Aug. 5, 2020, 4:02 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 intermodal, logistics, truck brokerage and dedicated 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 such as 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 one or more of our largest customers;

awards received during annual customer bids not materializing;

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;

changes in insurance costs and claims expense; and

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

Current Update and Effects of COVID-19 Outbreak

All business lines are experiencing soft demand from customers whose businesses are being impacted by the COVID-19 pandemic. Intermodal revenue is also being impacted by competitive conditions in the truckload and intermodal markets as well as lower fuel prices. Intermodal gross margin is expected to decline from second quarter levels due to lower pricing and increased rail costs. Revenue for logistics, brokerage and dedicated is expected to decline from second quarter levels due to the impact of lost customers and softness from existing customers, partially offset by revenue from new 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. We donated refrigerated trailers with a carrying value of approximately $5.4 million during the second quarter of 2020 and $5.6 million in total for the six months ended June 30, 2020.

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 six months ended June 30, 2020, HGT accounted for approximately 60% of our drayage needs by assisting us in providing reliable, cost effective intermodal services to our customers. As of June 30, 2020, HGT operated approximately 1,450 tractors and 250 trailers, employed approximately 1,500 drivers and contracted with approximately 950 owner-operators.

Our dedicated operation 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 84 locations throughout the U.S. As of June 30, 2020, our dedicated operation employed approximately 1,350 drivers.

Our 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.

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.

We have 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 and logistics services to them.

Our multimodal solutions group works with our pricing, account management and operations teams to enhance our customer margins across all lines of business. We are working on margin enhancement initiatives including pricing optimization, matching of inbound and outbound loads, reducing empty miles, improving the retention of our drivers, controlling our maintenance costs, improving tractor and driver utilization, enhancing our procurement strategy, improving our recovery of accessorial costs, reducing repositioning costs, providing holistic solutions, and reviewing and improving low profit freight.

Our top 50 customers represent approximately 67% of revenue for the six months ended June 30, 2020. We use various performance indicators to manage our business. We closely monitor profitability of our top 50 customers. We also evaluate on-time performance, customer service, cost per load and trade receivables of these customer accounts. Vendor cost changes and vendor service issues are also monitored closely. Management continuously reviews and assesses the environment, especially with the rapidly-changing COVID-19 pandemic and its potential impact 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 June 30, 2020 Compared to the Three Months Ended June 30,
        2019
        The following table summarizes our revenue by business line (in thousands):
                            Three Months Ended June 30,
                             2020                 2019
        Intermodal      $      460,676       $      542,890
        Logistics              163,743              193,463
        Truck brokerage         86,675              107,081
        Dedicated               68,149               77,729
         Total revenue  $      779,243       $      921,163
        


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 June 30,
                                               2020                      2019
        Revenue                       $  779,243     100.0%      $ 921,163     100.0%
        Transportation costs             671,994      86.2%        788,460      85.6%
        Gross margin                     107,249      13.8%        132,703      14.4%
        Costs and expenses:
        Salaries and benefits             49,676      6.4%          60,859      6.6%
        General and administrative        28,970      3.7%          24,028      2.6%
        Depreciation and amortization      7,625      1.0%           7,095      0.8%
        Total costs and expenses          86,271      11.1%         91,982      10.0%
        Operating income              $   20,978      2.7%       $  40,721      4.4%
        


Revenue

Total revenue decreased 15.4% to $779.2 million in 2020 from $921.2 million in 2019. Intermodal revenue decreased 15.1% to $460.7 million due to an 8.1% decline in volume, lower pricing, and lower fuel revenue. Logistics revenue declined 15.4% to $163.7 million as a result of the soft demand environment, partially offset by growth at CaseStack. Truck brokerage revenue decreased 19.1% to $86.7 million due in part to a 12.1% decline in loads resulting from the soft demand environment and lower fuel revenue. Dedicated revenue decreased 12.3% to $68.1 million primarily due to the impact of business we exited, partially offset by growth with new accounts.

Transportation Costs

Transportation costs decreased 14.8% to $672.0 million in 2020 from $788.5 million in 2019. Transportation costs in 2020 consisted of purchased transportation costs of $513.4 million and equipment and driver related costs of $158.6 million. Transportation costs in 2019 consisted of purchased transportation costs of $631.7 million and equipment and driver related costs of $156.8 million. The 18.7% decrease in purchased transportation costs was primarily due to lower volumes in intermodal and truck brokerage, improved purchasing, and lower fuel costs, partially offset by rail cost increases. Equipment and driver related costs increased 1.1% in 2020 due to an increased usage of our internal drayage resources from 54% of total drayage in 2019 to 61% in 2020 and an increase in equipment depreciation expense, partially offset by the benefits from operational improvements in our trucking operation and declines in fuel cost.

Gross Margin

Gross margin decreased 19.2% to $107.2 million in 2020 from $132.7 million in 2019. Gross margin decreased in all lines of business. Intermodal gross margin decreased compared to the prior year primarily due to an 8.1% decline in volume, lower prices, unfavorable mix and rail cost increases, partially offset by the benefits from operational improvements in our trucking operation. Logistics gross margin decreased primarily due to soft demand. Truck brokerage gross margin decreased primarily due to a 12.1% decline in volume. Dedicated gross margin declined primarily due to business we exited.

As a percentage of revenue, gross margin declined to 13.8% in 2020 from 14.4% in 2019. Intermodal gross margin as a percentage of revenue declined 220 basis points due to lower prices and rail cost increases, partially offset by the benefits from operational improvements. Logistics gross margin as a percentage of revenue expanded by 190 basis points due to our continuous improvement initiatives, higher margin new business and growth at CaseStack. Truck brokerage gross margin as a percentage of revenue was up 100 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. Dedicated gross margin as a percent of revenue increased by 200 basis points compared to the prior year due to our profit improvement initiatives.

CONSOLIDATED OPERATING EXPENSES

Salaries and Benefits

Salaries and benefits decreased to $49.7 million in 2020 from $60.9 million in 2019. As a percentage of revenue, salaries and benefits decreased to 6.4% in 2020 from 6.6% in 2019. The decrease of $11.2 million was primarily due to lower variable compensation and lower headcount, including reductions in bonus expense of $5.0 million, salaries expense of $4.9 million and employee benefits expense of $0.7 million. Headcount as of June 30, 2020 and 2019 was 1,891 and 2,205, respectively, which excludes drivers, as driver costs are included in transportation costs. The decrease in headcount is primarily due to technology driven efficiencies and improved processes.

General and Administrative

General and administrative expenses increased to $29.0 million in 2020 from $24.0 million in 2019. These expenses, as a percentage of revenue, increased to 3.7% in 2020 from 2.6% in 2019. The increase of $5.0 million in general and administrative expense was primarily due to $5.7 million of expense related to donations of refrigerated trailers in support of COVID-19 relief efforts, a $2.6 million increase in professional services related primarily to a consulting project, partially offset by decreases in travel and meals and entertainment expenses of $1.9 million and other cost reduction measures.

Depreciation and Amortization

Depreciation and amortization increased to $7.6 million in 2020 from $7.1 million in 2019. This expense as a percentage of revenue increased to 1.0% in 2020 from 0.8% in 2019. This increase was related primarily to the deployment of IT initiatives.

Other Expense

Other expense increased to $3.0 million in 2020 from $2.1 million in 2019 due to higher interest expense related to higher borrowings and lower interest income on cash balances due to the decrease in interest rates.

Provision for Income Taxes

Provision for income taxes decreased to $4.9 million in 2020 from $9.4 million in 2019. We provided for income taxes using an effective rate of 27.0% in 2020 and an effective rate of 24.3% in 2019. The 2020 effective tax rate was higher due to a combination of lower book income in 2020 and the establishment of a new tax reserve related to state taxes. We expect our effective tax rate for the full year of 2020 will range from 24.5% to 25.5%.

Net Income

Net income decreased to $13.2 million in 2020 from $29.2 million in 2019 due primarily to decreases in gross margin, partially offset by lower costs and expenses, and income tax expenses.







        Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019
        The following table summarizes our revenue by business line (in thousands):
                          Six Months Ended June 30,
                             2020             2019
        Intermodal      $      955,999     $ 1,078,923
        Logistics              346,999         396,725
        Truck brokerage        184,692         224,669
        Dedicated              130,412         153,844
         Total revenue  $    1,618,102     $ 1,854,161
        


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







                                                   Six Months Ended June 30,
                                               2020                        2019
        Revenue                       $ 1,618,102     100.0%      $ 1,854,161     100.0%
        Transportation costs            1,406,259      86.9%        1,594,169      86.0%
        Gross margin                      211,843      13.1%          259,992      14.0%
        Costs and expenses:
        Salaries and benefits             100,552      6.2%           122,887      6.7%
        General and administrative         55,306      3.4%            46,946      2.5%
        Depreciation and amortization      15,248      1.0%            13,849      0.7%
        Total costs and expenses          171,106      10.6%          183,682      9.9%
        Operating income              $    40,737      2.5%       $    76,310      4.1%
        


Revenue

Total revenue decreased to $1.6 billion in 2020 from $1.9 billion in 2019. Intermodal revenue decreased 11.4% to $956.0 million due to an 7.5% decline in volume, lower pricing, and lower fuel revenue. Logistics revenue decreased 12.5% to $347.0 million due to soft demand, partially offset by strong growth at CaseStack. Truck brokerage revenue decreased 17.8% to $184.7 million due to a 10.9% decline in volume, while fuel, price and mix combined were down 6.9% due to soft demand. Dedicated revenue decreased 15.2% to $130.4 million primarily due to the impact of business we exited, partially offset by growth with new accounts.

Transportation Costs

Transportation costs decreased 11.8% to $1.4 billion in 2020 from $1.6 billion in 2019. Transportation costs in 2020 consisted of purchased transportation costs of $1.1 billion and equipment and driver related costs of $324.1 million compared to 2019, which consisted of purchased transportation costs of $1.3 billion and equipment and driver related costs of $309.8 million. The 15.7% decline in purchased transportation costs was primarily due to lower volumes in intermodal and truck brokerage, improved purchasing, and lower fuel costs, partially offset by rail cost increases. Equipment and driver related costs increased 4.6% in 2020 primarily due to an increased usage of our internal drayage resources from 54% in 2019 to 60% in 2020 and an increase in equipment depreciation expense, partially offset by the benefits from operational improvements in our trucking operation and declines in fuel cost.

Gross Margin

Gross margin decreased to $211.8 million in 2020 from $260.0 million in 2019. The $48.1 million gross margin decrease was the result of decreases in all lines of business. Intermodal gross margin decreased compared to the prior year primarily due to an 7.5% decline in volume, lower prices, unfavorable mix and rail cost increases, partially offset by the benefits from operational improvements in our trucking operation and better purchasing. Logistics gross margin decreased primarily due to soft demand, partially offset by growth at CaseStack. Truck brokerage gross margin decreased primarily due to a 10.9% decline in volume and lower pricing, fuel, and mix. Dedicated gross margin declined primarily due to business we exited.

As a percentage of revenue, gross margin declined to 13.1% in 2020 from 14.0% in 2019. Intermodal gross margin as a percentage of revenue declined 220 basis points because of lower prices and rail cost increases, partially offset by the benefits from operational improvements and better purchasing. Logistics gross margin as a percentage of revenue expanded by 130 basis points due to our continuous improvement initiatives, higher margin new business, procurement benefits and growth at CaseStack. Truck brokerage gross margin as a percentage of revenue was up 120 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. Dedicated gross margin as a percent of revenue increased by 30 basis points compared to the prior year due to our profit improvement initiatives.

CONSOLIDATED OPERATING EXPENSES

Salaries and Benefits

Salaries and benefits decreased to $100.6 million in 2020 from $122.9 million in 2019. As a percentage of revenue, salaries and benefits decreased to 6.2% in 2020 from 6.7% in 2019. The decrease of $22.3 million was primarily due to lower variable compensation and lower headcount, including a decrease in bonus expense of $12.0 million, salaries expense of $7.1 million and commissions expense and payroll tax expense of $1.1 million each. Salary and benefit expenses included $3.3 million of severance expense in 2020 versus $1.9 million in 2019.

General and Administrative

General and administrative expenses increased to $55.3 million in 2020 from $46.9 million in 2019. As a percentage of revenue, these expenses increased to 3.4% in 2020 from 2.5% in 2019. The increase of $8.4 million was primarily due to $5.9 million of expense related to donations of refrigerated trailers in support of COVID-19 efforts, a $3.6 million increase in professional services related primarily to a consulting project and lower gains on the sale of equipment of $1.6 million, partially offset by decreases of travel and entertainment expenses of $2.4 million, temporary labor expenses of $0.5 million and the impact of our cost reduction efforts.

Depreciation and Amortization

Depreciation and amortization increased to $15.2 million in 2020 from $13.8 million in 2019. This expense as a percentage of revenue increased to 1.0% in 2020 from 0.7% in 2019. This increase was related primarily to the deployment of IT initiatives.

Other Expense

Other expense increased to $5.2 million in 2020 from $4.8 million in 2019 due to lower interest income on cash balances related to lower interest rates.

Provision for Income Taxes

Provision for income taxes decreased to $9.1 million in 2020 from $18.4 million in 2019. The provision for income taxes decreased primarily due to lower pre-tax income in 2020, while the effective tax rate stayed the same year over year.

Net Income

Net income decreased to $26.4 million in 2020 from $53.1 million in 2019 due primarily to decreases in gross margin, partially offset by lower operating and income tax expenses.

LIQUIDITY AND CAPITAL RESOURCES

During the first six months of 2020, we funded operations, capital expenditures, payments for 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 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. We repaid the $100 million of borrowings in June 2020. We believe that our cash, cash flows from operations and borrowings available under the Credit Agreement 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, 2020 was approximately $111.5 million, which resulted primarily from income of $26.4 million adjusted for non-cash charges of $80.7 million and a positive change in operating assets and liabilities of $4.4 million.

Cash provided by operating activities decreased $23.7 million in 2020 versus 2019. The decrease was due to decreases in net income of $26.7 million and . . .

Aug 05, 2020

COMTEX_368932999/2041/2020-08-05T16:02:27

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