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HUBG > SEC Filings for HUBG > Form 10-K on 24-Feb-2014All Recent SEC Filings

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Form 10-K for HUB GROUP INC


24-Feb-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

The information contained in this annual 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 annual report. Factors that could cause our actual results to differ materially, in addition to those set forth under Items 1A "Risk Factors," 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 identify, close and successfully integrate any future business combinations.

CAPITAL STRUCTURE

We have authorized common stock comprised of Class A Common Stock and Class B Common Stock. The rights of holders of Class A Common Stock and Class B Common Stock are identical, except each share of Class B Common Stock entitles its holder to approximately 80 votes, while each share of Class A Common Stock entitles its holder to one vote. We have authorized 2,000,000 shares of preferred stock.

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. The results of operations of the Mode segment are included in our Consolidated Statements of Income for the entire years 2013 and 2012 and for the period April 1, 2011 to December 31, 2011. For the segment financial results, refer to Note 5 to 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.


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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 December 31, 2013, approximately 70% 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, Hammond (IN), 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 December 31, 2013, Comtrak leased or owned 327 tractors, leased or owned 448 trailers, employed 522 drivers and contracted with 2,269 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 64% of the Hub segment revenue for the year ended December 31, 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.

Mode has approximately 230 agents, consisting of 90 sales/operating agents, known as Independent Business Owners ("IBOs"), who sell and operate the business throughout North America and 140 sales only agents. Mode also has a company managed operation and corporate offices in Dallas, a temperature protected services division, Temstar, located in Oak Brook, IL and corporate offices in Memphis. Mode's top 20 customers represent approximately 36% of the Mode segment revenue for the year ended December 31, 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.


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RESULTS OF OPERATIONS

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

The following table summarizes our revenue by segment and business line (in
thousands):



                                                     Twelve Months                                                    Twelve Months
                                                Ended December 31, 2013                                          Ended December 31, 2012
                                                               Inter-             Hub                                           Inter-             Hub
                                                               Segment           Group                                          Segment           Group
                                  Hub            Mode           Elims            Total             Hub            Mode           Elims            Total
Intermodal                    $ 1,808,001      $ 389,186      $ (46,401 )     $ 2,150,786      $ 1,731,487      $ 354,662      $ (43,863 )     $ 2,042,286
Truck brokerage                   343,641        311,930         (1,453 )         654,118          335,213        318,848         (2,945 )         651,116
Logistics                         448,121        122,043         (1,170 )         568,994          325,589        106,418         (1,301 )         430,706

Total revenue                 $ 2,599,763      $ 823,159      $ (49,024 )     $ 3,373,898      $ 2,392,289      $ 779,928      $ (48,109 )     $ 3,124,108

Revenue

Hub Group's revenue increased 8% to $3.4 billion in 2013 from $3.1 billion in 2012.

The Hub segment revenue increased 8.7% to $2.6 billion. Hub segment intermodal revenue increased 4% to $1.8 billion due to a 4% increase in loads. Price was up, but was offset by the impact of lower fuel surcharges. Hub segment truck brokerage revenue increased 3% to $344 million due primarily to a 5% increase in loads partially offset by unfavorable mix, which was primarily due to a 6% decrease in length of haul. Hub segment logistics revenue increased 38% to $448 million related primarily to growth from new customers that were onboarded in the first half of 2013.

Mode's revenue increased 5.5% to $823.2 million in 2013 from $779.9 million in 2012. Mode's intermodal revenue increased 10% primarily due to a 13% increase in volume. Mode's truck brokerage revenue declined 2%. Mode's logistic revenue increased 15% due primarily to an increase in less than truckload business.

The following is a summary of operating results for our business segments (in thousands):

                                                        Twelve Months                                                    Twelve Months
                                                   Ended December 31, 2013                                          Ended December 31, 2012
                                                                  Inter-             Hub                                           Inter-             Hub
                                                                  Segment           Group                                          Segment           Group
                                     Hub            Mode           Elims            Total             Hub            Mode           Elims            Total
Revenue                          $ 2,599,763      $ 823,159      $ (49,024 )     $ 3,373,898      $ 2,392,289      $ 779,928      $ (48,109 )     $ 3,124,108
Transportation costs               2,325,512        726,387        (49,024 )       3,002,875        2,128,942        687,209        (48,109 )       2,768,042

Gross margin                         274,251         96,772             -            371,023          263,347         92,719             -            356,066
Costs and expenses:
Salaries and benefits                120,478         14,863             -            135,341          113,855         15,288             -            129,143
Agent fees and commissions             1,372         54,417             -             55,789            1,900         53,212             -             55,112
General and administrative            50,484          6,288             -             56,772           45,411          7,421             -             52,832
Depreciation and amortization          4,326          2,144             -              6,470            4,448          2,171             -              6,619
Impairment of trade name               2,904             -              -              2,904               -              -              -                 -

Total costs and expenses             179,564         77,712             -            257,276          165,614         78,092             -            243,706

Operating income                 $    94,687      $  19,060      $      -        $   113,747      $    97,733      $  14,627      $      -        $   112,360


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Gross Margin

Hub Group's gross margin increased 4.2% to $371.0 million in 2013 from $356.1 million in 2012. Hub Group's gross margin as a percentage of sales decreased to 11.0% in 2013 from 11.4% in 2012.

The Hub segment gross margin increased 4.1% to $274.3 million. Logistics and intermodal gross margin increased, but were partially offset by a decline in truck brokerage margin. Logistics' gross margin was up due to new customer growth. Intermodal gross margin was up as a 4% increase in loads and modest price increases were partially offset by higher transportation costs and unfavorable mix. Truck brokerage gross margin was down because of unfavorable traffic mix, primarily less high value added services.

Mode's gross margin increased 4.4% to $96.8 million in 2013 from $92.7 million in 2012 due to growth in intermodal and logistics. Mode's gross margin as a percentage of revenue decreased to 11.8% in 2013 from 11.9% in 2012.

CONSOLIDATED OPERATING EXPENSES

The following table includes certain items in the Consolidated Statements of
Income as a percentage of revenue:



                                                Twelve Months Ended
                                                    December 31,
                                                 2013           2012
              Revenue                              100.0 %       100.0 %
              Transportation costs                  89.0          88.6
              Gross margin                          11.0          11.4
              Costs and expenses:
              Salaries and benefits                  4.0           4.1
              Agent fees and commissions             1.6           1.8
              General and administrative             1.7           1.7
              Depreciation and amortization          0.2           0.2
              Impairment of trade name               0.1            -

              Total costs and expenses               7.6           7.8
              Operating income                       3.4           3.6

Salaries and Benefits

Hub Group's salaries and benefits increased to $135.3 million in 2013 from $129.1 million in 2012. As a percentage of revenue, Hub Group's salaries and benefits decreased to 4.0% in 2013 from 4.1% in 2012.

The Hub segment salaries and benefits increase of $6.6 million was due to increases in salaries of $6.6 million, compensation related to restricted stock awards of $0.9 million, employee benefits of $0.6 million, payroll taxes of $0.4 million, partially offset by decreases in bonuses of $1.7 million and commissions of $0.2 million.

Mode's salaries and benefits expense decreased to $14.9 million in 2013 from $15.3 million in 2012. The decrease was due to decreases in salaries of $0.5 million and employee benefits of $0.2 million, partially offset by increases in compensation related to restricted stock awards of $0.2 million and bonuses of $0.1 million.

Hub's headcount as of December 31, 2013 and 2012 was 1,334 and 1,224, respectively, which excludes drivers, as driver costs are included in transportation costs. As of December 31, 2013 and 2012, Mode had 126 and 131 employees, respectively.

Agent Fees and Commissions

Hub Group's agent fees and commissions increased to $55.8 million in 2013 from $55.1 million in 2012. As a percentage of revenue, these expenses decreased to 1.6% in 2013 from 1.8% in 2012. The increase in the expense and the decrease in the percentage of revenue was primarily related to Mode's increase in gross margin.

The Hub segment agent fees and commissions expense decrease of $0.5 million was due to a smaller Hub agent program.

The Mode segment agent fees and commissions expense increase of $1.2 million was primarily due to the increase in gross margin.


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General and Administrative

Hub Group's general and administrative expenses increased to $56.8 million in 2013 from $52.8 million in 2012. As a percentage of revenue, these expenses remained consistent at 1.7% in 2013 and 2012.

The Hub segment increase of $5.1 million was due primarily to increases in professional fees of $1.6 million primarily associated with an unsuccessful acquisition, rent expense of $1.1 million, general insurance expense of $0.8 million and bad debt expense of $0.6 million.

Mode's general and administrative expenses decreased to $6.3 million in 2013 from $7.4 million in 2012. The decrease was primarily due to a decrease in outside consultant expense of $0.7 million, additional gains on the sale of equipment of $0.6 million and decreases in rent, telephone and office expense of $0.1 million each. These decreases were partially offset by an increase in bad debt expense of $0.5 million.

Depreciation and Amortization

Hub Group's depreciation and amortization decreased to $6.5 million in 2013 from $6.6 million in 2012. This expense as a percentage of revenue remained constant at 0.2% in both 2013 and 2012.

The Hub segment's depreciation expense decreased slightly to $4.3 million in 2013 from $4.4 million in 2012.

Mode's depreciation expense remained consistent at $2.2 million in both 2013 and 2012.

Impairment of Trade Name

In 2013, the Hub segment incurred a $2.9 million expense associated with changing the Comtrak Logistics trade name to Hub Group Trucking. This expense as a percentage of revenue was 0.1% in 2013. See Note 6 to the consolidated financial statements for information on this impairment charge.

Other Income (Expense)

Hub Group's interest expense remained consistent at $1.2 million in both 2013 and 2012.

Provision for Income Taxes

The provision for income taxes increased slightly to $43.4 million in 2013 from $43.3 million in 2012 due to our increase in pretax income partially offset by a decrease in our effective tax rate. Our effective tax rate was 38.6% in 2013 and 38.9% in 2012. The rate decrease was primarily due to the benefit from a state tax incentive granted in connection with relocating our corporate headquarters partially offset by an increase in our state income tax effective rate.

Net Income

Net income increased to $69.1 million in 2013 from $68.0 million in 2012 due primarily to higher gross margin at both the Hub and Mode segments.

Earnings Per Common Share

Basic earnings per share increased to $1.88 in 2013 from $1.83 in 2012. Basic earnings per share increased due to the increase in net income and a decrease in the number of outstanding basic shares.

Diluted earnings per share increased to $1.87 in 2013 from $1.83 in 2012. Diluted earnings per share increased due to the increase in net income and a decrease in the number of outstanding diluted shares.


Table of Contents

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

The following table summarizes our revenue by segment and business line (in
thousands):



                                                     Twelve Months                                                    Twelve Months
                                                Ended December 31, 2012                                          Ended December 31, 2011
                                                               Inter-             Hub                                           Inter-             Hub
                                                               Segment           Group                                          Segment           Group
                                  Hub            Mode           Elims            Total             Hub            Mode           Elims            Total
Intermodal                    $ 1,731,487      $ 354,662      $ (43,863 )     $ 2,042,286      $ 1,553,594      $ 258,087      $ (16,392 )     $ 1,795,289
Truck brokerage                   335,213        318,848         (2,945 )         651,116          339,444        238,418         (1,033 )         576,829
Logistics                         325,589        106,418         (1,301 )         430,706          290,876         89,746         (1,206 )         379,416

Total revenue                 $ 2,392,289      $ 779,928      $ (48,109 )     $ 3,124,108      $ 2,183,914      $ 586,251      $ (18,631 )     $ 2,751,534

Revenue

Hub Group's revenue increased 13.5% to $3.1 billion in 2012 from $2.8 billion in 2011.

The Hub segment revenue increased 9.5% to $2.4 billion. Hub segment intermodal revenue increased 11% to $1.7 billion due to a 10% increase in loads and an increase for price and fuel, partially offset by a decline related to mix. Hub segment truck brokerage revenue decreased 1% to $335.2 million due to a 5% decline in fuel, price and mix combined, partially offset by a 4% increase in loads. Hub segment logistics revenue increased 12% to $325.6 million related primarily to a combination of existing and new customer growth and growth from transactional business as opposed to management fee business.

Mode's revenue increased 33.0% to $779.9 million in 2012 from $586.3 million in 2011. Mode's intermodal revenue increased 37% while Mode's truck brokerage and logistic revenues increased 34% and 19%, respectively. The increase in revenue was primarily due to Hub Group owning Mode for twelve months in 2012 as compared to nine months in 2011.

Mode's revenue for the period April 1 through December 31 ("comparable nine month period") was $592.7 million in 2012 as compared to $586.3 million in 2011.

The following is a summary of operating results for our business segments (in thousands):

                                                        Twelve Months                                                    Twelve Months
                                                   Ended December 31, 2012                                          Ended December 31, 2011
                                                                  Inter-             Hub                                           Inter-             Hub
                                                                  Segment           Group                                          Segment           Group
                                     Hub            Mode           Elims            Total             Hub            Mode           Elims            Total
Revenue                          $ 2,392,289      $ 779,928      $ (48,109 )     $ 3,124,108      $ 2,183,914      $ 586,251      $ (18,631 )     $ 2,751,534
Transportation costs               2,128,942        687,209        (48,109 )       2,768,042        1,939,263        518,354        (18,631 )       2,438,986

Gross margin                         263,347         92,719             -            356,066          244,651         67,897             -            312,548
Costs and expenses:
Salaries and benefits                113,855         15,288             -            129,143          107,378         13,666             -            121,044
Agent fees and commissions             1,900         53,212             -             55,112            2,771         38,720             -             41,491
General and administrative            45,411          7,421             -             52,832           42,523          7,428             -             49,951
Depreciation and amortization          4,448          2,171             -              6,619            3,975          1,628             -              5,603

Total costs and expenses             165,614         78,092             -            243,706          156,647         61,442             -            218,089

Operating income                 $    97,733      $  14,627      $      -        $   112,360      $    88,004      $   6,455      $      -        $    94,459


Table of Contents

Gross Margin

Hub Group's gross margin increased 13.9% to $356.1 million in 2012 from $312.5 million in 2011. Hub Group's gross margin as a percentage of sales remained consistent at 11.4%.

The Hub segment gross margin increased 7.6% to $263.3 million. The Hub segment margin increase of $18.7 million came from all three business lines. The primary driver was Hub intermodal, which had margin growth because our volume increased 10% and due to our focus on growing and improving drayage operations and fleet utilization.

Mode's gross margin increased 36.6% to $92.7 million in 2012 from $67.9 million in 2011 due to Hub Group owning Mode for twelve months in 2012 as compared to nine months in 2011. Mode's gross margin as a percentage of revenue increased to 11.9% in 2012 from 11.6% in 2011.

Mode's gross margin for the comparable nine month period was $70.5 million in 2012 as compared to $67.9 million in 2011. Mode's gross margin as a percentage of revenue was 11.9% and 11.6% for the comparable nine month period in 2012 and 2011, respectively.

CONSOLIDATED OPERATING EXPENSES

The following table includes certain items in the Consolidated Statements of
Income as a percentage of revenue:



                                                Twelve Months Ended
                                                    December 31,
                                                 2012           2011
              Revenue                              100.0 %       100.0 %
              Transportation costs                  88.6          88.6
              Gross margin                          11.4          11.4
              Costs and expenses:
              Salaries and benefits                  4.1           4.5
              Agent fees and commissions             1.8           1.5
              General and administrative             1.7           1.8
              Depreciation and amortization          0.2           0.2

              Total costs and expenses               7.8           8.0
              Operating income                       3.6           3.4

Salaries and Benefits

Hub Group's salaries and benefits increased to $129.1 million in 2012 from . . .

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