Hub Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Unless otherwise stated, operating results below are continuing operations. Amounts are in millions of dollars.
Business context and material changes
Hub provides intermodal, truck brokerage, logistics and dedicated transportation services. On August 31, 2018, it sold Mode Transportation, LLC to an affiliate of York Capital Management for approximately $238.5 million in cash, subject to customary adjustments. Mode’s temperature-protected Temstar division was retained and moved into intermodal. Mode is presented as discontinued operations, and prior-period results were recast accordingly. The sale generated a $113.6 million pretax gain.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue, continuing operations | $933.2 | $824.8 | $2,665.3 | $2,213.8 |
| Gross margin | $115.0 | $86.3 | $307.0 | $231.0 |
| Gross margin percentage | 12.3% | 10.5% | 11.5% | 10.4% |
| Operating income | $34.7 | $15.7 | $76.7 | $37.4 |
| Continuing-operations net income | $25.8 | $11.6 | $54.0 | $23.7 |
| Net income, including discontinued operations | $114.6 | $15.3 | $152.8 | $35.2 |
| Diluted EPS, continuing operations | $0.77 | $0.35 | $1.61 | $0.71 |
| Diluted EPS, total | $3.41 | $0.46 | $4.56 | $1.06 |
Q3 revenue rose 13.1%; intermodal grew 20.5%, truck brokerage 8.4%, and dedicated 35.7%, while logistics declined 11.2% amid customer losses. Management attributed improved gross margin chiefly to intermodal pricing, accessorial-cost recovery and volume, and stronger truck brokerage results. Rail transits lengthened, weighing on results; logistics and dedicated margins faced customer-mix, purchased-transportation, outside-carrier and wage pressures. Nine-month revenue grew 20.4%, including a longer contribution period from the 2017 Dedicated acquisition.
Net income and EPS include Mode’s discontinued operations and sale gain; they are therefore not directly indicative of continuing operating performance. Q3 discontinued-operations income was $88.8 million after tax, including the sale gain; nine-month discontinued-operations income was $98.8 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $140.8 million, versus $87.1 million in 2017. Investing cash flow was positive $93.2 million, including $228.0 million of net Mode-disposition proceeds, offset in part by $138.8 million of capital expenditures. Financing cash flow was positive $5.0 million.
- Cash and equivalents were $267.5 million at September 30, 2018, compared with $28.6 million at December 31, 2017; the increase largely reflects the disposition proceeds.
- Debt carrying value was $303.5 million, including $95.9 million current and $207.6 million long-term, versus $292.1 million at year-end 2017. The company had no revolving-credit borrowings, $325.0 million in unused available borrowings, and $25.0 million in letters of credit. It reported compliance with debt covenants.
- Management said cash, operating cash flow and available credit should cover needs for at least the next 12 months. Capital expenditures were estimated at $200–$220 million for 2018; equipment purchases were expected to be financed with debt.
Outlook, risks and unusual items
- Management expected a 2018 effective tax rate of 23%–24%; it also estimated a Q4 rate of 22.0%–22.4%. The nine-month effective rate was 23.3%, versus 29.8% in 2017, primarily reflecting the U.S. Tax Cuts and Jobs Act.
- On November 2, 2018, Hub agreed to acquire CaseStack for approximately $255 million in cash, subject to customary conditions and approvals, with closing expected in early December. CaseStack’s SupplyPike software business is excluded. The filing does not provide financing terms for the purchase.
- Risks identified include transportation-cost and capacity changes, pricing and margin pressure, rail service disruption, driver recruitment and classification issues, customer concentration, competition, cybersecurity, fuel and interest-rate changes, and integration of acquisitions. The top 50 customers represented approximately 67% of nine-month revenue.
- California driver-classification litigation remains a contingency. The company said 96% of California drivers had accepted settlement offers in the Robles matter; related Adame litigation also remains pending. The company disputes the underlying classification allegations.
- Hub adopted ASC 606 on January 1, 2018. For 2017, the standard reduced reported revenue and transportation costs by $0.7 million for Q3 and $2.2 million for the nine-month period, with no stated margin effect.
Important facts for investors to verify
- Separate recurring continuing-operations earnings from the $113.6 million pretax Mode sale gain and discontinued-operations results.
- Assess whether improved intermodal pricing and margins can persist amid higher rail, drayage, fuel and driver costs and longer rail transit times.
- Review the funding and expected impact of the $255 million CaseStack acquisition alongside the $200–$220 million 2018 capital-expenditure plan and equipment debt commitments.
- Monitor logistics customer losses, dedicated startup and carrier costs, customer concentration, and the outcomes of the driver-related litigation.