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
warehousing services that are marketed primarily to consumer-packaged goods
companies who serve the North American retail channel.
Hub has full time marketing representatives throughout
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 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
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.
Strategic Transactions
On
subsidiary. Mode’s temperature protected division (“Temstar”) was not included
in the transaction and is now included in our intermodal line of business.
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
consideration for the transaction was
million
reflected in our Consolidated Balance Sheet under Accrued Other and is being
paid in twenty four equal monthly installments.
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
revenue decreased 2.4% to
volume and lower fuel revenue, partially offset by improved pricing. Truck
brokerage revenue decreased 12.8% to
fuel, mix and price combined, partially offset by an 11.4% increase in volume
due to the addition of
million
increased 2.0% to
partially offset by lost business.
Transportation Costs
Hub’s transportation costs decreased to
in 2018. Transportation costs in 2019 consisted of purchased transportation
costs of
compared to 2018, which consisted of purchased transportation costs of
billion
decrease in purchased transportation costs was primarily due to decreases in
intermodal volume and improved purchasing, partially offset by rail cost
increases. Equipment and driver related costs increased 7.3% in 2019 primarily
due to increases in equipment depreciation expense, higher insurance and claims
costs and driver compensation.
Gross Margin
Hub’s gross margin increased 16.9% to
in 2018. The
all lines of business. Intermodal gross margin increased primarily due to
improved pricing and network optimization. Partially offsetting the intermodal
margin growth were higher rail costs and an increase in insurance and claims
costs and lower volumes. Truck brokerage gross margin increased due to the
addition of
technology. Logistics gross margin increased due to the addition of
Dedicated gross margin increased due to revenue management initiatives and
improved operational discipline.
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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
Logistics gross margin as a percentage of sales increased 550 basis points due
to the addition of
gross margin as a percentage of sales increased 410 basis points due to
decreased costs for third party carriers and improved operational discipline.
CONSOLIDATED OPERATING EXPENSES
Salaries and Benefits
Hub’s salaries and benefits increased to
million
increased to 6.4% in 2019 from 6.0% in 2018.
Hub’s salaries and benefits increase of
addition of
stock increased
increased
and commissions combined.
Hub’s headcount as of
respectively, which excludes drivers, as driver costs are included in
transportation costs. The decrease in Hub’s headcount is primarily due to
technology driven efficiencies and improved processes.
General and Administrative
Hub’s general and administrative expenses increased to
from
to 2.8% in 2019 from 2.2% in 2018.
The increase of
primarily to the addition of
claim first made in 2013 for the alleged misclassification of drivers, the
million
that decreased general and administrative expenses in 2018, as well as increases
in IT consulting and professional service expense of
of
million
of equipment in 2019 versus 2018.
Depreciation and Amortization
Hub’s depreciation and amortization increased to
in 2019 from 0.5% in 2018. This increase was related primarily to the addition
of amortization related to
Other Income (Expense)
Hub’s other expense increased to
due to higher interest expense on debt related to equipment purchases, partially
offset by higher interest income earned on increased cash balances.
Provision for Income Taxes
The provision for income taxes increased to an expense of
from
continuing operations in 2019. Our effective tax rate was 25.5% in 2019 and
24.9% in 2018. The effective tax rate increased in 2019 largely due to an
unfavorable adjustment related to stock-based compensation impacting the 2019
tax rate.
Net Income
Net income from continuing operations increased to
higher operating expenses and higher income tax expense.
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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
approximately
million
of
Cash provided by operating activities increased
2018. The increase was due to the change in non-cash items of
transaction costs related to the Disposition in 2018 of
offset by a decrease in net income of
liabilities of
gain on Disposition in 2019 versus a gain on Disposition in 2018 of
million
consideration of
stock-based plans of
The negative change in operating assets and liabilities of
caused by decreases in the changes in accrued expenses of
accounts payable of
investments of
the changes in accounts receivable of
million
million
Cash provided by operating activities increased
2017. The increase was due to higher net income in 2018 of
decrease of
costs related to the Disposition in 2018. The positive change in operating
assets and liabilities of
accounts receivable of
expenses of
decrease in the cash used for prepaid taxes of
were partially offset by decreases in accounts payable of
the timing of vendor payments, non-current liabilities of
other assets of
resulted from the gain on Disposition of
contingent consideration adjustment and the higher gain of the sale of equipment
of
million
related to stock-based compensation plans of
Net cash used in investing activities for the year ended
acquisition payments related to
Capital expenditures of
million
construction of our corporate headquarters of
equipment of
Capital expenditures decreased by approximately
compared to 2018. The 2019 decrease was due to decreases in tractor purchases of
containers of
leasehold improvements of
million
Net cash used in investing activities decreased by
million
proceeds received from the Disposition in 2018 of
no proceeds in 2017 and an increase in the proceeds from the sale of equipment
of
used in 2018 for capital expenditures of
approximately
million
of
equipment, including trailers, of
improvements.
In 2020, we estimate capital expenditures will range from
million
technology investments will range from
office building at our
million
debt.
Net cash used in financing activities for the year ended
purchase of treasury stock of
payments of withholding taxes of
million
million
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The
cash provided by financing activities in 2018 was primarily due to the decrease
in proceeds from the issuance of debt of
treasury shares purchased of
debt payments of
to employee withholding taxes of
Net cash provided by financing activities increased by
million
proceeds from the issuance of debt of
of
million
In 2019, cash paid for income taxes was
related to 2018 and
million
of
related to depreciation and approximately
be paid with extensions in
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
our letters of credit were
As of
credit and our unused and available borrowings were
and available borrowings were
our line of credit is adequate to meet our cash needs. We were in compliance
with our debt covenants 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
accepted accounting principles requires management to make estimates and
assumptions. In certain circumstances, those estimates and assumptions can
affect amounts reported in the accompanying consolidated financial statements.
We have made our best estimates and judgments of certain amounts included in the
financial statements, giving due consideration to materiality. We do not believe
there is a great likelihood that materially different amounts would be reported
related to the accounting policies described below. However, application of
these accounting policies involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. The following is a brief discussion of the more
significant accounting policies and estimates. These critical accounting
policies are further discussed in Note 1 of the consolidated financial
statements.
Revenue Recognition
On
606, Revenue from Contracts with Customers. Under this new standard our
significant accounting policy for revenue is as follows:
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
27 --------------------------------------------------------------------------------
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.
28 --------------------------------------------------------------------------------
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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