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HUBG > SEC Filings for HUBG > Form 10-Q on 31-Oct-2013All Recent SEC Filings

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Form 10-Q for HUB GROUP INC


31-Oct-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information contained in this quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expects," "hopes," "believes," "intends," "estimates," "anticipates," and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Actual results or experience could differ materially from the forward-looking statements as a result of many factors. We assume no liability to update any such forward-looking statements contained in this quarterly report. Factors that could cause our actual results to differ materially include:

the degree and rate of market growth in the domestic intermodal, truck brokerage and logistics markets served by us;

deterioration in our relationships with existing railroads or adverse changes to the railroads' operating rules;

changes in rail service conditions or adverse weather conditions;

further consolidation of railroads;

the impact of competitive pressures in the marketplace, including entry of new competitors, direct marketing efforts by the railroads or marketing efforts of asset-based carriers;

changes in rail, drayage and trucking company capacity;

railroads moving away from ownership of intermodal assets;

equipment shortages or equipment surplus;

changes in the cost of services from rail, drayage, truck or other vendors;

increases in costs for independent contractors due to regulatory, judicial and legal changes;

labor unrest in the rail, drayage or trucking company communities;

general economic and business conditions;

inability to successfully protect our data against cyber attacks;

significant deterioration in our customers' financial condition, particularly in the retail, consumer products and durable goods sectors;

fuel shortages or fluctuations in fuel prices;

increases in interest rates;

changes in homeland security or terrorist activity;

difficulties in maintaining or enhancing our information technology systems;

changes to or new governmental regulations;

significant increases to health insurance costs due to the Affordable Care Act;

loss of several of our largest customers and Mode agents;

inability to recruit and retain key personnel and Mode sales agents and IBOs;

inability to recruit and maintain drivers and owner-operators;

changes in insurance costs and claims expense;

changes to current laws which will aid union organizing efforts; and

inability to close and successfully integrate any future business combinations.


Table of Contents

EXECUTIVE SUMMARY

Hub Group, Inc. ("we", "us" or "our") reports two distinct business segments, Hub and Mode. The Mode segment includes only the business we acquired on April 1, 2011. The Hub segment includes all businesses other than Mode. Hub Group (as opposed to just Hub), refers to the consolidated results for the whole company, including both the Mode and Hub segments. For the segment financial results, refer to Note 2 of the consolidated financial statements.

We are the largest intermodal marketing company ("IMC") in the United States and a full service transportation provider offering intermodal, truck brokerage and logistics services. We operate through a nationwide network of operating centers and independent business owners.

As an IMC, we arrange for the movement of our customers' freight in containers and trailers over long distances. We contract with railroads to provide transportation for the long-haul portion of the shipment and with local trucking companies, known as "drayage companies," for local pickup and delivery. As part of the intermodal services, we negotiate rail and drayage rates, electronically track shipments in transit, consolidate billing and handle claims for freight loss or damage on behalf of our customers.

As of September 30, 2013, approximately 66% of Hub's drayage needs were met by our subsidiary, Comtrak Logistics, Inc. ("Comtrak"), which assists us in providing reliable, cost effective intermodal services to our customers. Comtrak has terminals in Atlanta, Birmingham, Charlotte, Chattanooga, Chicago, Cleveland, Columbus (OH), Dallas, Harrisburg, Huntsville, Indianapolis, Jacksonville, Kalamazoo, Kansas City, Milwaukee, Memphis, Nashville, Newark, Los Angeles, Perry (FL), Philadelphia, Portland (OR), Savannah, Seattle, St. Louis, Stockton, and Titusville (FL). As of September 30, 2013, Comtrak leased or owned 333 tractors, leased or owned 448 trailers, employed 405 drivers and contracted with 2,290 owner-operators.

We also arrange for the transportation of freight by truck, providing customers with another option for their transportation needs. We match the customers' needs with carriers' capacity to provide the most effective service and price combinations. As part of our truck brokerage services, we negotiate rates, track shipments in transit and handle claims for freight loss or damage on behalf of our customers.

Our logistics service consists of complex transportation management services, including load consolidation, mode optimization and carrier management. These service offerings are designed to take advantage of the increasing trend for shippers to outsource all or a greater portion of their transportation needs.

Hub has full time marketing representatives throughout North America who service local, regional and national accounts. We believe that fostering long-term customer relationships is critical to our success and allows us to better understand our customers' needs and specifically tailor our transportation services to them.

Hub's yield management group works with pricing and operations to enhance Hub's customer margins. We are working on margin enhancement projects including matching up inbound and outbound loads, reducing empty miles, improving our recovery of accessorial costs, using Comtrak more, and reviewing and improving low margin loads.

Hub's top 50 customers represent approximately 63% of the Hub segment revenue for the nine months ended September 30, 2013. We use various performance indicators to manage our business. We closely monitor margin and gains and losses for our top 50 customers. We also evaluate on-time performance, cost per load and daily sales outstanding by customer account. Vendor cost changes and vendor service issues are also monitored closely.


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Mode has approximately 235 agents, consisting of 96 sales/operating agents, known as Independent Business Owners ("IBOs"), who sell and operate the business throughout North America and 139 sales only agents. Mode also has a company managed operation and corporate offices in Dallas, a temperature protected services division, Temstar, located in Downers Grove, IL and corporate offices in Memphis. Mode's top 20 customers represent approximately 36% of the Mode segment revenue for the nine months ended September 30, 2013. We closely monitor revenue and margin for these customers. We believe Mode brings us highly complementary service offerings, more scale and a talented sales channel that allows us to better reach small and midsize customers.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2013 Compared to the Three Months Ended
September 30, 2012

The following table summarizes our revenue by segment and business line (in
thousands) for the three months ended September 30:



                                                  Three Months                                             Three Months
                                            Ended September 30, 2013                                 Ended September 30, 2012
                                                           Inter-           Hub                                     Inter-           Hub
                                                           Segment         Group                                    Segment         Group
                                 Hub          Mode          Elims          Total          Hub          Mode          Elims          Total
Intermodal                    $ 466,849     $ 102,105     $ (11,962 )    $ 556,992     $ 444,760     $  92,552     $ (13,240 )    $ 524,072
Truck brokerage                  88,281        81,708          (549 )      169,440        87,782        79,746          (717 )      166,811
Logistics                       123,443        33,611          (505 )      156,549        86,794        27,605          (394 )      114,005

Total revenue                 $ 678,573     $ 217,424     $ (13,016 )    $ 882,981     $ 619,336     $ 199,903     $ (14,351 )    $ 804,888

Revenue

Hub Group's revenue increased 9.7% to $883.0 million in 2013 from $804.9 million in 2012.

The Hub segment revenue increased 9.6% to $678.6 million. Hub intermodal revenue increased 5% to $466.8 million due to a 5% increase in loads. Price was up, but was offset by the impact of lower fuel surcharges and unfavorable mix. Hub truck brokerage revenue increased 1% to $88.3 million due primarily to a 4% increase in loads partially offset by unfavorable mix, which was primarily due to a 6% decrease in length of haul. Hub logistics revenue increased 42% to $123.4 million related primarily to new customer growth.

Mode's revenue increased 8.8% to $217.4 million in 2013 from $199.9 million in 2012. Mode intermodal revenue increased 10% while Mode truck brokerage and logistics revenues increased 2% and 22%, respectively. Mode's intermodal loads increased 16% while logistics revenue increased due to 19% growth in less than truckload business.

Gross Margin

Hub Group's gross margin increased 1.7% to $93.1 million in 2013 from $91.6 million in 2012.

The Hub segment gross margin decreased 0.1% to $67.2 million. Logistics' gross margin increased but was offset by a decline in truck brokerage gross margin. Intermodal gross margin was flat. Logistics' gross margin is up due to new customer growth. Truck brokerage gross margin is down because of unfavorable traffic mix, including growth in short-haul lanes. Intermodal margin was flat as volume and modest price increases were offset by higher transportation costs and unfavorable mix. Hub's gross margin as a percentage of sales decreased to 9.9% as compared to last year's 10.9% margin. This decrease is due to lower yields in all three business lines.


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Mode's gross margin increased 6.5% to $25.9 million in 2013 from $24.3 million in 2012 due primarily to growth in intermodal. Mode's gross margin as a percentage of revenue decreased to 11.9% in 2013 from 12.2% in 2012.

CONSOLIDATED OPERATING EXPENSES

The following table includes certain items in the consolidated statements of
income as a percentage of revenue:



                                                 Three Months Ended
                                                    September 30,
                                                 2013           2012
               Revenue                             100.0 %       100.0 %
               Transportation costs                 89.5          88.6

               Gross margin                         10.5          11.4
               Costs and expenses:
               Salaries and benefits                 3.6           3.9
               Agent fees and commissions            1.6           1.7
               General and administrative            1.6           1.8
               Depreciation and amortization         0.2           0.2

               Total costs and expenses              7.0           7.6
               Operating income                      3.5           3.8

Salaries and Benefits

Hub Group's salaries and benefits increased to $31.9 million in 2013 from $31.4 million in 2012. As a percentage of revenue, Hub Group's salaries and benefits decreased to 3.6% in 2013 from 3.9% in 2012 due to increased revenue.

The Hub segment increase of $0.4 million was due to increases in salaries of $2.2 million, due to higher headcount and merit increases, compensation related to restricted stock awards of $0.2 million and employee benefits of $0.1 million. These increases were offset by a decrease in employee bonuses of $2.1 million.

Mode's salaries and benefits expense increased to $3.6 million in 2013 from $3.5 million in 2012. The increase was due primarily to increases in salaries of $0.1 million and compensation related to restricted stock awards of $0.1 million, offset by a decrease in employee bonuses of $0.1 million.

Hub Group's headcount as of September 30, 2013 was 1,413, which excludes drivers, as driver costs are included in transportation costs. As of September 30, 2013, Mode had 129 employees.

Agent Fees and Commissions

Hub Group's agent fees and commissions expenses increased to $14.6 million in 2013 from $13.8 million in 2012. These expenses as a percentage of revenue decreased to 1.6% in 2013 from 1.7% in 2012.

The Hub segment agent fees and commissions expense remained consistent at $0.4 million in both 2013 and 2012.

The Mode segment agent fees and commissions expense increase of $0.7 million was due to the increase in gross margin.


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General and Administrative

Hub Group's general and administrative expenses decreased to $13.8 million in 2013 from $14.4 million in 2012. As a percentage of revenue, these expenses decreased to 1.6% in 2013 from 1.8% in 2012.

The Hub segment decrease of $0.5 million was due primarily to a decrease in claims expense of $1.5 million and a decrease in outside consultant expenses of $0.7 million. These decreases were partially offset by increases in bad debt expense of $0.4 million, repairs and maintenance expense of $0.4 million, general insurance expense of $0.3 million, rent expense of $0.2 million and meals and entertainment, office expense, temporary labor and employee training each for $0.1 million.

Mode's general and administrative expenses decreased to $1.7 million in 2013 from $1.9 million in 2012. The decrease was primarily due to a decrease in outside consultant expense of $0.2 million.

Depreciation and Amortization

Hub Group's depreciation and amortization remained consistent at $1.6 million in both 2013 and 2012.

The Hub segment's depreciation expense was consistent at $1.1 million in both 2013 and 2012.

Mode's depreciation expense was consistent at $0.5 million in both 2013 and 2012

Other Income (Expense)

Hub Group's interest expense remained consistent at $0.3 million in both 2013 and 2012.

Provision for Income Taxes

The provision for income taxes increased to $12.4 million in 2013 from $11.6 million in 2012. This increase was the combined result of greater income in 2013 and the enactment of Pennsylvania income tax changes in July 2013 which increased our effective rate to 39.9% in 2013 from 38.5% in 2012.

Net Income

Net income increased to $18.6 million in 2013 from $18.5 million in 2012 due primarily to higher gross margin.

Earnings Per Common Share

Basic earnings per share were $0.50 in both 2013 and 2012.

Diluted earnings per share were $0.50 in both 2013 and 2012.


Table of Contents

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended
September 30, 2012

The following table summarizes our revenue by segment and business line (in
thousands) for the nine months ended September 30:



                                                      Nine Months                                                      Nine Months
                                               Ended September 30, 2013                                         Ended September 30, 2012
                                                               Inter-             Hub                                           Inter-             Hub
                                                               Segment           Group                                          Segment           Group
                                  Hub            Mode           Elims            Total             Hub            Mode           Elims            Total
Intermodal                    $ 1,342,656      $ 284,056      $ (34,280 )     $ 1,592,432      $ 1,280,825      $ 260,823      $ (33,414 )     $ 1,508,234
Truck brokerage                   255,688        234,551         (1,110 )         489,129          247,900        241,062         (2,259 )         486,703
Logistics                         317,805         90,195           (915 )         407,085          249,711         79,493         (1,056 )         328,148

Total revenue                 $ 1,916,149      $ 608,802      $ (36,305 )     $ 2,488,646      $ 1,778,436      $ 581,378      $ (36,729 )     $ 2,323,085

Revenue

Hub Group's revenue increased 7.1% to $2.5 billion in 2013 from $2.3 billion in 2012.

The Hub segment revenue increased 7.7% to $1.9 billion. Hub's intermodal revenue increased 5% to $1.3 billion due to a 3% increase in loads and an increase in price partially offset by slightly lower fuel surcharges. Hub truck brokerage revenue increased 3% to $255.7 million primarily due to a 5% increase in loads partially offset by unfavorable mix, which was primarily due to a 5% reduction in length of haul. Hub logistics revenue increased 27% to $317.8 million related primarily to new customer growth.

Mode's revenue increased 4.7% to $608.8 million in 2013 from $581.4 million in 2012. Mode's intermodal revenue increased 9% while Mode's truck brokerage revenue decreased by 3%. Mode's logistics revenue increased by 13%. Mode's` intermodal loads increased 13% while logistics revenue increased due to 11% growth in less than truckload business.

Gross Margin

Hub Group's gross margin increased 5.0% to $275.9 million in 2013 from $262.7 million in 2012.

The Hub segment gross margin increased 5.3% to $203.8 million. Hub's $10.2 million gross margin increase came primarily from intermodal and logistics. Intermodal margin grew primarily due to 3% volume growth. Logistics margin growth was driven primarily by new customers. As a percentage of Hub segment revenue, gross margin decreased to 10.6% in 2013 from 10.9% in 2012. This decrease is due to lower yield in intermodal and truck brokerage.

Mode's gross margin increased 4.3% to $72.1 million in 2013 from $69.1 million in 2012 due primarily to growth in intermodal gross margin. Mode's gross margin as a percentage of revenue decreased slightly to 11.8% in 2013 from 11.9% in 2012.


Table of Contents

CONSOLIDATED OPERATING EXPENSES

The following table includes certain items in the consolidated statements of
income as a percentage of revenue:



                                                 Nine Months Ended
                                                   September 30,
                                                 2013          2012
               Revenue                             100.0 %      100.0 %
               Transportation costs                 88.9         88.7

               Gross margin                         11.1         11.3
               Costs and expenses:
               Salaries and benefits                 4.1          4.1
               Agent fees and commissions            1.6          1.8
               General and administrative            1.7          1.7
               Depreciation and amortization         0.2          0.2

               Total costs and expenses              7.6          7.8
               Operating income                      3.5          3.5

Salaries and Benefits

Hub Group's salaries and benefits increased to $101.5 million in 2013 from $96.1 million in 2012. As a percentage of revenue, salaries and benefits remained consistent at 4.1% in both 2013 and 2012.

The Hub segment salaries and benefits increase of $5.7 million was due primarily to increases in salaries of $4.3 million, compensation related to restricted stock awards of $0.6 million, employee benefits of $0.5 million, payroll taxes of $0.4 million and employee bonuses of $0.1 million. These increases were partially offset by a decrease in commissions of $0.2 million.

Mode's salaries and benefits decrease of $0.4 million was due primarily to a decrease in salaries of $0.4 million and employee benefits of $0.2 million partially offset by increases in employee bonuses and compensation related to restricted stock awards of $0.1 million each.

Agent Fees and Commissions

Hub Group's agent fees and commissions expenses increased to $41.5 million in 2013 from $41.1 million in 2012. These expenses as a percentage of revenue decreased to 1.6% in 2013 from 1.8% in 2012.

The Hub segment agent fees and commissions decrease of $0.3 million was due to a smaller Hub agent program.

The Mode segment agent fees and commissions increase of $0.7 million was due to the increase in Mode's gross margin.

General and Administrative

Hub Group's general and administrative expenses increased to $41.7 million in 2013 from $39.7 million in 2012. As a percentage of revenue, these expenses remained consistent at 1.7% in both 2013 and 2012.

The Hub segment increase of $3.1 million was due primarily to increases in; professional fees associated with an unsuccessful acquisition of $1.0 million, rent expense of $0.9 million, bad debt expense of $0.7 million, general insurance expense of $0.6 million, repairs and maintenance expense of $0.5 million and meals and entertainment, equipment leases and other taxes of $0.2 million each. These increases were partially offset by a decrease in claims expense of $1.5 million in 2013.


Table of Contents

Mode's general and administrative expenses decreased by $1.2 million to $4.6 million in 2013. The decrease was primarily due to a decrease in outside consultant expense of $0.7 million and an increase in the gain on the sale of equipment of $0.5 million.

Depreciation and Amortization

Hub Group's depreciation and amortization decreased to $4.8 million in 2013 from $5.0 million in 2012. This expense as a percentage of revenue remained constant at 0.2% in both 2013 and 2012.

The Hub segment expense was $3.2 million for 2013 and $3.3 million in 2012.

Mode's depreciation expense was $1.6 million for 2013 and $1.7 million in 2012.

Other Income (Expense)

Hub Group's interest expense remained consistent at $0.9 million in both 2013 and 2012.

Provision for Income Taxes

The provision for income taxes increased to $33.1 million in 2013 from $30.7 million in 2012. Our effective rate was 38.6% in 2013 and 38.5% in 2012. The 2013 rate was higher primarily due to the enactment of Pennsylvania income tax changes in July 2013.

Net Income

Net income increased to $52.6 million in 2013 from $49.1 million in 2012 due primarily to higher gross margin.

Earnings Per Common Share

Basic earnings per share increased to $1.43 in 2013 from $1.32 in 2012. Basic earnings per share increased primarily due to the increase in net income.

Diluted earnings per share increased to $1.42 in 2013 from $1.32 in 2012. Diluted earnings per share increased primarily due to the increase in net income.

LIQUIDITY AND CAPITAL RESOURCES

During the first nine months of 2013, we funded operations, capital expenditures, purchase of treasury stock and stock buy backs related to employee withholding upon vesting of restricted stock through cash flows from operations, cash on hand and proceeds from the issuance of long-term debt. We believe that our cash, cash flow from operations and borrowings available under our Credit Agreement will be sufficient to meet our cash needs for at least the next twelve months.

Cash provided by operating activities for the nine months ended September 30, 2013 was approximately $81.9 million, which resulted primarily from income of $52.6 million and adjustments for non-cash charges of $31.7 million partially offset by the change in operating assets and liabilities of $2.4 million.

Net cash used in investing activities for the nine months ended September 30, 2013 was $64.3 million, which includes proceeds from the sale of equipment of $1.8 million. Capital expenditures of $66.1 million related primarily to the construction of our new corporate headquarters of $15.0 million, computer hardware and software of $6.9 million, containers and transportation equipment of $42.7 million and leasehold improvements of $1.3 million. We expect capital expenditures to be between $40 million and $60 million in the fourth quarter of 2013. Fourth quarter capital expenditures will primarily consist of our new corporate headquarters, which should be completed by the end of 2013, containers and technology related investments.


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Net cash provided by financing activities for the nine months ended September 30, 2013 was $3.8 million. We used $2.6 million of cash for stock tendered for payments of withholding taxes, $1.7 million for capital lease payments, $0.9 million to purchase treasury stock and $0.4 million for repayment of long term debt. These payments were offset by proceeds from the issuance of debt of $9.1 million and excess tax benefits from share-based compensation of $0.3 million as a financing cash in-flow.

We have standby letters of credit that expire at various dates in 2013 and 2014. As of September 30, 2013, our letters of credit were $4.2 million.

Our unused and available borrowings under our bank revolving line of credit were $45.8 million as of September 30, 2013. We were in compliance with our debt covenants as of September 30, 2013.

We believe that our cash, cash flow from operations and borrowings available under our Credit Agreement will be sufficient to meet our cash needs for at least the next twelve months.

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