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May 8, 2020, 4:36 p.m. EDT

10-Q: HUB GROUP, INC.

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(EDGAR Online via COMTEX) -- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

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," "predicts," "projects," "potential," "may," "could," "might," "should," and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements are neither historical facts nor assurance of future performance. Instead, they are based on our beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Such factors include, but are not limited to, uncertainties caused by adverse economic conditions, including, without limitation, as a result of extraordinary events or circumstances such as the coronavirus (COVID-19)

pandemic, and their impact on our customers' businesses and workforce levels, disruptions of our business and operations, or the operations of our customers.

Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. All forward-looking statements made by us in this report are based upon information available to us on the date of this report and speak only as of the date in which they are made. Except as required by law, we expressly disclaim any obligations to publicly update any forward-looking statements whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, in addition to those identified in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 10-K") as well as in Part II, Item 1A of this Quarterly Report on Form 10-Q, include the following as they may be affected, either individually, or in the aggregate, by the ongoing effects of the COVID-19 outbreak:

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

deterioration in our relationships, service conditions or provision of equipment with existing railroads or adverse changes to the railroads' operating rules;

inability to recruit and retain company drivers and owner-operators;

inability to hire or retain management and other key personnel that are critical to our continued success;

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

unanticipated changes in rail, drayage, warehousing and trucking company capacity or costs of services;

increases in costs related to any reclassification or change in our treatment of drivers, owner-operators or other workers due to regulatory, judicial and legal decisions, including workers directly contracted with the Company and those contracted to the Company's vendors;

joint employer claims alleging that the Company is a co-employer of any workers providing services to a Company contractor;

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

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

inability to identify, close and successfully integrate any future business combinations;

fuel shortages or fluctuations in fuel prices;

increases in interest rates;

acts of terrorism and military action and the resulting effects on security;

difficulties in maintaining or enhancing our information technology systems, implementing new systems or protecting against cyber-attacks;

increases in costs associated with changes to or new governmental regulations;

significant increases to employee health insurance costs;

loss of several of our largest customers;

awards received during annual customer bids not materializing;

changes in insurance costs and claims expense;

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

further consolidation of railroads;

the effects or perceived effects of epidemics, pandemics or other health concerns;

imposition of new tariffs or trade barriers or withdrawal from or renegotiation of existing free trade agreements which could reduce international trade and economic activity; and

losses sustained on insured matters where the liability materially exceeds available insurance proceeds.

Current Update - Effects of COVID-19 Outbreak

We are anticipating a mid- to high-teens percentage decline in our April 2020 revenue as compared to April of 2019. As a result, our revenue is expected to decline in the second quarter of 2020 as compared to 2019.

All business lines are experiencing soft demand from customers whose businesses are being impacted by the COVID-19 pandemic. We estimate that approximately 20% of our revenue from our top 100 customers is from businesses that are currently closed. Intermodal revenue is also being impacted by the loose truckload environment as well as lower import activity and lower fuel prices. Brokerage is being impacted by weakness in the spot truckload market due to abundant capacity. Logistics is experiencing soft customer demand, offset in part by strong growth at CaseStack. Dedicated is seeing surges with our home improvement and general retail customers that is partially offsetting softer demand from other customers.

We provided assistance and support to hospitals, food banks and other organizations across the United States by donating refrigerated trailers to be used by emergency responders in fighting the COVID-19 pandemic. In April 2020, we donated refrigerated trailers with a carrying value of approximately $5.2 million.

EXECUTIVE SUMMARY

Hub Group, Inc. (the "Company", "Hub", "we", "us" or "our") is a leading, world class supply chain management company that provides value-added multi-modal transportation and logistics solutions by offering reliability, visibility and value to our customers. Our mission is to continuously elevate each customer's business to drive long term success. Our vision is to build the industry's premier customer-centric supply chain solutions. Our service offerings include comprehensive intermodal, truck brokerage, dedicated trucking, managed transportation, freight consolidation, warehousing, international transportation and other logistics services. The Company is a Delaware corporation that was incorporated on March 8, 1995 as successor to a business that was founded in 1971.

As an intermodal provider, we arrange for the movement of our customers' freight in containers, typically over long distances of 750 miles or more. We contract with railroads to provide transportation for the long-haul portion of the shipment between rail terminals. Local pickup and delivery services between origin or destination and rail terminals (referred to as "drayage") are provided by our HGT subsidiary and third-party local trucking companies.

For the three months ended March 31, 2020, HGT accounted for approximately 60% of Hub's drayage needs by assisting us in providing reliable, cost effective intermodal services to our customers. As of March 31, 2020, HGT leased or owned approximately 1,300 tractors and 200 trailers, employed approximately 1,500 drivers and contracted with approximately 1,000 owner-operators.

Our dedicated service line contracts with customers who seek to outsource a portion of their trucking transportation needs. We offer a dedicated fleet of equipment and drivers to each customer, as well as the management and infrastructure to operate according to the customer's high service expectations. Contracts with customers generally include fixed and variable pricing arrangements and may include charges for early termination which serves to reduce the financial risk we bear with respect to the utilization of our equipment. Our dedicated operation currently operates a fleet of approximately 1,200 tractors and 5,400 trailers at 86 locations throughout the U.S. As of March 31, 2020, our dedicated operation employed approximately 1,400 drivers.

Our truck brokerage operation arranges for the transportation of freight by truck, providing customers with an over the road service option for their transportation needs. Our brokerage service does not operate any trucks; instead we match customers' needs with carriers' capacity to provide the most effective service and price combination. We have contracts with a substantial base of carriers allowing us to meet the varied needs of our customers. 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.

Hub's logistics business offers a wide range of transportation management services and technology solutions including shipment optimization, load consolidation, mode selection, carrier management, load planning and execution and web-based shipment visibility. Our multi-modal transportation capabilities include small parcel, heavyweight, expedited, less-than-truckload, truckload, intermodal,

railcar and international shipping. In 2018, we acquired CaseStack, which leverages proprietary technology along with collaborative partnerships with retailers and logistics providers to deliver cost savings and performance-enhancing supply chain services to consumer packaged goods clients. CaseStack contracts with third-party warehouse providers in seven markets across North America to which its customers ship their goods to be stored and eventually consolidated, along with goods from other CaseStack customers, into full truckload shipments destined to major North American retailers. CaseStack offers its customers shipment visibility, transportation cost savings, high service and compliance with retailers' increasingly stringent supply chain requirements.

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 multimodal solutions group works with pricing, account management and operations to enhance Hub's customer margins across all lines of business. We are working on margin enhancement projects including pricing optimization, matching of inbound and outbound loads, reducing empty miles, improving the retention of our drivers, improving our recovery of accessorial costs, optimizing our drayage costs, enhancing our procurement strategy, reducing repositioning costs, providing holistic solutions and reviewing and improving low profit freight.

Hub's top 50 customers represent approximately 68% of revenue for the three months ended March 31, 2020. 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, customer service, cost per load and daily sales outstanding by customer account. Vendor cost changes and vendor service issues are also monitored closely. Management continuously reviews and assesses the environment, especially with the current, rapidly-changing COVID-19 pandemic and its potential impacts on the credit worthiness and collectability of our accounts receivable with customers most affected by the COVID-19 pandemic.







        RESULTS OF OPERATIONS
        Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31,
        2019
        The following table summarizes our revenue by business line (in thousands):
                           Three Months Ended March 31,
                             2020                 2019
        Intermodal      $      495,324       $      536,032
        Truck brokerage         98,017              117,587
        Logistics              183,255              203,263
        Dedicated               62,263               76,116
         Total revenue  $      838,859       $      932,998
        


The following is a summary of operating results and certain items in the consolidated statements of income as a percentage of revenue:







                                                    Three Months Ended
                                                         March 31,
                                              2020                      2019
        Revenue                       $ 838,859     100.0%      $ 932,998     100.0%
        Transportation costs            734,265      87.5%        805,709      86.4%
        Gross margin                    104,594      12.5%        127,289      13.6%
        Costs and expenses:
        Salaries and benefits            50,876      6.1%          62,028      6.6%
        General and administrative       26,336      3.1%          22,918      2.5%
        Depreciation and amortization     7,623      0.9%           6,754      0.7%
        Total costs and expenses         84,835      10.1%         91,700      9.8%
        Operating income              $  19,759      2.4%       $  35,589      3.8%
        


Revenue

Hub's revenue decreased 10.1% to $838.9 million in 2020 from $933.0 million in 2019. Intermodal revenue decreased 7.6% to $495.3 million primarily due to a 6.8% decrease in volume as well as lower pricing. Truck brokerage revenue decreased 16.6% to $98.0 million due to a 9.6% decrease in volume, while fuel, price and mix combined were down 7.0% due primarily to the soft demand environment. Logistics revenue decreased 9.8% to $183.3 million primarily due to a soft demand environment partially offset by strong growth at CaseStack. Dedicated's revenue decreased 18.2% to $62.3 million primarily due to the impact of business we exited, partially offset by growth with new accounts.

Transportation Costs

Hub's transportation costs decreased 8.9% to $734.3 million in 2020 from $805.7 million in 2019. Transportation costs in 2020 consisted of purchased transportation costs of $568.7 million and equipment and driver related costs of $165.6 million. In 2019, purchased transportation costs were $652.7 million and equipment and driver related costs were $153.0 million. The 12.9% decrease in purchased transportation costs was primarily due to decreases in intermodal and brokerage volumes and improved purchasing, partially offset by rail cost increases. Equipment and driver related costs increased 8.2% in 2020 primarily due to an increased usage of our internal drayage resources from 53% in the first quarter of 2019 to 60% in the first quarter of 2020 and an increase in equipment depreciation expense.

Gross Margin

Hub's gross margin decreased 17.8% to $104.6 million in 2020 from $127.3 million in 2019. The $22.7 million gross margin decrease was the result of decreases in all lines of business. Intermodal gross margin decreased primarily due to a 6.8% decrease in volume, lower prices, higher insurance and claims costs, and rail cost increases, partially offset by the benefits from operational improvements and better purchasing. Truck brokerage gross margin decreased primarily due to a 9.6% decrease in volume. Logistics gross margin decreased primarily due to soft customer demand, partially offset by strong growth at CaseStack. Dedicated gross margin decreased primarily due to business we exited, repairs expense, start up costs and idle equipment cost, partially offset by revenue management initiatives.

As a percentage of revenue, gross margin decreased to 12.5% in 2020 from 13.6% in 2019. Intermodal gross margin as a percentage of revenue decreased 210 basis points due to lower prices, rail cost increases, and higher insurance and claims costs, partially offset by the benefits from operational improvements and better purchasing. Truck brokerage gross margin as a percentage of revenue increased 150 basis points as a result of the benefits from the transformation of our operating model, an enhanced technology platform and a deeper engagement with our carrier network. Logistics gross margin as a percentage of revenue increased 70 basis points due to our continuous improvement initiatives, revenue management, and strong growth at CaseStack. Dedicated gross margin as a percentage of revenue decreased 160 basis points due primarily to increased idle equipment costs, start up costs and repairs and maintenance expense.

CONSOLIDATED OPERATING EXPENSES

Salaries and Benefits

Hub's salaries and benefits decreased to $50.9 million in 2020 from $62.0 million in 2019. As a percentage of revenue, Hub's salaries and benefits decreased to 6.1% in 2020 from 6.6% in 2019.

Hub's salaries and benefits decrease of $11.2 million is primarily due to lower variable compensation and lower headcount. Variable compensation had decreases in bonus expense of $7.0 million, salaries expense of $3.5 million, commissions expense of $0.7 million, payroll tax and restricted stock expenses of $0.5 million each, and employee benefits expense of $0.3 million. These decreases were partially offset by an increase in severance expense of $1.3 million. Salary and benefit expenses included $2.1 million of severance expense in 2020.

Hub's headcount as of March 31, 2020 and 2019 was 1,971 and 2,247, respectively, which excludes drivers, as driver costs are included in transportation costs. The decrease in Hub's headcount is primarily due to technology driven efficiencies and improved processes.

General and Administrative

Hub's general and administrative expenses increased to $26.3 million in 2020 from $22.9 million in 2019. These expenses, as a percentage of revenue, increased to 3.1% in 2020 from 2.5% in 2019. The increase of $3.4 million in general and administrative expense was primarily due to a $3.1 million increase in professional services primarily related to IT development and implementation costs, legal expenses, and costs related to a consulting project, less gains on the sale of equipment of $1.0 million and trailer donations of $0.2 million, partially offset by a $0.5 million decrease in travel and meals and entertainment expenses, and decreases in voice data services and temporary labor expenses of $0.2 million each.

Depreciation and Amortization

Hub's depreciation and amortization increased to $7.6 million in 2020 from $6.8 million 2019. This expense as a percentage of revenue increased to 0.9% in 2020 from 0.7% in 2019. This increase was related primarily to the deployment of IT initiatives.

Other Income (Expense)

Hub's other expense decreased to $2.3 million in 2020 from $2.7 million in 2019 due to lower interest expense on debt related to equipment purchases.

Provision for Income Taxes

The provision for income taxes decreased to $4.2 million in 2020 from $9.0 million in 2019. We provided for income taxes using an effective rate of 24.3% in 2020 and an effective rate of 27.3% in 2019. The 2020 effective tax rate was lower primarily due to a tax benefit related to stock-based compensation realized in the first quarter of 2020, compared to a tax deficit realized in the first quarter of 2019.

Net Income

Net income decreased to $13.2 million in 2020 from $23.9 million in 2019 due primarily to decreased gross margin, partially offset by lower costs and expenses and a lower provision for income taxes.

LIQUIDITY AND CAPITAL RESOURCES

During the first three months of 2020, we funded operations, capital expenditures, finance leases, repayments of debt and the purchase of our stock related to employee withholding upon vesting of restricted stock through cash flows from operations, proceeds from the issuance of long-term debt including our revolver and cash on hand. In March 2020, we elected to borrow $100.0 million under the Credit Agreement as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. The $100.0 million of proceeds from the borrowing may be used for general corporate purposes. We believe that our cash, cash flows 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 three months ended March 31, 2020 was $40.7 million, which resulted primarily from non-cash charges of $35.8 million, net income of $13.2 million, and a negative change in operating assets and liabilities of $8.3 million.

Cash provided by operating activities decreased $22.8 million in 2020 versus 2019. The decrease was due to a $10.7 million decrease in net income, a $9.0 million decrease in the change of operating assets and liabilities and a $3.1 million decrease in non-cash items in 2020 as compared to 2019.

The decrease in the change of operating assets and liabilities of $9.0 million was caused by decreases in the change of accounts receivable of $42.4 million, non-current liabilities of $4.8 million, prepaid expenses of $3.5 million and prepaid taxes of $0.5 million. These decreases were partially offset by increases in the changes in accounts payable of $34.0 million, restricted investments of $6.3 million, accrued expenses of $1.6 million and other assets of $0.3 million. The negative change in non-cash items was due to decreases in deferred taxes of $5.6 million and compensation expense related to stock-based compensation plans of $0.8 million, partially offset by increases in depreciation and amortization related to equipment purchases as well as additional amortization incurred for lease accounting of $2.2 million and a lower gain on the sale of equipment of $1.2 million.

Net cash used in investing activities for the three months ended March 31, 2020 was $25.0 million. Capital expenditures of $25.5 million related primarily to containers of $8.8 million, trailers of $7.8 million, technology investments of $4.8 million and construction of a new building on our corporate headquarters campus of $3.9 million. Proceeds from the sale of equipment was $0.5 million.

Net cash provided by investing activities for the quarter ended March 31, 2019 was $6.2 million. The decrease in net cash provided by investing activities of $31.2 million in 2020 versus 2019 was due primarily to lower proceeds related to the disposition of discontinued operations of $19.4 million, an increase in capital expenditures of $8.4 million related primarily to the purchase of containers and trailers, technology development and construction of a new building on our corporate headquarters campus and the decrease in proceeds from the sale of equipment of $3.3 million.

We estimate capital expenditures for the remainder of 2020 will range from $50 million to $80 million and will primarily consist of purchases for tractors, trailers and containers to support growth in our business, as well as technology investments. We plan to fund these expenditures with a combination of cash and debt.

The net cash provided by financing activities for the three months ended March 31, 2020 was $92.6 million, which resulted from the proceeds from the issuance of long-term debt of $121.4 million which included $100.0 million we borrowed on our revolver as noted above, partially offset by the repayment of long-term debt of $24.3 million, stock withheld for payments of withholding taxes of $3.8 million and finance lease payments of $0.7 million.

The decrease in net cash used in financing activities of $111.2 million in 2020 versus 2019 was primarily due to an increase of proceeds from the issuance of long-term debt of $111.0 million, including the $100.0 million borrowing under our revolving line of credit and less repayments of long-term debt of $1.4 million, partially offset by an increase in stock withheld for payments of withholding taxes of $1.2 million.

As a result of anticipated unfavorable timing differences, we expect our cash paid for income taxes in 2020 to be more than our income tax expense.

Our unused and available borrowings were $219.2 million as of March 31, 2020 and $318.5 million as of December 31, 2019. We had standby letters of credit that expire at various dates in 2020. As of March 31, 2020, our letters of credit were $30.8 million. We were in compliance with our debt covenants as of March 31, 2020 and December 31, 2019.

We are continually evaluating the possible effects of current economic conditions and reasonable and supportable economic forecasts in operational cash flows, including the risks of declines in the overall freight market and our customers' liquidity and ability to pay. We are monitoring working capital on a daily basis and are in frequent communications with our customers.

May 08, 2020

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