Hub Group, Inc. — Q3 2019 Form 10-Q
Business context and period. Hub Group is a multimodal transportation and logistics provider. This unaudited report covers the three and nine months ended September 30, 2019. Results are from continuing operations unless noted; 2018 includes the discontinued Mode business in reported net income. CaseStack, acquired in December 2018, contributed to 2019 results, affecting comparability.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $913.3 million | $933.2 million | $2,767.4 million | $2,665.3 million |
| Gross margin | $135.2 million; 14.8% | $115.0 million; 12.3% | $395.2 million; 14.3% | $307.0 million; 11.5% |
| Operating income | $37.2 million | $34.7 million | $113.6 million | $76.7 million |
| Continuing-operations income | $26.1 million | $25.8 million | $79.2 million | $54.0 million |
| Diluted EPS from continuing operations | $0.78 | $0.77 | $2.36 | $1.61 |
Q3 revenue declined 2.1%, while gross margin increased 17.6% and operating income increased 7.2%. For the nine months, revenue rose 3.8%, gross margin rose 28.7%, and operating income rose 48.0%. Reported net income was $26.1 million in Q3 2019 versus $114.6 million in Q3 2018, and $79.2 million versus $152.8 million for the nine-month periods; the 2018 figures included Mode sale gains and discontinued-operation income. The 2018 Mode disposition gain was $113.6 million.
Revenue by line: Q3 intermodal revenue fell 7.4% to $539.5 million, truck brokerage fell 10.3% to $109.5 million, logistics rose 26.6% to $189.5 million, and dedicated fell 4.9% to $74.8 million. Nine-month intermodal revenue was nearly flat at $1,618.4 million; truck brokerage declined 6.4% to $334.2 million, logistics increased 22.1% to $586.2 million, and dedicated increased 7.4% to $228.6 million.
Cash, debt and liquidity
- Cash and cash equivalents were $89.6 million at September 30, 2019, compared with $61.4 million at December 31, 2018.
- Operating cash flow for the first nine months was $128.7 million, versus $140.8 million a year earlier. Capital expenditures were $55.6 million.
- Cash used in investing activities was $27.8 million; financing activities used $72.7 million. Financing included $79.1 million of debt repayments, $36.6 million of new debt, and $25.0 million of treasury-stock purchases.
- Equipment-note debt totaled $288.2 million, down from $330.8 million at year-end 2018, including $95.8 million current and $192.4 million long-term. The company had no revolving-credit borrowings, with $319.4 million available under its $350 million facility after letters of credit. It reported covenant compliance.
- Adoption of the lease standard resulted in $43.9 million of right-of-use assets and $44.7 million of lease liabilities. These are in addition to reported debt.
Changes, outlook and risks
- Management attributed stronger margins to CaseStack, yield and revenue management, purchasing and operational improvements. Intermodal faced soft demand, lower volume and greater truckload/intermodal competition; rail, driver and equipment costs pressured margins.
- Q3 general and administrative expense included a $4.8 million charge for settlements of driver-classification claims, subject to final court approval. Other cost increases included CaseStack-related expenses, technology spending and amortization of acquired intangibles.
- Management expected 2019 capital expenditures of $90–$95 million and an effective tax rate of 25%–26%. It expected cash taxes to be slightly greater than income tax expense, partly due to tax extension payments related to the 2018 Mode sale.
- Management stated cash, operating cash flow and available credit should cover needs for at least the next 12 months. New property leases signed but not yet commenced were estimated to add approximately $11.2 million of lease assets and liabilities.
- Key disclosed risks include demand and competitive conditions, railroad service and costs, recruiting and retaining drivers, labor and worker-classification claims, customer concentration, fuel and interest-rate changes, regulation, cyber and technology risks, and trade barriers. The top 50 customers represented about 68% of Q3 revenue.
- The company began phased implementation of a new ERP system in July 2019; management said controls were effective at quarter-end and that it would continue monitoring controls affected by implementation.
Important facts for investors to verify
- Whether intermodal volumes and demand stabilize, and how rail and equipment costs affect margins.
- Whether CaseStack growth and margin benefits continue to offset pressure in other business lines.
- Final court approval and payment timing for the $4.8 million driver-claim settlements, and any material developments in other litigation.
- Execution against the 2019 capital-expenditure and tax outlook, and cash conversion given working-capital movements.
- Debt repayment, share repurchases and lease obligations, including the effect of new leases and the ERP implementation on future costs and controls.