What changed in this filing

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Item 1. Financial Statements

2023-11-03 compared with 2023-08-04 · 144 added, 116 removed, 376 unchanged (41% of the section changed)

1 unchanged sentence

HUB GROUP, INC.

CONSOLIDATED BAL ANCE SHEETS

C ONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

September 30,

CURRENT ASSETS:

51 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Operating revenue

23 unchanged sentences

HUB GROUP, INC.

UNAUDITED CONSOLIDATED STATEMENTS STOCKHOLDERS’

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(in thousands, except per share amounts)

1 unchanged sentence

Comprehensive

Treasury Stock

Balance March 31, 2022

Balance June 30, 2022

Stock withheld for payments of withholding taxes

Purchase of treasury stock

Purchase of treasury stock from related party

Issuance of restricted stock awards, net of forfeitures

1 unchanged sentence

Foreign currency translation adjustment

Balance September 30, 2022

Balance June 30, 2023

Balance March 31, 2023

Purchase of treasury stock

Stock withheld for payments of withholding taxes

Purchase of treasury stock

Issuance of restricted stock awards, net of forfeitures

1 unchanged sentence

Foreign currency translation adjustment

Balance June 30, 2023

Balance September 30, 2023

Balance December 31, 2021

Stock withheld for payments of withholding taxes

Purchase of treasury stock

Purchase of treasury stock from related party

Issuance of restricted stock awards, net of forfeitures

1 unchanged sentence

Foreign currency translation adjustment

Balance June 30, 2022

Balance September 30, 2022

Balance December 31, 2022

Purchase of treasury stock

Stock withheld for payments of withholding taxes

Purchase of treasury stock

Issuance of restricted stock awards, net of forfeitures

1 unchanged sentence

Foreign currency translation adjustment

Balance June 30, 2023

Balance September 30, 2023

Some amounts may not foot due to rounding.

See notes to unaudited consolidated financial statements.

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(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

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Purchases of property and equipment

Cash used in acquisition

Cash provided by (used in) acquisitions

Net cash used in investing activities

5 unchanged sentences

Proceeds from issuance of debt

Net cash (used in) provided by financing activities

Purchase of treasury stock from related party

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

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However, we believe that the disclosures contained herein are adequate to make the information presented not misleading.

The financial statements reflect, in our opinion, all material adjustments (which include only normal recurring adjustments) necessary to fairly present our financial position as of June 30, 2023 and results of operations for the three and six months ended June 30, 2023 and 2022.

The financial statements reflect, in our opinion, all material adjustments (which include only normal recurring adjustments) necessary to fairly present our financial position as of September 30, 2023 and results of operations for the three and nine months ended September 30, 2023 and 2022.

These unaudited consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 10-K”).

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The following is a reconciliation of our earnings per share (in thousands, except for per share data):

Three Months Ended June 30,

Six Months Ended June 30,

Net income for basic and diluted earnings per share

Three Months Ended September 30,

Nine Months Ended September 30,

Weighted average shares outstanding - basic

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Intermodal and Transportation Solutions (“ITS”) and Logistics which are based primarily on the services each segment provides.

Results for the three and six months ended June 30, 2022 have been recast below to conform with the current period presentation.

Results for the three and nine months ended September 30, 2023 have been recast below to conform with the current period presentation.

Our ITS segment includes our asset-light business lines:

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Our Intermodal and Transportation Solutions segment offers high service, nationwide door-to-door intermodal transportation, providing value, visibility and reliability in both transcontinental and local lanes by combining rail transportation with local trucking.

This segment also includes our trucking operations which provides drayage for our intermodal service offering and serves our customers who require high service local and regional trucking transportation using equipment dedicated to their needs.

Our dedicated service operation offers fleets of equipment and drivers to each customer on a contract basis, as well as the management and infrastructure to operate accordin g to the customer’s high service expectations.

As of June 30, 2023, our trucking transportation operation consisted of approximately 2,400 tractors, 3,200 employee drivers and 4,400 trailers.

We also contract for services with approximately 560 independent owner-operators.

This segment includes our trucking operations which provides our customers with local pickup and delivery (referred to as “drayage”) as well as high service local and regional trucking transportation using equipment dedicated to their needs.

We arrange for the movement of our customers’

freight in one of our approximately 50,000 containers.

Our Logistics segment offers a full range of trucking transportation services, including dry van, expedited, less-than-truckload, refrigerated and flatbed, all of which is provided by third party carriers with whom we contract.

This segment also offers a wide range of logistics services including transportation management, shipment optimization, load consolidation, mode selection, carrier management, load planning and execution, warehousing, fulfillment, cross-docking, consolidation services and final mile delivery.

We leverage proprietary technology along with collaborative relationships with third party service providers to deliver cost savings and performance-enhancing supply chain services to our clients.

We contract with railroads to provide transportation for the long-haul portion of the shipment between rail terminals.

Drayage between origin or destination and rail terminals are provided by our own trucking operations and third parties with whom we contract.

As of September 30, 2023 , our trucking transportation operation consisted of approximately 2,300 tractors, 3,100 employee drivers and 4,400 trailers.

We also contract for services with approximately 480 independent owner-operators.

Our Logistics segment offers a wide range of services including transportation management, freight brokerage services, shipment optimization, load consolidation, mode selection, carrier management, load planning and execution, warehousing, fulfillment, cross-docking, consolidation services and final mile delivery.

These services include a full range of trucking transportation services, including dry van, expedited, less-than-truckload, refrigerated and flatbed, all of which is provided by third party carriers with whom we contract.

We also leverage proprietary technology along with collaborative relationships with third party service providers to deliver cost savings and performance-enhancing supply chain services to our clients.

Our transportation management offering also serves as a source of volume for our ITS segment.

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Operating Revenue

September 30,

Intermodal and Transportation Solutions

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Operating Income

September 30,

Intermodal and Transportation Solutions

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

Depreciation and Amortization

September 30,

Intermodal and Transportation Solutions

1 unchanged sentence

Fair Value Measurement

The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of June 30, 2023 and December 31, 2022.

As of June 30, 2023, the fair value of the Company’s fixed-rate borrowings was $ 9.0 million less than the historical carrying value of $ 336.6 million.

The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of September 30, 2023 and December 31, 2022.

As of September 30, 2023, the fair value of the Company’s fixed-rate borrowings was $ 8.9 million less than the historical carrying value of $ 346.6 million.

As of December 31, 2022 , the fair value of the Company's fixed-rate borrowings was $ 11.7 million less than the historical carrying value of $ 342.5 million.

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We consider as cash equivalents all highly liquid instruments with an original maturity of three months or less.

As of June 30, 2023 and December 31, 2022, our cash and temporary investments were with high quality financial institutions in demand deposit accounts, savings accounts, checking accounts and money market accounts.

Restricted investments included $ 20.3 million and $ 18.1 million as of June 30, 2023 and December 31, 2022, respectively, of mutual funds which are reported at fair value.

These investments relate to our nonqualified deferred compensation plan and insurance deposits.

As of September 30, 2023 and December 31, 2022, our cash and temporary investments were with high quality financial institutions in demand deposit accounts, savings accounts, checking accounts and money market accounts.

Restricted investments included $ 19.8 million and $ 18.1 million as of September 30, 2023 and December 31, 2022, respectively, of mutual funds which are reported at fair value.

These investments relate to our non-qualified deferred compensation plan and insurance deposits.

Our assets and liabilities measured at fair value are based on valuation techniques that consider prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.

These valuation methods are based on either quoted market prices (Level 1) or inputs, other than quoted prices in active markets, that are observable either directly or indirectly (Level 2), or unobservable inputs (Level 3).

These valuation methods are based on either quoted market prices (Level 1) or inputs, other than quoted prices in active markets, which are observable either directly or indirectly (Level 2), or unobservable inputs (Level 3).

Cash and cash equivalents, mutual funds, accounts receivable and accounts payable are defined as “Level 1,”

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We have standby letters of credit that expire in 2023 and 2024 .

As of June 30, 2023 and December 31, 2022, our letters of credit were $ 0.9 million and $ 43.4 million, respectively.

As of June 30, 2023 and December 31, 2022 , we had no borrowings under the Credit Agreement and our unused and available borrowings were $ 349.1 million and $ 306.6 million, respectively.

We were in compliance with our debt covenants as of June 30, 2023 and December 31, 2022.

As of September 30, 2023, and December 31, 2022, our letters of credit totaled $ 0.9 million and $ 43.4 million, respectively.

As of September 30, 2023 and December 31, 2022 , we had no borrowings under the Credit Agreement and our unused and available borrowings were $ 349.1 million and $ 306.6 million, respectively.

We were in compliance with our debt covenants as of September 30, 2023 and December 31, 2022.

We have entered into various Equipment Notes (“Notes”) for the purchase of tractors, trailers, containers and refrigeration units.

1 unchanged sentence

Our outstanding Notes are as follows (in thousands):

September 30,

Interim funding for equipment received and expected to be converted to an equipment note in subsequent year;

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However, actual outcomes could be material to the Company's financial position, operating results, or cash flows for any particular period.

Subsequent Event

In October 2023, our Board of Directors (the "Board") authorized the purchase of up to $ 250 million of our Class A Common Stock pursuant to a share repurchase program that replaces prior share repurchase programs.

Under the Program, the shares may be repurchased in the open market or in privately negotiated transactions, from time to time subject to market and other conditions.

The approved share repurchase program does not obligate us to repurchase any dollar amount or number of shares, and the program may be modified, suspended, or discontinued at any time.

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

13 unchanged sentences

Beginning in first quarter 2023, we have two reportable segments - Intermodal and Transportation Solutions, and Logistics, which are based primarily on the services each segment provides.

Results for the for the three and six months ended June 30, 2022, have been recast to conform with the current period presentation.

Results for the three and nine months ended September 30, 2022, have been recast to conform with the current period presentation.

Intermodal and Transportation Solutions.

This segment includes our trucking operations which provides our customers with local pickup and delivery as well as high service local and regional trucking transportation using equipment dedicated to their needs.

In 2023, approximately 77% of our drayage services was provided by our own fleet.

We arrange for the movement of our customers’

1 unchanged sentence

We contract with railroads to provide transportation for the long-haul portion of the shipment between rail terminals.

Local pickup and delivery services (referred to as “drayage”) between origin or destination and rail terminals are provided by our own trucking operations and third-parties with whom we contract.

As of June 30, 2023, our trucking transportation operation consisted of approximately 2,400 tractors, 3,200 employee drivers and 4,400 trailers.

Drayage between origin or destination and rail terminals are provided by our own trucking operations and third parties with whom we contract.

As of September 30, 2023, our trucking transportation operation consisted of approximately 2,300 tractors, 3,100 employee drivers and 4,400 trailers.

We also contract for services with approximately 480 independent owner-operators.

Our transportation management offering also serves as a source of volume for our ITS segment.

Many of the customers for these solutions are consumer goods companies who sell into the retail channel.

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We are working on several yield enhancement projects including network optimization, matching of inbound and outbound loads, reducing empty miles, improving our recovery of accessorial costs, increasing our driver and asset utilization, reducing repositioning costs, providing holistic solutions and improving low profit freight.

Hub’s top 50 customers represent approximately 63% of revenue for the six months ended June 30, 2023, while one customer accounted for more than 10% of our revenue for the six months ended June 30, 2023.

Hub’s top 50 customers represent approximately 63% of revenue for the nine months ended September 30, 2023, while one customer accounted for more than 10% of our revenue for the nine months ended September 30, 2023.

We use various performance indicators to manage our business.

We closely monitor profit levels for our top customers.

We also evaluate on-time performance, customer service, cost per load and daily sales outstanding by customer account.

We also evaluate on-time performance, customer service, cost per load and outstanding accounts receivable by customer.

Vendor cost changes and vendor service levels are also monitored closely.

Uncertainties and risks to our outlook include the following:

inflation, a slowdown in consumer spending (driven by, among other factors, rising inflation, an economic recession, increases in interest rates, and geopolitical concerns), a shift by consumers to spending on services at the expense of goods, an increase of retailers’

inventory levels, a significant increase in transportation supply in the marketplace, aggressive pricing actions by our competitors and any inability to pass cost increases, such as transportation and warehouse costs, through to our customers, all of which could have a materially negative impact on our revenue, profitability and cash flow in 2023.

inflation, increased healthcare costs, a slowdown in consumer spending (driven by, among other factors, rising inflation, increases in interest rates, an economic recession and geopolitical concerns), a shift by consumers to spending on services at the expense of goods, an increase of retailers’

inventory levels, the ability of customers to pay our accounts receivable, a significant increase in transportation supply in the marketplace, aggressive pricing actions by our competitors and any inability to pass cost increases, such as transportation and warehouse costs, through to our customers, all of which could have a materially negative impact on our revenue, profitability and cash flow in 2023.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

The following table summarizes our operating revenue by segment (in thousands):

1 unchanged sentence

Operating Revenue

September 30,

Intermodal and Transportation Solutions

4 unchanged sentences

Operating Income

September 30,

Intermodal and Transportation Solutions

1 unchanged sentence

Total consolidated operating revenue decreased 24% to $1,025 million in 2023 from $1,355 million in 2022.

Intermodal and Transportation Solutions (“ITS”) revenue decreased 30% to $615 million primarily due to a 17% decrease in intermodal volume driven by elevated retailer inventory levels and soft import activity that impacted demand for our services, an 18% decrease in intermodal revenue per load (primarily due to lower price, fuel prices and mix) and a 7% decline in dedicated revenues due to lost customers partially offset by growth with existing and new customers.

ITS operating income decreased to $32 million, 5% of revenue, as compared to $101 million, 11% of revenue in the prior year due to lower volume, lower customer rates, higher equipment costs and lower surcharges and accessorial income.

These headwinds were partially offset by lower drayage costs as we increased the portion of drayage handled on our own fleet to 79% in the second quarter of 2023 as compared to 62% in the prior year, as well as an improvement in profitability at our Dedicated service line.

Logistics revenue decreased 17% to $454 million primarily driven by lower revenue per load in our brokerage service line and lower managed transportation service line revenue, partially offset by revenue from TAGG.

Brokerage volumes declined 1% compared to the prior year.

Intermodal and Transportation Solutions (“ITS”) revenue decreased 30% to $595 million primarily due to a 16% decrease in intermodal volume due to low transportation demand and an oversupply of truckload carrier capacity, a 20% decrease in intermodal revenue per load (primarily due to lower price, fuel prices and mix) and a 6% decline in dedicated revenues due to lost customers partially offset by growth with existing and new customers.

ITS operating income decreased to $13 million, 2% of revenue, as compared to $87 million, 10% of revenue in the prior year, due to lower customer rates, volume and accessorials.

These headwinds were partially offset by lower drayage costs, rail expenses and equipment costs.

In third quarter 2023, we increased the portion of drayage handled on our own fleet to 78% as compared to 62% in the prior year.

Logistics revenue decreased 12% to $460 million primarily driven by lower revenue per load in our brokerage service line, partially offset by performance of our managed transportation, consolidation and final mile service lines, as well as contribution from our fulfillment business.

Brokerage volumes increased 5% compared to the prior year.

Operating income was 6% of revenue in both 2023 and 2022.

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Three Months Ended

September 30,

Operating revenue

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Purchased transportation and warehousing costs decreased 24% to $773 million in 2023 from $1,023 million in 2022.

Purchased transportation and warehousing costs declined as compared to prior year due to lower volumes, reductions in third party carrier costs, decreased use of third-party carriers for drayage in ITS and a change in method of estimating accruals for certain costs, partially offset by higher equipment costs.

Purchased transportation and warehousing costs declined as compared to prior year due to lower volumes, reductions in third party carrier costs and decreased use of third-party carriers for drayage in ITS.

Salaries and Benefits

1 unchanged sentence

As a percentage of revenue, salaries and benefits increased to 13.5% in 2023 from 10.1% in 2022.

This increase was primarily due to $30 million of incremental expense related to growth of our driver and warehouse employee headcount, partially offset by an $18 million reduction in office employee compensation due to lower headcount and lower incentive compensation expense.

Headcount, which includes drivers, warehouse personnel and office employees, was 5,864 and 4,783 as of June 30, 2023 and 2022, respectively.

The increase in headcount related primarily to drivers as we have expanded the portion of drayage coverage handled by our own fleet, as well as the acquisition of TAGG, which added 671 warehouse employees.

This increase was primarily due to $19 million of incremental expense related to growth of our driver and warehouse employees which includes a $2 million increase in medical claims, as well as increased expenses resulting from TAGG, which incurred three months of expenses in 2023 as compared to just over one month of expenses in 2022.

These increases were partially offset by an $18 million reduction in office employee compensation due to lower headcount and lower incentive compensation expense.

Headcount, which includes drivers, warehouse personnel and office employees, was 5,610 and 5,783 as of September 30, 2023 and 2022, respectively.

The decrease in headcount of office and warehouse employees was partially offset by increases in the number of drivers as we have expanded the portion of drayage handled by our own fleet.

Depreciation and Amortization

Depreciation and amortization expense increased to $36 million in 2023 from $34 million in 2022.

This increase was primarily due to increased container and tractor depreciation expense as well as the amortization of intangibles related to the acquisition of TAGG.

This increase was primarily due to increased container, tractor and warehouse equipment depreciation expense as well as the amortization of intangibles related to the acquisition of TAGG.

This expense, as a percentage of revenue, increased to 3.5% in 2023 from 2.5% in 2022.

Depreciation expense includes transportation equipment, technology investments, leasehold improvements, office equipment and building improvements.

Depreciation expense includes transportation equipment, technology investments, leasehold improvements, warehouse equipment, office equipment and building improvements.

Insurance and Claims

Insurance and claims expense increased to $12 million in 2023 from $11 million in 2022.

This increase was primarily due to increased auto liability expenses not covered by insurance which increased due to an increase in mileage run on our own trucking fleet.

These expenses, as a percentage of revenue, increased to 1.1% in 2023 from 0.8% in 2022.

Insurance and claims expense decreased to $12 million in 2023 from $18 million in 2022.

This decrease was primarily due to less claim expenses related to both auto liability and workers compensation claims in 2023.

These expenses, as a percentage of revenue, decreased to 1.1% in 2023 from 1.3% in 2022.

General and Administrative

General and administrative expenses decreased to $24 million in 2023 from $34 million in 2022.

These expenses, as a percentage of revenue, remained consistent at 2.6% in both 2023 and in 2022.

This decrease was primarily due to a decrease in legal and acquisition-related expenses, bad debt expense and professional services expense including IT software expense, partially offset by increased expense due to the acquisition of TAGG and higher rent expense.

These expenses, as a percentage of revenue, decreased to 2.4% in 2023 from 2.5% in 2022.

This expense decrease was primarily due to higher 2022 expenses resulting from an impairment charge of a right-of-use asset, higher use tax expense and higher legal expense.

These decreases were partially offset by higher rent expense and increased expenses resulting from TAGG, which incurred three months of expenses in 2023 as compared to just over one month of expenses in 2022.

Gain on Sale of Assets, Net

1 unchanged sentence

This decrease resulted from both less units sold and a lower average gain per unit sold in 2023 as compared to 2022.

These gains, as a percentage of revenue, decreased to 0.1% in 2023 from 0.6% in 2022.

Other Income (Expense)

Other expense decreased to $1 million in 2023 from $2 million in 2022.

Interest expense increased due primarily to higher interest rates on our debt to $3 million in 2023 from $1 million in 2022.

This increase was offset by increased interest income to $2 million in 2023 due to higher interest rates on our cash balance.

Interest expense increased to $4 million in 2023 from $2 million in 2022 due primarily to higher interest rates on our debt and higher debt balances.

This expense increase was partially offset by increased interest income of $3 million in 2023 due to higher interest rates on our cash balance and higher cash balances.

These changes resulted in Other Expense decreasing to $1 million in 2023 from $3 million in 2022.

Provision for Income Taxes

The provision for income taxes decreased to $15 million in 2023 from $33 million in 2022.

The provision for income taxes decreased to $11 million in 2023 from $28 million in 2022 due a decrease in pre-tax income.

We provided for income taxes using an effective rate of 26.9% in 2023 and an effective rate of 24.2% in 2022.

The second quarter 2023 effective tax rate of 23.9% benefitted primarily from a change in state apportionment methodology.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

The third quarter 2023 effective tax rate of 26.9% was adversely affected by a reduction in the expected use of state income tax credits and larger permanent differences in 2023.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

The following table summarizes our operating revenue by segment (in thousands):

Six Months Ended

Nine Months Ended

Operating Revenue

September 30,

Intermodal and Transportation Solutions

2 unchanged sentences

The following table summarizes our operating income by segment (in thousands):

Six Months Ended

Nine Months Ended

Operating Income

September 30,

Intermodal and Transportation Solutions

1 unchanged sentence

Total consolidated operating revenue decreased 21% to $3,218 million in 2023 from $4,055 million in 2022.

Intermodal and Transportation Solutions (“ITS”) revenue decreased 20% to $1,324 million primarily due to a 15% decrease in intermodal volume driven by elevated retailer inventory levels and soft import activity that impacted demand for our services, an 8% decrease in intermodal revenue per load (primarily due to lower price, fuel prices and mix) and a 1% decline in dedicated revenues due to lost customers, partially offset by growth with existing and new customers.

Intermodal and Transportation Solutions (“ITS”) revenue decreased 23% to $1,919 million primarily due to a 15% decrease in intermodal volume due to low transportation demand and an oversupply of truckload carrier capacity, a 12% decrease in intermodal revenue per load (primarily due to lower price, fuel prices and mix) and a 3% decline in dedicated revenues due to lost customers partially offset by growth with existing and new customers.

ITS operating income decreased to $95 million, 5% of revenue, as compared to $273 million, 11% of revenue in the prior year due to lower volume, lower customer rates, higher equipment costs and lower surcharges and accessorial income.

These headwinds were partially offset by lower drayage costs as we increased the portion of drayage handled on our own fleet to 76% in the first six months of 2023 as compared to 60% in the prior year, as well as an improvement in profitability at our Dedicated service line.

Logistics revenue decreased 15% to $923 million primarily driven by lower revenue per load in our brokerage service line and lower managed transportation service line revenue, partially offset by revenue from TAGG.

These headwinds were partially offset by lower drayage costs as we increased the portion of drayage handled on our own fleet to 77% in the first nine months of 2023 as compared to 61% in the prior year, as well as an improvement in profitability at our Dedicated service line.

Logistics revenue decreased 14% to $1,383 million primarily driven by lower revenue per load in our brokerage service line and lower managed transportation service line revenue, partially offset by an increase in fulfillment revenue.

Brokerage volumes increased 1% compared to the prior year.

Operating income was 6% of revenue in both 2023 and 2022.

1 unchanged sentence

The following is a summary of operating results and certain items in the consolidated statements of income as a percentage of revenue (in thousands):

Six Months Ended

Nine Months Ended

September 30,

Operating revenue

11 unchanged sentences

Purchased transportation and warehousing costs decreased 22% to $2,403 million in 2023 from $3,081 million in 2022.

Salaries and Benefits

1 unchanged sentence

As a percentage of revenue, salaries and benefits increased to 13.0% in 2023 from 9.8% in 2022.

This increase was primarily due to $58 million of incremental expense related to growth of our driver and warehouse employee headcount, partially offset by a $37 million reduction in office employee compensation due to lower headcount and lower incentive compensation expense.

This increase was primarily due to $78 million of incremental expense related to growth of our driver and warehouse employees which includes a $4 million increase in medical claims, as well as increased expenses resulting from TAGG, which incurred nine months of expenses in 2023 as compared to just over four months of expenses in 2022.

These increases were partially offset by a $56 million reduction in office employee compensation due to lower headcount and lower incentive compensation expense.

Depreciation and Amortization

Depreciation and amortization expense increased to $107 million in 2023 from $97 million in 2022.

This increase was primarily due to increased container and tractor depreciation expense as well as the amortization of intangibles related to the acquisition of TAGG.

This increase was primarily due to increased container, tractor and warehouse equipment depreciation expense as well as the amortization of intangibles related to the acquisition of TAGG.

This expense, as a percentage of revenue, increased to 3.3% in 2023 from 2.4% in 2022.

Depreciation expense includes transportation equipment, technology investments, leasehold improvements, office equipment and building improvements.

Depreciation expense includes transportation equipment, technology investments, leasehold improvements, warehouse equipment, office equipment and building improvements.

Insurance and Claims

Insurance and claims expense increased to $24 million in 2023 from $20 million in 2022.

This increase was primarily due to increased workers compensation costs and auto liability expenses not covered by insurance which increased due to an increase in mileage run on our own trucking fleet.

Insurance and claims expense decreased to $36 million in 2023 from $38 million in 2022.

This decrease was primarily due to less claim expenses related to both auto liability and workers compensation claims in 2023.

These expenses, as a percentage of revenue, increased to 1.1% in 2023 from 0.9% in 2022.

2 unchanged sentences

These expenses, as a percentage of revenue, increased to 2.4% in 2023 from 2.3% in 2022.

This expense decrease was primarily due to decreases in legal and acquisition-related expenses, use tax expense, professional services expense including IT software expense, less impairment of a right-of-use asset, bad debt expense and outside sales commissions, partially offset by higher rent expense, increased expenses resulting from TAGG, which incurred nine months of expenses in 2023 as compared to just over one month of expenses in 2022 and higher temporary labor expense.

Gain on Sale of Assets, Net

Net gains on the sale of equipment decreased to $6 million in 2023 from $21 million in 2022.

The decrease resulted from both less units sold and a lower average gain per unit sold in 2023 as compared to 2022.

These gains, as a percentage of revenue, decreased to 0.2% in 2023 from 0.5% in 2022.

This decrease resulted from both less units sold and a lower average gain per unit sold in 2023 as compared to 2022.

Other Income (Expense)

Other expense remained consistent at $3 million in both 2023 and in 2022.

Interest expense increased to $6 million in 2023 from $3 million in 2022.

This increase was due primarily to higher interest rates on our debt.

Interest income increased to $3 million in 2023 due to higher interest rates on our cash balance.

Interest expense increased to $10 million in 2023 from $5 million in 2022 due primarily to higher interest rates on our debt and higher average debt balances.

This expense increase was partially offset by increased interest income of $6 million in 2023 due to higher interest rates on our cash balance and higher cash balances.

These changes resulted in Other Expense decreasing to $3 million in 2023 from $6 million in 2022.

Provision for Income Taxes

The provision for income taxes decreased to $29 million in 2023 from $59 million in 2022.

The provision for income taxes decreased to $41 million in 2023 from $87 million in 2022 due a decrease in pre-tax income.

We provided for income taxes using an effective rate of 22.7% in 2023 and an effective rate of 23.9% in 2022.

The effective tax rate for the six months ended June 30, 2023 of 21.4% benefitted primarily from a change in state apportionment methodology.

The lower effective tax rate in 2023 resulted primarily from a change in state apportionment methodology.

LIQUIDITY AND CAPITAL RESOURCES

Our financing and liquidity strategy is to fund operating cash payments through cash received from the provision of services, cash on hand, and to a lesser extent, from cash received from the sale of equipment.

As of June 30, 2023, we had $342 million of cash and $20.3 million of restricted investments.

Our financing and liquidity strategy is to fund operating cash payments and future dividends through cash received from the provision of services, cash on hand, and to a lesser extent, from cash received from the sale of equipment.

As of September 30, 2023, we had $401 million of cash and cash equivalents and $20 million of restricted investments.

We generally fund our purchases of transportation equipment through the issuance of secured, fixed rate Equipment Notes.

Payments for our other investing activities, investments in warehousing improvements and our capitalized technology investments, have been funded by cash on hand or cash flows from operations.

In prior years, we have funded our business acquisitions from cash on hand.

Payments for our other investing activities, such as the construction of our office buildings and our capitalized technology investments, have been funded by cash on hand or cash flows from operations.

Cash used in financing activities including the purchase of treasury stock has been funded by cash from operations or cash on hand.

We have not historically used our Credit Facility to fund our operating, investing, or financing cash needs, though it is available to fund future cash requirements as needed.

In the last three years, we have funded our business acquisitions from cash on hand, though in the future we may elect to fund these activities through a combination of cash on hand, borrowings on our Credit Facility, or from issuance of secured or unsecured debt.

Based on past performance and current expectations, we believe cash on hand and cash received from the provision of services, along with other financing sources, will provide us the necessary capital to fund transactions and achieve our planned growth for the next twelve months and the foreseeable future.

Cash provided by operating activities for the six months ended June 30, 2023 was approximately $221 million, which resulted primarily from net income of $108 million plus non-cash charges of $110 million and changes in operating assets and liabilities of $3 million.

Cash provided by operating activities for the nine months ended September 30, 2023 was $323 million, which resulted primarily from net income of $139 million plus non-cash charges of $168 million and changes in operating assets and liabilities of $16 million.

Cash provided by operating activities totaled $323 million in 2023 compared to $350 million in 2022.

The $20 million increase in cash flow was primarily due to increases in a positive change in operating assets and liabilities of $65 million, primarily due to a decrease in the accounts receivable balance, an increase in non-cash charges of $37 million partially offset by a decrease in net income of $82 million.

Net cash used in investing activities for the six months ended June 30, 2023 was $50 million which resulted from capital expenditures of $66 million, partially offset by proceeds from the sale of equipment of $15 million.

The $28 million decrease in cash flow was primarily due to a decrease in net income of $139 million, partially offset by an increase in non-cash charges of $59 million and an increase in the change in assets and liabilities of $52 million.

Net cash used in investing activities for the nine months ended September 30, 2023 was $85 million which included capital expenditures of $106 million, partially offset by proceeds from the sale of equipment of $20 million.

Capital expenditures of $106 million related primarily to tractors of $50 million, containers of $34 million, technology investments of $11 million, warehouse equipment of $9 million and leasehold improvements of $2 million.

Capital expenditures decreased by approximately $52 million in 2023 as compared to 2022.

The 2023 decrease was due to lower spend on our corporate headquarters of $15 million, decreases in container purchases of $14 million and technology investments of $7 million.

These decreases were partially offset by increases in the purchase of tractors and warehouse equipment of $7 million each and leasehold improvements of $2 million.

The 2023 decrease was due to decreased container purchases of $39 million, less spend on our corporate headquarters of $17 million and technology investments of $8 million.

These decreases were partially offset by more purchases of warehouse equipment of $9 million, tractors of $2 million and the remainder related to leasehold improvements in 2023.

In 2023, we estimate capital expenditures will range from $140 million to $150 million.

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We plan to fund these expenditures with a combination of cash and debt.

Net cash used in financing activities for the six months ended June 30, 2023 was $115 million which includes purchases of treasury stock of $100 million, repayments of long-term debt of $56 million, cash for stock tendered for payments of withholding taxes of $8 million and finance lease payments of $1 million, partially offset by proceeds from the issuance of debt of $50 million.

Net cash used in financing activities for the nine months ended September 30, 2023 was $123 million which includes cash used for the purchase of treasury stock of $117 million, repayments of long-term debt of $81 million, cash used for stock tendered for payments of withholding taxes of $8 million and finance lease payments of $2 million, partially offset by proceeds from the issuance of debt of $85 million.

Debt incurred in 2023 was used to fund the purchase of transportation equipment.

The $121 million increase in cash used in financing activities for 2023 versus 2022 was primarily due to the increase in the purchase of treasury stock of $100 million, less proceeds from the issuance of debt of $16 million and increases in both cash paid for stock related to employee withholding taxes and repayments of long-term debt of $2 million each.

The $51 million increase in cash used in financing activities for 2023 versus 2022 was primarily due to a decrease in proceeds from the issuance of debt of $42 million, an increase in the purchase of treasury stock of $7 million and an increase in cash paid for stock related to employee withholding taxes of $2 million.

As a result of anticipated favorable timing differences, primarily related to depreciation and compensation, we expect our cash paid for income taxes in 2023 to be less than our income tax expense.

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We have standby letters of credit that expire in 2023 and 2024.

As of June 30, 2023 and December 31, 2022, our letters of credit were $1 million and $43 million, respectively.

As of June 30, 2023, and December 31, 2022, we had no borrowings under the Credit Agreement and our unused and available borrowings were $349 million and $307 million, respectively.

We were in compliance with our debt covenants as of June 30, 2023 and December 31, 2022.

As of September 30, 2023 and December 31, 2022, our letters of credit were $1 million and $43 million, respectively.

As of September 30, 2023, and December 31, 2022, we had no borrowings under the Credit Agreement and our unused and available borrowings were $349 million and $307 million, respectively.

We were in compliance with our debt covenants as of September 30, 2023 and December 31, 2022.

We are continually evaluating the possible effects of current economic conditions and reasonable and supportable economic forecasts in operational cash flows, including the risks of declines in the overall freight market and our customers’

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk as of June 30, 2023 from that presented in our 2022 10-K.

There have been no material changes in our market risk as of September 30, 2023 from that presented in our 2022 10-K.

CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.

As of June 30, 2023, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)).

Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2023.

As of September 30, 2023, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)).

Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.

(b) Changes in Internal Control over Financial Reporting.

There have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the fiscal quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On August 22, 2022, we completed the acquisition of TAGG.

We are currently integrating processes, employees, technologies and operations.

Management will continue to evaluate our internal controls over financial reporting as we complete our integration.

Other Information

There have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the fiscal quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Oth er Information

Legal Proceedings

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements