Hub Group, Inc. — FY 2012 Form 10-K
Business and period: Hub Group is an asset-light freight transportation manager providing intermodal, truck brokerage and logistics services. This filing covers the fiscal year ended December 31, 2012; 2011 comparisons include Mode Transportation only from its April 1, 2011 acquisition, so reported growth is not fully comparable. Unless stated otherwise, dollar amounts are in millions.
Financial results
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $3,124.1 | $2,751.5 | +13.5% |
| Gross margin | $356.1 | $312.5 | +13.9% |
| Operating income | $112.4 | $94.5 | +18.9% |
| Net income | $68.0 | $58.2 | +16.8% |
| Diluted EPS | $1.83 | $1.57 | +$0.26 |
| Operating cash flow | $92.9 | $74.9 | +$18.1 |
- Gross margin was 11.4% of revenue in both years; operating margin improved to 3.6% from 3.4%. Transportation costs were 88.6% of revenue.
- Intermodal generated 65% of revenue in 2012 and 2011; truck brokerage generated 21% in both years. Consolidated intermodal revenue was $2,042.3 million, truck brokerage $651.1 million and logistics $430.7 million.
- FY 2012 net income increased primarily with higher gross margin in both segments. The Hub segment’s intermodal loads rose 10%; Hub truck brokerage revenue fell 1%, while logistics revenue increased 12%. Mode’s comparable April–December revenue was $592.7 million versus $586.3 million; its full-year comparison is affected by the additional three months of ownership in 2012.
- Fourth-quarter 2012 revenue was $801.0 million, gross margin $93.4 million, operating income $31.6 million, net income $18.8 million and diluted EPS $0.51. Fourth-quarter 2011 figures were $762.8 million, $83.8 million, $27.1 million, $17.0 million and $0.46, respectively.
Liquidity, debt and investment
- Cash and cash equivalents were $70.8 million at year-end, versus $49.1 million a year earlier. Current assets were $459.3 million and current liabilities $277.4 million.
- Operating cash flow of $92.9 million funded capital spending and share repurchases. Investing cash outflow was $56.4 million; financing cash outflow was $14.9 million. Management noted Mode’s working-capital profile weighed on operating cash flow.
- The company reported no outstanding borrowings under its $50 million revolving credit facility; $46.3 million was available after letters of credit. The facility matures in March 2014, carries interest at LIBOR plus 1.75%, and the company was covenant-compliant.
- Capital lease obligations were approximately $23.2 million on the balance sheet. Total scheduled operating-lease, capital-lease and other commitments were $100.4 million. Maximum exposure under owner-operator tractor lease guarantees was $48.2 million; the recorded liability was about $1.0 million.
- 2012 capital expenditures were $56.9 million. Management forecast 2013 capital expenditures of $90–$100 million, including $30–$32 million for the new headquarters and about $50 million for containers and other transportation equipment.
Outlook, risks and unusual items
- Management estimated a 2013 effective tax rate of 38.5%, expected interest expense to remain consistent, and anticipated depreciation and amortization to remain consistent in 2013, with depreciation increasing in 2014 after the headquarters move. No specific revenue or EPS guidance was provided.
- Management cited rail service and economic conditions as key influences on revenue growth. Gross margin may fluctuate with business mix, vendor costs, fuel, capacity, service levels, utilization, accessorial recovery, insurance and driver-recruiting costs.
- Key exposures include reliance on railroads and third-party drayage/trucking capacity; transportation costs represented 88.6% of revenue. Other stated risks include equipment shortages, labor disruptions, customer and Mode agent concentration, economic cyclicality, regulation of independent contractors, cybersecurity and insurance claims.
- A January 2013 California federal complaint seeks class certification for current and former Comtrak California drivers alleging worker misclassification and labor-law violations. The company called the complaint without merit and intends to defend it; the filing does not quantify potential damages.
- The company repurchased $13.0 million of treasury stock in 2012, including purchases under a new $25 million authorization. No goodwill or indefinite-lived intangible impairment was recorded. Auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Assess underlying growth using comparable periods, particularly for Mode, and separate volume, rate/fuel and mix effects.
- Track gross-margin performance and the ability to pass through higher rail, drayage, trucking and fuel costs.
- Monitor operating cash conversion, receivables/payables trends and the planned step-up in 2013 capital spending.
- Review the Comtrak driver-classification litigation and the broader regulatory risk to independent-contractor models.
- Check rail service, equipment and labor conditions, customer/agent retention, and utilization of owned and leased transportation equipment.