Hub Group, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Statements in this section and other parts of this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements, provided pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that might cause the actual performance of the Company to differ materially from those expressed or implied by this discussion and, therefore, should be viewed with caution. Further information on the risks that may affect the Company’s business is included in filings it makes with the SEC from time to time, including those discussed under the “Risk Factors” section in the 2023 10-K and subsequent filings. The Company assumes no obligation to update any such forward-looking statements. EXECUTIVE SUMMARY We are a leading supply chain solutions provider in North America that offers comprehensive transportation and logistics management services focused on reliability, visibility and value for our customers. Our service offerings include a full range of freight transportation and logistics services, some of which are provided by assets we own and operate, and some of which are provided by third parties with whom we contract. Our services include intermodal, truckload, less-than-truckload, flatbed, temperature-controlled, dedicated and regional trucking. Other services include full outsource logistics solutions, transportation management services, freight consolidation, warehousing and fulfillment, final mile delivery, parcel and international services. We service a large and diversified customer base in a broad range of industries, including retail, consumer products and durable goods. We believe our strategy to offer multi-modal supply chain management solutions serves to strengthen and deepen our relationships with our customers and allows us to provide a more cost effective and higher service solution. Intermodal and Transportation Solutions. 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 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 the first six months of 2024, approximately 75% of our drayage services was provided by our own fleet. We arrange for the movement of our customers’ freight in one of our approximately 50,000 containers. 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. 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 according to the customer’s high service expectations. As of June 30, 2024, our trucking transportation operation consisted of approximately 2,200 tractors, 2,900 employee drivers and 4,300 trailers. We also contract for services with approximately 400 independent owner-operators. These assets and contractual services are used to support drayage for our intermodal service offering and to serve 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 according to the customer’s high service expectations. Logistics . Our Logistics segment offers a wide range of non-asset-based 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. Logistics includes our brokerage business which consists of a full range of trucking transportation services, including dry van, expedited, less-than-truckload (“LTL”), refrigerated and flatbed, all of which is provided by third-party carriers with whom we contract. 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. 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. Our final mile delivery offering provides residential final mile delivery and installation of appliances and big and bulky goods. Final mile operates through a network of independent service providers in company, customer and third-party facilities throughout the continental United States. Our business operates or has access to approximately 10 million square feet of warehousing and cross-dock space across North America, to which our customers ship their goods to be stored and distributed to destinations including residences, retail stores and other commercial locations. These services offer our customers shipment visibility, transportation cost savings, high service and compliance with retailers’ increasingly stringent supply chain requirements. 13 On December 20, 2023, we acquired 100% of the equity interest of Forward Air Final Mile (“FAFM”). Total consideration for the transaction was $257.2 million. $260.9 million was paid in cash in December 2023 while $3.7 million was received from the seller in the second quarter of 2024 as part of the post-closing true-up of net working capital. We are focused on several margin 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 71% of revenue for the six months ended June 30, 2024, while one customer accounted for more than 10% of our revenue in both segments for both the six months ended June 30, 2024 and 2023. We use various performance indicators to manage our business. We closely monitor operating cash flow, profit levels for our top customers, daily sales outstanding by customer account and vendor cost changes. On-time performance, customer service, cost per load and vendor service levels are also monitored closely. The following table includes the one customer that represented 10% or more of our revenue by segment for the six months ending June 30, 2024 and 2023, respectively: Six Months Ended Customer A Jume 30, 2024 2023 ITS 19% 14% Logistics 15% 10% Total operating revenue 18% 13% Uncertainties and risks to our outlook include inflation, increased healthcare costs, a slowdown in consumer spending (driven by, among other factors, 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, elevated levels of 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 2024. Exiting of truckload capacity, retail inventory levels declining leading to restocking demand, a return of typical shipping peak season demands and a stronger used tractor market could have a materially positive impact on our revenue, profitability and cash flows in 2024. RESULTS OF OPERATIONS Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023 The following table summarizes our operating revenue by segment (in thousands): Three Months Ended Operating Revenue June 30, 2024 2023 Intermodal and Transportation Solutions $ 561,033 $ 614,632 Logistics 459,088 453,549 Inter-segment eliminations (33,626 ) (27,719 ) Total operating revenue $ 986,495 $ 1,040,462 The following table summarizes our operating income by segment (in thousands): Three Months Ended Operating Income June 30, 2024 2023 Intermodal and Transportation Solutions $ 13,639 $ 31,777 Logistics 25,889 30,293 Total operating income $ 39,528 $ 62,070 14 Total consolidated operating revenue decreased 5% to $986 million in 2024 from $1,040 million in 2023. Intermodal and Transportation Solutions (“ITS”) revenue decreased 9% to $561 million primarily due to lower fuel revenue, lower accessorial revenue, price declines and mix, partially offset by an 8% increase in intermodal volume and a 4% increase in dedicated revenue resulting from growth of existing customers. ITS operating income decreased to $14 million, 2.4% of revenue, as compared to $32 million, 5.2% of revenue, in the prior year due to lower customer rates and lower accessorial revenue. These headwinds were partially offset by lower equipment costs, lower drayage costs and lower accessorial costs. Logistics revenue increased 1% to $459 million primarily due to the recent acquisition in final mile, partially offset by lower revenue in our brokerage service line and consolidation and fulfillment service lines. Brokerage revenue per load declined 13% due to lower pricing, fuel and customer mix and a 4% decline in volume. Logistics operating income decreased to $26 million, 5.6% of revenue, as compared to $30 million, 6.7% of revenue, due to lower brokerage margins, partially offset by our recent acquisition in final mile. The following is a summary of operating results and certain items in the condensed consolidated statements of income as a percentage of revenue (in thousands): Three Months Ended June 30, 2024 2023 Operating revenue $ 986,495 100.0% $ 1,040,462 100.0% Operating expenses: Purchased transportation and warehousing 727,236 73.7% 763,609 73.4% Salaries and benefits 141,856 14.4% 141,823 13.6% Depreciation and amortization 37,772 3.8% 35,386 3.4% Insurance and claims 12,639 1.3% 11,676 1.1% General and administrative 27,877 2.8% 26,757 2.6% Gain on sale of assets, net (413 ) 0.0% (859 ) -0.1% Total operating expenses 946,967 96.0% 978,392 94.0% Operating income $ 39,528 4.0% $ 62,070 6.0% Other income (expense): Interest expense (3,689 ) -0.4% (3,116 ) -0.3% Interest income 1,808 0.2% 2,087 0.2% Other, net (66 ) 0.0% 69 0.0% Total other expense, net (1,947 ) -0.2% (960 ) -0.1% Income before provision for income taxes 37,581 3.8% 61,110 5.9% Provision for income taxes 8,566 0.9% 14,605 1.4% Net income $ 29,015 2.9% $ 46,505 4.5% CONSOLIDATED OPERATING EXPENSES. OTHER EXPENSES AND INCOME TAXES Purchased Transportation and Warehousing Purchased transportation and warehousing costs decreased 5% to $727 million in 2024 from $764 million in 2023. As a percentage of revenue, purchased transportation and warehousing costs increased to 73.7% in 2024 from 73.4% in 2023. Purchased transportation and warehousing costs declined as compared to prior year due to rail cost decreases, lower outside carrier costs, lower accessorial costs and lower fuel costs, partially offset by higher volumes in intermodal. 15 Salaries and Benefits Salaries and benefits remained consistent at $142 million in 2024 and 2023. As a percentage of revenue, salaries and benefits increased to 14.4% in 2024 from 13.6% in 2023. While an increase of $10 million was primarily due to the acquisition of FAFM on December 20, 2023, this increase was partially offset by decreases in driver costs of $7 million and office employee compensation expense of $3 million, both related to lower headcount, which excludes FAFM. Headcount, which includes drivers, warehouse personnel and office employees, was 5,813, which includes 582 employees of FAFM, as of June 30, 2024 and 5,851 as of June 30, 2023, respectively. The decrease in headcount related primarily to drivers, partially offset by increases in office and warehouse employees due to the FAFM acquisition. Depreciation and Amortization Depreciation and amortization expense increased to $38 million in 2024 from $35 million in 2023. This increase was related primarily to the amortization of intangibles related to the acquisition of FAFM on December 20, 2023, as well as increased technology, container and warehouse depreciation expense. This expense, as a percentage of revenue, increased to 3.8% in 2024 from 3.4% in 2023. 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 $13 million in 2024 from $12 million in 2023. This increase was primarily due to increased auto liability expense related to claim costs. These expenses, as a percentage of revenue, increased to 1.3% in 2024 from 1.1% in 2023. General and Administrative General and administrative expenses increased to $28 million in 2024 from $27 million in 2023. These expenses, as a percentage of revenue, increased to 2.8% in 2024 from 2.6% in 2023. This increase in general and administrative expenses was primarily due to the acquisition of FAFM on December 20, 2023, as well as increases in use tax expense and legal expense of $1 million each, partially offset by less impairment of right-of-use assets of $2 million and a decrease in bad debt expense of $1 million. Gain on Sale of Assets, Net Net gains on the sale of equipment decreased to $0.4 million in 2024 from $1 million in 2023. This decrease resulted from both less units sold and a lower average gain per unit sold in 2024 as compared to 2023. Other Income (Expense) Other expense increased to $2 million in 2024 from $1 million in 2023 primarily due to an increase in interest expense due to higher interest rates on our debt. Provision for Income Taxes The provision for income taxes decreased to $9 million in 2024 from $15 million in 2023 due primarily to lower pre-tax income in 2024. We provided for income taxes using an effective rate of 22.8% in 2024 and an effective rate of 23.9% in 2023. The second quarter 2024 effective tax rate of 22.8% was lower than the rate from 2023, as in 2024 we received a one-time benefit from amending state tax returns. 16 Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023 The following table summarizes our operating revenue by segment (in thousands): Six Months Ended Operating Revenue June 30, 2024 2023 Intermodal and Transportation Solutions $ 1,113,066 $ 1,323,881 Logistics 939,312 922,690 Inter-segment eliminations (66,390 ) (53,844 ) Total operating revenue $ 1,985,988 $ 2,192,727 The following table summarizes our operating income by segment (in thousands): Six Months Ended Operating Income June 30, 2024 2023 Intermodal and Transportation Solutions $ 26,670 $ 80,981 Logistics 49,997 59,294 Total operating income $ 76,667 $ 140,275 Total consolidated operating revenue decreased 9% to $1,986 million in 2024 from $2,193 million in 2023. Intermodal and Transportation Solutions (“ITS”) revenue decreased 16% to $1,113 million primarily due to price declines, lower fuel revenue, lower accessorial revenue, a 1% decline in intermodal volume due to lower transportation demand and mix, partially offset by a 3% increase in dedicated revenue resulting from growth of existing customers. ITS operating income decreased to $27 million, 2.4% of revenue, as compared to $81 million, 6.1% of revenue, in the prior year, due to lower customer rates, lower accessorial revenue and lower volume. These headwinds were partially offset by lower drayage costs, lower equipment costs and lower accessorial costs. Logistics revenue increased 2% to $939 million primarily due to the recent acquisition in final mile, partially offset by lower revenue in our brokerage service line and consolidation and fulfillment service lines. Brokerage revenue per load declined 16% due to lower pricing, fuel and customer mix. Brokerage volume declined by 1%. Logistics operating income decreased to $50 million, 5.3% of revenue, as compared to $59 million, 6.4% of revenue, due to lower brokerage margins, partially offset by our recent acquisition in final mile. 17 The following is a summary of operating results and certain items in the condensed consolidated statements of income as a percentage of revenue (in thousands): Six Months Ended June 30, 2024 2023 Operating revenue $ 1,985,988 100.0% $ 2,192,727 100.0% Operating expenses: Purchased transportation and warehousing 1,467,408 73.9% 1,630,540 74.4% Salaries and benefits 286,352 14.4% 279,254 12.7% Depreciation and amortization 76,103 3.8% 70,835 3.2% Insurance and claims 25,257 1.3% 24,359 1.1% General and administrative 55,111 2.8% 52,298 2.4% Gain on sale of assets, net (910 ) -0.1% (4,834 ) -0.2% Total operating expenses 1,909,321 96.1% 2,052,452 93.6% Operating income $ 76,667 3.9% $ 140,275 6.4% Other income (expense): Interest expense (7,588 ) -0.4% (6,086 ) -0.3% Interest income 3,201 0.2% 3,463 0.2% Other, net (236 ) 0.0% 108 0.0% Total other expense, net (4,623 ) -0.2% (2,515 ) -0.1% Income before provision for income taxes 72,044 3.7% 137,760 6.3% Provision for income taxes 15,976 0.8% 29,475 1.3% Net income $ 56,068 2.9% $ 108,285 5.0% CONSOLIDATED OPERATING EXPENSES. OTHER EXPENSES AND INCOME TAXES Purchased Transportation and Warehousing Purchased transportation and warehousing costs decreased 10% to $1,467 million in 2024 from $1,631 million in 2023. Purchased transportation and warehousing costs declined as compared to prior year due to rail cost decreases, lower outside carrier costs, lower accessorial costs, lower fuel costs and lower volumes. Salaries and Benefits Salaries and benefits increased to $286 million in 2024 from $279 million in 2023. As a percentage of revenue, salaries and benefits increased to 14.4% in 2024 from 12.7% in 2023. Decreases in driver related expenses of $11 million related to lower driver headcount, lower office compensation expense of $7 million and lower restricted stock expense of $1 million were more than offset by increases primarily due to the acquisition of FAFM, as well as increases in incentive compensation expense of $5 million and payroll tax expense of $2 million. Depreciation and Amortization Depreciation and amortization expense increased to $76 million in 2024 from $71 million in 2023. This increase was related primarily to the amortization of intangibles related to the acquisition of FAFM, as well as increased technology, container and warehouse depreciation expense. This expense, as a percentage of revenue, increased to 3.8% in 2024 from 3.2% in 2023. Depreciation expense includes transportation equipment, technology investments, leasehold improvements, warehouse equipment, office equipment and building improvements. 18 Insurance and Claims Insurance and claims expense increased to $25 million in 2024 from $24 million in 2023. This increase was primarily due to increased claim costs. These expenses, as a percentage of revenue, increased to 1.3% in 2024 from 1.1% in 2023. General and Administrative General and administrative expenses increased to $55 million in 2024 from $52 million in 2023. These expenses, as a percentage of revenue, increased to 2.8% in 2024 from 2.4% in 2023. This increase in general and administrative expenses was primarily due to the acquisition of FAFM, as well as increases in use tax expense and property tax expense of $1 million each, partially offset by less impairment of right-of-use assets of $2 million and a decrease in bad debt expense of $1 million. Gain on Sale of Assets, Net Net gains on the sale of equipment decreased to $1 million in 2024 from $5 million in 2023. The decrease resulted from both less units sold and a lower average gain per unit sold in 2024 as compared to 2023. Other Income (Expense) Other expense increased to $5 million in 2024 from $3 million 2023 primarily due to an increase in interest expense due to higher interest rates on our debt. Provision for Income Taxes The provision for income taxes decreased to $16 million in 2024 from $29 million in 2023 due primarily to lower pre-tax income in 2024. We provided for income taxes using an effective rate of 22.2% in 2024 as compared to an effective rate of 21.4% in 2023. The effective tax rate was lower in 2023 as compared to 2024 as a change in state apportionment methodology made in 2023 had a larger impact on the 2023 tax rate than it did in 2024. 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, 2024, we had $220 million of cash and $21.0 million of restricted investments. We generally fund our purchases of transportation equipment through the issuance of secured, fixed rate Equipment Notes. 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 and dividend payments have 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. Based on past performance and current expectations, we believe cash on hand and cash received from the provision of services, along with our Credit Facility and other potential 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, 2024 was approximately $150 million, which resulted primarily from net income of $56 million plus non-cash charges of $98 million, partially offset by the changes in operating assets and liabilities of $4 million. Cash provided by operating activities totaled $150 million in 2024 compared to $221 million in 2023. The $71 million decrease in cash flow was primarily due to a decrease in net income of $52 million, a decrease in non-cash charges of $12 million and a negative change in operating assets and liabilities of $7 million, primarily due to the change in accounts receivable. Net cash used in investing activities for the six months ended June 30, 2024 was $22 million which resulted from capital expenditures of $31 million, partially offset by proceeds from the sale of equipment of $6 million and $4 million related to the FAFM acquisition. Capital expenditures of $31 million related primarily to tractors of $14 million, technology investments of $9 million and warehouse equipment of $6 million. 19 Capital expenditures decreased by approximately $34 million in 2024 as compared to 2023. The 2024 decrease was due to lower spend on tractors of $21 million, decreases in container purchases of $11 million, leasehold improvements of $2 million and warehouse equipment of $1 million. These decreases were partially offset by increases in the technology investments of $1 million. In 2024, we estimate capital expenditures will range from $45 million to $65 million. Expected purchases include replacement tractors, technology projects and warehouse equipment. 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, 2024 was $96 million which includes repayments of long-term debt of $53 million, purchases of treasury stock of $33 million, dividends paid of $15 million, cash for stock tendered for payments of withholding taxes of $9 million and finance lease payments of $1 million, partially offset by proceeds from the issuance of debt of $16 million. Debt incurred in 2024 was used to fund the purchase of transportation equipment. The $20 million decrease in cash used in financing activities for 2024 versus 2023 was primarily due to the decrease in the purchase of treasury stock of $67 million and less repayments of long-term debt of $3 million, partially offset by less proceeds from the issuance of debt of $35 million and an increase in dividends paid of $15 million. As a result of anticipated unfavorable timing differences, primarily related to depreciation and compensation, we expect our cash paid for income taxes in 2024 to exceed our income tax expense. See Note 6 of the condensed consolidated financial statements for details related to interest rates and commitment fees. We have standby letters of credit that expire in 2024 and 2025. As of both June 30, 2024 and December 31, 2023, our letters of credit were $1 million. As of both June 30, 2024, and December 31, 2023, we had no borrowings under the Credit Agreement and our unused and available borrowings were $349 million. We were in compliance with our debt covenants as of June 30, 2024 and December 31, 2023. 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’ liquidity and ability to pay. We are monitoring working capital on a daily basis and are in frequent communications with our customers. We do not have any off-balance sheet transactions, arrangements, obligations (including contingent obligations) or liabilities. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Refer to the company's 2023 10-K for a complete discussion regarding our critical accounting policies and estimates. As of June 30, 2024, there were no material changes to our critical accounting policies and estimates. I tem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in our market risk as of June 30, 2024 from that presented in our 2023 10-K. I tem 4. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. As of June 30, 2024, 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, 2024. (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, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. On December 20, 2023, we completed the acquisition of Forward Air Final Mile (“FAFM”). 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. 20 P ART II. Other Information Item 1. Legal Proceedings For information regarding legal proceedings, see Note 7 “Legal Matters” to the Condensed Consolidated Financial Statements included in Part I, Item 1. “Financial Statements.”