Hub Group, Inc. 10-Q Summary: Period Ended June 30, 2007
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Hub Group, Inc., the largest intermodal marketing company (IMC) in the United States. The report covers the three and six-month periods ended June 30, 2007. The company provides intermodal, truck brokerage, and logistics services through a nationwide network. Results include the operations of its subsidiary, Comtrak Logistics, Inc., acquired in 2006. The Hub Group Distribution Services (HGDS) segment was sold in May 2006 and is reported as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Revenue | $401.6 million | $794.9 million |
| Gross Margin | $57.8 million (14.4% of revenue) | $114.4 million (14.4% of revenue) |
| Operating Income | $22.2 million (5.5% of revenue) | $40.4 million (5.1% of revenue) |
| Net Income | $13.8 million | $25.2 million |
| Diluted EPS | $0.35 | $0.64 |
| Cash and Equivalents | $52.4 million (Balance Sheet) | N/A |
| Operating Cash Flow | N/A | $30.9 million |
| Debt / Liquidity | $47.5 million available on revolving credit line | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 1.6% for the quarter and 5.7% for the six-month period compared to 2006. Intermodal revenue drove growth (up 5.2% Q/Q and 7.7% YTD), while truck brokerage revenue declined 6.3% in the quarter due to volume decreases.
- Margin Expansion: Gross margin percentage improved to 14.4% in 2007 from 14.0% in the prior year quarter. This was attributed to increased intermodal volume and efficiencies in performing more of its own drayage.
- Profitability: Net income from continuing operations rose 12.7% for the quarter and 21.8% for the six-month period. This was driven by higher gross margins, lower depreciation and amortization, and increased interest income.
- Discontinued Operations: Income from discontinued operations (HGDS) was $0 in 2007, compared to $0.3 million for the quarter and $1.0 million for the six months in 2006, following the sale of the subsidiary.
Outlook, Risks, and Management Commentary
- Capital Allocation: The company spent approximately $12.5 million on stock repurchases in the first half of 2007. It has authorization to spend an additional $62.5 million through June 2008. Capital expenditures for 2007 are expected to be between $10.0 million and $11.0 million.
- Acquisitions and Contracts: The company paid a $5.0 million earn-out related to the Comtrak acquisition. In March 2007, it entered a contract to purchase 2,000 freight containers for approximately $19.4 million, with delivery expected by year-end.
- Tax Matters: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) in 2007. An IRS dispute regarding the 1997 tax return is under appeal; a resolution by year-end could decrease uncertain tax liabilities by up to $4.0 million, positively impacting the effective tax rate.
- Risks: Key risks include fuel price fluctuations, rail service conditions, competitive pressures, labor unrest, and the loss of major customers (top 50 customers represent ~51.8% of revenue).
Investor Verification Checklist
- Customer Concentration: Verify the stability of the top 50 customers, who account for over 50% of total revenue.
- IRS Dispute Resolution: Monitor the status of the 1997 federal tax return dispute, which could impact future tax liabilities and effective tax rates.
- Container Delivery: Confirm the timeline and cost implications of the $19.4 million container purchase contract with Singamas.
- Stock Repurchase Activity: Track the utilization of the remaining $62.5 million stock buyback authorization.
- Discontinued Operations: Ensure no residual liabilities or income from the sold HGDS segment are impacting current results.