Hub Group, Inc. annual report, FY2013

Hub Group, Inc. — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. Hub Group is an asset-light freight transportation manager with two reporting segments, Hub and Mode, offering intermodal, truck brokerage and logistics services. Financial amounts below are in U.S. dollars.

Financial results and liquidity

Metric20132012
Revenue$3,373.9 million$3,124.1 million
Gross margin$371.0 million (11.0% of revenue)$356.1 million (11.4%)
Operating income$113.7 million (3.4% of revenue)$112.4 million (3.6%)
Income before taxes$112.6 million$111.3 million
Net income$69.1 million$68.0 million
Diluted EPS$1.87$1.83
Cash from operating activities$117.4 million$92.9 million
Capital expenditures$110.9 million$56.9 million
  • Revenue rose 8.0%; gross margin rose 4.2%, while gross margin as a share of revenue declined 0.4 percentage points. Transportation costs were 89.0% of revenue, versus 88.6%.
  • Intermodal generated 64% of 2013 revenue, compared with 65% in 2012; truck brokerage generated 19%, compared with 21%.
  • Hub segment revenue increased 8.7% to $2.60 billion; Mode revenue increased 5.5% to $823.2 million. Hub logistics revenue grew 38%, primarily from new customers; Mode intermodal revenue grew 10%, mainly on higher volume. Mode truck brokerage revenue declined 2%.
  • At December 31, cash and cash equivalents were $69.0 million, current assets $486.0 million, and current liabilities $321.3 million. Total assets were $1.048 billion and stockholders’ equity $561.5 million.
  • Balance-sheet debt included $8.2 million of equipment notes and capital lease liabilities of $20.9 million; current portions were $1.8 million of debt and $2.4 million of capital leases. The revolving facility had $44.8 million available, net of letters of credit, and the company reported compliance with its covenants.

Fourth-quarter results and comparison

For the quarter ended December 31, 2013, revenue was $885.3 million, gross margin $95.1 million, operating income $27.3 million, net income $16.5 million and diluted EPS $0.45. Compared with fourth-quarter 2012, revenue increased from $801.0 million and gross margin from $93.4 million, while operating income declined from $31.6 million, net income from $18.8 million and diluted EPS from $0.51.

Management commentary, outlook and notable items

  • Management attributed annual revenue growth to higher volumes and logistics customer growth. Gross-margin pressure reflected higher transportation costs and unfavorable business mix; truck brokerage margin weakened, while intermodal and logistics margins increased.
  • A $2.9 million fourth-quarter impairment was recorded after the company decided to retire the Comtrak name and rebrand the operation as Hub Group Trucking. No goodwill impairment was recorded.
  • Operating cash flow funded much of the year’s spending, including $110.9 million of capital expenditures: $59 million for containers, $26 million for the new headquarters, and $14 million for tractors and trailers. Management estimated 2014 capital expenditures of $60–$80 million, excluding any new container purchases, and had not decided on a container order.
  • Management expected 2014 depreciation and amortization to rise by $2.0–$2.5 million and interest expense to increase with planned equipment financing. It estimated a 2014 effective tax rate of 38.8%. The filing does not provide revenue or earnings guidance.
  • The credit facility was amended in December 2013, extending its term to December 2018 and reducing rates and commitment fees; maximum unsecured borrowing capacity remained $50 million. In January 2014, the company agreed to finance approximately $25.4 million of tractors with five-year secured debt at 1.87%–1.93%.
  • Key risks include reliance on railroads and intermodal demand, constrained drayage and trucking capacity, driver shortages, equipment availability, transportation-cost increases that may not be passed to customers, customer and Mode-agent retention, economic cyclicality, cybersecurity and regulation of independent contractors.
  • A California class-action complaint alleges Comtrak misclassified certain drivers as independent contractors. Proceedings were stayed, and the company could not reasonably estimate any potential loss. Management stated other ordinary-course litigation was not expected to materially affect results.
  • Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.

Investor verification priorities

  • Assess whether revenue growth can translate into improved gross and operating margins after the 2013 margin-rate decline.
  • Verify the return and utilization of the sharp increase in capital spending, including container and tractor purchases, and the resulting financing needs.
  • Track rail service, drayage and driver capacity, vendor cost changes, and the company’s ability to pass those costs through to customers.
  • Monitor the California driver-classification litigation, potential regulatory changes, and any resulting contingent liabilities.
  • Review 2014 spending, equipment financing, tax-rate assumptions and any subsequent guidance or container-purchase decisions.