitions. The company was party to ordinary-course litigation and did not expect it to materially adversely affect financial position or results. It disclosed $3.0 million of standby letters of credit outstanding.
Important facts for investors to verify
- How much reported growth reflects underlying volume, pricing and yield versus the differing Mode ownership periods and acquisition-related comparability.
- Whether Hub’s weaker intermodal yield and gross-margin rate improve, given management’s comments on rail-vendor cost increases.
- Cash conversion and working-capital trends, particularly the receivables and payables effects and management’s note that Mode’s payable-versus-receivable timing affects operating cash flow.
- Execution and funding of planned capital expenditures, headquarters construction and committed container purchases.
- Developments in owner-operator lease guarantees, claims expense, customer concentration, and Mode integration and internal controls.