Hub Group, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; selected fourth-quarter results are included below. Hub Group provides asset-light intermodal, logistics, truck brokerage and dedicated transportation services.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $3.496 billion | $3.668 billion | Down 4.7% |
| Gross margin | $425.4 million; 12.2% | $521.1 million; 14.2% | Down 18.4%; 200 basis points lower |
| Operating income | $105.8 million; 3.0% of revenue | $152.4 million; 4.2% | Down 30.6% |
| Net income | $73.6 million | $107.2 million | Down 31.4% |
| Diluted EPS | $2.19 | $3.20 | Down 31.6% |
| Cash from operating activities | $175.0 million | $254.5 million | Down $79.6 million |
Transportation costs were $3.070 billion, or 87.8% of revenue, compared with 85.8% in 2019. The effective tax rate fell to 23.5% from 25.5%. Cash and equivalents were $124.5 million at year-end, versus $168.7 million. Total equipment-note debt was $270.4 million, including $93.6 million current; the revolving credit facility had no borrowings and $312.3 million available after letters of credit. Stockholders’ equity was $1.158 billion.
Investing cash outflow was $196.9 million, including $115.3 million of capital expenditures and $84.8 million of net acquisition payments. Financing cash outflow was $22.3 million. The company borrowed $100 million under its revolver in March as a precaution and repaid it in June. Management stated cash, operating cash flow and available credit should meet needs for at least 12 months; the company was in compliance with debt covenants.
Fourth quarter: Revenue was $952.7 million, gross margin $105.6 million, operating income $31.2 million and net income $22.4 million. Compared with fourth-quarter 2019, revenue increased from $900.7 million, while gross margin, operating income and net income declined from $125.9 million, $38.9 million and $28.0 million, respectively.
Business changes and key drivers
- Intermodal revenue declined 3.4% to $2.092 billion, mainly from a 4.2% decrease in revenue per load, partly offset by 0.8% volume growth. Intermodal accounted for 60% of revenue.
- Logistics revenue fell 8.4% to $704.8 million, as lost customers outweighed growth in CaseStack retail-supplier solutions and the December NSD acquisition. Truck brokerage revenue decreased 0.6%; dedicated revenue fell 10.4%, primarily due to exited business.
- Revenue was down 13% year over year in the first half, then grew 4% in the second half. Intermodal volume fell 7% in the first half and grew 9% in the second half.
- Gross-margin pressure reflected lower intermodal pricing, higher repositioning and rail costs, and weaker results in other lines. Lower salaries and benefits—including reduced variable compensation and headcount—partly offset the decline.
- On December 9, 2020, Hub acquired residential last-mile provider NSD for $103.3 million of total consideration. NSD contributed $10.2 million revenue and $0.9 million operating income after acquisition. Purchase-price accounting remained preliminary.
Outlook, risks and unusual items
- Management forecast 2021 capital expenditures of $150 million to $170 million, including $140 million to $155 million for equipment, and expected to fund them with cash and debt. It expected interest expense to rise due to debt-funded equipment purchases. The estimated 2021 effective tax rate was 23% to 25%.
- COVID-19 materially affected first-half demand; the duration and future effects remained uncertain. Other key risks include reliance on railroads and third-party capacity, driver shortages, pricing and transportation-cost pressure, customer concentration, and competition.
- The top 10 customers represented approximately 46% of 2020 revenue; one customer exceeded 10%. Management also reported the top 50 accounted for approximately 69%.
- Other notable exposures include self-insured claims, independent-contractor classification and employment litigation, cybersecurity and ERP implementation risks, and the ability to integrate acquisitions. The year-end auto and workers’ compensation claims accrual was $32.1 million, up from $20.0 million.
- Hub donated refrigerated trailers with a carrying value of approximately $5.6 million in 2020 for COVID-19 response efforts. A $0.8 million lease right-of-use asset impairment and approximately $1.0 million of NSD transaction costs were also recorded.
- The financial-statement audit opinion and internal-control opinion were unqualified. The auditor identified claims accruals as a critical audit matter because estimates depend on actuarial assumptions and claim development. NSD was excluded from the year-end internal-control assessment while integration continues.
Investor verification priorities
- Check whether intermodal pricing and gross-margin performance recovered after the 2020 decline, and how volume and transportation costs are trending.
- Assess customer concentration, especially the customer exceeding 10% of revenue, and retention of customers cited as lost in logistics and dedicated.
- Review NSD’s final purchase-price allocation, integration progress and subsequent contribution to revenue and earnings.
- Track operating cash conversion, planned capital spending, debt maturities and utilization of the revolving facility.
- Review claims-reserve development, pending driver-classification litigation and the timing and outcome of the Robles and Adame settlements, which remained subject to court approval.