Hub Group, Inc. — Q3 2010 Form 10-Q
Business and period: Hub Group provides intermodal, truck brokerage and logistics services. This unaudited quarterly report covers the three and nine months ended September 30, 2010; comparisons are to the same 2009 periods.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $478.4m | $388.8m | $1,353.8m | $1,103.1m |
| Gross margin | $57.4m | $48.2m | $156.8m | $139.1m |
| Operating income | $20.7m | $15.9m | $50.7m | $40.0m |
| Net income | $12.6m | $9.8m | $30.9m | $24.3m |
| Diluted EPS | $0.34 | $0.26 | $0.83 | $0.65 |
Revenue rose 23.1% in Q3 and 22.7% year to date. Q3 growth by business line was intermodal 25.1%, truck brokerage 15.7%, and logistics 22.9%; nine-month growth was 22.8%, 19.7%, and 27.9%, respectively. Q3 operating margin was 4.3% versus 4.1%; gross margin was 12.0% versus 12.4%. For nine months, operating margin was 3.8% versus 3.6%, while gross margin was 11.6% versus 12.6%.
Cash provided by operations was $27.3m for the first nine months, down from $39.8m. The filing attributes the 2010 cash flow in part to a $66.4m increase in accounts receivable, partly offset by a $39.7m increase in accounts payable. Investing used $12.5m, including $13.4m of property and equipment purchases. Financing used $23.6m, including $23.8m for treasury stock purchases. Cash and cash equivalents were $118.0m at September 30, 2010, versus $126.9m at December 31, 2009.
At quarter-end, current assets were $350.4m and current liabilities $199.7m; total assets were $645.0m. The filing does not provide a clear outstanding bank borrowing balance. The revolving facility’s maximum capacity was reduced to $10m and $7.4m was unused and available, with $2.6m of standby letters of credit outstanding. The facility runs through March 2013; Hub Group reported covenant compliance. Interest expense was $12,000 for Q3 and $38,000 year to date.
Material changes and management commentary
- Revenue and earnings improved, driven by higher volumes and customer growth. Management cited new customers as the primary source of logistics revenue growth.
- Gross margin percentage declined, primarily because tighter capacity increased truck brokerage costs; lower intermodal mix also weighed on the nine-month margin rate.
- Management said cash, operating cash flow and available borrowings should meet cash needs for at least the next 12 months.
- Full-year 2010 capital expenditures were expected to be $30m–$35m, including approximately $24.8m for 2,500 containers expected by the end of November. Potential real-property purchases could take spending above that range.
- On October 11, 2010, the company contracted to buy 1,000 53-foot containers, with an option for 2,000 more that had to be exercised by early December. Expected purchase cost was $11m–$33m, with delivery anticipated March–October 2011.
Risks, contingencies and unusual items
- Management identified risks including economic and market conditions, railroad service and relationships, constrained or surplus transportation capacity, vendor costs, fuel prices, customer concentration, recruiting drivers and owner-operators, regulation, insurance costs, technology systems, and competition. The top 50 customers represented approximately 61% of revenue.
- Litigation includes freight loss or damage, billing, property damage and personal injury claims; management did not expect the litigation to materially adversely affect financial position.
- Lease guarantees for owner-operator tractors subject to California emissions rules had maximum potential exposure of approximately $5.9m at September 30, 2010; the recorded liability was approximately $0.1m. No material defaults occurred in the first nine months.
- The company repurchased 748,097 shares during the first nine months for $23.8m of cash. At September 30, $7.7m remained under the $30m authorization, which expires March 31, 2011.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Interim results may be affected by seasonality and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether higher shipment volumes and new customer business persist, and whether tighter truck capacity continues to pressure gross margin.
- Receivables, payables and operating cash flow trends, given the substantial working-capital use of cash in 2010.
- Actual 2010 capital expenditures, any property purchases, and whether the additional container option was exercised.
- Customer concentration, transportation-provider capacity and service conditions, and the status of lease guarantees and litigation.
- Remaining share-repurchase authorization, facility availability and continued compliance with credit covenants.