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HUBG > SEC Filings for HUBG > Form 10-Q on 25-Apr-2014All Recent SEC Filings

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Form 10-Q for HUB GROUP INC


25-Apr-2014

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 company 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.

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 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 March 31, 2014, approximately 70% of Hub's drayage needs were met by our subsidiary, Hub Group Trucking, Inc., which assists us in providing reliable, cost effective intermodal services to our customers. Hub Group Trucking 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), Salt Lake City, Savannah, Seattle, St. Louis, Stockton, and Titusville (FL). As of March 31, 2014, Hub Group Trucking leased or owned 527 tractors, leased or owned 448 trailers, employed 609 drivers and contracted with 2,229 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 Hub Group Trucking more, and reviewing and improving low contribution freight.

Hub's top 50 customers represent approximately 66% of the Hub segment revenue for the quarter ended March 31, 2014. 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 229 agents, consisting of 89 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 quarter ended March 31, 2014. 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

Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31,
2013

The following table summarizes our revenue by segment and business line (in
thousands) for the three months ended March 31:



                                                  Three Months                                             Three Months
                                              Ended March 31, 2014                                     Ended March 31, 2013
                                                           Inter-           Hub                                     Inter-           Hub
                                                           Segment         Group                                    Segment         Group
                                 Hub          Mode          Elims          Total          Hub          Mode          Elims          Total
Intermodal                    $ 435,432     $ 100,436     $ (13,202 )    $ 522,666     $ 428,992     $  86,736     $ (10,463 )    $ 505,265
Truck brokerage                  83,967        78,523          (445 )      162,045        81,902        73,933          (463 )      155,372
Logistics                       134,010        29,947          (219 )      163,738        81,757        26,791          (205 )      108,343

Total revenue                 $ 653,409     $ 208,906     $ (13,866 )    $ 848,449     $ 592,651     $ 187,460     $ (11,131 )    $ 768,980

Revenue

Hub Group's revenue increased 10.3% to $848.4 million in 2014 from $769.0 million in 2013.

The Hub segment revenue increased 10.3% to $653.4 million. Intermodal revenue increased 1.5 % to $435.4 million due to a 2% increase in loads. Price increased, but was offset by the impact of lower fuel. Truck brokerage revenue increased 2.5% to $84.0 million due to an 8% increase in price and mix partially offset by a 5% decline in volume. Logistics revenue increased 63.9% to $134.0 million related primarily to growth from new customers on-boarded in 2013.

Mode's revenue increased 11.4% to $208.9 million in 2014 from $187.5 million in 2013. Mode's intermodal, logistics and truck brokerage revenue increased 15.8%, 11.8% and 6.2%, respectively.

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

                                                    Three Months                                             Three Months
                                                Ended March 31, 2014                                     Ended March 31, 2013
                                                             Inter-           Hub                                     Inter-           Hub
                                                             Segment         Group                                    Segment         Group
                                   Hub          Mode          Elims          Total          Hub          Mode          Elims          Total
Revenue                         $ 653,409     $ 208,906     $ (13,866 )    $ 848,449     $ 592,651     $ 187,460     $ (11,131 )    $ 768,980
Transportation costs              588,912       184,659       (13,866 )      759,705       527,471       165,302       (11,131 )      681,642

Gross margin                       64,497        24,247            -          88,744        65,180        22,158            -          87,338
Costs and expenses:
Salaries and benefits              33,337         3,755            -          37,092        30,777         3,806            -          34,583
Agent fees and commissions             11        13,655            -          13,666           449        12,825            -          13,274
General and administrative         13,739         1,693            -          15,432        11,698         1,493            -          13,191
Depreciation and amortization       1,517           541            -           2,058         1,020           533            -           1,553

Total costs and expenses           48,604        19,644            -          68,248        43,944        18,657            -          62,601

Operating income                $  15,893     $   4,603     $      -       $  20,496     $  21,236     $   3,501     $      -       $  24,737


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Gross Margin

Hub Group's gross margin increased 1.6% to $88.7 million in 2014 from $87.3 million in 2013. Hub Group's gross margin as a percentage of sales decreased to 10.5% as compared to last year's 11.4% margin.

The Hub segment gross margin decreased 1.0% to $64.5 million. The Hub segment margin decrease of $0.7 million came from intermodal and truck brokerage, partially offset by an increase in logistics gross margin. Intermodal margin decreased due primarily to higher transportation costs related to the adverse weather. The weather related impact in intermodal was approximately $2.2 million and included a couple of percentage points of lost volume, sub optimization of the network, slower box turns, increased equipment and accessorial costs, higher fuel and accidents. Truck brokerage margin decreased due to lower volume and higher transportation costs. The logistics margin increased due primarily to new customer growth. As a percentage of revenue, the Hub segment gross margin decreased to 9.9% in 2014 from 11.0% in 2013. The biggest driver of the decrease in the gross margin percent was logistics, which decreased due to the fee structure of our new business and weather-related costs.

Mode's gross margin increased to $24.2 million in 2014 from $22.2 million in 2013 due to growth in all three service lines. Mode's gross margin as a percentage of revenue decreased to 11.6% in 2014 from 11.8% in 2013 due to mix.

CONSOLIDATED OPERATING EXPENSES

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



                                                 Three Months Ended
                                                      March 31,
                                                 2014           2013
               Revenue                             100.0 %       100.0 %
               Transportation costs                 89.5          88.6

               Gross margin                         10.5          11.4
               Costs and expenses:
               Salaries and benefits                 4.4           4.5
               Agent fees and commissions            1.6           1.7
               General and administrative            1.9           1.8
               Depreciation and amortization         0.2           0.2

               Total costs and expenses              8.1           8.2
               Operating income                      2.4           3.2

Salaries and Benefits

Hub Group's salaries and benefits increased to $37.1 million in 2014 from $34.6 million in 2013. As a percentage of revenue, Hub Group's salaries and benefits as a percentage of revenue decreased to 4.4% in 2014 from 4.5% in 2013.

The Hub segment salaries and benefits increase of $2.6 million was due to increases in salaries of $1.9 million related to merit increases and higher headcount, employee benefits of $0.3 million, compensation related to restricted stock awards of $0.2 million, employee bonuses of $0.2 million, and payroll taxes of $0.1 million, partially offset by a decrease in commissions of $0.1 million.


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Mode's salaries and benefits expense remained consistent at $3.8 million in both 2014 and 2013.

Hub Group's headcount as of March 31, 2014 was 1,342, which excludes drivers, as driver costs are included in transportation costs. As of March 31, 2014, Mode had 125 employees.

Agent Fees and Commissions

Hub Group's agent fees and commissions increased to $13.7 million in 2014 from $13.3 million in 2013. As a percentage of revenue, these expenses decreased to 1.6% in 2014 from 1.7% in 2013.

The Hub segment agent fees and commissions decrease of $0.4 million was due to a smaller Hub agent program.

The Mode segment agent fees and commissions increase of $0.8 million was due primarily due to the increase in gross margin.

General and Administrative

Hub Group's general and administrative expenses increased to $15.4 million in 2014 from $13.2 million in 2013. As a percentage of revenue, these expenses increased to 1.9% in 2014 from 1.8% in 2013.

The Hub segment increase of $2.0 million was due primarily to increases in outside consultant expenses of $1.5 million and general expenses of $0.8 million which includes real estate taxes, general insurance and temporary labor. These increases were partially offset by a decrease in rent of $0.4 million.

Mode's general and administrative expenses increased to $1.7 million in 2014 from $1.5 million in 2013. The increase was primarily due to a lower gain on the sale of equipment in 2014 as compared to 2013.

Depreciation and Amortization

Hub Group's depreciation and amortization increased to $2.1 million in 2014 from $1.6 million in 2013. This expense as a percentage of revenue remained constant at 0.2% in both 2014 and 2013.

The Hub segment increase in expense of $0.5 million was related primarily to depreciation for the new corporate headquarters.

Mode's depreciation expense was consistent at $0.5 million for both 2014 and 2013.

Other Income (Expense)

Total other expense increased to $0.6 million in 2014 from $0.3 million in 2013 due primarily to the increased interest expense related to our tractor debt and foreign currency translation losses.

Provision for Income Taxes

The provision for income taxes decreased to $7.9 million in 2014 from $9.1 million in 2013. We provided for income taxes using an effective rate of 39.5% in 2014 and an effective rate of 37.2% in 2013. The 2014 effective tax rate was higher primarily due to income tax changes enacted by the state of New York on March 31, 2014 and to a lesser extent, the expiration of the Federal Research Credit on January 1, 2014. We expect our effective tax rate for the whole year to be 38.9%.

Net Income

Net income decreased to $12.0 million in 2014 from $15.4 million in 2013 due primarily to higher operating expenses in 2014.


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Earnings Per Common Share

Basic earnings per share were $0.33 in 2014 and $0.42 in 2013. Basic earnings per share decreased due to the decrease in net income.

Diluted earnings per share were $0.33 in 2014 and $0.42 in 2013. Diluted earnings per share decreased due to the decrease in net income.

LIQUIDITY AND CAPITAL RESOURCES

During the first quarter of 2014, we funded operations, capital expenditures, capital leases, repayments of debt 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 quarter ended March 31, 2014 was approximately $18.6 million, which resulted primarily from income of $12.0 million adjusted for non-cash charges of $10.9 million partially offset by the change in operating assets and liabilities of $4.3 million.

Net cash used in investing activities for the quarter ended March 31, 2014 was $33.0 million. Capital expenditures of $33.0 million related primarily to tractors of $25 million, new corporate headquarters of $5 million and the remainder for technology investments. We expect capital expenditures to be between $125 million and $140 million in 2014. Approximately $60 million is for tractors and $56 million is for containers.

The net cash provided by financing activities for the quarter ended March 31, 2014 was $20.7 million, which resulted from proceeds from the issuance of debt of $25.4 million and excess tax benefits from share-based compensation of $0.1 million, partially offset by $3.0 million of cash for stock tendered for payments of withholding taxes, $1.1 million for repayment of long-term debt and $0.6 million for capital lease payments.

We have standby letters of credit that expire at various dates in 2014. As of March 31, 2014, our letters of credit were $5.1 million.

As further discussed in Note 5 of the consolidated financial statements, during the first quarter of 2014, we incurred additional borrowings of $25.4 million, which requires monthly principal and interest payments of $0.4 million through February 2019. Our unused and available borrowings under our bank revolving line of credit were $44.9 million as of March 31, 2014 and $44.8 million as of December 31, 2013. We were in compliance with our debt covenants as of March 31, 2014.

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