Hub Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated. Hub provides intermodal, truck brokerage, logistics and dedicated transportation services. Results are unaudited. Amounts below are in millions except per-share data.
Financial results
- Revenue: $933.0, up 11.4%. Intermodal revenue rose 8.4% to $536.0; logistics increased 25.1% to $203.3; dedicated grew 26.0% to $76.1; truck brokerage declined 2.0% to $117.6.
- Margins and operating income: Gross margin was $127.3, up 39.8%, and increased to 13.6% of revenue from 10.9%. Operating income rose to $35.6 from $16.5; operating margin improved to 3.8% from 2.0%.
- Profit: Continuing-operations income was $23.9 versus $11.1; diluted EPS from continuing operations was $0.71 versus $0.33. Net income was also $23.9 versus $16.2, but Q1 2018 included $5.1 of income from discontinued operations.
- Cash flow: Operating cash flow was $63.4 versus $33.2. Investing activities provided $6.2, including $19.4 received from the prior-year Mode disposition, while capital expenditures were $17.1. Financing activities used $18.6. Cash ended the quarter at $112.4, up from $61.4 at year-end 2018.
- Debt and liquidity: Equipment-note debt totaled $315.5, including $100.2 current and $215.2 long-term, compared with $330.8 at year-end. The company had no revolver borrowings and $321.5 available under its $350 million credit line, net of letters of credit. It reported compliance with debt covenants.
- Balance sheet: Total assets were $1,931.3 and stockholders’ equity was $1,007.1 at March 31, 2019. Adoption of lease accounting added $40.0 of right-of-use assets and $41.4 of lease liabilities at January 1, 2019.
Material changes and drivers
- Improved pricing, procurement and yield-management practices contributed to higher gross margin across business lines. Intermodal pricing and network balance helped, though rail and drayage costs and weaker rail-related utilization partially offset gains.
- CaseStack, acquired in December 2018 for total consideration of $252.9, expanded logistics and freight-consolidation services and contributed to revenue and costs. Purchase accounting remained preliminary; $165.9 of goodwill and $75.6 of intangibles were preliminarily allocated.
- Hub sold Mode in August 2018; its 2018 results are reported as discontinued operations. The $19.4 remaining disposition receivable was collected in Q1 2019.
- Operating costs increased: salaries and benefits rose to $62.0, general and administrative expense to $22.9, and depreciation and amortization to $6.8. The filing attributes increases in part to CaseStack, higher compensation and IT consulting.
Outlook, risks and contingencies
- Management estimated 2019 capital expenditures of $115–$125, principally for tractors, containers, trailers, an Oak Brook building and technology. It expected cash, operating cash flow and available credit to cover needs for at least 12 months.
- Management expected a 2019 effective tax rate of 25%–26% and cash income-tax payments below tax expense, partly due to expected depreciation timing differences. No full-year earnings or revenue guidance was provided in the supplied filing text.
- Key disclosed risks include freight-market growth, railroad service and costs, driver recruitment and classification, carrier capacity and pricing, customer concentration, competition, fuel and interest rates, regulation, cybersecurity and integration of acquisitions. The top 50 customers represented about 67% of Q1 revenue.
- The company disclosed California driver wage-and-hour and classification-related litigation, including putative class and PAGA matters. It could not estimate reasonably possible losses for certain pending cases; management did not believe the matters were likely to materially affect the company overall, though outcomes for a particular period could be material.
- Management stated disclosure controls were effective as of March 31, 2019 and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue and margin growth reflects CaseStack acquisition effects versus organic performance, especially given the preliminary purchase-price allocation.
- Whether margin improvements persist amid rail, drayage, fuel and third-party carrier cost changes, and whether utilization improves.
- Progress and funding of the $115–$125 million capital-spending plan, and the resulting effect on cash and equipment debt.
- Developments in driver-related litigation and any resulting losses, settlements or operating-model changes.
- Whether customer concentration, customer losses and the disclosed market and capacity risks affect future results.