Hub (HUBG) - 2021 Q3 - Quarterly Report

PART I. Financial Information This section presents Hub Group, Inc.'s unaudited consolidated financial statements and management's discussion and analysis Item 1. Financial Statements Presents Hub Group's unaudited consolidated financial statements, including balance sheets, income, equity, and cash flow statements, with detailed notes Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and equity, as of specific dates Consolidated Balance Sheet Highlights (in thousands) | Metric | September 30, 2021 | December 31, 2020 | | :-------------------------- | :------------------- | :------------------ | | Cash and cash equivalents | $230,656 | $124,506 | | Total Current Assets | $881,007 | $672,835 | | Total Assets | $2,291,480 | $2,105,396 | | Total Current Liabilities | $644,256 | $529,105 | | Total Liabilities | $1,036,355 | $947,473 | | Total Stockholders' Equity | $1,255,125 | $1,157,923 | Unaudited Consolidated Statements of Income and Comprehensive Income Details the company's revenues, expenses, and net income over specific periods Consolidated Statements of Income Highlights (in thousands, except per share amounts) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $1,075,107 | $924,812 | $2,975,980 | $2,542,914 | | Gross margin | $157,600 | $108,035 | $386,908 | $319,878 | | Operating income | $59,873 | $33,917 | $120,872 | $74,654 | | Net income | $43,338 | $24,781 | $87,160 | $51,171 | | Diluted earnings per share | $1.28 | $0.74 | $2.58 | $1.53 | Unaudited Consolidated Statements of Stockholders' Equity Outlines changes in stockholders' equity, including net income and share-based compensation, over a period Changes in Stockholders' Equity (Nine Months Ended Sep 30, 2021, in thousands) | Item | Amount | | :------------------------------------------ | :------- | | Balance December 31, 2020 | $1,157,923 | | Stock withheld for payments of withholding taxes | $(4,038) | | Issuance of restricted stock awards, net of forfeitures | - | | Share-based compensation expense | $14,090 | | Net income | $87,160 | | Foreign currency translation adjustment | $(10) | | Balance September 30, 2021 | $1,255,125 | Unaudited Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Nine Months Ended Sep 30, in thousands) | Metric | 2021 | 2020 | | :------------------------------------ | :--------- | :--------- | | Net cash provided by operating activities | $178,058 | $122,688 | | Net cash used in investing activities | $(53,608) | $(54,054) | | Net cash used in financing activities | $(18,289) | $(51,976) | | Net increase in cash and cash equivalents | $106,150 | $16,607 | | Cash and cash equivalents end of the period | $230,656 | $185,336 | Notes to Unaudited Consolidated Financial Statements Provides detailed explanations of accounting policies, significant transactions, and financial statement line items NOTE 1. Interim Financial Statements Explains the basis of preparation for interim financial statements and their limitations - The unaudited consolidated financial statements are prepared in accordance with SEC rules, include normal recurring adjustments, and should be read in conjunction with the annual 10-K. Interim results are not necessarily indicative of full-year results due to seasonality[18][19][20] NOTE 2. Acquisition Details the acquisition of NonstopDelivery, LLC, including purchase price and intangible assets recognized - On December 9, 2020, Hub Group acquired 100% of NonstopDelivery, LLC (NSD) for $105.9 million, expanding its logistics service offering to include residential last-mile logistics. NSD operates through a non-asset business model with over 170 carriers[21][22] Goodwill and Other Intangibles (in thousands) | Metric | January 1, 2021 | September 30, 2021 | | :-------------------- | :-------------- | :----------------- | | Goodwill Balance | $508,555 | $522,360 | NSD Intangible Assets at Acquisition Date (in thousands) | Intangible Asset | Amount | Estimated Useful Life | | :----------------- | :------- | :-------------------- | | Customer relationships | $46,200 | 15 years | | Agent relationships | $600 | 4 years | | Trade name | $900 | 18 months | - Amortization expense related to NSD for the three and nine months ended September 30, 2021, was $1.0 million and $2.8 million, respectively[23][24] NOTE 3. Earnings Per Share Reconciles net income to basic and diluted earnings per share calculations Earnings Per Share Reconciliation (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $43,338 | $24,781 | $87,160 | $51,171 | | Weighted average shares outstanding - basic | 33,433 | 33,177 | 33,427 | 33,169 | | Dilutive effect of stock options and restricted stock | 440 | 420 | 415 | 344 | | Weighted average shares outstanding - diluted | 33,873 | 33,597 | 33,842 | 33,513 | | Earnings per share - basic | $1.30 | $0.75 | $2.61 | $1.54 | | Earnings per share - diluted | $1.28 | $0.74 | $2.58 | $1.53 | NOTE 4. Revenue from Contracts with Customers Disaggregates revenue by business line and describes the company's service offerings - Hub offers comprehensive multimodal solutions including intermodal, truck brokerage, logistics (including last mile delivery via NSD), and dedicated services across the United States, Canada, and Mexico[26][27][28][29][30][31] Disaggregated Revenue by Business Line (in thousands) | Business Line | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Intermodal | $633,427 | $543,464 | $1,689,617 | $1,468,624 | | Logistics | $224,136 | $192,187 | $663,620 | $569,682 | | Truck brokerage | $153,270 | $119,994 | $420,523 | $304,686 | | Dedicated | $64,274 | $69,167 | $202,220 | $199,922 | | Total revenue | $1,075,107 | $924,812 | $2,975,980 | $2,542,914 | NOTE 5. Fair Value Measurement Describes the fair value measurement of financial instruments and their classification within the fair value hierarchy - The carrying value of cash, accounts receivable, and accounts payable approximated fair value. Fixed-rate borrowings' fair value was estimated using an income approach. Restricted investments (mutual funds) are reported at fair value. Assets and liabilities are categorized into Level 1 (cash, mutual funds, receivables, payables) and Level 2 (long-term debt) of the fair value hierarchy[33][34][35][36] NOTE 6. Long-Term Debt and Financing Arrangements Outlines the company's credit facilities, secured equipment notes, and debt covenant compliance - Hub has a $350 million unsecured credit agreement maturing July 1, 2022, with $41.3 million in standby letters of credit outstanding as of September 30, 2021. Unused and available borrowings were $308.7 million. The company was in compliance with debt covenants[37][38][101] Secured Equipment Notes (in thousands) | Maturity | Interest Rate Range | September 30, 2021 | December 31, 2020 | | :------- | :------------------ | :----------------- | :---------------- | | 2026 | 1.48% - 1.83% | $67,656 | - | | 2025 | 1.51% - 1.80% | $63,211 | $74,494 | | 2024 | 2.50% - 3.59% | $37,730 | $49,920 | | 2023 | 2.20% - 4.20% | $72,275 | $112,668 | | 2022 | 2.20% - 2.90% | $4,679 | $8,943 | | 2021 | 2.02% - 2.96% | $2,259 | $15,432 | | Total | | $258,250 | $270,359 | | Less current portion | | $(92,598) | $(93,562) | | Total long-term debt | | $165,652 | $176,797 | NOTE 7. Legal Matters Discusses ongoing legal proceedings, including class-action lawsuits and their potential impact - Hub Group agreed in principle to settle the Robles and Adame class-action lawsuits, alleging driver misclassification, for $4.8 million in September 2019. The company converted its California driver model to employees in late 2014. Management believes other pending litigation is not likely to have a material adverse effect[40][41][42][43][44] NOTE 8. New Accounting Pronouncements Identifies recently adopted accounting pronouncements and their impact on financial statements - Hub Group adopted ASU 2019-12, Income Taxes (Topic 740), on January 1, 2021, which clarifies and simplifies income tax accounting, but it did not have a material impact on the consolidated financial statements[45] NOTE 9. Subsequent Events Reports significant events occurring after the balance sheet date, such as the Choptank Transport acquisition - On October 19, 2021, Hub Group acquired Choptank Transport, LLC for approximately $130 million in cash and $20 million in restricted stock. This acquisition enhances refrigerated transportation solutions and leverages Choptank's technology platform for truck brokerage[46][47][48] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations, including performance, liquidity, and forward-looking statements Forward-Looking Information Highlights inherent uncertainties and risks that may cause actual results to differ from forward-looking statements - The report contains forward-looking statements subject to inherent uncertainties, risks, and changes in circumstances, including adverse economic conditions (e.g., COVID-19 pandemic), market growth, railroad relationships, driver recruitment, competitive pressures, and regulatory changes, which could cause actual results to differ materially[49][50][51][57] EXECUTIVE SUMMARY Provides an overview of Hub Group's business, service offerings, and strategic focus on margin enhancement - Hub Group is a leading supply chain solutions provider offering comprehensive transportation and logistics management services, including intermodal, truck brokerage, dedicated trucking, and various logistics services. Its mission is to elevate customer business, and its vision is to build the industry's premier supply chain solutions[52] - Hub Group Trucking (HGT) provided approximately 51% of drayage needs for intermodal services for the nine months ended September 30, 2021, operating ~1,400 tractors and employing ~1,400 drivers. The dedicated operation runs ~1,000 tractors and 4,600 trailers at 65 locations with ~1,100 drivers[54][58] - The company focuses on margin enhancement initiatives such as pricing optimization, load matching, reducing empty miles, improving driver retention, controlling maintenance costs, and enhancing procurement. Its top 50 customers represent approximately 69% of revenue for the nine months ended September 30, 2021[60][61] RESULTS OF OPERATIONS (Three Months Ended September 30, 2021 Compared to 2020) Analyzes financial performance, including revenue and gross margin trends, for the three months ended September 30 Revenue by Business Line (Three Months Ended Sep 30, in thousands) | Business Line | 2021 | 2020 | Change (%) | | :------------ | :--------- | :--------- | :--------- | | Intermodal | $633,427 | $543,464 | +16.6% | | Logistics | $224,136 | $192,187 | +16.6% | | Truck brokerage | $153,270 | $119,994 | +27.7% | | Dedicated | $64,274 | $69,167 | -7.1% | | Total revenue | $1,075,107 | $924,812 | +16.3% | - Gross margin increased 45.9% to $157.6 million, with gross margin as a percentage of revenue rising to 14.7% (2021) from 11.7% (2020). This was driven by higher prices and lower equipment repositioning costs in intermodal, revenue growth and yield management in logistics, and higher revenue per load in truck brokerage[66][67] - Transportation costs increased 12.3% to $917.5 million, primarily due to higher third-party carrier, rail, and fuel costs, partially offset by lower volumes in intermodal and truck brokerage[65] CONSOLIDATED OPERATING EXPENSES (Three Months Ended September 30, 2021 Compared to 2020) Examines changes in operating expenses, including salaries, benefits, and general and administrative costs, for the three-month period - Salaries and benefits increased to $65.4 million (2021) from $45.6 million (2020), primarily due to the NSD acquisition, $11.9 million in employee bonuses, $2.3 million in commissions, and $2.4 million in employee benefits and payroll taxes. Headcount increased to 1,971 from 1,849[68] - General and administrative expenses increased to $23.4 million (2021) from $20.8 million (2020), driven by a $3.2 million increase in legal claims, $2.1 million in professional services (Choptank acquisition-related), and additional NSD expenses, partially offset by $4.9 million in gains on asset sales[69] - Net income increased to $43.3 million (2021) from $24.8 million (2020), primarily due to increased revenue and gross margin, partially offset by higher operating expenses and income tax expense. The effective tax rate was 25.3% in 2021, up from 21.5% in 2020[73][75] RESULTS OF OPERATIONS (Nine Months Ended September 30, 2021 Compared to 2020) Analyzes financial performance, including revenue and gross margin trends, for the nine months ended September 30 Revenue by Business Line (Nine Months Ended Sep 30, in thousands) | Business Line | 2021 | 2020 | Change (%) | | :------------ | :----------- | :----------- | :--------- | | Intermodal | $1,689,617 | $1,468,624 | +15.0% | | Logistics | $663,620 | $569,682 | +16.5% | | Truck brokerage | $420,523 | $304,686 | +38.0% | | Dedicated | $202,220 | $199,922 | +1.1% | | Total revenue | $2,975,980 | $2,542,914 | +17.0% | - Gross margin increased 21.0% to $386.9 million, with gross margin as a percentage of revenue rising to 13.0% (2021) from 12.6% (2020). This growth was primarily driven by increased pricing and volumes in intermodal, profitability initiatives and the NSD acquisition in logistics, and revenue per load growth in truck brokerage[79][80][81] - Transportation costs increased 16.5% to $2.6 billion, mainly due to higher purchased transportation costs, increased fuel costs, and higher per-driver compensation[78] CONSOLIDATED OPERATING EXPENSES (Nine Months Ended September 30, 2021 Compared to 2020) Examines changes in operating expenses, including salaries, benefits, and general and administrative costs, for the nine-month period - Salaries and benefits increased $30.6 million to $176.7 million (2021) from $146.1 million (2020), primarily due to the NSD acquisition, $21.0 million in employee bonuses, $3.0 million in commissions, and $3.4 million in employee benefits and payroll taxes[82] - General and administrative expenses decreased $13.1 million to $63.1 million (2021) from $76.2 million (2020), mainly due to a $9.1 million change in gain on asset sales, a $5.4 million decrease in COVID-19 donation expense, and a $4.1 million decrease in professional services, partially offset by $3.4 million in legal claims and NSD costs[83] - Net income increased to $87.2 million (2021) from $51.2 million (2020), primarily due to increased revenue and gross margin, partially offset by higher operating costs and income tax expense. The effective tax rate was 24.1% in 2021, up from 23.7% in 2020[86][87] LIQUIDITY AND CAPITAL RESOURCES Discusses the company's cash position, operating cash flows, capital expenditures, and debt management - Hub Group believes its cash on hand, cash flows from operations, and available borrowings are sufficient to meet cash needs for at least the next twelve months. Net cash provided by operating activities increased $55.4 million to $178.1 million for the nine months ended September 30, 2021[89][90][91] - Net cash used in investing activities was $53.6 million, including $84.1 million in capital expenditures (containers, tractors, technology, new building). Estimated capital expenditures for the remainder of 2021 range from $66 million to $76 million[94][95] - Net cash used in financing activities decreased $33.7 million to $18.3 million, primarily due to more proceeds from new debt issuance on transportation equipment. The company deferred $11.3 million of 2020 payroll taxes under the CARES Act, with half due in December 2021 and the other half in December 2022[97][98][100] Item 3. Quantitative and Qualitative Disclosures about Market Risk States that there have been no material changes in market risk since the prior annual report - No material changes in market risk as of September 30, 2021, from that presented in the 2020 10-K[103] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures and ongoing integration efforts for acquisitions - Disclosure controls and procedures were effective as of September 30, 2021, as concluded by management, including the CEO and CFO[104] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended September 30, 2021. The integration of processes, employees, technologies, and operations from the NonstopDelivery, LLC acquisition is ongoing[105][106] PART II. Other Information This section provides additional information beyond the financial statements, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings Reports no material developments in legal proceedings beyond prior disclosures - No material developments in legal proceedings during the nine months ended September 30, 2021, as disclosed in the 2020 10-K[107] Item 1A. Risk Factors Refers to previously identified risk factors and cautionary statements regarding forward-looking information - Investing in company stock involves risks identified in Part I, Item 1A of the 2020 10-K and cautionary statements in this 10-Q, including "Forward-Looking Information"[108] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details share repurchases for employee tax withholding and the status of the stock repurchase program - No purchases were made under the $100 million Class A Common Stock repurchase program in 2021 or 2020[109] Shares Purchased for Employee Tax Withholding (Q3 2021) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------------- | :----------------------------- | :--------------------------- | | 7/1/2021 - 7/31/2021 | 703 | $65.48 | | 8/1/2021 - 8/31/2021 | 53 | $67.38 | | 9/1/2021 - 9/30/2021 | 212 | $69.85 | | Total | 968 | $66.54 | Item 6. Exhibits Lists all exhibits filed as part of the Form 10-Q, including certifications and interactive data files - Exhibits include certifications (CEO, CFO), interactive data files (Inline XBRL for financial statements and notes), and the cover page[115]