10-K 1 hubg-10k_20141231.htm 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

x

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2014

OR

¨

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 0-27754

 

HUB GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-4007085

(State or other jurisdiction

of incorporation of organization)

 

(I.R.S. Employer

Identification No.)

2000 Clearwater Drive

Oak Brook, Illinois 60523

(Address and zip code of principal executive offices)

(630) 271-3600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $.01 par value

(Title of Class)

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No   ¨

Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer

 

x

  

Accelerated Filer

 

¨

 

 

 

 

Non-Accelerated Filer

 

¨

  

Smaller Reporting Company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the Registrant’s voting stock held by non-affiliates on June 30, 2014 , based upon the last reported sale price on that date on the NASDAQ Global Select Market of $50.40 per share, was $1,778,865,682.

On February 18, 2015, the Registrant had 36,204,899 outstanding shares of Class A Common Stock, par value $.01 per share, and 662,296 outstanding shares of Class B Common Stock, par value $.01 per share.

Documents Incorporated by Reference

The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 8, 2015 (the “Proxy Statement”) is incorporated by reference in Part III of this Form 10-K to the extent stated herein. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.

 

 

 

 


 

 

 

PART I

 

FORWARD LOOKING STATEMENTS

The information contained in this annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “hopes,” “believes,” “intends,” “estimates,” “anticipates,” “predicts,” “projects,” “potential,” “may,” “could,” “might,” “should,” and variations of these words and similar expressions are intended to identify these forward-looking statements. In particular, information appearing under “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes 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. All forward-looking statements are based upon information available to us on the date of this report. Except as required by law, we expressly disclaim any obliations to publicly release any revisions to forward-looking statements to reflect events after the date of this annual report.  Factors that could cause our actual results to differ materially, in addition to those set forth under Items 1A “Risk Factors,” include:

·

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

·

deterioration in our relationships with existing railroads or adverse changes to the railroads’ operating rules;

·

changes in rail service conditions or adverse weather conditions;

·

further consolidation of railroads;

·

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

·

changes in rail, drayage and trucking company capacity;

·

railroads moving away from ownership of intermodal assets;

·

equipment shortages or equipment surplus;

·

changes in the cost of services from rail, drayage, truck or other vendors;

·

increases in costs for independent contractors due to regulatory, judicial and legal changes;

·

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

·

general economic and business conditions;

·

inability to successfully protect our data against cyber attacks;

·

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

·

fuel shortages or fluctuations in fuel prices;

·

increases in interest rates;

·

changes in homeland security or terrorist activity;

·

difficulties in maintaining or enhancing our information technology systems;

·

changes to or new governmental regulations;

·

significant increases to employee health insurance costs;

·

loss of several of our largest customers and Mode agents;

·

inability to recruit and retain key personnel and Mode sales agents and IBOs;

·

inability to recruit and maintain drivers and owner-operators;

·

changes in insurance costs and claims expense;

·

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

·

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

1


 

 

Item  1.

BUSINESS

General

Hub Group, Inc. (“Company”, “we”, “us” or “our”) is a Delaware corporation that was incorporated on March 8, 1995. We are one of North America’s leading asset-light freight transportation management companies. We offer comprehensive intermodal, truck brokerage and logistics services. Since our founding in 1971, we have grown to become one of the largest intermodal marketing companies (“IMC”) in the United States and one of the largest truck brokers. Through our network, we have the ability to arrange for the movement of freight in and out of every major city in the United States, Canada and Mexico. We utilize an asset-light strategy in order to minimize our investment in equipment and facilities and reduce our capital requirements. We arrange freight movement for our customers through transportation carriers and equipment providers.

In April 2011, we acquired all of the capital stock of Exel Transportation Services, Inc. (“ETS”). ETS is now our wholly-owned subsidiary, operating independently and renamed Mode Transportation, LLC (“Mode”). Mode has approximately 233 agents, consisting of 103 sales/operating agents, known as Independent Business Owners (“IBOs”), who sell and operate the business throughout North America and 130 sales only agents. Mode also has a company managed operation and corporate offices in Dallas, TX, a temperature protected services division operated out of our Oak Brook, IL headquarters and corporate offices in Memphis, TN.

We report two distinct business segments. The first segment is “Mode,” which includes the acquired Mode business only. The second segment is “Hub,” which is all business other than Mode. Both segments offer intermodal, truck brokerage and logistics services. “Hub Group” includes both segments.

Hub operates through a network of operating centers throughout the United States, Canada and Mexico. Each operating center is strategically located in a market with a significant concentration of shipping customers and one or more railheads. Hub services a large and diversified customer base in a broad range of industries, including consumer products, retail and durable goods.

Mode markets and operates its freight transportation services primarily through its network of IBOs who enter into contracts with Mode. Mode’s company managed operation includes a business arranging for the transportation of raw materials and finished products for a major food producer and, to a lesser extent, other highway brokerage, intermodal and logistics operations.

Services Provided

Our transportation services for both the Hub and the Mode segments can be broadly placed into the following categories:

Intermodal. As an IMC, we arrange for the movement of our customers’ freight in containers and trailers, typically over long distances of 750 miles or more. 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 pickup and delivery. As part of our 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.

We use our network to access containers and trailers owned by leasing companies, railroads and steamship lines. We are able to track trailers and containers entering a service area and reuse that equipment to fulfill the customers’ outbound shipping requirements. This effectively allows us to “capture” containers and trailers and keep them within our network. As of December 31, 2014, we owned a total of 22,449 53’ private containers. In addition to the containers we own, we had exclusive access to approximately 5,892 rail-owned containers for our dedicated use on the Union Pacific (“UP”) and the Norfolk Southern (“NS”) rails as of December 31, 2014.

Our subsidiary, Hub Group Trucking, Inc. has grown substantially and during 2014, accounted for approximately 70% of Hub’s drayage needs by assisting 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, Philadelphia, Portland (OR), Salt Lake City, Savannah, Seattle, St. Louis, Stockton, and Titusville (FL) metro areas. As of December 31, 2014, Hub Group Trucking leased or owned 1,218 tractors, leased or owned 448 trailers, employed 1,063 drivers and contracted with 1,759 owner-operators.

Truck Brokerage (Highway Services). We are one of the largest truck brokers in the United States, 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 combination. We have contracts with a substantial base of carriers allowing us to meet the varied needs of our customers. As part of the truck brokerage services, we negotiate rates, track shipments in transit and handle claims for freight loss and damage on behalf of our customers.

2


 

Logistics and Other Services. Hub’s logistics business operates under the name of Unyson Logistics. Unyson Logistics is comprised of a network of logistics professionals dedicated to developing, implementing and operating customized logistics solutions. Unyson 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. Unyson Logistics operates throughout North America, providing operations through its main operating location in St. Louis with additional support locations in the Boston, Chicago, Cleveland and Minneapolis metro areas. Certain Mode agents provide logistics services. Our multi-modal transportation capabilities through both the Hub and Mode segments include small parcel, heavyweight, expedited, less-than-truckload, truckload, intermodal and railcar.

Hub and Mode Network

Hub’s entire network is interactively connected through Hub’s proprietary Network Management System and Mode’s network is connected through its third party transportation management system. This enables us to move freight into and out of every major city in the United States, Canada and Mexico.

In a typical intermodal transaction, the customer contacts one of Hub’s intermodal operating centers or a Mode IBO to place an order. The operating center/IBO determines the price, obtains the necessary intermodal equipment, arranges for it to be delivered to the customer by a drayage company and, after the freight is loaded, arranges for the transportation of the container or trailer to the rail ramp. Relevant information is entered into our system by the assigned operating center/IBO. Our predictive track and trace technology then monitors the shipment to ensure that it arrives as scheduled and alerts the customer service personnel if there are service delays. The operating center/IBO then arranges for and confirms delivery by a drayage company at destination. After unloading, the empty equipment is made available for reloading by the operating center/IBO for the delivery market.

We provide truck brokerage services to our customers in a similar manner. In a typical truck brokerage transaction, the customer contacts one of Hub’s highway operating centers or a Mode IBO to obtain a price quote for a particular freight movement. The customer then provides appropriate shipping information to the Hub operating center/IBO. The operating center/IBO makes the delivery appointment and arranges with the appropriate carrier to pick up the freight. Once it receives confirmation that the freight has been picked up, the operating center/IBO monitors the movement of the freight until it reaches its destination and the delivery has been confirmed. If the carrier notifies us that after delivering the load it will need additional freight, we may notify other operating centers or IBOs. Although under no obligation to do so, those parties may then attempt to secure additional freight for the carrier.

Marketing and Customers

We believe that fostering long-term customer relationships is critical to our success. Through these long-term relationships, we are able to better understand our customers’ needs and tailor our transportation services to the specific customer, regardless of the customer’s size or volume. Hub currently has full-time marketing representatives at various operating centers and sales offices with primary responsibility for servicing local, regional and national accounts. These sales representatives directly or indirectly report to our Chief Marketing Officer. This model allows us to provide Hub customers with both a local marketing contact and access to our competitive rates as a result of being a large, multinational transportation service provider. Mode IBOs and sales agents are located throughout North America and also enjoy local marketing advantages with access to the Hub network and carrier base. Mode IBOs may act to both generate business and to perform the transportation brokerage services. Mode sales agents are focused entirely on the sales effort and utilize an IBO to service the freight.

The Mode acquisition diversifies Hub Group’s customer base with more small and medium sized customers, as Hub has traditionally focused to a significant degree on larger national accounts. Mode IBOs and sales agents are often able to devote more attention to smaller and medium sized shippers and develop long-term relationships with them.

Our marketing efforts have produced a large, diverse customer base, with no one customer representing more than 10% of our total revenue in 2014 in either reporting segment. We service customers in a wide variety of industries, including consumer products, retail and durable goods.

 

 

 

 

 

 

3


 

Management Information Systems

A primary component of our business strategy is the continued improvement of our core transportation management systems and other technology to ensure that we remain a leader among transportation providers in information technology.  Our Network Management System, which is proprietary software, continues to be the basis of our technology for our intermodal and brokerage business.  This proprietary software is running on a combination of platforms which includes the IBM iSeries and Microsoft Windows Server environments located at a secure offsite data center.  Also a critical part of conducting business is transmitting data to and from our customers, rail providers, and drayage providers.  In 2014, we successfully completed an upgrade and migration for all EDI transmissions for intermodal, brokerage, and logistics.  This robust integration platform will now serve as our primary communication mechanism.  We will continue to offer solutions via our internet based applications at www.hubgroup.com.  These solutions offer customers the ability to receive pricing information, place orders, track shipments, and review historical shipment information.  In addition, drayage carriers can provide status information, view paperwork requirements and facilitate invoicing.  Also new in 2014 and focused on timely communication accessible from a mobile device is our first mobile application, currently being used in Hub Group Trucking as an additional communication mechanism.  

 

Our Unyson business uses highly customized software that includes planning and execution solutions.  This solution has enabled us to provide complex supply chain planning and logistics management, modeling, optimization and monitoring for our customers.  We are now looking to leverage additional software solutions with more robust and modern capabilities in these areas.  This will included sophisticated optimization, customer centric solutions to solve complex supply chain challenges, mobile solutions for carriers and customers, and modern capabilities when interacting via the internet.  The beginning of the transformation is now visible with the recent completion and deployment of www.unyson.com.

 

Mode Transportation utilizes a best in class third party transportation management system to manage its business.  This includes providing multi modal solutions, timely information about the status of shipments, business intelligence solutions to better understand outcomes and opportunities as well as the facilitation of customer billing.  Our transportation providers also take advantage of a robust portal that allows the exchange of information about available loads, available capacity, and event status information.  In addition, we leverage an industry leading solution to provide EDI connectivity between thousands of trading partners from customers to each of the major rail carriers as well as numerous trucking companies.  This allows us to provide seamless integration in a timely fashion as we continue to grow our transportation network.

Relationship with Railroads

A key element of our business strategy is to strengthen our close working relationship with the major intermodal railroads in the United States. Due to our size and relative importance, some railroads have dedicated support personnel to focus on our day-to-day service requirements. On a regular basis, our senior executives and each of the railroads meet to discuss major strategic issues concerning intermodal transportation.

We have relationships with each of the following major railroads:

 

Burlington Northern Santa Fe

  

Florida East Coast

Canadian National

  

Kansas City Southern

Canadian Pacific

  

Norfolk Southern

CSX

  

Union Pacific

Ferromex

  

 

We also have relationships with each of the following major service providers: APL, CMA CGM (America) Inc., COSCO (China Ocean Shipping (Group) Company), Evergreen Shipping Agency (America) Corp., Express System Intermodal Inc., Domestic Intermodal America, Hamburg Sud Group, Hanjin Shipping, Hapag-Lloyd (America) Inc., Hyundai Merchant Marine, K-Line America, Maersk Sea-Land, Mitsui O.S.K. Lines (America) Inc., NYK (Nippon Usen Kaisha) Line, Triton Overseas Transport, Yang Ming (America) Corp., and Zim Integrated Shipping Services.

Transportation rates are market driven. We sometimes negotiate with the railroads or other major service providers on a route or customer specific basis. Consistent with industry practice, some of the rates we negotiate are special commodity quotations (“SCQs”), which provide discounts from published price lists based on competitive market factors and are designed by the railroads or major service providers to attract new business or to retain existing business. SCQ rates are generally issued for the account of a single IMC. SCQ rates apply to specific customers in specified shipping lanes for a specific period of time, usually up to 12 months.

4


 

Relationship with Drayage Companies

Hub has a “Quality Drayage Program,” under which participants commit to provide high quality drayage service along with clean and safe equipment, maintain a defined on-time performance level and follow specified procedures designed to minimize freight loss and damage. We negotiate drayage rates for transportation between specific origin and destination points.

We also provide drayage services with our own drayage operations, which we operate through our subsidiary Hub Group Trucking. Our drayage operations employ their own drivers and also contract with owner-operators who supply their own trucks.

Relationship with Trucking Companies

Our truck brokerage operation has a large number of active trucking companies that we use to transport freight. The Hub operating centers and Mode IBOs deal daily with these carriers on an operational level. Our corporate headquarters handles the administrative and regulatory aspects of the trucking company relationship. Our relationships with these trucking companies are important since these relationships determine pricing, load coverage and overall service.

Risk Management and Insurance

We require all drayage companies participating in Hub’s Quality Drayage Program to carry at least $1.0 million in general liability insurance, $1.0 million in truckman’s auto liability insurance and a minimum of $100,000 in cargo insurance. Railroads, which are self-insured, provide limited cargo protection, generally up to $250,000 per shipment. To cover freight loss or damage when a carrier’s liability cannot be established or a carrier’s insurance is insufficient to cover the claim, we carry our own cargo insurance with a limit of $1.0 million per container or trailer and a limit of $20.0 million in the aggregate. We also carry general liability insurance with limits of $1.0 million per occurrence and $2.0 million in the aggregate with a companion $45.0 million umbrella policy on this general liability insurance.

We maintain separate insurance policies to cover potential exposure from our company-owned drayage operations. We carry commercial general liability insurance with a limit of $1.0 million per occurrence, subject to a $2.0 million policy aggregate limit, and trucker’s automobile liability insurance with a limit of $1.0 million per occurrence. Additionally, we have an umbrella excess liability policy with a limit of $19.0 million. We also maintain motor truck cargo liability insurance with a limit of $1.0 million per occurrence.

Government Regulation

Hub Group, Inc. and various subsidiaries, including Mode Transportation, LLC, are licensed by the Department of Transportation as brokers in arranging for the transportation of general commodities by motor vehicle. To the extent that the Hub operating centers and Mode IBOs perform truck brokerage services, they do so under these licenses. The Department of Transportation prescribes qualifications for acting in this capacity, including a $75,000 surety bond that we have posted. In addition, Hub and Mode each have customs bonds. To date, compliance with these regulations has not had a material adverse effect on our results of operations or financial condition. However, the transportation industry is subject to legislative or regulatory changes that can affect the economics of the industry by requiring changes in operating practices or influencing the demand for, and cost of providing, transportation services.

Custom-Trade Partnership Against Terrorism

We achieved Custom-Trade Partnership Against Terrorism (C-TPAT) certification in 2013 and validation in 2014. C-TPAT is a voluntary supply chain security program led by the U.S. Customs and Border Protection focused on improving the security of private companies’ supply chains with respect to terrorism. Companies who achieve C-TPAT certification must have a documented process for determining and alleviating risks throughout their international supply chain. This certification allows us to be considered low risk, resulting in expedited processing of our customers’ cargo, including fewer customs examinations.

Competition

The transportation services industry is highly competitive. We compete against other IMCs, as well as logistics companies, third party brokers, trucking companies and railroads that market their own intermodal services. Several larger trucking companies have entered into agreements with railroads to market intermodal services nationwide. Competition is based primarily on freight rates, quality of service, reliability, transit time and scope of operations. Several transportation service companies and trucking companies, and all of the major railroads, have substantially greater financial and other resources than we do.

5


 

General

Employees: As of December 31, 2014, Hub Group had 2,568 employees consisting of 2,443 Hub employees, or 1,380 employees excluding drivers, and 125 Mode employees. We are not a party to any collective bargaining agreements and consider our relationship with our employees to be satisfactory.

As of December 31, 2014, Mode had 103 IBOs (sales/operating agents) and 130 sales only agents. Nearly all of the sales agents and IBOs are under contract with Mode.

Other: No material portion of our operations is subject to renegotiation of profits or termination of contracts at the election of the federal government. Our business is seasonal to the extent that certain customer groups, such as retail, are seasonal.

Periodic Reports

Our annual report to the Securities and Exchange Commission (“SEC”) on Form 10-K, our quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to such reports, are available free of charge on our website at www.hubgroup.com as soon as reasonably practicable after we electronically file or furnish such reports to the SEC. Information on our website does not constitute part of this annual report on Form 10-K. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC. Any materials we file with, or furnish to, the SEC may also be read and/or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

 

 

Item  1A.

RISK FACTORS

Because our business is concentrated on intermodal marketing, any decrease in demand for intermodal transportation services compared to other transportation services could have an adverse effect on our results of operations.

We derived 62% of our revenue from our intermodal services in 2014, 64% in 2013 and 65% in 2012. As a result, any decrease in demand for intermodal transportation services compared to other transportation services could have an adverse effect on our results of operations.

Because we depend on railroads for our operations, our operating results and financial condition are likely to be adversely affected by any reduction or deterioration in rail service.

We depend on the major railroads in the United States for virtually all of the intermodal services we provide. In many markets, rail service is limited to one or a few railroads. Consequently, a reduction in, or elimination of, rail service to a particular market is likely to adversely affect our ability to provide intermodal transportation services to some of our customers. In addition, the railroads are relatively free to adjust shipping rates up or down as market conditions permit. Rate increases would result in higher intermodal transportation costs, reducing the attractiveness of intermodal transportation compared to truck or other transportation modes, which could cause a decrease in demand for our services. Further, our ability to continue to expand our intermodal transportation business is dependent upon the railroads’ ability to increase capacity for intermodal freight and provide consistent and reliable service. Our business could also be adversely affected by a work stoppage at one or more railroads or by adverse weather conditions or other factors that hinder the railroads’ ability to provide reliable transportation services. In the past, there have been service issues when railroads have merged. As a result, we cannot predict what effect, if any, further consolidations among railroads may have on intermodal transportation services or our results of operations.

Because our relationships with the major railroads are critical to our ability to provide intermodal transportation services, our business may be adversely affected by any change to those relationships.

We have important relationships with certain major U.S. railroads. To date, the railroads have chosen to rely on us, other IMCs and other intermodal competitors to market their intermodal services rather than fully developing their own marketing capabilities. If one or more of the major railroads were to decide to reduce their dependence on us, the volume of intermodal shipments we arrange would likely decline, which could adversely affect our results of operations and financial condition.

 

 

6


 

Because we rely on drayage companies in our intermodal operations, our ability to expand our business or maintain our profitability may be adversely affected by a shortage of drivers and drayage capacity.

In certain markets we serve, we use third-party drayage companies for pickup and delivery of some or all of our intermodal containers. Most drayage companies operate relatively small fleets and have limited access to capital for fleet expansion. In some of our markets, there are a limited number of drayage companies that can meet our quality standards. This could limit our ability to expand our intermodal business or require us to establish more of our own drayage operations in some markets, which could increase our operating costs and could adversely affect our profitability and financial condition. Also, the trucking industry chronically experiences a shortage of available drivers, which may limit the ability of third-party drayage companies to expand their fleets. This shortage also may require them to increase drivers’ compensation, thereby increasing our cost of providing drayage services to our customers. Therefore, the driver shortage could also adversely affect our profitability and limit our ability to expand our intermodal business.

Because we depend on trucking companies for our truck brokerage services, our ability to maintain or expand our truck brokerage business may be adversely affected by a shortage of trucking capacity.

We derived 19% of our revenue from our truck brokerage services in both 2014 and 2013 and 21% in 2012. We depend upon various third-party trucking companies for the transportation of our customers’ loads. Particularly during periods of economic expansion, trucking companies may be unable to expand their fleets due to capital constraints or chronic driver shortages, and these trucking companies also may raise their rates. If we face insufficient capacity among our third-party trucking companies, we may be unable to maintain or expand our truck brokerage business. Also, we may be unable to pass rate increases on to our customers, which could adversely affect our profitability.

 

Because we depend on less than truckload companies for our logistic services, our ability to maintain or expand our logistics business may be adversely affected by a shortage of less than truckload capacity.

 

We derived 19% of our revenue from our logistics services in 2014, 17% in 2013 and 14% in 2012.  We depend on various less than truckload companies for the transportation of our customers’ freight. As many of our logistic contracts have a gain share component, changes in less than truckload rates due to these trucking companies being unable to expand their fleets or chronic driver shortages, may affect our profitability and our ability to retain our customers.

Because we use a significant number of independent contractors, such as owner operators, in our businesses, legislative, judicial and regulatory authorities could take actions or render decisions that change the independent contractor classification, which could have a significant impact on our gross margin and operating income.

We do business with a large number of independent contractors, such as Mode Sales Independent Business Owners and Operations Independent Business Owners and Hub Group Trucking owner-operators, consistent with longstanding industry practices.  Legislative, judicial, and regulatory (including tax) authorities could take actions or render decisions that could affect the independent contractor classifications.  Class action and individual lawsuits have been filed against us and others in our industries, challenging the independent contractor classifications.  See Item 3 - Legal Proceedings for further discussion and see Note 15 to the consolidated financial statements under “Legal Matters” for a description of material pending litigation and regulatory matters affecting us and certain risks to our business presented by such matters.  If current independent contractors are determined to be employees, then we may incur legal liabilities associated with that determination, such as liability for unpaid wages, overtime, employee health insurance and taxes.  If we were to change how we treat independent contractors or reclassify independent contractors to employees, then we would likely incur expenses associated with that reclassification and could incur additional ongoing expenses.  The costs associated with these matters could have a material adverse effect on results of operations and our financial position.

We depend on third parties for equipment essential to operate our business, and if we fail to secure sufficient equipment, we could lose customers and revenue.

We depend on third parties for transportation equipment, such as tractors, containers, chassis and trailers, necessary for the operation of our business. Our industry has experienced equipment shortages in the past, particularly during the peak shipping season in the fall. A substantial amount of intermodal freight originates at or near the major West Coast ports, which have historically had the most severe equipment shortages. If we cannot secure sufficient transportation equipment at a reasonable price from third parties to meet our customers’ needs, our customers may seek to have their transportation needs met by other providers. This could have an adverse effect on our business, results of operations and financial position.

7


 

Our business could be adversely affected by strikes or work stoppages by draymen, truckers, port workers and railroad workers.

There has been labor unrest, including strikes and work stoppages, among workers at various transportation providers and in industries affecting the transportation industry, such as port workers. We could lose business due to any significant work stoppage or slowdown and, if labor unrest results in increased rates for transportation providers such as draymen, we may not be able to pass these cost increases on to our customers. Strikes among longshoreman and clerical workers at ports in the past few years have slowed down the ports for a time, creating a major impact on the transportation industry. West coast longshoremen have been operating without a union contract since the summer of 2014, and a risk of labor unrest and labor slowdowns continues though the parties recently reached a tentative agreement that still must be approved by the union membership. Work stoppages occurring among owner-operators in a specific market have increased our operating costs periodically over the past several years. In the past several years, there have been strikes involving railroad workers. Future strikes by railroad workers in the United States, Canada or anywhere else that our customers’ freight travels by railroad would impact our operations. Any significant work stoppage, slowdown or other disruption involving ports, railroads, truckers or draymen could adversely affect our business and results of operations.

Losing one or more key Mode IBOs or sales agents could have an adverse effect on revenue and net income.

Certain Mode IBOs and sales agents represent a large portion of Mode’s overall revenues. Traditionally, transportation agents have shifted from company to company, although most companies, including Mode, attempt to address this situation contractually. If one or more large IBOs or sales agents were to terminate their relationship with Mode, there could be an adverse effect on Mode’s business and results of operations.

Our results of operations are susceptible to changes in general economic conditions and cyclical fluctuations.

Economic recession, customers’ business cycles, changes in fuel prices and supply, interest rate fluctuations, increases in fuel or energy taxes and other general economic factors affect the demand for transportation services and the operating costs of railroads, trucking companies and drayage companies. We have little or no control over any of these factors or their effects on the transportation industry. Increases in the operating costs of railroads, trucking companies or drayage companies can be expected to result in higher freight rates. Our operating margins could be adversely affected if we were unable to pass through to our customers the full amount of higher freight rates. Economic recession or a downturn in customers’ business cycles also may have an adverse effect on our results of operations and growth by reducing demand for our services. Therefore, our results of operations, like the entire freight transportation industry, are cyclical and subject to significant period-to-period fluctuations.

Relatively small increases in our transportation costs that we are unable to pass through to our customers are likely to have a significant effect on our gross margin and operating income.

Transportation costs represented 90% of our consolidated revenue in 2014 and 89% in both 2013 and 2012. Because transportation costs represent such a significant portion of our costs, even relatively small increases in these transportation costs, if we are unable to pass them through to our customers, are likely to have a significant effect on our gross margin and operating income.  Transportation costs may increase if we are unable to sign on owner-operators or recruit employee drivers as this may increase driver costs or force us to use more expensive purchased transportation.

Our business could be adversely affected by heightened security measures, actual or threatened terrorist attacks, efforts to combat terrorism, military action against a foreign state or other similar event.

We cannot predict the effects on our business of heightened security measures, actual or threatened terrorist attacks, efforts to combat terrorism, military action against a foreign state or other similar events. It is possible that one or more of these events could be directed at U.S. or foreign ports, borders, railroads or highways. Heightened security measures or other events are likely to slow the movement of freight through U.S. or foreign ports, across borders or on U.S. or foreign railroads or highways and could adversely affect our business and results of operations. Any of these events could also negatively affect the economy and consumer confidence, which could cause a downturn in the transportation industry.

 

 

 

 

 

 

 

 

8


 

If we fail to maintain and enhance our information technology systems, or if we fail to successfully implement new technology or enhancements, we may be at a competitive disadvantage and lose customers.

Hub Group’s information technology systems are critical to our operations and our ability to compete effectively as an IMC, truck broker and logistics provider. We expect our customers to continue to demand more sophisticated information technology applications from their suppliers. If we do not continue to enhance Hub Group’s Network Management System and the logistics software we use to meet the increasing demands of our customers, we may be placed at a competitive disadvantage and could lose customers. Information technology enhancements are also costly and challenging to implement and failure to successfully implement these enhancements could adversely affect our results of operations and financial condition.

Our information technology systems are subject to risks that we cannot control and the inability to use our information technology systems could materially adversely affect our business.

Our information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced significant system failures and electrical outages in the past. Our systems are susceptible to outages from fire, floods, power loss, telecommunications failures, break-ins and similar events. Our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. The occurrence of any of these events could disrupt or damage our information technology systems and inhibit our internal operations, our ability to provide services to our customers and the ability of our customers and vendors to access our information technology systems. This could result in a loss of customers or a reduction in demand for our services.

Disruptions and other damages to our information technology and other networks and operations and breaches in data security could adversely affect our business.

Our current operations reside on multiple technology platforms. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and random attack. Failure to prevent or mitigate data loss or other security breaches could expose us or our vendors or customers to a risk of loss or misuse of such information, adversely affect our operating results, result in litigation or potential liability for us and otherwise harm our business. Likewise, data privacy breaches by employees and others who access our systems may pose a risk that sensitive customer or vendor data may be exposed to unauthorized persons or to the public, adversely impacting our customer service, employee relationships and our reputation. While we believe that we have taken appropriate security measures to protect our data and information technology systems and prevent data loss, there can be no assurance that our efforts may not prevent breakdowns or breaches in our systems that could have an adverse effect on our business.

The transportation industry is subject to government regulation, and regulatory changes could have a material adverse effect on our operating results or financial condition.

Hub Group, Inc. and various subsidiaries, including Mode Transportation, LLC, are licensed by the Department of Transportation as motor carrier freight brokers. The Department of Transportation prescribes qualifications for acting in this capacity, including surety bond requirements. Our Hub Group Trucking subsidiary is licensed by the Department of Transportation to act as a motor carrier. To date, compliance with these regulations has not had a material adverse effect on our results of operations or financial condition. However, the transportation industry is subject to legislative or regulatory changes, including potential limits on carbon emissions under climate change legislation and Department of Transportation regulations regarding, among other things, driver breaks and “restart” rules, that can affect the economics of the industry by requiring changes in operating practices or influencing the demand for, and cost of providing, transportation services. We may become subject to new or more restrictive regulations relating to fuel emissions or limits on vehicle weight and size. Future laws and regulations may be more stringent and require changes in operating practices, influence the demand for transportation services or increase the cost of providing transportation services, any of which could adversely affect our business and results of operations.

We are not able to accurately predict how new governmental laws and regulations, or changes to existing laws and regulations, will affect the transportation industry generally, or us in particular. Although government regulation that affects us and our competitors may simply result in higher costs that can be passed along to customers, that may not be the case.

 

 

 

 

9


 

Antidumping and Other Duties Could be Imposed on Us and Our Suppliers

We import 53 foot intermodal containers manufactured in China.  A petition has been filed requesting the United States Government to impose antidumping duties on these containers.  Under United States law, an antidumping duty may be imposed on any imports if two conditions are met.  First, the Department of Commerce must decide that the imports are being sold in the United States at less than fair value.  Second, the International Trade Commission (the “ITC”) must determine that the United States industry is materially injured, threatened with material injury or materially retarded by reason of the imports.  The ITC’s determination of material injury or retardation involves a two-prong inquiry:  first, whether the industry is materially injured or retarded, and second, whether the dumping, not other factors, caused the injury or retardation.  The ITC is required to analyze the volume of imports, the effect of imports on United States prices for like merchandise, and the effects the imports have on United States producers of like products, taking into account many factors, including lost sales, market share, profits, productivity, return on investment, and utilization of production capacity.  If antidumping or other increased duties are imposed on these containers, this could adversely affect our results of operations.

Our operations may be subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.

From time to time, we arrange for the movement of hazardous materials at the request of our customers. As a result, we may be subject to various environmental laws and regulations relating to the handling of hazardous materials. If we are involved in a spill or other accident involving hazardous materials, or if we are found to be in violation of applicable laws or regulations, we could be subject to substantial fines or penalties and to civil and criminal liability, any of which could have an adverse effect on our business and results of operations.

We derive a significant portion of our revenue from our largest customers and the loss of several of these customers could have a material adverse effect on our revenue and business.

For Hub Group’s consolidated revenue, our largest 20 customers accounted for approximately 36% of our revenue in 2014 and 34% in both 2013 and 2012. A reduction in or termination of our services by several of our largest customers could have a material adverse effect on our revenue and business.

Insurance and claims expenses could significantly reduce our earnings.

Our future insurance and claims expenses might exceed historical levels, which could reduce our earnings. If the number or severity of claims increases, our operating results could be adversely affected. We maintain insurance with licensed insurance companies. Our insurance and claims expense could increase when our current coverage expires. If these expenses increase, and we are unable to offset the increase with higher freight rates, our earnings could be materially and adversely affected.

Our success depends upon our ability to recruit and retain key personnel including Mode Sales Agents and IBOs.

Our success depends upon attracting and retaining the services of our management team, Mode Sales Agents and IBOs as well as our ability to attract and retain a sufficient number of other qualified personnel to run our business. There is substantial competition for qualified personnel in the transportation services industry. As all key personnel devote their full time to our business, the loss of any member of our management team, key Mode Sales Agents or IBOs or other key persons could have an adverse effect on us. We do not have written employment agreements with any of our executive officers and do not maintain key man insurance on any of our executive officers. Nearly all Mode Sales Agents and IBOs are under contract with Mode.

Our growth could be adversely affected if we are not able to identify, successfully acquire and integrate future acquisition prospects.

We believe that future acquisitions and/or the failure to make such acquisitions could significantly impact financial results. Financial results most likely to be impacted include, but are not limited to, revenue, gross margin, salaries and benefits, selling general and administrative expenses, depreciation and amortization, interest expense, net income and our debt level.

 

 

 

10


 

An economic downturn could materially adversely affect our business.

Our operations and performance depend significantly on economic conditions. Uncertainty about global economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on demand for transportation services. We are unable to predict the likely duration and severity of disruptions in the financial markets and the adverse global economic conditions, and if the current uncertainty continues or economic conditions further deteriorate, our business and results of operations could be materially and adversely affected. Other factors that could influence demand include fluctuations in fuel costs, labor costs, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. There could be a number of follow-on effects from a credit crisis on our business, including the insolvency of key transportation providers and the inability of our customers to obtain credit to finance development and/or manufacture products resulting in a decreased demand for transportation services. Our revenues and gross margins are dependent upon this demand, and if demand for transportation services declines, our revenues and gross margins could be adversely affected.

Although we believe we have adequate liquidity and capital resources to fund our operations internally, our inability to access the capital markets on favorable terms, or at all, may adversely affect our ability to engage in strategic transactions. The inability to obtain adequate financing from debt or capital sources could force us to self-fund strategic initiatives or even forgo certain opportunities, which in turn could potentially harm our performance.

Uncertainty about global economic conditions could also increase the volatility of our stock price.

We are exposed to credit risk and fluctuations in the market values of our investment portfolio.

Although we have not recognized any material losses on our cash and cash equivalents, future declines in their market values could have a material adverse effect on our financial condition and operating results. The value or liquidity of our cash and cash equivalents could decline, which could have a material adverse effect on our financial condition and operating results.

 

 

Item 1B.

UNRESOLVED STAFF COMMENTS

None.

Item 1C.EXECUTIVE OFFICERS OF THE REGISTRANT

In reliance on General Instruction G to Form 10-K, information on executive officers of the Registrant is included in this Part I. The table sets forth certain information as of February 1, 2015 with respect to each person who is an executive officer of the Company.

 

Name

  

Age

  

Position

 

 

 

David P. Yeager

  

61

  

Chairman of the Board of Directors and Chief Executive Officer

 

 

 

Mark A. Yeager

  

50

  

Vice Chairman of the Board of Directors, President and Chief Operating Officer

 

 

 

Terri A. Pizzuto

 

56

 

Executive Vice President, Chief Financial Officer and Treasurer

 

 

 

Daniel W. Burke

 

51

 

Chief Intermodal Officer

 

 

 

 

 

Christopher R. Kravas

 

49

 

Chief Marketing Officer

 

 

 

 

 

David L. Marsh

  

47

  

Chief Supply Chain Officer

 

 

 

James J. Damman

  

57

  

President – Mode Transportation

 

 

 

James B. Gaw

  

64

  

Executive Vice President-Sales

 

 

 

 

 

 

 

 

11


 

David P. Yeager has served as our Chairman of the Board since November 2008 and as Chief Executive Officer since March 1995. From March 1995 through November 2008, Mr. Yeager served as Vice Chairman of the Board. From October 1985 through December 1991, Mr. Yeager was President of Hub Chicago. From 1983 to October 1985, he served as Vice President, Marketing of Hub Chicago. Mr. Yeager founded the St. Louis Hub in 1980 and served as its President from 1980 to 1983. Mr. Yeager founded the Pittsburgh Hub in 1975 and served as its President from 1975 to 1977. Mr. Yeager received a Masters in Business Administration degree from the University of Chicago in 1987 and a Bachelor of Arts degree from the University of Dayton in 1975. Mr. Yeager is the brother of Mark A. Yeager.

Mark A. Yeager has served as Vice Chairman of the Board since November 2008. He became the President of the Company in January 2005 and has been our Chief Operating Officer and a Director since May 2004. From July 1999 to December 2004, Mr. Yeager was President-Field Operations. From November 1997 through June 1999, Mr. Yeager was Division President, Secretary and General Counsel. From March 1995 to November 1997, Mr. Yeager was Vice President, Secretary and General Counsel. From May 1992 to March 1995, Mr. Yeager served as our Vice President-Quality. Prior to joining us in 1992, Mr. Yeager was an associate at the law firm of Grippo & Elden from January 1991 through May 1992 and an associate at the law firm of Sidley & Austin from May 1989 through January 1991. Mr. Yeager received a Juris Doctor degree from Georgetown University in 1989 and a Bachelor of Arts degree from Indiana University in 1986. Mr. Yeager is the brother of David P. Yeager.

Terri A. Pizzuto has been our Executive Vice President, Chief Financial Officer and Treasurer since March 2007. Prior to this promotion, Ms. Pizzuto was Vice President of Finance from July 2002 through February 2007. Prior to joining us, Ms. Pizzuto was a partner in the Assurance and Business Advisory Group at Arthur Andersen LLP. Ms. Pizzuto worked for Arthur Andersen LLP for 22 years holding various positions and serving numerous transportation companies. Ms. Pizzuto received a Bachelor of Science in Accounting from the University of Illinois in 1981. Ms. Pizzuto is a CPA and a member of the American Institute of Certified Public Accountants.

Daniel W. Burke became our Chief Intermodal Officer in May of 2014 with responsibility for Hub Group’s intermodal operations and drayage subsidiary, Hub Group Trucking. Previously, Mr. Burke served as President of Hub Group Trucking and has been with the company since October 2010. Prior to joining Hub Group, Mr. Burke held various senior management positions at the Santa Fe Railway and the Burlington Northern Santa Fe primarily in the Intermodal and Automotive business units. Additionally, he was an equity owner in an intermodal services company that provided a variety of terminal services such as ramp operations, gate operations, container and chassis maintenance, crane maintenance and fleet maintenance. Dan earned a Bachelor of Science degree in Marketing from Eastern Illinois University.

Christopher R. Kravas became our Chief Marketing Officer in May of 2014 overseeing the company’s sales, corporate marketing and customer service organizations.  Previously, Mr. Kravas served as Chief Intermodal Officer since October 2007. Prior to this promotion, Mr. Kravas was Executive Vice President-Strategy and Yield Management from December 2003 through September 2007. From February 2002 through November 2003, Mr. Kravas served as President of Hub Highway Services. From February 2001 through December 2001, Mr. Kravas was Vice President-Enron Freight Markets. Mr. Kravas joined Enron after it acquired Webmodal, an intermodal business he founded. Mr. Kravas was Chief Executive Officer of Webmodal from July 1999 through February 2001. From 1989 through June 1999 Mr. Kravas worked for the Burlington Northern Santa Fe Railway in various positions in the intermodal business unit and finance department. Mr. Kravas received a Bachelor of Arts degree in 1987 from Indiana University and a Masters in Business Administration in 1994 from the University of Chicago.

David L. Marsh was named our Chief Supply Chain Officer in May 2014 with responsibility for Unyson Logistics and Hub Highway.  Previously, Mr. Marsh served as Chief Marketing Officer since October 2007. Prior to this promotion, Mr. Marsh was Executive Vice President-Highway from February 2004 through September 2007. Mr. Marsh previously served as President of Hub Ohio from January 2000 through January 2004. Mr. Marsh joined us in March 1991 and became General Manager with Hub Indianapolis in 1993, a position he held through December 1999. Prior to joining Hub Group, Mr. Marsh worked for Carolina Freight Corporation, a less than truckload carrier, starting in January 1990. Mr. Marsh received a Bachelor of Science degree in Marketing and Physical Distribution from Indiana University-Indianapolis in December 1989. Mr. Marsh has been a member of the American Society of Transportation and Logistics, the Indianapolis Traffic Club, the Council for Logistics Management and served as an advisor to the Indiana University-Indianapolis internship program for transportation and logistics. Mr. Marsh was honored as the Indiana Transportation Person of the Year in 1999.

 

 

 

12


 

James J. Damman assumed the role of President of Mode Transportation, following the acquisition of Exel Transportation Services from Deutsche Post DHL in April 2011. Prior to this transaction, Mr. Damman served as a President of Exel Transportation Services and President of Technology, Aerospace and Service Logistics Americas for DHL/Exel. Before Exel, he served as a President of Transentric LLC, a supply chain technology provider. Prior to this, Mr. Damman held senior executive roles in operations, marketing, sales and customer service with the Union Pacific Railroad. Mr. Damman has been in Transportation and Supply Chain Management since 1980, holding various executive and management positions. Mr. Damman received a Bachelor of Science degree in Business from Central Michigan University in 1980 and a Master of Business Administration from Southern Illinois University at Edwardsville in 1986.

James B. Gaw has been our Executive Vice President-Sales since February 2004. From December 1996 through January 2004, Mr. Gaw was President of Hub North Central, located in Milwaukee. From 1990 through late 1996, he was Vice President and General Manager of Hub Chicago. Mr. Gaw joined Hub Chicago as Sales Manager in 1988. Mr. Gaw’s entire career has been spent in the transportation industry, including 13 years of progressive leadership positions at Itofca, an intermodal marketing company, and Flex Trans. Mr. Gaw received a Bachelor of Science degree from Elmhurst College in 1973.

Directors of the Registrant

In addition to David P. Yeager and Mark A. Yeager, the following four individuals are also on our Board of Directors: Gary D. Eppen – currently retired and formerly the Ralph and Dorothy Keller Distinguished Service Professor of Operations Management and Deputy Dean for part-time Masters in Business Administration Programs at The University of Chicago Booth School of Business; Charles R. Reaves – Chief Executive Officer of Reaves Enterprises, Inc., a real estate development company, Martin P. Slark – Chief Executive Officer of Molex Incorporated, a manufacturer of electronic, electrical and fiber optic interconnection products and systems, and Jonathan P. Ward – Operating Partner at Kohlberg & Co., a leading U.S. private equity firm.

 

 

Item 2.

PROPERTIES

We directly, or indirectly through our subsidiaries, operate 36 offices throughout the United States, Canada and Mexico, including our headquarters in Oak Brook, Illinois and our Company-owned drayage operations located throughout the United States. Hub operates out of 35 of the 36 offices.  Mode has a company managed operation and corporate offices in Dallas, TX, a temperature protected services division operated out of our Oak Brook, IL headquarters and corporate offices in Memphis, TN. All of our office space except for our corporate headquarters is leased. Most office leases have initial terms of more than one year, and many include options to renew. While some of our leases expire in the near term, we do not believe that we will have difficulty in renewing them or in finding alternative office space. We believe that our offices are adequate for the purposes for which they are currently used.

 

 

Item  3.

LEGAL PROCEEDINGS

We are a party to litigation incident to our business, including claims for personal injury and/or property damage, bankruptcy preference claims, claims regarding freight lost or damaged in transit, improperly shipped or improperly billed. Some of the lawsuits to which we are party are covered by insurance and are being defended by our insurance carriers. Some of the lawsuits are not covered by insurance and we defend those ourselves. We do not believe that the outcome of this litigation will have a materially adverse effect on our financial position or results of operations. See Item 1 Business—Risk Management and Insurance and see Note 15 to the consolidated financial statements under “Legal Matters”.

 

 

Item  4.

MINE SAFETY DISCLOSURES

Not applicable

 

 

 

 

13


 

PART II

 

 

Item  5.

MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Class A Common Stock (“Class A Common Stock”) trades on the NASDAQ Global Select Market tier of the NASDAQ Stock Market under the symbol “HUBG.” There is no established trading market for shares of our Class B Common Stock (the “Class B Common Stock” together with the Class A Common Stock, the “Common Stock”). Set forth below are the high and low closing prices for shares of the Class A Common Stock for each full quarterly period in 2014 and 2013.

 

 

2014

 

 

2013

 

 

High

 

Low

 

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

$

43.09

 

$

38.17

 

 

$

41.18

 

$

33.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter

$

50.63

 

$

39.13

 

 

$

39.78

 

$

34.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter

$

51.47

 

$

39.14

 

 

$

40.67

 

$

35.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter

$

41.40

 

$

32.69

 

 

$

40.37

 

$

34.85

 

On February 18, 2015, there were approximately 413 stockholders of record of the Class A Common Stock and, in addition, there were an estimated 8,557 beneficial owners of the Class A Common Stock whose shares were held by brokers and other fiduciary institutions. On February 18, 2015, there were 10 holders of record of our Class B Common Stock.

We were incorporated in 1995 and have never paid cash dividends on either the Class A Common Stock or the Class B Common Stock. The declaration and payment of dividends are subject to the discretion of the Board of Directors. Any determination as to the payment of dividends will depend upon our results of operations, capital requirements and financial condition of the Company, and such other factors as the Board of Directors may deem relevant. Accordingly, there can be no assurance that the Board of Directors will declare or pay cash dividends on the shares of Common Stock in the future. Our certificate of incorporation requires that any cash dividends must be paid equally on each outstanding share of Class A Common Stock and Class B Common Stock. Our credit facility prohibits us from paying dividends on the Common Stock if there has been, or immediately following the payment of a dividend there would be, a default or an event of default under the credit facility. We are currently in compliance with the covenants contained in the credit facility.

See Note 16 to the consolidated financial statements for information on share repurchases.

14


 

Performance Graph

The following line graph compares the Company’s cumulative total stockholder return on its Class A Common Stock since December 31, 2009 with the cumulative total return of the Nasdaq Stock Market Index (NQUSBT) and the Nasdaq Trucking and Transportation Index (NQUSB27707). These comparisons assume the investment of $100 on December 31, 2009 in each index and in the Company’s Class A Common Stock and the reinvestment of dividends.

 

15


 

Item 6.

SELECTED FINANCIAL DATA

Selected Financial Data

(in thousands except per share data)

 

 

Years Ended December 31,

 

 

2014

 

 

2013

 

 

2012

 

 

2011 (1)

 

 

2010

 

Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

3,571,126

 

 

$

3,373,898

 

 

$

3,124,108

 

 

$

2,751,534

 

 

$

1,833,737

 

Gross margin

 

370,435

 

 

 

371,023

 

 

 

356,066

 

 

 

312,548

 

 

 

213,433

 

Operating income

 

83,877

 

 

 

113,747

 

 

 

112,360

 

 

 

94,459

 

 

 

69,882

 

Income from operations before taxes

 

81,867

 

 

 

112,555

 

 

 

111,257

 

 

 

94,297

 

 

 

70,093

 

Net income

 

51,558

 

 

 

69,110

 

 

 

67,953

 

 

 

58,178

 

 

 

43,458

 

Basic earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Income from operations

$

1.41

 

 

$

1.88

 

 

$

1.83

 

 

$

1.58

 

 

$

1.17

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Income from operations

$

1.40

 

 

$

1.87

 

 

$

1.83

 

 

$

1.57

 

 

$

1.16

 

 

 

As of December 31,

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

2010

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,212,127

 

 

$

1,047,943

 

 

$

919,853

 

 

$

842,684

 

 

$

629,407

 

Long-term debt, including capital lease

 

88,397

 

 

 

24,952

 

 

 

21,099

 

 

 

23,436

 

 

 

-

 

Stockholders' equity

 

600,784

 

 

 

561,527

 

 

 

500,897

 

 

 

438,865

 

 

 

376,300

 

 

(1)

Includes the results of operations of Mode Transportation, LLC from April 1, 2011, the date of its acquisition by Hub Group.

 

 

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

    

CONDITION AND RESULTS OF OPERATIONS

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 5 to the consolidated financial statements.

We are one of the largest intermodal marketing companies (“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.

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, efficiently using our dray network and reviewing and improving low margin loads.

16


 

Hub’s top 50 customers represent approximately 64% of the Hub segment revenue for the year ended December 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 233 agents, consisting of 103 sales/operating agents, known as Independent Business Owners (“IBOs”), who sell and operate the business throughout North America and 130 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 35% of the Mode segment revenue for the year ended December 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.

 

 

 

RESULTS OF OPERATIONS

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

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

 

 

Twelve Months

 

 

Twelve Months

 

 

Ended December 31, 2014

 

 

Ended December 31, 2013

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

Hub

 

Mode

 

Elims

 

Total

 

 

Hub

 

Mode

 

Elims

 

Total

 

Intermodal

$

1,815,842

 

$

466,859

 

$

(79,406

)

$

2,203,295

 

 

$

1,818,162

 

$

389,186

 

$

(46,401

)

$

2,160,947

 

Truck brokerage

 

338,590

 

 

335,587

 

 

(946

)

 

673,231

 

 

 

333,027

 

 

311,930

 

 

(1,453

)

 

643,504

 

Logistics

 

568,367

 

 

128,685

 

 

(2,452

)

 

694,600

 

 

 

448,574

 

 

122,043

 

 

(1,170

)

 

569,447

 

Total revenue

$

2,722,799

 

$

931,131

 

$

(82,804

)

$

3,571,126

 

 

$

2,599,763

 

$

823,159

 

$

(49,024

)

$

3,373,898

 

 

 

 

Revenue

Hub Group’s revenue increased 6% to $3.6 billion in 2014 from $3.4 billion in 2013.

The Hub segment revenue increased 5% to $2.7 billion. Hub segment intermodal revenue was flat at $1.8 billion. Price and mix combined were up but were offset by a 2% decline in loads. Hub segment truck brokerage revenue increased 2% to $339 million. Price, fuel and mix were up 12% offset by a volume decline of 10%.  Length of haul increased 7%. Hub segment logistics revenue increased 27% to $568 million related primarily to growth from existing customers.

Mode’s revenue increased 13% to $931.1 million in 2014 from $823.2 million in 2013. Mode’s intermodal revenue increased 20% primarily due to a 17% increase in volume. Mode’s truck brokerage revenue increased 8% due to truckload capacity and increased rates.  Mode’s logistic revenue increased 5% due to an increase in both loads and rates across multiple business lines.

17


 

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

 

 

Twelve Months

 

 

Twelve Months

 

 

Ended December 31, 2014

 

 

Ended December 31, 2013

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

Hub

 

Mode

 

Elims

 

Total

 

 

Hub

 

Mode

 

Elims

 

Total

 

Revenue

$

2,722,799

 

$

931,131

 

$

(82,804

)

$

3,571,126

 

 

$

2,599,763

 

$

823,159

 

$

(49,024

)

$

3,373,898

 

Transportation costs

 

2,461,144

 

 

822,351

 

 

(82,804

)

 

3,200,691

 

 

 

2,325,512

 

 

726,387

 

 

(49,024

)

 

3,002,875

 

Gross margin

 

261,655

 

 

108,780

 

 

-

 

 

370,435

 

 

 

274,251

 

 

96,772

 

 

-

 

 

371,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

122,097

 

 

14,383

 

 

-

 

 

136,480

 

 

 

120,478

 

 

14,863

 

 

-

 

 

135,341

 

Agent fees and commissions

 

45

 

 

61,996

 

 

-

 

 

62,041

 

 

 

1,372

 

 

54,417

 

 

-

 

 

55,789

 

General and administrative

 

51,108

 

 

6,906

 

 

-

 

 

58,014

 

 

 

50,484

 

 

6,288

 

 

-

 

 

56,772

 

Depreciation and amortization

 

6,238

 

 

1,561

 

 

-

 

 

7,799

 

 

 

4,326

 

 

2,144

 

 

-

 

 

6,470

 

Driver settlements and related costs

 

10,343

 

 

-

 

 

-

 

 

10,343

 

 

 

-

 

 

-

 

 

-

 

 

-

 

Impairment of software

 

11,881

 

 

-

 

 

-

 

 

11,881

 

 

 

-

 

 

-

 

 

-

 

 

-

 

Impairment of trade name

 

-

 

 

-

 

 

-

 

 

-

 

 

 

2,904

 

 

-

 

 

-

 

 

2,904

 

Total costs and expenses

 

201,712

 

 

84,846

 

 

-

 

 

286,558

 

 

 

179,564

 

 

77,712

 

 

-

 

 

257,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

$

59,943

 

$

23,934

 

$

-

 

$

83,877

 

 

$

94,687

 

$

19,060

 

$

-

 

$

113,747

 

 

 

Transportation Costs

 

Hub Group’s transportation costs increased 6.6% to $3.2 billion in 2014 from $3.0 billion in 2013.  Transportation costs in 2014 consisted of purchased transportation costs of $2.8 billion and equipment and driver related costs of $425.9 million compared to 2013 costs of purchased transportation of $2.6 billion and equipment and driver related costs of $380.6 million.  

 

 

The Hub segment transportation costs increased 5.8% to $2.5 billion in 2014 from $2.3 billion in 2013.  Hub segment transportation costs in 2014 consisted of $2.04 billion in purchased transportation costs up from $1.95 billion in 2013.  The 4.6% increase was due to higher rail and truck costs due to price increases and higher volumes.  Equipment and driver related costs increased 12.1% to $421.7 million in 2014 from $376.3 million in 2013 due primarily to an increase in equipment depreciation and lease costs due to an increase in our tractor and container fleet size and higher driver and maintenance costs due to our change in driver model in California and a larger tractor fleet.

 

The Mode segment transportation costs increased 13.2% to $822.4 million in 2014 from $726.4 million in 2013.  Mode segment transportation costs are primarily purchased transportation costs which increased due to higher volume and slight price increases.  

 

Gross Margin

Hub Group’s gross margin decreased 0.2% to $370.4 million in 2014 from $371.0 million in 2013. Hub Group’s gross margin as a percentage of sales decreased to 10.4% in 2014 from 11.0% in 2013.

 

The Hub segment gross margin decreased 4.6% to $261.7 million.  Hub’s $12.6 million gross margin decrease came primarily from intermodal.  Intermodal margin declined primarily due to higher transportation costs related to a challenging intermodal operating environment.  The first quarter weather related gross margin 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 accident costs.  The second quarter was impacted by the unfavorable timing of cost increases and worse equipment utilization year over year due to rail service issues.  Rail service continued to deteriorate year over year in the third quarter, further impacting equipment utilization.  Slower train speeds and late trains hurt our fleet utilization by 1.4 days and caused us to incur higher repositioning and accessorial costs as well as more empty miles.  Gross margin was also negatively impacted in the third quarter due to increased costs associated with chassis shortages and insufficient gate reservations.  Higher drayage costs also negatively impacted intermodal margin in the third quarter as a result of our business model change in California from independent contractors to employee drivers.  In the fourth quarter, gross margin continued to be impacted by the same challenges we experienced in the third quarter. Intermodal margin declined in the fourth quarter due to rail service issues and higher drayage costs.  Poor rail execution hurt our fleet utilization by 1.6 days, and caused us to incur more empty miles and increased our accessorial costs.  Truck

18


 

brokerage margin declined because of lower value added services. Logistics margin helped offset a small portion of these declines with an increase in margin due to growth with existing customers.  As a percentage of Hub segment revenue, gross margin decreased to 9.6% in 2014 from 10.5% in 2013.  This decrease is due to lower yield across all business lines.

Mode’s gross margin increased 12.4% to $108.8 million in 2014 from $96.8 million in 2013 due to growth in intermodal and highway.  Mode’s gross margin as a percentage of revenue decreased to 11.7% in 2014 from 11.8% in 2013.

CONSOLIDATED OPERATING EXPENSES

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

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended

 

 

December 31,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Revenue

 

100.0%

 

 

 

100.0%

 

 

 

 

 

 

 

 

 

Transportation costs

 

89.6

 

 

 

89.0

 

 

 

 

 

 

 

 

 

Gross margin

 

10.4

 

 

 

11.0

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

     Salaries and benefits

 

3.8

 

 

 

4.0

 

     Agent fees and commissions

 

1.8

 

 

 

1.6

 

     General and administrative

 

1.6

 

 

 

1.7

 

     Depreciation and amortization

 

0.2

 

 

 

0.2

 

     Driver settlements and related costs

 

0.3

 

 

 

0.0

 

     Impairment of software

 

0.3

 

 

 

0.0

 

     Impairment of trade name

 

0.0

 

 

 

0.1

 

Total costs and expenses

 

8.0

 

 

 

7.6

 

 

 

 

 

 

 

 

 

Operating income

 

2.4

 

 

 

3.4

 

Salaries and Benefits

Hub Group’s salaries and benefits increased to $136.5 million in 2014 from $135.3 million in 2013. As a percentage of revenue, Hub Group’s salaries and benefits decreased to 3.8% in 2014 from 4.0% in 2013.

The Hub segment salaries and benefits increase of $1.6 million was due primarily to increases in salaries of $4.8 million, employee benefits of $1.0 million and compensation related to restricted stock awards of $0.3 million partially offset by decreases in bonuses of $3.7 million and commissions of $0.9 million.

 

Mode’s salaries and benefits expense decreased to $14.4 million in 2014 from $14.9 million in 2013. The decrease was due primarily to decreases in bonuses of $0.5 million, and salaries of $0.1 million partially offset by increases in compensation related to restricted stock awards of $0.2 million.  

Hub’s headcount as of December 31, 2014 and 2013 was 1,380 and 1,334, respectively, which excludes drivers, as driver costs are included in transportation costs. As of December 31, 2014 and 2013, Mode had 125 and 126 employees, respectively.

Agent Fees and Commissions

Hub Group’s agent fees and commissions increased to $62.0 million in 2014 from $55.8 million in 2013. As a percentage of revenue, these expenses increased to 1.8% in 2014 from 1.6% in 2013. The increase in the expense and the decrease in the percentage of revenue was primarily related to Mode’s increase in gross margin.

The Mode segment agent fees and commissions expense increase of $7.6 million was primarily due to the increase in gross margin.

 

19


 

General and Administrative

Hub Group’s general and administrative expenses increased to $58.0 million in 2014 from $56.8 million in 2013. As a percentage of revenue, these expenses decreased to 1.6% in 2014 from 1.7% in 2013.

The Hub segment increase of $0.6 million was due primarily to increases in travel and entertainment expense of $0.7 million, consultant expense of $0.6 million, repairs and maintenance expense of $0.6 million, outside sales commissions of $0.5 million, general insurance expense of $0.4 million, temporary labor expense of $0.2 million, training expense of $0.2 million and office expense of $0.1 million.  These increases were partially offset by decreases in rent of $1.9 million due to the move to our new corporate headquarters in 2013, a decrease in loss on sale of fixed assets in 2014 of $0.3 million, decrease in bad debt expense of $0.3 million and other taxes of $0.2 million.

 

Mode’s general and administrative expenses increased to $6.9 million in 2014 from $6.3 million in 2013.  The increase was primarily due to a lower gain on the sale of equipment in 2014 as compared to 2013 of $0.5 million and increases in repairs and maintenance of $0.3 and consultant expense of $0.2 million.  These increases were partially offset by a decrease in bad debt expense of $0.2 million and also a decrease in travel and entertainment expense of $0.1 million.

 

Depreciation and Amortization

Hub Group’s depreciation and amortization increased to $7.8 million in 2014 from $6.5 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 $6.2 million in 2014 from $4.3 million in 2013.  This increase was related primarily to depreciation for the new corporate headquarters and more depreciation related to computer software.

 

Mode’s depreciation expense decreased to $1.6 million in 2014 from $2.1 million in 2013.   The decrease in expense was primarily related to less depreciation related to computer software.

 

Driver Settlements and Related Costs

 

Driver settlements and related costs include $9.3 million in settlements for individual drivers and $1.0 million of related legal, communication and implementation costs.  See Note 15 of the notes to unaudited consolidated financial statements for more details.

 

Impairment of Software

 

In 2014, the Hub segment recorded a charge of $11.9 million related to the write-off of software development costs as a result of our decision to terminate a long-term technology project.  See Note 4 of the notes to consolidated financial statements for more details.

 

Impairment of Trade Name

In 2013, the Hub segment incurred a $2.9 million expense associated with changing the Comtrak Logistics trade name to Hub Group Trucking. See Note 6 to the consolidated financial statements for information on this impairment charge.

 

Other Income (Expense)

 

Hub Group’s interest expense increased to $1.8 million in 2014 from $1.2 million in 2013 due primarily to the increased interest expense related to higher debt.  

 

Provision for Income Taxes

The provision for income taxes decreased to $30.3 million in 2014 from $43.4 million in 2013 primarily due to the decrease in our pretax income.  Our effective tax rate was 37.0% in 2014 and 38.6% in 2013.  The rate decrease was primarily due to the effect of state tax apportionment changes on our deferred tax assets and liabilities.

Net Income

Net income decreased to $51.6 million in 2014 from $69.1 million in 2013 due primarily to the driver settlements and related costs and the software impairment charge.

 

20


 

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

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

 

 

Twelve Months

 

 

Twelve Months

 

 

Ended December 31, 2013

 

 

Ended December 31, 2012

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

Hub

 

Mode

 

Elims

 

Total

 

 

Hub

 

Mode

 

Elims

 

Total

 

Intermodal

$

1,818,162

 

$

389,186

 

$

(46,401

)

$

2,160,947

 

 

$

1,731,487

 

$

354,662

 

$

(43,863

)

$

2,042,286

 

Truck brokerage

 

333,027

 

 

311,930

 

 

(1,453

)

 

643,504

 

 

 

335,213

 

 

318,848

 

 

(2,945

)

 

651,116

 

Logistics

 

448,574

 

 

122,043

 

 

(1,170

)

 

569,447

 

 

 

325,589

 

 

106,418

 

 

(1,301

)

 

430,706

 

Total revenue

$

2,599,763

 

$

823,159

 

$

(49,024

)

$

3,373,898

 

 

$

2,392,289

 

$

779,928

 

$

(48,109

)

$

3,124,108

 

Revenue

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

The Hub segment revenue increased 8.7% to $2.6 billion. Hub segment intermodal revenue increased 5% to $1.8 billion due to a 4% increase in loads. Price was up, but was offset by the impact of lower fuel surcharges. Hub segment truck brokerage revenue decreased slightly to $333 million due primarily to a 5% increase in loads partially offset by unfavorable mix, which was primarily due to a 6% decrease in length of haul. Hub segment logistics revenue increased 38% to $449 million related primarily to growth from new customers that were onboarded in the first half of 2013.

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

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

 

 

Twelve Months

 

 

Twelve Months

 

 

Ended December 31, 2013

 

 

Ended December  31, 2012

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

Hub

 

Mode

 

Elims

 

Total

 

 

Hub

 

Mode

 

Elims

 

Total

 

Revenue

$

2,599,763

 

$

823,159

 

$

(49,024

)

$

3,373,898

 

 

$

2,392,289

 

$

779,928

 

$

(48,109

)

$

3,124,108

 

Transportation costs

 

2,325,512

 

 

726,387

 

 

(49,024

)

 

3,002,875

 

 

 

2,128,942

 

 

687,209

 

 

(48,109

)

 

2,768,042

 

Gross margin

 

274,251

 

 

96,772

 

 

-

 

 

371,023

 

 

 

263,347

 

 

92,719

 

 

-

 

 

356,066

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

120,478

 

 

14,863

 

 

-

 

 

135,341

 

 

 

113,855

 

 

15,288

 

 

-

 

 

129,143

 

Agent fees and commissions

 

1,372

 

 

54,417

 

 

-

 

 

55,789

 

 

 

1,900

 

 

53,212

 

 

-

 

 

55,112

 

General and administrative

 

50,484

 

 

6,288

 

 

-

 

 

56,772

 

 

 

45,411

 

 

7,421

 

 

-

 

 

52,832

 

Depreciation and amortization

 

4,326

 

 

2,144

 

 

-

 

 

6,470

 

 

 

4,448

 

 

2,171

 

 

-

 

 

6,619

 

Impairment of trade name

 

2,904

 

 

-

 

 

-

 

 

2,904

 

 

 

-

 

 

-

 

 

-

 

 

-

 

Total costs and expenses

 

179,564

 

 

77,712

 

 

-

 

 

257,276

 

 

 

165,614

 

 

78,092

 

 

-

 

 

243,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

$

94,687

 

$

19,060

 

$

-

 

$

113,747

 

 

$

97,733

 

$

14,627

 

$

-

 

$

112,360

 

 

 

Transportation Costs

 

Hub Group’s transportation costs increased 8.5% to $3.0 billion in 2013 from $2.8 billion in 2012.  Transportation costs in 2013 consisted of purchased transportation costs of $2.6 billion and equipment and driver related costs of $380.6 million compared to 2012 costs of purchased transportation of $2.4 billion and equipment and driver related costs of $330.1 million.  

 

The Hub segment transportation costs increased 9.2% to $2.3 billion in 2013 from $2.1 billion in 2012.  Hub segment transportation costs in 2013 consisted of $1.95 billion in purchased transportation costs up from $1.80 billion in 2012.  The 8.0% increase was due to higher rail and truck costs due to price increases and higher volumes.  Equipment and driver related costs increased 16.2% to $376.3 million in 2013 from $324.0 million in 2012 due primarily to an increase of 317 drivers.

21


 

 

The Mode segment transportation costs increased 5.7% to $726.4 million in 2013 from $687.2 million in 2012.  Mode segment transportation costs are primarily purchased transportation costs which increased due to higher volume and slight price increases.

Gross Margin

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

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

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

CONSOLIDATED OPERATING EXPENSES

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

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended

 

 

December 31,

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

Revenue

 

100.0%

 

 

 

100.0%

 

 

 

 

 

 

 

 

 

Transportation costs

 

89.0

 

 

 

88.6

 

 

 

 

 

 

 

 

 

Gross margin

 

11.0

 

 

 

11.4

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

     Salaries and benefits

 

4.0

 

 

 

4.1

 

     Agent fees and commissions

 

1.6

 

 

 

1.8

 

     General and administrative

 

1.7

 

 

 

1.7

 

     Depreciation and amortization

 

0.2

 

 

 

0.2

 

     Impairment of trade name

 

0.1

 

 

-

 

Total costs and expenses

 

7.6

 

 

 

7.8

 

 

 

 

 

 

 

 

 

Operating income

 

3.4

 

 

 

3.6

 

Salaries and Benefits

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

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

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

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

22


 

Agent Fees and Commissions

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

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

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

General and Administrative

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

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

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

Depreciation and Amortization

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

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

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

Impairment of Trade Name

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

Other Income (Expense)

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

Provision for Income Taxes

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

Net Income

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

Earnings Per Common Share

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

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

LIQUIDITY AND CAPITAL RESOURCES

During 2014, we funded operations, capital expenditures, capital leases, purchase of treasury stock 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 year ended December 31, 2014 was approximately $98.5 million, which resulted primarily from income of $51.6 million adjusted for non-cash charges of $73.9 million partially offset by the change in operating assets and liabilities of $27.0 million. The $18.9 million decrease in cash flow provided by operating activities for 2014 compared to 2013 was primarily attributed to the decrease in net income of $17.6 million, a larger use of cash for prepaid taxes offset by higher add backs of non-cash items such as the impairment of software and higher depreciation expense.

Cash provided by operating activities was approximately $117.4 million and $92.9 million for the years ended December 31, 2013 and 2012, respectively.  The cash provided by operating activities in 2013 resulted primarily from income of $69.1 million adjusted for non-cash charges of $48.1 million and the change in operating assets and liabilities of $0.2 million.  The $24.5 million increase in cash flow provided by operating activities for 2013 compared to 2012 was primarily attributed to the timing of payments to our transportation providers which resulted in a $20.2 million increase in cash flow.

Net cash used in investing activities for the year ended December 31, 2014 was $118.6 million which includes proceeds from the sale of equipment of $0.6 million. Capital expenditures of $119.2 million included tractor purchases of $59 million, container purchases of $39 million, payments for our new headquarters in Oak Brook of $8 million and the remainder was related primarily to technology.  Capital expenditures increased by approximately $8 million in 2014 as compared to 2013. The 2014 increase was due to additional tractor purchases of $44 million and technology and other purchases of $2 million partially offset by approximately $20 million less of container purchases and $18 million less spent on construction costs for our new headquarters.

 

Net cash used in investing activities for the year ended December 31, 2013 was $109.1 million as compared to $56.4 million in 2012.  The increase of $53 million in 2013 was due primarily to the purchase of containers and the construction of our new headquarters.

We have not finalized our capital expenditures for 2015. Estimated capital expenditures for 2015 are estimated to be between $60 million and $80 million relating primarily to the purchase of tractors, containers and technology, including satellite tracking units. We have not made a decision on our new container order.

 

Net cash provided by financing activities for the year ended December 31, 2014 was $60.8 million.  We used $18.0 million to purchase treasury stock, $7.3 million for repayment of long term debt, $3.2 million of cash for stock tendered for payments of withholding taxes and $2.5 million for capital lease payments. These payments were offset by proceeds from the issuance of debt of $91.1 million and excess tax benefits from share-based compensation of $0.7 million as a financing cash in-flow.  The $70.9 million increase in cash provided by financing activities for 2014 compared to 2013 was primarily due to the increase of $81.9 million in debt issuance which was partially offset by the $6.4 million increase in debt payments.  In January 2015, we entered into agreements to finance tractors for $2.2 million using secured debt with a five year term at an interest rate of 2.26% and containers for $7.0 million using secured debt with a five year term at an interest rate of 1.72%.

 

The net cash used in financing activities for the year ended December 31, 2013 was $10.1 million. We used $13.8 million to purchase treasury stock, $2.6 million of cash for stock tendered for payments of withholding taxes, $2.3 million for capital lease payments, and $0.9 million for repayment of long term debt. These payments were offset by proceeds from the issuance of debt of $9.1 million, excess tax benefits from share-based compensation of $0.3 million and proceeds from stock options exercised of $0.1 million as a financing cash in-flow.  The $4.7 million increase in cash used by financing activities for 2013 compared to 2012 was primarily due to the $9.1 million in new debt issuance which was slightly offset by the $2.6 million increase in the purchase of treasury stock.

Cash paid for income taxes of $20.2 million was less than our income tax expense of $30.3 million primarily due to timing differences between our tax returns and financial statements.  The two largest timing differences in 2014 relate to depreciation for tractors and containers and the amortization of purchased intangibles.  In 2015, we expect our cash paid for taxes to be closer to our income tax expense due to the likely elimination of federal bonus depreciation for fixed asset purchases.

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See Note 10 of the consolidated financial statements for details related to interest rates and commitment fees.

We have standby letters of credit that expire in 2015. As of December 31, 2014, our letters of credit were $6.1 million.

Our unused and available borrowings under our bank revolving line of credit were $43.9 million as of December 31, 2014 and $44.8 million as of December 31, 2013. We believe our line of credit is adequate to meet our cash needs.  We were in compliance with our debt covenants as of December 31, 2014.

CONTRACTUAL OBLIGATIONS

Aggregated information about our obligations and commitments to make future contractual payments, such as debt and lease agreements, and contingent commitments as of December 31, 2014 is presented in the following table (in thousands).

Future Payments Due: 

 

 

 

 

 

Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leases and

 

 

Long

 

 

 

 

 

 

Capital

 

 

Other

 

 

Term

 

 

 

 

 

 

Lease

 

 

Commitments

 

 

Debt

 

 

Total

 

2015

$

3,179

 

 

$

9,686

 

 

$

19,619

 

 

$

32,484

 

2016

 

3,188

 

 

 

7,476

 

 

 

20,023

 

 

 

30,687

 

2017

 

3,179

 

 

 

5,676

 

 

 

20,209

 

 

 

29,064

 

2018

 

3,179

 

 

 

3,926

 

 

 

19,668

 

 

 

26,773

 

2019

 

3,179

 

 

 

2,820

 

 

 

12,560

 

 

 

18,559

 

2020 and thereafter

 

5,037

 

 

 

7,361

 

 

 

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