Hub Group, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; comparisons are with the same 2013 periods. Amounts below are in millions of dollars unless noted. Hub provides intermodal, truck brokerage and logistics services through its Hub and Mode segments.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $913.4 | $883.0 | $2,655.8 | $2,488.6 |
| Gross margin | $93.2 | $93.1 | $280.5 | $275.9 |
| Operating income | $7.7 | $31.3 | $59.1 | $86.5 |
| Net income | $4.5 | $18.6 | $35.2 | $52.6 |
| Diluted EPS | $0.12 | $0.50 | $0.96 | $1.42 |
| Operating margin | 0.8% | 3.5% | 2.2% | 3.5% |
| Gross margin as % of revenue | 10.2% | 10.5% | 10.6% | 11.1% |
- Revenue grew 3.4% in Q3 and 6.7% year to date. Nine-month growth included Hub logistics revenue growth of 32% and Mode revenue growth of 12.7%.
- Q3 gross margin was nearly flat. Hub segment gross margin fell 4.7%, while Mode gross margin rose 12.4%.
- Q3 net income fell primarily because of a $10.3 million driver-settlement charge and an $11.9 million software impairment. Nine-month results also reflect these charges.
- Cash from operations was $58.6 million for the first nine months, down from $81.9 million. Capital expenditures were $75.9 million, versus $66.1 million; cash ended September 30 at $92.8 million, compared with $69.0 million at year-end 2013.
- At September 30, total debt was $53.3 million, including $11.6 million current; capital lease obligations totaled $19.3 million. The company had $43.9 million of unused revolver availability, $6.1 million of letters of credit, and was in compliance with debt covenants. Current assets were $571.2 million and current liabilities $383.8 million.
Material changes and operating commentary
- Management attributed Q3 intermodal margin pressure to rail service deterioration, slower and late trains, reduced fleet utilization, repositioning and accessorial costs, empty miles, West Coast chassis shortages and limited gate reservations. These issues, together with higher California drayage costs following a shift to employee drivers, reduced Q3 intermodal gross margin by approximately $6 million.
- For the first nine months, management cited weather-related intermodal effects in Q1 of approximately $2.2 million and continuing rail-service and equipment-utilization issues. Hub’s nine-month gross margin as a percentage of segment revenue declined to 9.8% from 10.6%.
- Management estimated no earnings-per-share-based employee bonus would be earned in 2014. The nine-month effective tax rate was 39.1%, compared with 38.6% in 2013; management cited expiration of the federal research credit as a factor.
Outlook, risks and contingencies
- Management expected Q4 2014 capital expenditures of $55–$60 million, primarily for tractors and containers, and intended to finance remaining equipment purchases with secured fixed-rate debt. It stated available cash, operating cash flow and revolver capacity should cover needs for at least 12 months. No earnings or revenue guidance is provided in the filing text.
- The company reported equipment purchase commitments involving tractors and containers; it planned to acquire 3,500 new containers for approximately $38.3 million and was taking delivery of 300 tractors under a roughly $39.3 million contract.
- California driver lawsuits allege misclassification and related labor-law violations. Hub made individual settlement offers without admitting liability; 92% of drivers had accepted as of the filing. A separate Illinois owner-operator class action was filed. The company said it could not reasonably estimate possible losses from unresolved claims.
- Other disclosed risks include rail service and capacity, vendor costs, fuel prices, competition, customer or agent losses, driver and owner-operator recruitment, regulation and legal changes affecting contractor classification, cybersecurity, and information-technology systems.
- On October 22, 2014, the board authorized repurchases of up to $75 million of Class A common stock through December 31, 2015, subject to market conditions.
Important facts for investors to verify
- Whether rail service, equipment utilization and drayage costs improved after quarter-end, and the effect on Hub intermodal margins.
- The final cost and scope of the driver settlements, and potential exposure from the unresolved California and Illinois litigation.
- Whether the terminated technology project creates additional costs beyond the $11.9 million write-off.
- Completion, financing and returns from planned tractor and container purchases, alongside the expected Q4 capital spending.
- Any share repurchases under the new authorization and their impact on cash, debt and share count.