Hub Group, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Hub Group provides intermodal, truck brokerage, and logistics services. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $485.4 | $417.3 | +16.3% |
| Gross margin | $57.3 | $48.8 | +17.4% |
| Operating income | $16.8 | $14.2 | +17.7% |
| Net income | $10.5 | $8.7 | +20.6% |
| Diluted EPS | $0.28 | $0.23 | Higher |
| Operating cash flow | $25.5 | $18.3 | Higher |
- Gross margin was 11.8% of revenue versus 11.7%; operating margin was 3.5% versus 3.4%; net margin was 2.2% versus 2.1%.
- Revenue by line: intermodal $336.7 million (+17.4%), truck brokerage $84.7 million (+1.3%), and logistics $64.0 million (+36.3%).
- Cash and equivalents were $134.9 million at March 31, 2011, up from $115.1 million at year-end. Current assets were $369.6 million and current liabilities $195.6 million.
- Q1 investing cash use was $4.9 million, primarily capital expenditures; financing cash use was $0.9 million. Capital expenditures were $4.9 million.
- The balance sheet reports no separate borrowings balance. The amended revolving credit facility provides up to $50.0 million; $47.4 million was available after $2.6 million of outstanding letters of credit. The company reported compliance with covenants.
Changes and management commentary
- Intermodal load volume increased 13%; revenue also benefited from fuel and pricing, partly offset by mix. Truck brokerage loads fell 9%, while fuel and price/mix increased revenue; length of haul declined 5% (37 miles). Logistics growth reflected existing customers and customers added in 2010.
- Intermodal drove most gross-margin growth, supported by more in-house drayage, improved equipment utilization, higher loads, and pricing. Logistics gross margin declined 241 basis points, which management attributed to a greater share of business recorded gross rather than on a management-fee basis.
- Salaries and benefits rose to $26.8 million, but declined as a share of revenue to 5.5% from 5.6%. General and administrative expense increased to $12.8 million, including $1.7 million of costs related to the pending-at-quarter-end Mode Transportation acquisition.
- Management cited higher gross margin as the primary reason for improved net income. The effective tax rate fell to 38.2% from 39.2%.
Outlook, transactions, and risks
- No earnings or revenue guidance is provided. Management expected 2011 capital expenditures of $45–$49 million, including approximately $24 million for the first 2,000 53-foot containers; purchasing the remaining 2,000 would add approximately $23 million. The filing also describes an April 8 agreement to acquire 1,000 containers for an expected $13.5 million, with delivery expected May–August.
- On April 1, 2011, after quarter-end, Hub Group acquired Exel Transportation Services for $83.4 million before post-closing adjustments, paid with cash on hand, and renamed it Mode Transportation. Initial purchase accounting was incomplete. Management cited complementary services, greater scale, and expanded sales reach as expected benefits.
- The credit facility was amended on March 31, increasing unsecured capacity from $10 million to $50 million and extending its term to March 2014. Its rate is LIBOR plus 1.75%; financial covenants include minimum net worth of $300 million and cash-flow leverage no greater than 2.0 to 1.0.
- Management believed cash, operating cash flow, and available credit would meet cash needs for at least 12 months. It also disclosed interest-rate exposure on the credit line and identified risks including rail and carrier capacity/service, vendor costs, fuel prices, competition, customer concentration, regulation, labor, and successful integration of acquisitions.
- The company’s top 50 customers generated approximately 63% of revenue. Litigation is described as ordinary-course; management did not expect it to materially adversely affect financial position or results. Maximum exposure under owner-operator tractor lease guarantees was approximately $9.8 million, with a recorded liability of about $0.2 million; no material defaults occurred in the quarter.
Important facts for investors to verify
- Whether the Mode Transportation acquisition delivers the anticipated growth and complementary-service benefits, and the final purchase accounting, including assets, liabilities, contingencies, and goodwill.
- Actual 2011 container purchases, capital expenditures, and resulting cash and liquidity after the $83.4 million acquisition payment.
- Whether intermodal pricing, load growth, and utilization can sustain margins, and whether logistics’ lower gross margin mix persists.
- Customer concentration and carrier capacity, service, and cost trends, as well as the company’s compliance with credit covenants.
Interim results may not indicate full-year performance; the filing notes seasonality and that forward-looking statements are subject to risks and actual results may differ.