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HUBG > SEC Filings for HUBG > Form 10-Q on 30-Jul-2014All Recent SEC Filings

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Form 10-Q for HUB GROUP INC


30-Jul-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, port, 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 or duties on imported equipment;

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 or change the classification of owner-operators; 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.


Table of Contents

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 June 30, 2014, approximately 72% 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 June 30, 2014, Hub Group Trucking leased or owned 529 tractors, leased or owned 448 trailers, employed 697 drivers and contracted with 2,217 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 eliminating or improving low contribution freight.

Hub's top 50 customers represent approximately 65% of the Hub segment revenue for the six months ended June 30, 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 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 Oak Brook, IL and corporate offices in Memphis. Mode's top 20 customers represent approximately 36% of the Mode segment revenue for the six months ended June 30, 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 June 30, 2014 Compared to the Three Months Ended June 30,
2013

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



                                                   Three Months                                              Three Months
                                                Ended June 30, 2014                                       Ended June 30, 2013
                                                            Inter-                                                    Inter-
                                                            Segment       Hub Group                                   Segment       Hub Group
                                  Hub          Mode          Elims          Total           Hub          Mode          Elims          Total
Intermodal                     $ 455,763     $ 113,744     $ (19,037 )    $  550,470     $ 451,074     $  95,215     $ (11,854 )    $  534,435
Truck brokerage                   86,407        86,537           (91 )       172,853        81,193        78,910           (98 )       160,005
Logistics                        139,879        31,257          (529 )       170,607       112,657        29,793          (205 )       142,245

Total revenue                  $ 682,049     $ 231,538     $ (19,657 )    $  893,930     $ 644,924     $ 203,918     $ (12,157 )    $  836,685

Revenue

Hub Group's revenue increased 6.8% to $893.9 million in 2014 from $836.7 million in 2013.

The Hub segment revenue increased 5.8% to $682.0 million. Hub intermodal revenue increased 1.0% to $455.8 million. Volume was flat and price was up slightly. Hub truck brokerage revenue increased 6.4% to $86.4 million due to a 16% increase for price, fuel and mix combined, partially offset by a 10% decline in volume. Length of haul increased 8%. Hub logistics revenue increased 24.2% to $139.9 million due mostly to growth from customers that we onboarded last year.

Mode's revenue increased 13.5% to $231.5 million in 2014 from $203.9 million in 2013. Mode's intermodal revenue increased 19.5%, brokerage revenue increased 9.7% and logistics revenue increased 4.9%.

Gross Margin

Hub Group's gross margin increased 3.3% to $98.6 million in 2014 from $95.5 million in 2013.

The Hub segment gross margin decreased 1.0% to $70.7 million. Intermodal margin was down because of unfavorable timing of cost increases and worse equipment utilization due to rail service issues, partially offset by a modest increase in price. Truck brokerage gross margin increased because of customer price increases and more value added services. Logistics margin increased due to growth with customers we onboarded last year. Hub's gross margin as a percentage of revenue decreased to 10.4% as compared to last year's 11.1% gross margin. The primary reason for the decline was due to intermodal because of a change in the mix of business and unfavorable timing of cost increases.

Mode's gross margin increased 16.0% to $27.9 million in 2014 from $24.0 million in 2013 due to growth in all three service lines with the largest growth coming from intermodal. Mode's gross margin as a percentage of revenue increased to 12.0% in 2014 from 11.8% in 2013.


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CONSOLIDATED OPERATING EXPENSES

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



                                                 Three Months Ended
                                                      June 30,
                                                 2014           2013
               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           4.2
               Agent fees and commissions            1.7           1.6
               General and administrative            1.6           1.8
               Depreciation and amortization         0.2           0.2

               Total costs and expenses              7.5           7.8
               Operating income                      3.5           3.6

Salaries and Benefits

As a percentage of revenue, Hub Group's salaries and benefits decreased to 4.0% in 2014 from 4.2% in 2013. Hub Group's salaries and benefits increased to $35.6 million in 2014 from $35.0 million in 2013. This increase was due to increased salaries of $1.0 million due to higher headcount and merit increases, compensation related to restricted stock of $0.2 million, payroll taxes of $0.1 million and employee benefits of $0.1 million, partially offset by decreases in bonus expense of $0.7 million and commissions of $0.1 million.

The Hub segment increase of $0.8 million to $32.0 million in 2014 from $31.2 million in 2013 was due to increases in salaries of $1.1 million due to higher headcount and merit increases and payroll taxes of $0.1 million, partially offset by a decrease in bonus expense of $0.4 million.

Mode's decrease of $0.3 million to $3.5 million in 2014 from $3.8 million in 2013 was due primarily to decreases in bonus expense of $0.2 million and salaries of $0.1 million.

Hub Group's headcount as of June 30, 2014 was 1,481, which excludes drivers, as driver costs are included in transportation costs. As of June 30, 2014, Mode had 124 employees.

Agent Fees and Commissions

Hub Group's agent fees and commissions expenses increased to $15.5 million in 2014 from $13.7 million in 2013. These expenses as a percentage of revenue increased to 1.7% in 2014 from 1.6% in 2013.

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

The Mode segment agent fees and commissions increased to $15.5 million in 2014 from $13.3 million in 2013. The increase of $2.2 million was due to the increase in Mode's gross margin.

General and Administrative

Hub Group's general and administrative expenses remained consistent at $14.7 million in both 2014 and 2013. As a percentage of revenue, these expenses decreased to 1.6% in 2014 from 1.8% in 2013.


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The Hub segment decrease of $0.5 million was due primarily to decreases in rent expense of $0.6 million, bad debt expense of $0.2 million and outside consultant expenses of $0.1 million. These decreases were partially offset by increases in travel and entertainment expense of $0.2 million and outside sales commissions of $0.2 million.

Mode's general and administrative expenses increased to $1.9 million in 2014 from $1.4 million in 2013. The increase in expenses was primarily due to a decrease in gain on sale of fixed assets in 2014 of $0.2 million, an increase in bad debt expense of $0.2 million and an increase in repairs and maintenance of $0.1 million.

Depreciation and Amortization

Hub Group's depreciation and amortization increased to $1.9 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's depreciation expense increase of $0.5 million was related primarily to depreciation for the new corporate headquarters.

Mode's depreciation expense was $0.3 million for 2014 as compared to $0.5 million in 2013. The decrease in expense was primarily related to less depreciation related to computer software.

Other Income (Expense)

Total other expense increased to $0.4 million in 2014 from $0.3 million in 2013 due primarily to the increased interest expense related to our tractor debt.

Provision for Income Taxes

The provision for income taxes increased to $11.8 million in 2014 from $11.6 million in 2013. Our effective rate was 38.8% in 2014 and 38.4% in 2013. The 2014 effective tax rate was higher primarily due to the cumulative effect of income tax changes among the states and a change enacted by the state of Rhode Island on June 16, 2014. We expect our effective tax rate for the whole year to be 38.9%.

Net Income

Net income increased to $18.7 million in 2014 from $18.6 million in 2013 due primarily to higher gross margin.

Earnings Per Common Share

Basic earnings per share were $0.51 in 2014 and $0.50 in 2013. Basic earnings per share increased primarily due to the increase in gross margin.

Diluted earnings per share were $0.51 in 2014 and $0.50 in 2013. Diluted earnings per share increased primarily due to the increase in gross margin.


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Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

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



                                                      Six Months                                                       Six Months
                                                  Ended June 30, 2014                                              Ended June 30, 2013
                                                               Inter-                                                           Inter-
                                                               Segment         Hub Group                                        Segment         Hub Group
                                  Hub            Mode           Elims            Total             Hub            Mode           Elims            Total
Intermodal                    $   891,195      $ 214,180      $ (32,239 )     $ 1,073,136      $   880,065      $ 181,951      $ (22,317 )     $ 1,039,699
Truck brokerage                   170,374        165,060           (536 )         334,898          163,095        152,843           (561 )         315,377
Logistics                         273,889         61,204           (748 )         334,345          194,415         56,584           (410 )         250,589

Total revenue                 $ 1,335,458      $ 440,444      $ (33,523 )     $ 1,742,379      $ 1,237,575      $ 391,378      $ (23,288 )     $ 1,605,665

Revenue

Hub Group's revenue increased 8.5% to $1.7 billion in 2014 from $1.6 billion in 2013.

The Hub segment revenue increased 7.9% to $1.3 billion. Hub intermodal revenue increased 1.3% to $891.2 million due to a 0.6% increase in loads and an increase for price and mix partially offset by lower fuel. Hub truck brokerage revenue increased 4.5% to $170.4 million due to an increase for price, mix and fuel combined of 12.1%, partially offset by a 7.6% decrease in volume. Hub logistics revenue increased 40.9% to $273.9 million related primarily to new customers onboarded last year.

Mode's revenue increased 12.5% to $440.4 million in 2014 from $391.4 million in 2013. Mode's intermodal revenue increased 17.7%, truck brokerage revenue increased 8.0% and logistics revenue increased 8.2%.

Gross Margin

Hub Group's gross margin increased 2.5% to $187.3 million in 2014 from $182.8 million in 2013.

The Hub segment gross margin decreased 1.0% to $135.2 million. Hub's $1.4 million gross margin decrease came from intermodal partially offset by an increase in logistics and truck brokerage gross margin. The first quarter 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. In addition, second quarter intermodal margin was down because of unfavorable timing of cost increases and worse equipment utilization due to rail service issues, partially offset by a modest increase in price. Truck brokerage gross margin increased because of customer price increases and more value added services. Logistics margin increased due primarily to growth with customers we onboarded last year. As a percentage of Hub segment revenue, gross margin decreased to 10.1% in 2014 from 11.0% in 2013. The primary reason for the decline was due to intermodal because of a change in the mix of business, unfavorable timing of cost increases and weather related costs.

Mode's gross margin increased 12.8% to $52.1 million in 2014 from $46.2 million in 2013 due to an increase in all three service lines with the largest increases coming from truck brokerage and intermodal. Mode's gross margin as a percentage of revenue remained consistent at 11.8% in both 2014 and 2013.


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CONSOLIDATED OPERATING EXPENSES

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



                                                  Six Months Ended
                                                      June 30,
                                                  2014         2013
                Revenue                            100.0 %      100.0 %
                Transportation costs                89.2         88.6

                Gross margin                        10.8         11.4
                Costs and expenses:
                Salaries and benefits                4.2          4.3
                Agent fees and commissions           1.7          1.7
                General and administrative           1.7          1.8
                Depreciation and amortization        0.2          0.2

                Total costs and expenses             7.8          8.0
                Operating income                     3.0          3.4

Salaries and Benefits

Hub Group's salaries and benefits increased to $72.6 million in 2014 from $69.6 million in 2013. As a percentage of revenue, salaries and benefits decreased to 4.2% in 2014 from 4.3% in 2013.

The Hub segment increase of $3.4 million to $65.4 million in 2014 from $62.0 million in 2013 was due primarily to increases in salaries of $3.0 million due to higher headcount and merit increases, employee benefits of $0.4 million, compensation related to restricted stock of $0.3 million and payroll taxes of $0.2 million, partially offset by a decrease in bonus expense of $0.3 million and commissions of $0.2 million.

Mode's salaries and benefits expense decreased to $7.3 million in 2014 from $7.6 million in 2013. The decrease was due primarily to a decrease in bonus expense of $0.4 million, partially offset by an increase in compensation related to restricted stock of $0.1 million.

Agent Fees and Commissions

Hub Group's agent fees and commissions expenses increased to $29.2 million in 2014 from $27.0 million in 2013. As a percentage of revenue, these expenses remained consistent at 1.7% in both 2014 and 2013.

The Hub segment agent fees and commissions decrease of $0.8 million was due to a declining Hub agent program.

The Mode segment agent fees and commissions increased to $29.2 million in 2014 from $26.2 million in 2013. The increase of $3.0 million was due to the increase in gross margin.

General and Administrative

Hub Group's general and administrative expenses increased to $30.1 million in 2014 from $27.9 million in 2013. As a percentage of revenue, these expenses decreased to 1.7% in 2014 from 1.8% in 2013.

The Hub segment increase to $26.6 million in 2014 from $25.0 million in 2013 was due primarily to increases in outside consultant expenses of $1.4 million, travel and entertainment expenses of $0.3 million, outside sales commissions of $0.3 million, temporary labor expense of $0.2 million, office expense of $0.2 million, repairs and maintenance of $0.2 million, general insurance of $0.1 million and equipment leases of $0.1 million. These increases were partially offset by decreases in rent of $1.0 million and bad debt expense of $0.3 million.


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Mode's general and administrative expenses increased to $3.6 million in 2014 from $2.9 million in 2013. The increase was primarily due to a lower gain on the sale of equipment in 2014 as compared to 2013 of $0.4 million, higher bad debt expense of $0.2 million and higher repairs and maintenance expense of $0.1 million.

Depreciation and Amortization

Hub Group's depreciation and amortization increased to $3.9 million in 2014 from $3.1 million in 2013. This expense as a percentage of revenue remained constant at 0.2% in both 2014 and 2013.

The Hub segment's depreciation expense increased to $3.1 million in 2014 from $2.1 million in 2013. This increase of $1.0 million was related primarily to depreciation for the new corporate headquarters.

Mode's depreciation expense was $0.9 million for 2014 as compared to $1.1 million in 2013. The decrease in expense was primarily related to less depreciation related to computer software.

Other Income (Expense)

Total other expense increased to $1.0 million in 2014 from $0.5 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 $19.7 million in 2014 from $20.7 million in 2013. Our effective rate was 39.1% in 2014 and 37.8% 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 $30.7 million in 2014 from $34.0 million in 2013 due primarily to higher costs and expenses.

Earnings Per Common Share

Basic earnings per share decreased to $0.84 in 2014 from $0.92 in 2013. Basic earnings per share decreased primarily due to the decrease in net income.

Diluted earnings per share decreased to $0.84 in 2014 from $0.92 in 2013. Diluted earnings per share decreased primarily due to the decrease in net income.

LIQUIDITY AND CAPITAL RESOURCES

During the first half 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 and from other sources will be sufficient to meet our cash needs for at least the next twelve months.

Cash provided by operating activities for the six months ended June 30, 2014 was approximately $31.6 million, which resulted primarily from income of $30.7 million and adjustments for non-cash charges of $23.5 million partially offset by the change in operating assets and liabilities of $22.6 million.


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Net cash used in investing activities for the six months ended June 30, 2014 was $46.1 million, which included proceeds from the sale of equipment of $0.3 million and capital expenditures of $46.4 million. Capital expenditures consisted primarily of tractors of $24.5 million, containers of $8.7 million, new corporate headquarters of $7.4 million and the remainder for technology . . .

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