HUB GROUP, INC. This section of the Form 10-K generally discusses 2019 and 2018 items and
year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and
year-to-year comparisons between 2018 and 2017 that are not included in this
Form 10-K can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7 of the Company's Annual
Report on Form 10-K for the fiscal year ended
EXECUTIVE SUMMARY
We are a world class provider of multimodal transportation solutions. Our vision is to be the industry's premier customer-centric supply chain solutions provider. We offer comprehensive intermodal, truck brokerage, dedicated trucking and logistics services. We operate through a nationwide network of operating centers.
As an intermodal provider, we arrange for the movement of our customers' freight in containers and trailers, typically over distances of 750 miles or more. We contract with railroads to provide transportation for the long-haul portion of the shipment between rail terminals. Local pickup and delivery services between origin or destination and rail terminals (referred to as "drayage") are provided by our HGT subsidiary and third-party local trucking companies.
We also arrange for the transportation of freight by truck, providing customers with another option for their transportation needs. We match our 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 dedicated service line, Dedicated, 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 line of business 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. Our acquisition of
Hub has full time marketing representatives throughout
Hub's customer solutions group works with pricing, account management and operations to enhance Hub's customer margins across all lines of business. We are working on margin enhancement projects including network optimization, matching of inbound and outbound loads, reducing empty miles, improving our recovery of accessorial costs, asset utilization, reducing repositioning costs, providing holistic solutions and reviewing and improving low profit freight.
Hub's top 50 customers represent approximately 67% of revenue for the year ended
Strategic Transactions
On
Prior to the decision to sell Mode, Hub historically reported two distinct and reportable business segments. As a result of the decision to sell Mode, which is now classified as discontinued operations, we have one reporting segment. Revenue and costs related to Hub's business that were not included on the sale of Mode are reported within results from continuing operations. All revenues and costs related to Mode's business (other than Temstar) are presented in results from discontinued operations. Prior year information has been adjusted to conform with the current presentation. Unless otherwise stated, the information disclosed in Management's Discussion and Analysis refers to continuing operations. See Note 4 of the Consolidated Financial Statements for additional information regarding results from discontinued operations.
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On
RESULTS OF OPERATIONS
Year Ended
The following table summarizes our revenue by business line (in thousands):
Twelve Months Ended
December 31,
2019 2018
Intermodal $ 2,166,382 $ 2,219,739
Truck brokerage 433,793 497,282
Logistics 769,195 673,715
Dedicated 298,747 292,857
Total revenue $ 3,668,117 $ 3,683,593 The following is a summary of operating results and certain items in the consolidated statements of income as a percentage of revenue:
Twelve Months Ended
December 31,
2019 2018
Revenue $ 3,668,117 100.0% $ 3,683,593 100.0%
Transportation costs 3,147,047 85.8% 3,237,992 87.9%
Gross margin 521,070 14.2% 445,601 12.1%
Costs and expenses:
Salaries and benefits 235,963 6.4% 222,786 6.0%
General and administrative 104,206 2.8% 81,272 2.2%Depreciation and amortization 28,481 0.8% 16,624 0.5%
Total costs and expenses 368,650 10.0% 320,682 8.7% Operating income$ 152,420 4.2%$ 124,919 3.4% Revenue
Hub's revenue remained consistent at
Transportation Costs
Hub's transportation costs decreased to
Gross Margin
Hub's gross margin increased 16.9% to
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As a percentage of revenue, gross margin increased to 14.2% in 2019 from 12.1%
in 2018. Intermodal gross margin as a percentage of sales increased 50 basis
points due to improved prices and network optimization, partially offset by rail
cost increases, higher insurance and claims costs and lower surge volumes. Truck
brokerage gross margin as a percentage of sales increased 400 basis points
primarily due to the addition of
CONSOLIDATED OPERATING EXPENSES
Salaries and Benefits
Hub's salaries and benefits increased to
Hub's salaries and benefits increase of
Hub's headcount as of
General and Administrative
Hub's general and administrative expenses increased to
The increase of
Depreciation and Amortization
Hub's depreciation and amortization increased to
Other Income (Expense)
Hub's other expense increased to
Provision for Income Taxes
The provision for income taxes increased to an expense of
Net Income
Net income from continuing operations increased to
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--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
During 2019, we funded operations, capital expenditures, finance leases, repayments of debt, purchases of treasury shares and the purchase of our stock related to employee withholding upon vesting of restricted stock through cash flows from operations, proceeds from the issuance of long-term debt 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
Cash provided by operating activities increased
Cash provided by operating activities increased
Net cash used in investing activities for the year ended
Capital expenditures decreased by approximately
Net cash used in investing activities decreased by
In 2020, we estimate capital expenditures will range from
Net cash used in financing activities for the year ended
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The
Net cash provided by financing activities increased by
In 2019, cash paid for income taxes was
See Note 11 of the consolidated financial statements for details related to interest rates and commitment fees.
We have standby letters of credit that expire in 2020. As of
As of
CONTRACTUAL OBLIGATIONS
Aggregated information about our obligations and commitments to make future contractual payments, such as debt and lease obligations, and contingent commitments as ofDecember 31, 2019 is presented in the following table (in thousands). Future Payments Due: Operating Finance Interest Leases Leases Debt on Debt Total Year 1$ 9,703 $ 3,183 $ 94,691 $ 3,762 $ 111,339 Year 2 8,361 1,836 76,028 2,505 88,730 Year 3 7,029 8 60,489 1,370 68,896 Year 4 4,861 - 41,208 373 46,442 Year 5 3,706 - 9,209 29 12,944 Thereafter 7,190 - - - 7,190$ 40,850 $ 5,027 $ 281,625 $ 8,039 $ 335,541 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: Year 1$ 3,817 Year 2 2,282 Year 3 1,739 Year 4 1,310 Year 5 1,112 Thereafter 12,383$ 22,643 26
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CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with
Revenue Recognition
On
Revenue is recognized when we transfer services to our customers in an amount that reflects the consideration we expect to receive. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We generally recognize revenue over time because of continuous transfer of control to the customer. Since control is transferred over time, revenue and related transportation costs are recognized based on relative transit time, which is based on the extent of progress towards completion of the related performance obligation. We enter into contracts that can include various combinations of services, which are capable of being distinct and accounted for as separate performance obligations. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Further, in most cases, we report our revenue on a gross basis because we are the primary obligor as we are responsible for providing the service desired by the customer. Our customers view us as responsible for fulfillment including the acceptability of the service. Service requirements may include, for example, on-time delivery, handling freight loss and damage claims, setting up appointments for pick-up and delivery and tracing shipments in transit. We have discretion in setting sales prices and as a result, the amount we earn varies. In addition, we have the discretion to select our vendors from multiple suppliers for the services ordered by our customers. These factors, discretion in setting prices and discretion in selecting vendors, further support reporting revenue on a gross basis for most of our revenue.
Allowance for Uncollectible Trade Accounts Receivable
We extend credit to customers after a review of each customer's credit history. An allowance for uncollectible trade accounts has been established through an analysis of the accounts receivable aging, an assessment of collectability based on historical trends and an evaluation based on current economic conditions. Annually we review, in hindsight, the percentage of receivables that are collected that aged over one year, those that are not one year old and the accounts that went into bankruptcy. We reserve for accounts less than one year old based on specifically identified uncollectible balances and our historic collection percentage, including receivable adjustments charged through revenue for items such as billing disputes. In establishing a reserve for certain account balances specifically identified as uncollectible, we consider the aging of the customer receivables, the specific details as to why the receivable has not been paid, the customer's current and projected financial results, the customer's ability to meet and sustain its financial commitments, the positive or negative effects of the current and projected industry outlook and the general economic conditions. Our historical collection percentage has been over 98% for receivables that are less than a year old. Once a receivable ages over one year, our collection percentage is much lower, thus a separate calculation is done for open receivables that have aged over one year. We also review our collection percentage after a customer has gone into bankruptcy. Although these collection percentages may change both negatively and positively, since only a small portion of our receivables are aged over one year or are involved in a bankruptcy case, a large change in either of those collection percentages would not have a material impact on our financial statements. Our level of reserves for customer accounts receivable fluctuate depending upon all the factors mentioned above. Historically, our reserve for uncollectible accounts has approximated actual accounts written off and we do not expect the reserve for uncollectible accounts to change significantly relative to our accounts receivable balance. The allowance for uncollectible accounts is reported on the balance sheet in net accounts receivable. Recoveries of receivables previously charged off are recorded when received.
We capitalize internal and external costs, which include costs related to the development of our cloud computing or hosting arrangements, incurred to develop internal use software per ASC Subtopic 350-40. Internal use software has both the of the following characteristics: the software is acquired, internally developed, or modified solely to meet our needs and during the development or modification, no substantive plan exists or is being developed to market the software externally. Only costs incurred during the application development stage and costs to develop or obtain software that allows for access to or conversion of old data by new systems are capitalized. Capitalization of costs begins when the preliminary project stage is complete, management has committed to
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--------------------------------------------------------------------------------funding the project and it is probable the project will be completed, and the software will be used to perform its intended function. The measurement of the costs to capitalize include fees paid to third parties, costs incurred to obtain software from third parties, travel expenses by employees in their duties associated with developing software, payroll related costs for employees who devote time spent directly on the project and interest costs incurred while developing internal-use software or implementing a hosting arrangement. Capitalization ceases no later than when the project is substantially complete and ready for its intended use, after all substantial testing is complete.
Claims Accruals
We purchase insurance coverage for a portion of expenses related to employee injuries, vehicular collisions, accidents, and cargo damage. Certain insurance arrangements include high self-insurance retention limits (deductible) applicable to each claim. We have umbrella policies to limit our exposure to catastrophic claim costs.
Our claims accrual policy for all self-insured claims is to recognize a liability at the time of the incident based on our analysis of the nature and severity of the claims and analyses provided by third-party claims administrators, as well as legal and regulatory factors. Our safety and claims personnel work directly with representatives from the insurance companies and third party administrators to continually update the estimated cost of each claim. The ultimate cost of a claim develops over time as additional information regarding the nature, timing, and extent of damages claimed becomes available. Accordingly, we use an actuarial method to develop current claim information to derive an estimate of our ultimate claim liability. This process involves the use of loss-development factors based on our historical claims experience. In doing so, the recorded liability considers future claims growth and provides an allowance for incurred-but-not-reported claims. Our claim accrual liability is classified as either current or non-current in the consolidated balance sheet based on an estimate of when the claims are expected to be paid. We do not discount our estimated losses. In addition, we record receivables for amounts expected to be reimbursed for payments made in excess of self-insurance levels on covered claims.
OUTLOOK, RISKS AND UNCERTAINTIES
Business Combinations/Divestitures
We believe that any future acquisitions or divestitures that we may make could significantly impact financial results. Financial results most likely to be impacted include, but are not limited to, revenue, gross margin, salaries and benefits, selling general and administrative expenses, depreciation and amortization, interest expense, net income and our debt level.
Revenue
We believe that the performance of our railroad vendors and a severe or prolonged slow-down of the economy are the most significant factors that could negatively influence our revenue growth rate. Should there be further consolidation in the rail industry causing a service disruption, we believe our intermodal business would likely be negatively impacted. Should there be a significant service disruption, we expect that there may be some customers who would switch from using our intermodal service to other transportation services that may not be provided by Hub. We expect that these customers may choose to continue to utilize other services even when intermodal service levels are restored. Other factors that could negatively influence our growth rate include, but are not limited to, the elimination of fuel surcharges, lower fuel prices, the entry of new competitors, poor customer retention, inadequate drayage and intermodal service and inadequate equipment supply and the ongoing coronavirus outbreak or other health concerns.
Gross Margin
We expect fluctuations in gross margin as a percentage of revenue from quarter-to-quarter caused by various factors including, but not limited to, competitor pricing actions, changes in the transportation business mix, start-up costs for new business, changes in logistics services between transactional business and management fee business, changes in truck brokerage services between spot, committed and special, insurance and claim costs, driver recruiting costs, driver compensation changes, impact of regulations on drayage costs, trailer and container capacity, vendor cost increases, fuel costs, equipment utilization, intermodal industry growth, intermodal industry service levels, accessorials, competitive pricing and related changes in accounting estimates.
Salaries and Benefits
We estimate that salaries and benefits as a percentage of revenue could fluctuate from quarter-to-quarter as there are timing differences between volume increases and changes in levels of staffing. Factors that could cause the percentage not to stay in the recent historical range include, but are not limited to, revenue growth rates significantly higher or lower than forecasted, a management decision to invest in additional personnel to stimulate new or existing businesses, changes in customer requirements, changes in our operating structure, severance, employee insurance costs, how well we perform against our EPS and other bonus goals, and changes in railroad intermodal service levels which could result in a lower or higher cost of labor per move.
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--------------------------------------------------------------------------------General and Administrative
We believe there are several factors that could cause general and administrative expenses to fluctuate as a percentage of revenue. As customer expectations and the competitive environment require the development of new technology interfaces and the restructuring of our information systems and related platforms, we believe there could be significant expenses incurred. Other factors that could cause general and administrative expense to fluctuate include, but are not limited to, changes in insurance premiums, technology expense related to software and services, claim expense, bad debt expense, professional services expense and costs related to acquisitions or divestitures.
Equipment, Depreciation and Amortization
We operate tractors and utilize containers, trailers and chassis in connection with our business. This equipment may be purchased or leased as part of an operating or financing lease. In addition, we rent equipment from third parties and various railroads under short term rental arrangements. Equipment which is purchased is depreciated on the straight-line method over the estimated useful life.
Impairment of Property and Equipment,Goodwill and Indefinite-Lived Intangibles
On an ongoing basis, we assess the realizability of our assets. If, at any point during the year, we determine that an impairment exists, the carrying amount of the asset is reduced by the estimated impairment with a corresponding charge to earnings which could have a material adverse impact on earnings.
Other Income (Expense)
We expect interest expense to increase in 2020 because we financed our 2019 tractor and container purchases with debt. Factors that could cause a change in interest expense include, but are not limited to, change in interest rates, change in investments, funding working capital needs, funding capital expenditures, funding an acquisition and purchase of treasury stock.
Provision for Income Taxes
Based on current tax legislation, we estimate that our effective tax rate will be between 24% and 25% in 2020.
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