10-K 1 hubg-10k_20171231.htm 10-K hubg-10k_20171231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended December 31, 2017

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      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  

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      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      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.  

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

 

Accelerated Filer

 

Non-Accelerated Filer

 

Smaller Reporting Company

Emerging Growth Company

 

 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

 

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

The aggregate market value of the Registrant’s voting stock held by non-affiliates on June 30, 2017, based upon the last reported sale price on that date on the NASDAQ Global Select Market of $38.35 per share, was $1,237,047,973.

On February 16, 2018, the Registrant had 33,718,246 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 22, 2018 (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

This annual report contains, and our officers and representatives may from time to time make, 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 neither historical facts nor assurance of future performance.  Instead, they are based on our beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions.  Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control.  Our actual results and financial condition may differ materially from those indicated in the forward-looking statements.  All forward-looking statements made by us in this annual report are based upon information available to us on the date of this report and speak only as of the date in which they are made. Except as required by law, we expressly disclaim any obligations to publicly update any forward-looking statements whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.  Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward looking statements, in addition to those described in detail under Items 1A “Risk Factors,” include the following:

 

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

 

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

 

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;

 

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

 

increases in costs related to any reclassification or change in our treatment of drivers or owner-operators due to regulatory, judicial and legal changes;

 

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

 

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;

 

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

 

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

 

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

 

significant increases to employee health insurance costs;

 

loss of several of our largest customers;

 

awards received during annual customer bids not materializing;

 

inability to recruit or loss of Mode Transportation, LLC (“Mode LLC”) sales/operating agents known as Independent Business Owners (“IBOs”) and sales-only agents;

 

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

 

changes in insurance costs and claims expense;

 

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

 

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

 

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

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

 

Item  1.

BUSINESS

General

Hub Group, Inc. (the “Company”, “we”, “us” or “our”) is a Delaware corporation that was incorporated on March 8, 1995. We are a world class provider of multimodal logistics solutions. We offer comprehensive intermodal, truck brokerage, dedicated and logistics services. Since our founding in 1971, we have grown to become one of the largest intermodal and truck brokerage providers in the United States. 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.

Hub Group Trucking, Inc. (“HGT”), a wholly owned subsidiary of Hub Group, Inc., acquired all of the outstanding equity interests of Estenson Logistics, LLC (“Estenson”) on July 1, 2017 (the “Estenson Acquisition”).  Estenson is now our wholly owned subsidiary, operating under the name Hub Group Dedicated (“HGD”).  As a result of the Estenson Acquisition, HGT acquired substantially all of the assets of Estenson, which include tractors and trailers, as well as assumed certain liabilities, including equipment debt.  HGT and HGD are included in the Hub segment.

Mode Transportation, LLC (“Mode LLC”) is our wholly-owned subsidiary acquired in 2011, and operates independently. Mode LLC has approximately 173 agents, consisting of 99 IBOs, who sell services and operate the business throughout North America and 74 sales only agents. Mode also has a temperature protected services division operated out of our Oak Brook, IL headquarters and corporate offices in Memphis, TN and Dallas, TX.

Mode LLC 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.

We report two distinct business segments. The first segment is “Mode,” which includes the Mode LLC business only. Mode LLC markets and operates its freight transportation services primarily through its network of IBOs who enter into contracts with Mode LLC. The second segment is “Hub,” which is all business other than Mode. Hub operates through a network of operating centers throughout the United States, Canada and Mexico. Hub services a large and diversified customer base in a broad range of industries, including consumer products, retail and durable goods.  Hub includes our dedicated service offering and both segments offer intermodal, truck brokerage and logistics services. “Hub Group” includes both segments.

Services Provided

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

Intermodal. As an intermodal provider, 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.

As of December 31, 2017, we owned a total of approximately 32,000 53-foot private containers and we had exclusive access to approximately 2,500 rail-owned containers for our dedicated use on the Union Pacific (“UP”) and the Norfolk Southern (“NS”) rails. 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 that we do not own or have exclusive access to and keep them within our network.

During 2017, HGT accounted for approximately 54% of Hub’s drayage needs by assisting us in providing reliable, cost effective intermodal services to our customers. As of December 31, 2017 HGT had terminals in Atlanta, Birmingham, Charlotte, Chattanooga, Chicago, Dallas, Harrisburg, Huntsville, Indianapolis, Jacksonville, Kalamazoo, Kansas City, Milwaukee, Memphis, Nashville, Newark, Philadelphia, Portland (OR), Salt Lake City, Seattle, St. Louis, Stockton and Wilmington (IL) metro areas. As of December 31, 2017, HGT leased or owned approximately 900 tractors and 300 trailers, employed approximately 1,000 drivers and contracted with approximately 1,500 owner-operators.

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Dedicated: Our dedicated service line, HGD, contracts with customers looking to outsource a portion of their transportation needs. We offer a dedicated fleet of equipment and drivers to each customer, as well as the management and infrastructure to operate according to the customer’s high service expectations. Our dedicated service line currently operates a fleet of approximately 1,100 tractors and 4,700 trailers at 125 locations throughout the United States.  As of December 31, 2017, HGD employed 1,294 drivers.

Truck Brokerage (Highway Services). We are one of the largest truck brokers in the United States, providing customers with a highway service 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.

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 for customers. Unyson Logistics 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 services through its main operating location in St. Louis with additional support locations in the Boston, Chicago, Cleveland and Minneapolis metro areas. In addition, certain Mode LLC agents also provide logistics services. Our multi-modal transportation capabilities for both the Hub and Mode segments include small parcel, heavyweight, expedited, less-than-truckload, truckload, intermodal, railcar and international shipping.

Hub and Mode LLC Networks

Hub’s entire network is interactively connected through Hub’s proprietary Network Management System and Mode LLC’s network is connected through its third party transportation management system. This enables us to arrange for the movement of 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 LLC IBO to place an order. The operating center/IBO determines the price, obtains the necessary intermodal equipment, arranges for the equipment 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 the 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 LLC IBO to obtain a price quote for a particular freight movement. The customer then provides appropriate shipping information to the 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/IBOs. Although under no obligation to do so, those operating centers/IBOs may then attempt to secure additional freight for the carrier.

Marketing and Customers

As one of the world’s leading transportation management companies, Hub Group is committed to providing multi-modal solutions throughout North America, including intermodal, dedicated, truck brokerage and logistics services.  We have transformed our organization from a traditional IMC into a multi-modal solutions provider. This change has revolutionized our offerings and the way we service our customers.  We look at our customers’ entire network to provide innovative multi-modal solutions to drive savings, improve service and offer full visibility. 

After 47 years in business, we continue to live by the simple mantra that "good" is not good enough. To ensure we grow and improve, we focus intently on our customers, listening to their needs, developing comprehensive transportation solutions and delivering superior service. We invest in our people, equipment and technology to maintain our competitive edge in order to be the best transportation provider for our customers.

We face a continued need to help our customers meet consumer demands of having products and services through all buying channels. We have been delivering to an already leaner supply chain, with our customers reporting an increase in speed and improved visibility. Our satellite tracking units help to ensure our customers have the capacity they need.  Our state-of-the-art technology helps to maintain our high levels of service while providing 24/7 visibility into any shipment; and our people have the skills, training and information to quickly respond to our customers' changing supply chain network. Supporting every customer is a dedicated team of

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professionals ready to service any and all of our customers' needs. We call this exceptional service approach the "One Hub" experience.

The majority of our business is in the retail, consumer products, durable goods and automotive verticals.  No one customer represented more than 10% of our total revenue in 2017 and 2016 in either reporting segment.

Information Technology Systems

Based on the technology requirements for our business strategy and to keep pace with changing technologies and customer demand, we are making investments in both our back-office technology such as our ERP system and emerging technology.  The investments to enhance our existing technology include implementing new order management, transportation management and financial management processes and systems.  In addition, we anticipate making investments in artificial intelligence and automation technology to further drive innovation and efficiency throughout the organization and to support enhanced service to our customers.

In 2017, we launched Hub Group Connect, our new digital platform for customers.  This product was developed using open source technology and is based on a responsive design that allows our customers to use any type of device to connect with our services. Hub Group Connect allows all of our customers to interact with their order throughout its lifecycle. During 2018 we will continue to provide additional features to Hub Group Connect which will create value for our customers.

In 2017, we also introduced our first completely mobile solution for company and owner operator drivers.  We deployed this differentiating application to drivers on tablets. The features of the application and tablet combination also allowed us to replace a legacy paper scanning solution used to submit order paperwork.  This application also allows a driver to find a Hub Group container based on the location information provided via our GPS technology installed on our Hub Group containers.  We will continue to deliver new technology capabilities in 2018 leveraging our cloud services for immediate deployment to all devices.   Our Cloud First technology strategy is providing the expected benefit at the rate and pace at which we can deliver new and innovative technology solutions, while lowering the cost to serve our customers and maintain our high level of service quality.

In addition, in 2017, we implemented solutions for several new Unyson customers using Oracle Transportation Management (OTM).  These customers benefited from our ability to create sophisticated solutions that included multi-leg order optimization and iterative consolidation as well as customer unique web-based dashboards that provide insights to supply chain efficiency and vendor compliance.  

Mode LLC utilizes a dynamic transportation management platform that integrates best in class third party technologies to manage its business.  This platform includes an execution system that provides multi-modal solutions, visibility to status of shipments, facilitation of customer billing, and a robust portal that allows exchange of information about loads, capacity, and event status information between transportation providers and our customers.  Additionally Mode LLC’s platform consists of components that allow for optimization of our customer’s order process, management of our diverse carrier base, and robust analytics and business intelligence solutions that allow our customers to better understand outcomes and opportunities within their supply chain.  This platform provides a robust and scalable technological solution that can meet the needs of a growing transportation network.

Relationship with Railroads

A key element of our business strategy is to strengthen our close working relationships with the major intermodal railroads in North America. 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

  

 

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 apply to specific customers in specified shipping lanes for a specific period of time, usually up to 12 months.

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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 HGT. 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 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 relationships. 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 general liability insurance, truckman’s auto liability insurance and cargo insurance. Railroads, which are self-insured, provide limited cargo protection. 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. We also carry general liability insurance with a companion umbrella policy on this general liability insurance.

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

Government Regulation

The company and several of our subsidiaries, including HGD and Mode 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 LLC 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 LLC 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 have maintained it since then. C-TPAT is a voluntary supply chain security program led by 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 intermodal providers, 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, may have substantially greater financial and other resources than we do.

General

Employees: As of December 31, 2017, Hub Group had 4,377 employees. Hub Group had 2,030 employees excluding drivers at December 31, 2017. Hub had 1,914 employees excluding drivers and Mode LLC had 116 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, 2017, Mode LLC had 99 IBOs and 74 sales-only agents. Nearly all of the sales-only agents and IBOs are under written contracts with Mode LLC.

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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 we depend on railroads for our operations, our operating results and financial condition are likely to be adversely affected by any increase in rates, reduction or deterioration in rail service or change in the railroads’ reliance on us to market their intermodal transportation services.

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. 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.

To date, the railroads have chosen to rely on us 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 have a material adverse effect on our results of operations and financial condition.

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 continues to see technology as key to driving internal efficiencies as well as providing additional capabilities to customers and carriers. In addition, Hub Group’s systems are critical to our operations and our ability to compete effectively as an intermodal provider, dedicated and drayage carrier, truck broker and logistics provider. We expect our customers to continue to demand more sophisticated technology-driven solutions from their suppliers and we must enhance or replace our information technology systems in response. This may involve significant research and development costs, implementation costs and potential challenges. To keep pace with changing technologies and customer demand, we are making investments in our technology, as well as investing in emerging technology to further drive innovation and efficiency. The back-office investments include implementing new order management, transportation management and financial management processes and systems.  In a transformation of this size and scope we must mitigate risk by engaging external expertise and hiring internal experts. If we fail to successfully implement critical technology, if it does not provide the anticipated benefits or it does not meet market demands, we may be placed at a competitive disadvantage and could lose customers, materially adversely impacting our financial condition and results of operations. 

Technology and new market entrants may also disrupt the way we and our competitors operate.  As technology improves and new companies enter the freight brokerage market, our customers may be able to find alternatives to our services for matching shipments with available freight hauling capacity.  We must continue to develop innovative emerging technologies to source, track and provide visibility to capacity while exploiting machine learning and artificial intelligence to further improve customer outcomes.

Our information technology systems are subject to breaches in data security and other risks and the inability to use our information technology systems could materially adversely affect our business.

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Our information technology systems are dependent upon global communications and cloud service providers, as well as their respective vendors, all of whom have at some point experienced significant system failures and outages in the past. These providers’ systems are susceptible to outages from fire, floods, power loss, telecommunications failures, break-ins and similar events. Our infrastructure may also be vulnerable to computer viruses, malicious intrusion, random attacks and similar disruptions from unauthorized tampering with our computer systems. Failure to prevent or mitigate data loss or system intrusions from cyber-attacks or other security breaches, system failures or outages could expose us, our vendors, customers or third parties to a risk of loss or misuse of such information, which may adversely affect our operating results, result in litigation or otherwise harm our reputation or business.  Likewise, data privacy breaches by employees and others who access our systems may pose a risk that sensitive customer, vendor or employee data may be exposed to unauthorized persons or to the public, materially adversely impacting our customer service, employee, customer and vendor relationships and our reputation.  

The Company is continuously working to install new, and upgrade its existing, information technology systems and provide employee awareness training around phishing, malware, and other cyber risks to ensure that the Company is protected against cyber risks and security breaches. 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 result in a loss of customers or a reduction in demand for our services, or otherwise have a material adverse effect on our business.

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

Our 20 largest customers accounted for approximately 39% of our total revenue in 2017, 38% in 2016 and 35% in 2015. While our dedicated and logistics businesses may involve long-term contracts, those contracts may contain cancellation clauses, and there is no assurance that our current customers will continue to utilize our services or continue at the same levels.  A reduction in or termination of our services by one or more of our largest customers could have a material adverse effect on our revenue and business.

Our ability to expand our business or maintain our profitability may be adversely affected by a shortage of drivers and capacity.

We derive significant revenue from our truck brokerage, dedicated and logistics services. Driver shortages and reliance on third-party companies for the operation of our intermodal, truck brokerage, dedicated and logistics services could adversely affect our profitability and limit our ability to expand our business or retain customers. Most drayage and certain less than truckload companies operate relatively small fleets and have limited access to capital for fleet expansion. Particularly during periods of economic expansion, it may be difficult for HGD, HGT and third-party trucking companies to expand their fleets due to chronic driver shortages. Driver shortages may require increases to drivers’ compensation that we may be unable to pass on to our customers, thereby increasing our cost of providing services.  Truckload capacity could be tighter as a result of the ELD mandate that was effective in December 2017.  

Our obligation to pay our carriers is not contingent upon receipt of payment from our clients and we extend credit to certain clients as part of our business model.

In most cases, we take full risk of credit loss for the transportation services we procure from carriers.  Our obligation to pay our carriers is not contingent upon receipt of payment from our clients.  If any of our key clients fail to pay for our services, our profitability would be negatively impacted.

Because our business is concentrated on intermodal services, 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 57% of our revenue from our intermodal services in 2017, 61% in 2016 and 62% in 2015. As a result, any decrease in demand for intermodal transportation services compared to other transportation services could have a material adverse effect on our results of operations.

We operate in a highly competitive industry and our business may suffer if we are unable to adequately address potential downward pricing pressures and other competitive factors.

There are numerous competitive factors which could impair our ability to maintain our current profitability. We compete with many other transportation and logistics service providers, some of which have greater capital resources than we do. Some of our competitors periodically reduce their prices to gain business, and some of our competitors may have lower cost structures than we do, which may limit our ability to maintain or increase prices to preserve market share. Additionally, our customers may decide to in-source the services we currently provide for them using their own assets.

7


An economic downturn and cyclical fluctuations in the economy could materially adversely affect our business.

Our operations and performance depend significantly on economic conditions. Uncertainty about United States and 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 adverse economic conditions, and 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. We have little or no control over any of these factors or their effects on the transportation industry.  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.  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 use a significant number of independent contractors, such as owner operators, in our businesses.  Legislative, judicial and regulatory authorities may continue to take actions or render decisions that could affect 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 LLC IBO’s and sales agents and HGT owner-operators, consistent with longstanding industry practices. Legislative, judicial, and regulatory (including tax) authorities have taken actions and rendered 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 14 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 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.

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 89% of our consolidated revenue in 2017, 87% in 2016 and 88% in 2015. Because transportation costs represent such a significant portion of our costs, any increases in the operating costs of railroads, trucking companies or drayage companies can be expected to result in higher freight rates.  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.  The inability to pass cost increases to our customers is likely to have a significant effect on our gross margin and operating income.  

Insurance and claims expenses could significantly reduce our earnings.

We maintain insurance with licensed insurance companies.  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 and the cost to renew our insurance could increase when our current coverage expires. If these expenses increase, and we are unable to offset the increase with higher freight rates to our customers, our earnings could be materially and adversely affected.

We are partially self-insured for certain losses related to employee medical coverage. Our self-insurance reserves may not be adequate to cover our medical claim liabilities.

We are partially self-insured for certain losses related to employee medical coverage, excluding employees covered by health maintenance organizations. We generally have an individual stop loss deductible per enrollee unless specific exposures are separately insured. We accrue a contingent liability based upon examination of historical trends, historical actuarial analysis, our

8


claims experience, total plan enrollment (including employee contributions), population demographics, and other various estimates. Self-insurance reserves, net income, and cash flows could be materially affected if future claims differ significantly from our historical trends and assumptions.

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, trailers and cross docks 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. As an asset-light freight transportation management company, 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 with their own assets. This could have a material adverse effect on our business, results of operations and financial position.

Losing a member of our management team or one or more key Mode LLC sales only agents or IBOs could have an adverse effect on revenue and net income.

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 LLC sales only 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 LLC sales-only agents and IBOs are under written contract with Mode LLC.  Mode’s success depends upon attracting and retaining the services of Mode LLC sales-only agents and IBOs, as well as our ability to attract and retain a sufficient number of other qualified personnel to run our business. Certain Mode LLC IBOs and sales-only agents represent a large portion of Mode’s overall revenues. If one or more large IBOs or sales-only agents were to terminate their relationship with Mode LLC, there could be an adverse effect on Mode’s business and results of operations.

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

We believe that future acquisitions, the failure to make such acquisitions or the failure to integrate such acquired business could significantly impact financial results.  We cannot guarantee that we will be able to identify suitable acquisitions or execute acquisitions on commercially acceptable terms.  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.

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

There may be 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.  Work stoppages occurring among owner-operators in a specific market have increased our operating costs periodically in the past. 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 port workers, railroad workers, truckers or draymen could adversely affect our business and results of operations.

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

The Company and various subsidiaries, including HGD and Mode LLC, are licensed by the Department of Transportation (“DOT”) as motor carrier freight brokers. The DOT prescribes qualifications for acting in this capacity, including surety bond requirements. Our HGT and HGD subsidiaries are licensed by the DOT to act as motor carriers.  The transportation industry is subject to DOT regulations regarding, among other things, driver breaks, “restart” rules, and the use of Electronic Logging Devices (“ELD’s”) 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 are audited periodically by the DOT to ensure that we are in compliance with various safety, hours-of-service, and other rules and regulations. If we were found to be out of compliance, the DOT could levy fines and restrict or otherwise impact our operations. To date, compliance with these regulations has not had a material adverse effect on our results of operations or financial condition. We may also become subject to new or more restrictive regulations relating to carbon emissions under climate change legislation or limits on vehicle weight and size. Future laws and regulations may be more stringent and require changes in

9


operating practices, influence the demand for transportation services or increase the cost of providing transportation services, any of which could materially 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. We are also unable to predict how the change in administration will affect government regulation of the transportation industry.  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.

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. The Company is also subject to certain Environmental Protection Agency (“EPA”) and California Air Resources Board (“CARB”) regulations.  We may become subject to enforcement actions, new or more restrictive regulations, or differing interpretations of existing regulations, which may increase the cost of providing transportation services or adversely affect our results of operations.  

Any attempt by the current administration to impose new tariffs or withdraw from or materially modify NAFTA and certain other international trade arrangements could adversely affect our business, financial condition and results of operations.

We arrange for the movement of freight into and out of every major city in Mexico and Canada, and we import 53-foot intermodal containers manufactured in China. If the current administration takes action to withdraw from or materially modify the North American Free Trade Agreement (“NAFTA”) or certain other international trade arrangements, or to impose tariffs on imports of foreign-manufactured goods into the United States, our business, financial condition and results of operations could be adversely affected.  Additionally, the imposition of substantial tariffs on foreign-made intermodal containers or other products we utilize may increase the cost of providing transportation services or adversely affect our results of operations.

Changes in immigration laws could increase the costs of doing business or otherwise disrupt our operations.

We have hired individuals, including Information Technology (“IT”) employees, from outside the United States.  We have employee drivers and owner-operator drivers who are immigrants to the U.S.  We engage third party consultants, including for various IT projects, who may utilize personnel from outside the United States.  If immigration laws are changed or if new more restrictive government regulations are enacted or increased, our access to qualified and skilled personnel may be limited, the costs of doing business may increase and our operations may be disrupted.

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.

We face litigation risks that could have a material adverse effect on the operation of our business.

We face litigation risks regarding a variety of issues, including without limitation, accidents involving our trucks and employees, alleged violations of federal and state labor and employment laws, securities laws, environmental liability and other matters. These proceedings may be time-consuming, expensive and disruptive to normal business operations. The defense of such lawsuits could result in significant expense and the diversion of our management’s time and attention from the operation of our business. In recent years, several insurance companies have stopped offering coverage to trucking companies as a result of increases in the severity of automobile liability claims and higher costs of settlements and verdicts. This trend could adversely affect our ability to obtain suitable insurance coverage or could significantly increase our cost for obtaining such coverage, which would adversely affect our financial condition, results of operations, liquidity and cash flows. Costs we incur to defend or to satisfy a judgment or settlement of these claims may not be covered by insurance or could exceed the amount of that coverage or increase our insurance costs and could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

Item 1B.

UNRESOLVED STAFF COMMENTS

None.

10


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, 2018 with respect to each person who is an executive officer of the Company.

 

Name

  

Age

  

Position

 

 

 

David P. Yeager

  

64

  

Chairman of the Board of Directors and Chief Executive Officer

 

 

 

Donald G. Maltby

  

63

  

President, Chief Operating Officer and Director

 

 

 

Phillip D. Yeager

 

30

 

Chief Commercial Officer

 

 

 

 

 

Terri A. Pizzuto

 

59

 

Executive Vice President, Chief Financial Officer and Treasurer

 

 

 

David L. Marsh

  

50

  

Executive Vice President, Chief Highway Solutions Officer

 

 

 

 

 

Vava R. Dimond

  

51

  

Executive Vice President, Chief Information Officer

 

 

 

 

 

James J. Damman

  

60

  

Executive Vice President, President of Mode Transportation

 

 

 

John C. Vesco

  

55

  

Executive Vice President, President of Hub Group Trucking

 

 

 

Brian D. Alexander

  

38

  

Executive Vice President, Unyson Logistics

 

 

 

Vincent C. Paperiello

  

47

  

Executive Vice President, Pricing and Yield Management

 

 

 

 

 

Douglas G. Beck

  

51

  

Executive Vice President, Secretary and General Counsel

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 father of Phillip D. Yeager.

Donald G. Maltby was appointed a Director of the Company in May 2016 and President and Chief Operating Officer in September 2015.  Mr. Maltby served as Chief Supply Chain Officer of Hub Supply Chain Solutions from January 2011 to May 2014.  From February 2004 to December 2010, Mr. Maltby served as Executive Vice President-Logistics Services.  Mr. Maltby previously served as President of Hub Online, our e-commerce division, from February 2000 through January 2004.  Mr. Maltby also served as President of Hub Cleveland from July 1990 through January 2000 and from April 2002 to January 2004.  Prior to joining Hub Group, Mr. Maltby served as President of Lyons Transportation, a wholly owned subsidiary of Sherwin Williams Company, from 1988 to 1990.  In his career at Sherwin Williams, which began in 1981 and continued until he joined us in 1990, Mr. Maltby held a variety of management positions including Vice-President of Marketing and Sales for its Transportation Division. Mr. Maltby has been in the transportation and logistics industry since 1976, holding various executive and management positions.  Mr. Maltby received a Masters in Business Administration from Baldwin Wallace College in 1982 and a Bachelor of Science degree from the State University of New York in 1976.

Phillip D. Yeager was named Chief Commercial Officer in January 2018 after serving as Executive Vice President, Account Management and Intermodal Operations since January 2016.  Mr. Yeager previously served as Vice President of Account Management and Business Development from February 2014 to January 2016. Mr. Yeager is responsible for managing Hub Group’s overall customer experience, including customer service, intermodal operations and rail relationships. Mr. Yeager joined Hub Group in 2011 as the Director of Strategy and Acquisitions to focus on strategic initiatives and acquisitions throughout the company and lead the integration of Mode Transportation. Prior to joining Hub Group, Mr. Yeager served as Assistant Vice President of Commercial Banking at BMO Harris Bank, and as an investment banking analyst for Lazard Freres & Co. Mr. Yeager earned his Bachelor of Arts degree from Trinity College in Hartford, Connecticut, and a Master of Business Administration from the University of Chicago Booth School of Business. Mr. Yeager is the son 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

11


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.

David L. Marsh was named Executive Vice President in May 2016 and Chief Highway Solutions Officer in September 2015 after having served as Chief Supply Chain Officer since May 2014.  Previously, Mr. Marsh served as Chief Marketing Officer from October 2007 to May 2014. 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 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.

Vava R. Dimond was named an Executive Vice President of the Company in May 2016 and Chief Information Officer in April 2015 after serving as the Interim Chief Information Officer since September 2014. Ms. Dimond began her career with Hub Group in June 2013 as the Vice President of Business Engineering, responsible for overseeing Hub Group’s Business Intelligence, Business Engineering and Program Management projects and processes. Previously, Ms. Dimond spent 16 years with Schneider National and held several leadership positions within IT, most recently serving as Vice President of Technology Services. Ms. Dimond earned her Bachelor of Science degree in Economics from South Dakota State University in 1991.  Ms. Dimond is the spouse of Mr. John C. Vesco.

James J. Damman was appointed Executive Vice President in May 2016 after he assumed the role of President of Mode LLC, 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.

John C. Vesco was named Executive Vice President, President of Hub Group Trucking in January 2016. Mr. Vesco has led Hub Group Trucking’s operations as its President since January 2015, after serving as Executive Vice President of Hub Group Trucking from March 2012 to December 2014. Prior to joining Hub Group, Mr. Vesco held several management positions with Schneider National, most recently as Vice President and General Manager of Schneider Logistics. Mr. Vesco earned a Bachelor of Arts degree in Finance and Business Administration from Walsh University and a Master of Business Administration degree from Silver Lake College.  Mr. Vesco is the spouse of Ms. Vava R. Dimond.

Brian D. Alexander was named Executive Vice President of Unyson Logistics in September 2015.  Before being named Executive Vice President, Mr. Alexander served as Vice President of Operations of Unyson Logistics from December 2010 to September 2015 and was responsible for the operational execution and excellence for Fortune 500 manufacturing, retail and consumer packaged goods clients. Prior to that, Mr. Alexander was Unyson’s Senior Director of Strategic Accounts, where he had a ten-year history of managing and directing continuous improvement initiatives for key accounts. Mr. Alexander earned a Bachelor’s degree in Business Administration from Marquette University and Master of Business Administration degree from Cardinal Stritch University.

Vincent C. Paperiello was named Executive Vice President, Pricing and Yield Management in February 2016 after serving as Vice President, Pricing and Yield Management from March 2014 to February 2016. Since joining Hub Group in 1993, Mr. Paperiello has held a variety of operational, logistics management and business intelligence positions with the Company. In his current role, he is responsible for intermodal and regional trucking pricing strategy and execution, along with rail relations. Mr. Paperiello received a Bachelor of Arts degree in History from Western Illinois University and a Master of Business Administration – Finance degree from DePaul University, graduating with honors both times.

Douglas G. Beck was named Executive Vice President, Secretary and General Counsel in May 2016, after serving as Vice President, Secretary and General Counsel since July 2015, and Interim General Counsel since January 2015. In his role, Mr. Beck is responsible for managing the Legal, Human Resources and Compliance departments. Mr. Beck began his career with Hub Group in June 2011 as Assistant General Counsel. Prior to joining Hub Group, Mr. Beck was a Senior Attorney with Alberto-Culver Company from 2007 to 2011. Mr. Beck previously held counsel positions at Navistar International Corporation, Allegiance Healthcare Corporation and Seyfarth Shaw. Mr. Beck earned a Bachelor of Arts degree from the University of Illinois in 1987 graduating summa cum laude and received his Juris Doctor from Northwestern University School of Law in 1992.

12


Directors of the Registrant

In addition to David P. Yeager and Donald G. Maltby, the following six 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; James C. Kenny – Director of Kenny Industries, LLC, an asset holding company, and Director of Kerry Group, PLC, a company traded on the London and Dublin stock exchanges; Peter B. McNitt – Vice Chair of BMO Harris Bank, a United States bank; 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

As of December 31, 2017, we directly, or indirectly through our subsidiaries, operated 33 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.  We have corporate offices in Mesa, AZ, Memphis, TN and Dallas, TX and Mode has a temperature protected services division operated out of our Oak Brook, IL headquarters. 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, and 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 14 to the consolidated financial statements under “Legal Matters” for a detailed discussion of our ongoing legal proceedings.

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 2017 and 2016.

 

 

2017

 

 

2016

 

 

High

 

Low

 

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

$

52.50

 

$

41.55

 

 

$

40.96

 

$

28.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter

$

47.80

 

$

33.45

 

 

$

41.35

 

$

36.69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter

$

43.85

 

$

33.17

 

 

$

43.51

 

$

37.64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter

$

48.90

 

$

37.90

 

 

$

46.15

 

$

34.35

 

On February 16, 2018, there were approximately 496 stockholders of record of the Class A Common Stock and, in addition, there were an estimated 7,508 beneficial owners of the Class A Common Stock whose shares were held by brokers and other fiduciary institutions. On February 16, 2018, 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 15 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, 2012 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, 2012 in each index and in the Company’s Class A Common Stock and the reinvestment of dividends.

 

 

 

 

Item 6.

SELECTED FINANCIAL DATA

Selected Financial Data

(in thousands except per share data)

 

 

Years Ended December 31,

 

 

2017 (1)

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

4,034,897

 

 

$

3,572,790

 

 

$

3,525,595

 

 

$

3,571,126

 

 

$

3,373,898

 

Gross margin

 

457,517

 

 

 

454,785

 

 

 

412,695

 

 

 

370,435

 

 

 

371,023

 

Operating income

 

96,551

 

 

 

123,834

 

 

 

117,030

 

 

 

83,877

 

 

 

113,747

 

Income before provision for income taxes

 

90,937

 

 

 

121,421

 

 

 

111,582

 

 

 

81,867

 

 

 

112,555

 

Net income

 

135,153

 

 

 

74,805

 

 

 

70,949

 

 

 

51,558

 

 

 

69,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

4.07

 

 

$

2.21

 

 

$

1.98

 

 

$

1.41

 

 

$

1.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

$

4.05

 

 

$

2.20

 

 

$

1.97

 

 

$

1.40

 

 

$

1.87

 

15


 

 

(1)

Includes the results of operations for HGD from July 1, 2017, the date of its acquisition by Hub Group.

 

 

As of December 31,

 

 

2017 (1)

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,670,941

 

 

$

1,360,259

 

 

$

1,301,146

 

 

$

1,212,127

 

 

$

1,047,943

 

Long-term debt, including capital lease

 

222,504

 

 

 

126,105

 

 

 

114,194

 

 

 

88,397

 

 

 

24,952

 

Stockholders' equity

 

769,872

 

 

 

628,179

 

 

 

647,840

 

 

 

600,784

 

 

 

561,227

 

 

 

 

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

Hub Group, Inc. (the “Company”, “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 refers to the consolidated results for the company, including both the Mode and Hub segments. For the segment financial results, refer to Note 5 to the consolidated financial statements.

We are a world class provider of multimodal transportation solutions.  We offer intermodal, truck brokerage, dedicated 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 new dedicated service line, HGD, contracts with customers looking to outsource a portion of their transportation needs. We offer a dedicated fleet of equipment and drivers, as well as the management and infrastructure to operate according to the customers’ high service expectations.

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 account management group works with pricing, sales and operations to enhance Hub’s customer margins. We are working on margin enhancement projects including using the most cost effective drayage carriers, improving utilization, improving our accessorial management, reducing empty miles, improving network balance and routinely reviewing and improving low margin loads.

Hub’s top 50 customers represent approximately 66% of the Hub segment revenue for the year ended December 31, 2017. We use various performance indicators to manage our business. We closely monitor margin and gains and losses for our top 50 customers. We also evaluate on-time performance, customer service, cost per load and daily sales outstanding by customer account. Vendor cost changes and vendor service issues are also monitored closely.

Mode has approximately 173 agents, consisting of 99 sales/operating agents, known as Independent Business Owners (“IBOs”), who sell and operate the business throughout North America, and 74 sales only agents. Mode also has a temperature protected services division operated out of our Oak Brook, IL headquarters and corporate offices in Memphis, TN and Dallas, TX. Mode’s top 20 customers represent approximately 39% of the Mode segment revenue for the year ended December 31, 2017. 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.

16


RESULTS OF OPERATIONS

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

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

 

 

Twelve Months

 

 

Twelve Months

 

 

Ended December 31, 2017

 

 

Ended December 31, 2016

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

Hub

 

Mode

 

Elims

 

Total

 

 

Hub

 

Mode

 

Elims

 

Total

 

Intermodal

$

1,852,884

 

$

496,733

 

$

(56,587

)

$

2,293,030

 

 

$

1,785,865

 

$

486,758

 

$

(81,556

)

$

2,191,067

 

Truck brokerage

 

483,955

 

 

340,330

 

 

(1,990

)

 

822,295

 

 

 

391,901

 

 

308,055

 

 

(1,456

)

 

698,500

 

Logistics

 

655,543

 

 

192,097

 

 

(43,061

)

 

804,579

 

 

 

556,775

 

 

153,922

 

 

(27,474

)

 

683,223

 

Dedicated

 

115,012

 

 

-

 

 

(19

)

 

114,993

 

 

 

-

 

 

-

 

 

-

 

 

-

 

Total revenue

$

3,107,394

 

$

1,029,160

 

$

(101,657

)

$

4,034,897

 

 

$

2,734,541

 

$

948,735

 

$

(110,486

)

$

3,572,790

 

 

Revenue

Hub Group’s revenue increased 12.9% to $4.0 billion in 2017 from $3.6 billion in 2016.

The Hub segment revenue increased 13.6% to $3.1 billion. Intermodal revenue increased 3.8% to $1.9 billion primarily due to higher fuel revenue, 1.1% higher volume and favorable mix, partially offset by a decrease in customer pricing.  Truck brokerage revenue increased 23.5% to $484.0 million due to an 8.8% volume increase as well as a 14.7% increase in fuel, mix and price combined.  Logistics revenue increased 17.7% to $655.5 million related primarily to new customers on-boarded during the year.  Dedicated revenue was $115.0 million from the date of acquisition to December 31, 2017.  

Mode’s revenue increased 8.5% to $1,029.2 million in 2017 from $948.7 million in 2016.  Mode intermodal revenue increased 2.0%, truck brokerage revenue increased 10.5% and logistics revenue increased 24.8%.

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

 

 

Twelve Months

 

 

Twelve Months

 

 

Ended December 31, 2017

 

 

Ended December 31, 2016

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

Hub

 

Mode

 

Elims

 

Total

 

 

Hub

 

Mode

 

Elims

 

Total

 

Revenue

$

3,107,394

 

$

1,029,160

 

$

(101,657

)

$

4,034,897

 

 

$

2,734,541

 

$

948,735

 

$

(110,486

)

$

3,572,790

 

Transportation costs

 

2,771,291

 

 

907,746

 

 

(101,657

)

 

3,577,380

 

 

 

2,404,946

 

 

823,545

 

 

(110,486

)

 

3,118,005

 

Gross margin

 

336,103

 

 

121,414

 

 

-

 

 

457,517

 

 

 

329,595

 

 

125,190

 

 

-

 

 

454,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

174,573

 

 

13,816

 

 

-

 

 

188,389

 

 

 

165,136

 

 

15,323

 

 

-

 

 

180,459

 

Agent fees and commissions

 

58

 

 

74,024

 

 

-

 

 

74,082

 

 

 

66

 

 

72,830

 

 

-

 

 

72,896

 

General and administrative

 

77,085

 

 

8,097

 

 

-

 

 

85,182

 

 

 

60,811

 

 

7,819

 

 

-

 

 

68,630

 

Depreciation and amortization

 

12,139

 

 

1,174

 

 

-

 

 

13,313

 

 

 

7,698

 

 

1,268

 

 

-

 

 

8,966

 

Total costs and expenses

 

263,855

 

 

97,111

 

 

-

 

 

360,966

 

 

 

233,711

 

 

97,240

 

 

-

 

 

330,951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

$

72,248

 

$

24,303

 

$

-

 

$

96,551

 

 

$

95,884

 

$

27,950

 

$

-

 

$

123,834

 

 

Transportation Costs

Hub Group’s transportation costs increased to $3.6 billion in 2017 from $3.1 billion in 2016.  Transportation costs in 2017 consisted of purchased transportation costs of $3.1 billion and equipment and driver related costs of $449.8 million compared to 2016 which consisted of purchased transportation costs of $2.8 billion and equipment and driver related costs of $360.8 million.

The Hub segment transportation costs increased to $2.8 billion in 2017 from $2.4 billion in 2016.  Hub segment transportation costs in 2017 consisted of $2.3 billion in purchased transportation costs up from $2.0 billion in 2016. The 13.5% increase was primarily due to an increase in rail and fuel costs and higher volumes.  Equipment and driver related costs increased 24.9% to $446.5 million in 2017 from $357.3 million in 2016 due primarily to the equipment and driver related costs of HGD.

17


The Mode segment transportation costs increased 10.2% to $907.7 million in 2017 from $823.5 million in 2016. Mode segment transportation costs are primarily purchased transportation costs which increased due primarily to increased business in logistics, an increase in rail and fuel costs and higher volume in truck brokerage.

Gross Margin

Hub Group’s gross margin increased 0.6% to $457.5 million in 2017 from $454.8 million in 2016. Hub Group’s gross margin as a percentage of revenue decreased to 11.3% in 2017 from 12.7% in 2016.

The Hub segment gross margin increased 2.0% to $336.1 million.  Hub’s $6.5 million gross margin increase resulted from the addition of HGD and growth in truck brokerage margin, partially offset by decreases in intermodal and logistics margin.  Truck brokerage gross margin increased due to changes in customer mix. Intermodal gross margin decreased primarily because of lower customer prices than last year and rail cost increases partially offset by slightly improved volume.  Logistics gross margin decreased due to tighter truck capacity that resulted in higher purchased transportation costs and changes in customer mix.

As a percentage of Hub segment revenue, Hub segment gross margin decreased to 10.8% in 2017 from 12.1% in 2016.  Intermodal gross margin as a percentage of sales decreased 170 basis points because of lower customer prices than last year and rail cost increases.  Truck brokerage gross margin as a percentage of sales decreased 170 basis points due to lower customer contract rates, increased costs, and a change in customer mix.  Logistics gross margin as a percentage of sales decreased 190 basis points due to changes in customer mix and start-up costs associated with new customer on-boardings.  The addition of HGD partially offset these declines.  

Mode’s gross margin decreased 3.0% to $121.4 million in 2017 from $125.2 million in 2016 due primarily to decreases in intermodal and truck brokerage partially offset by an increase in logistics margin.  Mode’s gross margin as a percentage of revenue decreased to 11.8% in 2017 from 13.2% in 2016.

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,

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

Revenue

100.0%

 

 

 

100.0%

 

 

 

 

 

 

 

 

 

Transportation costs

 

88.7

 

 

 

87.3

 

 

 

 

 

 

 

 

 

Gross margin

 

11.3

 

 

 

12.7

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

     Salaries and benefits

 

4.7

 

 

 

5.1

 

     Agent fees and commissions

 

1.8

 

 

 

2.0

 

     General and administrative

 

2.1

 

 

 

1.9

 

     Depreciation and amortization

 

0.3

 

 

 

0.2

 

Total costs and expenses

 

8.9

 

 

 

9.2

 

 

 

 

 

 

 

 

 

Operating income

 

2.4

 

 

 

3.5

 

 

Salaries and Benefits

Hub Group’s salaries and benefits increased  to $188.4 million in 2017 from $180.5 million in 2016. As a percentage of revenue, Hub Group’s salaries and benefits decreased to 4.7% in 2017 from 5.1% in 2016.

The Hub segment salaries and benefits increase of $9.4 million was due primarily to the acquisition of HGD.  In addition, increases in salaries expense of $9.0 million, related to employee raises and higher severance expense of $3.1 million, compensation related to restricted stock awards of $1.3 million and an increase in employee benefits expense of $1.0 million, which were offset by decreases in employee bonus expense of $14.3 million, payroll taxes of $0.5 million and sales commissions of $0.3 million.

Mode’s salaries and benefits expense decreased to $13.8 million in 2017 from $15.3 million in 2016. The decrease was due primarily to decreases of $1.0 million related to employee bonus expense and $0.5 million related to salaries expense, employee benefits expense and payroll taxes.

18


Hub’s headcount as of December 31, 2017 and 2016 was 1,914 and 1,657, respectively, which excludes drivers, as driver costs are included in transportation costs. The increase in Hub’s headcount is due to the acquisition of HGD.  As of December 31, 2017 and 2016, Mode had 116 and 127 employees, respectively.

Agent Fees and Commissions

Hub Group’s agent fees and commissions increased to $74.1 million in 2017 from $72.9 million in 2016. As a percentage of revenue, these expenses decreased to 1.8% in 2017 from 2.0% in 2016.  The $1.2 million increase was primarily related to Mode’s conversion of the company managed operation to an IBO location in January 2017.  

General and Administrative

Hub Group’s general and administrative expenses increased to $85.2 million in 2017 from $68.6 million in 2016. As a percentage of revenue, these expenses increased to 2.1% in 2017 from 1.9% in 2016.

The Hub segment increase of $16.3 million in general and administrative expense was due primarily to the acquisition of HGD and increases in IT consulting and professional service expense of $4.0 million, expenses related to due diligence and acquisition costs of $1.7 million, increases in temporary labor expense of $1.1 million, increased IT maintenance expense of $0.9 million, a change in the gain/loss on sale of assets of $0.9 million, expenses related to a network optimization study of $0.6 million in 2017, increases in rent expense of $0.6 million, equipment lease expense of $0.3 million, and bad debt expense of $0.2 million, partially offset by decreases in outside sales commissions of $0.4 million and meals and entertainment of $0.2 million.

Mode’s general and administrative expenses increased to $8.1 million in 2017 from $7.8 million in 2016.  The increase was primarily due to increases in bad debt expense of $0.4 million, IT maintenance expense of $0.3 million and gross receipts taxes of $0.2 million, partially offset by a decrease in an intercompany charge from Hub of $0.6 million.

Depreciation and Amortization

Hub Group’s depreciation and amortization increased to $13.3 million in 2017 from $9.0 million in 2016. This expense as a percentage of revenue increased to 0.3% in 2017 from 0.2% in 2016.

The Hub segment’s depreciation and amortization expense increased to $12.1 million in 2017 from $7.7 million in 2016.  This increase was related primarily to the amortization of the HGD trade name and customer relationships as well as depreciation of additional computer software.

Mode’s depreciation and amortization expense decreased to $1.2 million in 2017 from $1.3 million in 2016.  

Other Income (Expense)

Hub Group’s other expense increased to $5.6 million in 2017 from $2.4 million in 2016 due primarily to the additional interest costs related to the acquisition of HGD, an increase in interest expense related to our equipment debt and less foreign currency translation gains in 2017.

Provision for Income Taxes

The provision for income taxes decreased to a benefit of $44.2 million in 2017 from an expense $46.6 million in 2016 due primarily to the favorable impact on income tax expense from the revaluation of deferred tax liabilities as a result of the enactment of the U.S. Tax Cuts and Jobs Act (the “Act”).  Our effective tax rate was a benefit of 48.6% in 2017 and an expense of 38.4% in 2016. 

Net Income

Net income increased to $135.2 million in 2017 from $74.8 million in 2016 due primarily to the revaluation of deferred tax liabilities in connection with the Act, resulting in an income tax benefit in 2017 and increased margin, partially offset by higher operating expenses.

 

 

19


Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

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

 

 

Twelve Months

 

 

Twelve Months

 

 

Ended December 31, 2016

 

 

Ended December 31, 2015

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

Hub

 

Mode

 

Elims

 

Total

 

 

Hub

 

Mode

 

Elims

 

Total

 

Intermodal

$

1,785,865

 

$

486,758

 

$

(81,556

)

$

2,191,067

 

 

$

1,792,046

 

$

483,910

 

$

(78,688

)

$

2,197,268

 

Truck brokerage

 

391,901

 

 

308,055

 

 

(1,456

)

 

698,500

 

 

 

355,402

 

 

314,498

 

 

(1,908

)

 

667,992

 

Logistics

 

556,775

 

 

153,922

 

 

(27,474

)

 

683,223

 

 

 

531,870

 

 

130,253

 

 

(1,788

)

 

660,335

 

Total revenue

$

2,734,541

 

$

948,735

 

$

(110,486

)

$

3,572,790

 

 

$

2,679,318

 

$

928,661

 

$

(82,384

)

$

3,525,595

 

 

Revenue

Hub Group’s revenue increased 1.3% to $3.6 billion in 2016 from $3.5 billion in 2015 due primarily to higher volume across our business lines.

The Hub segment revenue increased 2.1% to $2.7 billion. Hub segment intermodal revenue was flat at $1.8 billion. Intermodal volume increased 2% and price and mix combined were also up.  These increases were offset by a decline in fuel revenue. Hub segment truck brokerage revenue increased 10% to $392 million. Truck brokerage handled 14% more loads, but fuel, mix and price combined were down 4%.  Hub segment logistics revenue increased 5% to $557 million related primarily to growth with new customers.

Mode’s revenue increased 2.2% to $948.7 million in 2016 from $928.7 million in 2015.  Mode’s intermodal revenue increased 1% primarily due to a 2% increase in volume which was partially offset by a decline in fuel revenue. Mode’s truck brokerage revenue decreased 2% and Mode’s logistics revenue increased 18%.

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

 

 

Twelve Months

 

 

Twelve Months

 

 

Ended December 31, 2016

 

 

Ended December  31, 2015

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Inter-

 

Hub

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

 

 

 

 

 

 

Segment

 

Group

 

 

Hub

 

Mode

 

Elims

 

Total

 

 

Hub

 

Mode

 

Elims

 

Total

 

Revenue

$

2,734,541

 

$

948,735

 

$

(110,486

)

$

3,572,790

 

 

$

2,679,318

 

$

928,661

 

$

(82,384

)

$

3,525,595

 

Transportation costs

 

2,404,946

 

 

823,545

 

 

(110,486

)

 

3,118,005

 

 

 

2,385,197

 

 

810,087

 

 

(82,384

)

 

3,112,900

 

Gross margin

 

329,595

 

 

125,190

 

 

-

 

 

454,785

 

 

 

294,121

 

 

118,574

 

 

-

 

 

412,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

165,136

 

 

15,323

 

 

-

 

 

180,459

 

 

 

143,993

 

 

14,945

 

 

-

 

 

158,938

 

Agent fees and commissions

 

66

 

 

72,830

 

 

-

 

 

72,896

 

 

 

56

 

 

68,668

 

 

-

 

 

68,724

 

General and administrative

 

60,811

 

 

7,819

 

 

-

 

 

68,630

 

 

 

53,023

 

 

6,992

 

 

-

 

 

60,015

 

Depreciation and amortization

 

7,698

 

 

1,268

 

 

-

 

 

8,966

 

 

 

6,688

 

 

1,300

 

 

-

 

 

7,988

 

Total costs and expenses

 

233,711

 

 

97,240

 

 

-

 

 

330,951

 

 

 

203,760

 

 

91,905

 

 

-

 

 

295,665

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

$

95,884

 

$

27,950

 

$

-

 

$

123,834

 

 

$

90,361

 

$

26,669

 

$

-

 

$

117,030

 

 

Transportation Costs

Hub Group’s transportation costs remained consistent at $3.1 billion in both 2016 and 2015.  Transportation costs in 2016 consisted of purchased transportation costs of $2.8 billion and equipment and driver related costs of $360.8 million compared to 2015 which consisted of purchased transportation costs of $2.7 billion and equipment and driver related costs of $386.4 million.  As a percentage of revenue, transportation costs decreased in 2016 to 87.3% from 88.3% in 2015.  

The Hub segment transportation costs remained consistent at $2.4 billion in both 2016 and 2015.  Hub segment transportation costs in 2016 consisted of $2.0 billion in purchased transportation costs, which was consistent with 2015.  Equipment and driver related costs decreased 7% to $357.3 million in 2016 from $383.0 million in 2015 due primarily to a decrease in fuel costs and shutting down our Southern California drayage operation in the first quarter of 2016.

20


The Mode segment transportation costs increased 1.7% to $823.5 million in 2016 from $810.1 million in 2015. Mode segment transportation costs are primarily purchased transportation costs which increased due primarily to higher volume in intermodal and truck brokerage.

Gross Margin

Hub Group’s gross margin increased 10.2% to $454.8 million in 2016 from $412.7 million in 2015. Hub Group’s gross margin as a percentage of revenue increased to 12.7% in 2016 from 11.7% in 2015.

The Hub segment gross margin increased 12.1% to $329.6 million.  Hub’s $35.5 million gross margin increase resulted from an increase in gross margin in all three business lines.  Intermodal margin increased due to price increases, a 2% increase in loads, improved accessorial management, lower dray costs and improved mix and lane balance.  Rail cost increases partially offset some of this improvement.  Truck brokerage margin increased as a result of growth with targeted customer accounts. Logistics margin increased due to providing additional services to existing accounts and growth with new customers.  As a percentage of revenue, Hub segment gross margin increased to 12.1% in 2016 from 11.0% in 2015.  Intermodal gross margin as a percentage of sales increased 90 basis points because of price increases, lower drayage costs and improved accessorial management. Truck brokerage gross margin as a percentage of sales was up 150 basis points due to more value added services and better purchasing. Logistics gross margin as a percentage of sales was up 120 basis points due to improved customer mix, operational efficiencies and more cost effective purchasing.

Mode’s gross margin increased 5.6% to $125.2 million in 2016 from $118.6 million in 2015 due to growth in all three business lines.  Mode’s gross margin as a percentage of revenue increased to 13.2% in 2016 from 12.8% in 2015 due to a 140 basis point improvement in truck brokerage yield and a 30 basis point improvement in intermodal yield.

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,

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

Revenue

 

100.0%

 

 

 

100.0%

 

 

 

 

 

 

 

 

 

Transportation costs

 

87.3

 

 

 

88.3

 

 

 

 

 

 

 

 

 

Gross margin

 

12.7

 

 

 

11.7

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

     Salaries and benefits

 

5.1

 

 

 

4.5

 

     Agent fees and commissions

 

2.0

 

 

 

2.0

 

     General and administrative

 

1.9

 

 

 

1.7

 

     Depreciation and amortization

 

0.2

 

 

 

0.2

 

Total costs and expenses

 

9.2

 

 

 

8.4

 

 

 

 

 

 

 

 

 

Operating income

 

3.5

 

 

 

3.3

 

 

Salaries and Benefits

Hub Group’s salaries and benefits increased  to $180.5 million in 2016 from $158.9 million in 2015. As a percentage of revenue, Hub Group’s salaries and benefits increased to 5.1% in 2016 from 4.5% in 2015.

The Hub segment salaries and benefits increase of $21.1 million was due primarily to increases of $10.2 million related to higher headcount and merit increases, $6.5 million of employee bonus expense, $1.8 million of commissions, $1.4 million of employee benefits, $0.7 million of payroll taxes and $0.5 million of compensation related to restricted stock awards.

Mode’s salaries and benefits expense increased to $15.3 million in 2016 from $14.9 million in 2015. The increase was due primarily to increases of $0.7 million related to higher headcount and merit increases and $0.1 million of compensation related to restricted stock awards partially offset by a decrease in employee bonus expense of $0.4 million.  

Hub’s headcount as of December 31, 2016 and 2015 was 1,657 and 1,480, respectively, which excludes drivers, as driver costs are included in transportation costs. As of December 31, 2016 and 2015, Mode had 127 and 117 employees, respectively.

21


Agent Fees and Commissions

Hub Group’s agent fees and commissions increased to $72.9 million in 2016 from $68.7 million in 2015. As a percentage of revenue, these expenses remained consistent at 2.0% in both 2016 and 2015.  The increase in the expense was primarily related to Mode’s increase in gross margin.  

The Mode segment agent fees and commissions expense increase of $4.2 million was primarily due to the increase in gross margin.

General and Administrative

Hub Group’s general and administrative expenses increased to $68.6 million in 2016 from $60.0 million in 2015. As a percentage of revenue, these expenses increased to 1.9% in 2016 from 1.7% in 2015.

The Hub segment increase of $7.8 million was due primarily to increases in IT consulting expenses of $3.8 million, IT maintenance expense of $1.4 million, legal expenses of $1.0 million, office expenses and travel and entertainment of $0.9 million each, recruiting expenses of $0.4 million, general consulting expenses of $0.3 million, rent expense and employee training of $0.2 million each and equipment leases of $0.1 million.  These increases were partially offset by more gains on the sale of fixed assets of $0.6 million, an intercompany charge to Mode of $0.6 million and a reduction in bad debt expense of $0.2 million.

Mode’s general and administrative expenses increased to $7.8 million in 2016 from $7.0 million in 2015.  The increase was primarily due to an intercompany charge from Hub of $0.6 million and repairs and maintenance expenses, fewer gains on the sale of fixed assets and consulting services of $0.1 million each.  These increases were partially offset by a decrease in bad debt expense of $0.1 million.

Depreciation and Amortization

Hub Group’s depreciation and amortization increased to $9.0 million in 2016 from $8.0 million in 2015. This expense as a percentage of revenue remained consistent at 0.2% in both 2016 and 2015.

The Hub segment’s depreciation expense increased to $7.7 million in 2016 from $6.7 million in 2015.  This increase was related primarily to more depreciation related to additional computer software.

Mode’s depreciation expense remained consistent at $1.3 million in 2016 and 2015.  

Other Income (Expense)

Hub Group’s other expense decreased to $2.4 million in 2016 from $5.4 million in 2015 due primarily to gains on foreign currency translation of $0.8 million in 2016 compared to losses of $2.6 million in 2015, partially offset by increases of $0.7 million in interest expense in 2016 related to our tractor and container debt.

Provision for Income Taxes

The provision for income taxes increased to $46.6 million in 2016 from $40.6 million in 2015 due primarily to an increase in our pretax income and to a lesser extent an increase in our effective tax rate.  Our effective tax rate was 38.4% in 2016 and 36.4% in 2015.  The 2016 effective tax rate increased primarily due to the effects of income tax law changes enacted by the state of Connecticut in 2016 which raised our 2016 rate and income tax law changes enacted by the state of Missouri in 2015 which lowered our 2015 rate.

Net Income

Net income increased to $74.8 million in 2016 from $70.9 million in 2015 due primarily to increased margin, partially offset by higher operating expenses and higher income tax expense.

22


LIQUIDITY AND CAPITAL RESOURCES

During 2017, we funded operations, capital expenditures, an acquisition, capital leases, repayments of debt and stock buy backs related to employee withholding upon vesting of restricted stock through cash flows from operations, proceeds from the issuance of long-term debt and cash on hand.  We believe that our cash, cash flows from operations and borrowings available under our Credit Agreement will be sufficient to meet our cash needs for at least the next twelve months.

Cash provided by operating activities for the year ended December 31, 2017 was approximately $125.2 million, which resulted primarily from income of $135.2 million adjusted for non-cash charges of $31.1 million and a decrease in operating assets and liabilities of $41.1 million.

Cash provided by operating activities increased $22.7 million in 2017 versus 2016. The increase was due primarily to higher net income in 2017 of $60.3 million resulting primarily from a revaluation of deferred tax liabilities in connection with the recently enacted Tax Cuts and Job Act. As a result of this deferred tax revaluation, non-cash charges decreased by $34.6 million which included a change in deferred tax liabilities of $55.1 million partially offset by an increase in depreciation and amortization expense of $17.5 million. The negative change in operating assets and liabilities of $3.0 million was caused by a decrease in the change of accrued expenses of $12.2 million, an increase in the cash used for prepaid taxes of $11.9 million and prepaid expenses of $8.7 million, partially offset by an increase in the change of accounts payable of $23.3 million due to the timing of vendor payments.

Cash provided by operating activities was approximately $102.5 million and $171.7 million for the years ended December 31, 2016 and 2015, respectively.  The cash provided by operating activities in 2016 resulted primarily from income of $74.8 million plus the adjustment for non-cash charges of $65.7 million less the change in operating assets and liabilities of $38.0 million. The $69.2 million decrease in cash flow provided by operating activities for 2016 compared to 2015 was primarily attributed to a negative cash change in operating assets and liabilities of $77.7 million offset by an increase in non-cash charges of $4.6 million and net income of $3.9 million.  The negative cash change in assets and liabilities in 2016 versus 2015 resulted from higher Days Sales Outstanding (“DSO”) in 2016 versus 2015 caused by extended terms by select customers, partially offset by slower payments to our vendors.

Net cash used in investing activities for the year ended December 31, 2017 was $235.1 million which includes acquisition payments related to HGD of $165.9 million, capital expenditures of $74.5 million and proceeds from the sale of equipment of $5.3 million. Capital expenditures of $74.5 million included containers of $25.0 million, technology investments of $19.0 million, tractor purchases of $15.4 million, transportation equipment of $12.8 million, and the remainder for leasehold improvements.  

Capital expenditures decreased by approximately $32.9 million in 2017 as compared to 2016. The 2017 decrease was due to decreases in container purchases of $34.4 million and land of $14.9 million.  These decreases were partially offset by approximately $9.5 million more of tractor purchases, increased technology investments of $6.0 million and an increase in transportation equipment purchases of $1.2 million in 2016.

Net cash used in investing activities for the year ended December 31, 2016 was $105.3 million as compared to $80.7 million in 2015. Capital expenditures increased by approximately $24.4 million in 2016 as compared to 2015. The 2016 increase was due to increases in container purchases of $38.9 million, land of $14.9 million, technology of $7.2 million and leasehold improvements of $1.7 million.  These increases were partially offset by approximately $39.4 million more of tractor purchases in 2015.

In 2018, we estimate capital expenditures will range from $150.0 million to $170.0 million. We expect equipment purchases to range from $120.0 million to $130.0 million and technology investments will range from $30.0 million to $40.0 million.

Net cash provided by financing activities for the year ended December 31, 2017 was $11.1 million which includes proceeds from the issuance of debt $98.5 million, offset by repayments of long-term debt of $79.9 million, cash for stock tendered for payments of withholding taxes of $3.4 million, capital lease payments of $2.8 million and payment of debt issuance costs of $1.4 million.

The $88.4 million increase in cash provided by financing activities for 2017 compared to 2016 was primarily due to the decrease in treasury stock purchases of $100.0 million and an increase in the proceeds from issuance of debt of $36.4 million, partially offset by increases in debt payments of $45.1 million, debt issuance costs of $1.4 million and cash for stock tendered for payments of withholding taxes of $0.9 million.

Net cash used in financing activities for the year ended December 31, 2016 was $77.4 million.  We used $100.0 million to purchase treasury stock, $34.8 million for repayment of long-term debt, $2.6 million for capital lease payments and $2.5 million of cash for stock tendered for payments of withholding taxes. These payments were partially offset by proceeds from the issuance of debt of $62.2 million and excess tax benefits from share-based compensation of $0.4 million as a financing cash in-flow.  The $84.5 million increase in cash used in financing activities for 2016 compared to 2015 was primarily due to the increase in treasury stock purchases of $71.2 million, an increase in debt payments of $11.6 million and a decrease in the proceeds from issuance of debt of $2.3 million.

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Cash paid for income taxes of $13.1 million was higher than our income tax benefit of $44.2 million.  This was due primarily to the favorable impact on income tax expense from the revaluation of deferred tax liabilities as a result of the enactment of the Act. If the Act had not been enacted, cash paid for income taxes would have been less than income tax expense due to favorable timing differences between our tax returns and financial statements. The Act included modifications to depreciation rules, generally allowing for additional accelerated depreciation beginning in September 2017. As a result of anticipated favorable timing differences related to depreciation, we expect our cash paid for income taxes in 2018 to be significantly less than our income tax expense. 

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 2018. As of December 31, 2017, our letters of credit were $20.1 million.

As of December 31, 2017, we had $45.0 million of borrowings under our bank revolving line of credit and our unused and available borrowings were $284.9 million.  Our unused and available borrowings under our 2013 Credit Agreement were $38.2 million as of December 31, 2016. 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, 2017.

CONTRACTUAL OBLIGATIONS

Aggregated information about our obligations and commitments to make future contractual payments, such as debt and lease obligations, and contingent commitments as of December 31, 2017 is presented in the following table (in thousands).

Future Payments Due: 

 

 

 

 

 

 

Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leases and

 

 

Long

 

 

 

 

 

 

Capital

 

 

Other

 

 

Term

 

 

 

 

 

 

Lease

 

 

Commitments

 

 

Debt

 

 

Total

 

2018

$

3,137

 

 

$

10,755

 

 

$

77,266

 

 

$

91,158

 

2019

 

3,137

 

 

 

8,622

 

 

 

70,033

 

 

 

81,792

 

2020

 

3,145

 

 

 

7,700

 

 

 

50,268

 

 

 

61,113

 

2021

 

1,821

 

 

 

7,272

 

 

 

30,704

 

 

 

39,797

 

2022

 

-

 

 

 

6,576

 

 

 

13,092

 

 

 

19,668

 

2023 and thereafter

 

-

 

 

 

7,494

 

 

 

50,711

 

 

 

58,205

 

 

$

11,240

 

 

$

48,419

 

 

$

292,074

 

 

$

351,733

 

In November 2016, we committed to acquire 4,000 53’ containers.  As of December 31, 2017 we received 2,670 containers, which were financed with debt and we expect to receive the remaining 1,330 units in 2018, which we expect to finance with debt.

Deferred Compensation

Under our Nonqualified Deferred Compensation Plan (the “Plan”), participants can elect to defer certain compensation. Payments under the Plan are due as follows (in thousands):

Future Payments Due:

 

2018

$

1,990