Hub Group, Inc. — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Hub Group provides intermodal, truck brokerage and logistics services through its Hub and Mode segments.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $848.4 million | $769.0 million | +10.3% |
| Gross margin | $88.7 million; 10.5% of revenue | $87.3 million; 11.4% | +1.6% in dollars; margin down 0.9 percentage points |
| Operating income | $20.5 million; 2.4% of revenue | $24.7 million; 3.2% | -17.2% |
| Net income | $12.0 million | $15.4 million | -21.7% |
| Diluted EPS | $0.33 | $0.42 | Down $0.09 |
| Operating cash flow | $18.6 million | $28.0 million | Down $9.4 million |
| Capital expenditures | $33.0 million | $9.5 million | Up $23.6 million |
Cash and cash equivalents were $75.3 million at March 31, 2014, versus $69.0 million at year-end. Approximate cash flow after capital expenditures was negative $14.4 million. Total debt was $32.5 million, including $6.0 million current and $26.5 million long-term; capital lease obligations totaled about $20.3 million. Unused availability under the revolving credit line was $44.9 million. The company reported compliance with debt covenants.
Material changes and management commentary
- Hub segment revenue rose 10.3% to $653.4 million; Mode revenue increased 11.4% to $208.9 million. Logistics revenue grew notably, chiefly from customers onboarded in 2013; consolidated logistics revenue increased to $163.7 million from $108.3 million.
- Hub Group attributed lower gross margin percentage largely to transportation costs and adverse winter weather. Weather-related intermodal impact was estimated at approximately $2.2 million, including lost volume, network inefficiencies, slower equipment turns, added equipment/accessorial costs, higher fuel and accidents.
- Operating expenses increased to $68.2 million from $62.6 million. Management cited higher salaries and headcount, outside consulting and general expenses. The effective tax rate was 39.5%, compared with 37.2%, reflecting New York tax changes and expiration of the federal research credit.
Outlook, risks and contingencies
- Management expected 2014 capital expenditures of $125–$140 million, including approximately $60 million for tractors and $56 million for containers, and said cash, operating cash flow and available borrowing capacity should meet needs for at least 12 months.
- The company expected a full-year effective tax rate of 38.9%. Interim results may not indicate full-year performance, in part because of seasonality.
- In January, the company financed 200 Freightliner tractors with equipment notes totaling approximately $25.4 million, bearing fixed interest rates of 1.87%–1.93%. It also contracted in March to purchase 300 tractors for approximately $39.3 million, with delivery expected July–December 2014. A subsequent April contract covers 4,000 containers for approximately $44 million, expected June–November 2014. The company also planned approximately $7.8 million in container purchases as leases expire during 2014.
- Maximum exposure under owner-operator tractor lease guarantees was approximately $36.2 million; the recorded liability was approximately $0.6 million. No material defaults were reported.
- A proposed California driver-classification lawsuit against Hub Group Trucking remains stayed. The company said it could not reasonably estimate any possible loss. Management did not believe other ordinary-course litigation would materially affect financial position or results.
- Risks identified include rail service and weather disruptions, transportation capacity and vendor costs, competition, fuel prices, customer and agent concentration, regulatory changes affecting contractors, labor availability, cybersecurity and information-technology risks, and health-insurance costs.
Important facts for investors to verify
- Whether the margin and operating-income pressure persists after the reported weather-related disruption, and how margins develop in logistics growth.
- Actual 2014 capital spending and the associated financing, cash-flow and debt effects, including the announced tractor and container purchases.
- Whether the projected tax rate and liquidity expectations are borne out, and continued compliance with debt covenants.
- Developments and potential exposure in the California driver-classification case and owner-operator lease guarantees.