Hub Group, Inc 10-Q for FY2022 Q3
Hub Group, Inc. (HUBG)
About this 10-Q
Hub Group, Inc filed this 10-Q on November 4, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.36B
- up 26.1% from $1.08B a year earlier
- Net income
- $87.33M
- up 101.5% from net income of $43.34M a year earlier
- Diluted EPS
- $2.61
- up 103.9% from $1.28 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
(Address, including zip code, of principal executive offices)
(Registrant’s telephone number, including area code): (
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated Filer |
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Non-Accelerated Filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
On October 28, 2022, the registrant had
HUB GROUP, INC.
INDEX
2
HUB GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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September 30, |
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December 31, |
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2022 |
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2021 |
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ASSETS |
(unaudited) |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable trade, net |
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Other receivables |
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Prepaid taxes |
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Prepaid expenses and other current assets |
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TOTAL CURRENT ASSETS |
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Restricted investments |
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Property and equipment, net |
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Right-of-use assets - operating leases |
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Right-of-use assets - financing leases |
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Other intangibles, net |
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Goodwill |
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Other assets |
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TOTAL ASSETS |
$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable trade |
$ |
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$ |
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Accounts payable other |
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Accrued payroll |
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Accrued other |
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Lease liability - operating leases |
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Lease liability - financing leases |
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Current portion of long-term debt |
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TOTAL CURRENT LIABILITIES |
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Long-term debt |
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Non-current liabilities |
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Lease liability - operating leases |
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Deferred taxes |
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STOCKHOLDERS' EQUITY: |
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Preferred stock, $ par value; |
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Common stock |
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Class A: $ par value; |
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Class B: $ par value; |
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Additional paid-in capital |
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Purchase price in excess of predecessor basis, net of tax benefit of $ |
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( |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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( |
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Treasury stock; at cost, |
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( |
) |
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( |
) |
TOTAL STOCKHOLDERS' EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ |
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$ |
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See notes to unaudited consolidated financial statements.
3
HUB GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
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Three Months |
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Nine Months |
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Ended September 30, |
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Ended September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenue |
$ |
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$ |
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$ |
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$ |
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Transportation costs |
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Gross margin |
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Costs and expenses: |
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Salaries and benefits |
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General and administrative |
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Depreciation and amortization |
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Total costs and expenses |
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Operating income |
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Other income (expense): |
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Interest expense |
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( |
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( |
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( |
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( |
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Other, net |
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( |
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( |
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( |
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( |
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Total other expense, net |
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( |
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( |
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( |
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( |
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Income before provision for income taxes |
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Income tax expense |
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Net income |
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Other comprehensive income: |
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Foreign currency translation adjustments |
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( |
) |
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( |
) |
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( |
) |
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( |
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Total comprehensive income |
$ |
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$ |
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$ |
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$ |
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Basic earnings per common share |
$ |
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$ |
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$ |
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$ |
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Diluted earnings per common share |
$ |
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$ |
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$ |
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$ |
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Basic weighted average number of shares outstanding |
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Diluted weighted average number of shares outstanding |
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See notes to unaudited consolidated financial statements.
4
HUB GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
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Purchase Price |
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Class A & B |
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in Excess of |
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Accumulated |
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Common Stock |
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Additional |
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Predecessor |
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Other |
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Treasury |
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Shares |
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Paid-in |
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Basis, Net |
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Retained |
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Comprehensive |
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Stock |
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Issued |
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Amount |
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Capital |
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of Tax |
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Earnings |
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Income |
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Shares |
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Amount |
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Total |
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Balance June 30, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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( |
) |
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$ |
( |
) |
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$ |
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Stock withheld for payments of withholding taxes |
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- |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
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( |
) |
Issuance of restricted stock awards, net of forfeitures |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
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- |
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Share-based compensation expense |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Net income |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Foreign currency translation adjustment |
|
- |
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- |
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- |
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- |
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|
- |
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( |
) |
|
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- |
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|
- |
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( |
) |
Balance September 30, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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( |
) |
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$ |
( |
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$ |
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Balance June 30, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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( |
) |
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$ |
( |
) |
|
$ |
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Stock withheld for payments of withholding taxes |
|
- |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
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( |
) |
Purchase of treasury stock |
|
- |
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- |
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- |
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- |
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- |
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- |
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( |
) |
|
|
( |
) |
|
|
( |
) |
Purchase of treasury stock from related party (Note 8) |
|
- |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
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( |
) |
Issuance of restricted stock awards, net of forfeitures |
|
- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
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- |
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Share-based compensation expense |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Net income |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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||
Foreign currency translation adjustment |
|
- |
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|
|
- |
|
|
|
- |
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|
- |
|
|
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- |
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( |
) |
|
|
- |
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|
- |
|
|
|
( |
) |
Balance September 30, 2022 |
|
|
|
$ |
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|
$ |
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|
$ |
( |
) |
|
$ |
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$ |
( |
) |
|
|
( |
) |
|
$ |
( |
) |
|
$ |
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Balance December 31, 2020 |
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|
$ |
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|
$ |
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|
$ |
( |
) |
|
$ |
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$ |
( |
) |
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
Stock withheld for payments of withholding taxes |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
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|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Issuance of restricted stock awards, net of forfeitures |
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
- |
|
||
Share-based compensation expense |
|
- |
|
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|
- |
|
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|
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|
|
- |
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- |
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|
- |
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|
- |
|
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|
- |
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|
||
Net income |
|
- |
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|
- |
|
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|
- |
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|
- |
|
|
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|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
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|
||
Foreign currency translation adjustment |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
Balance September 30, 2021 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
|
( |
) |
|
$ |
( |
) |
|
$ |
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|||||||||
Balance December 31, 2021 |
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|
$ |
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|
$ |
|
|
$ |
( |
) |
|
$ |
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|
$ |
( |
) |
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
Stock withheld for payments of withholding taxes |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Purchase of treasury stock |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
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|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Purchase of treasury stock from related party (Note 8) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Issuance of restricted stock awards, net of forfeitures |
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
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|
- |
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|
- |
|
||
Share-based compensation expense |
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Net income |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Foreign currency translation adjustment |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
Balance September 30, 2022 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
5
HUB GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
Nine Months Ended September 30, |
|
|||||
|
2022 |
|
|
2021 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Net income |
$ |
|
|
$ |
|
||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
||
Impairment of right-of-use asset |
|
|
|
|
|
||
Deferred taxes |
|
( |
) |
|
|
( |
) |
Compensation expense related to share-based compensation plans |
|
|
|
|
|
||
Gain on sale of assets |
|
( |
) |
|
|
( |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Restricted investments |
|
|
|
|
|
||
Accounts receivable, net |
|
( |
) |
|
|
( |
) |
Prepaid taxes |
|
( |
) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
( |
) |
|
Other assets |
|
( |
) |
|
|
( |
) |
Accounts payable |
|
( |
) |
|
|
|
|
Accrued expenses |
|
|
|
|
|
||
Non-current liabilities |
|
( |
) |
|
|
( |
) |
Net cash provided by operating activities |
|
|
|
|
|
||
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
Proceeds from sale of equipment |
|
|
|
|
|
||
Purchases of property and equipment |
|
( |
) |
|
|
( |
) |
Cash used in acquisitions |
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
||
Proceeds from issuance of debt |
|
|
|
|
|
||
Repayments of long-term debt |
|
( |
) |
|
|
( |
) |
Purchase of treasury stock |
|
( |
) |
|
|
|
|
Purchase of treasury stock from related party (Note 8) |
|
( |
) |
|
|
|
|
Stock withheld for payments of withholding taxes |
|
( |
) |
|
|
( |
) |
Finance lease payments |
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||
|
|
|
|
|
|
||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
( |
) |
|
|
|
|
|
|
|
||
Net increase in cash and cash equivalents |
$ |
|
|
$ |
|
||
Cash and cash equivalents beginning of the period |
$ |
|
|
$ |
|
||
Cash and cash equivalents end of the period |
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Supplemental disclosures of cash paid for: |
|
|
|
|
|
||
Interest |
$ |
|
|
$ |
|
||
Income taxes |
$ |
|
|
$ |
|
||
See notes to unaudited consolidated financial statements.
6
HUB GROUP, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Statements
Our accompanying unaudited consolidated financial statements of Hub Group, Inc. (the “Company,” “Hub,” “we,” “us” or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been omitted pursuant to those rules and regulations. 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 September 30, 2022 and results of operations for the three and nine months ended September 30, 2022 and 2021.
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, 2021. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year due partially to seasonality.
NOTE 2. Acquisitions
TAGG Logistics Acquisition
On
TAGG is a nationwide provider with over
The initial accounting for the acquisition of TAGG is incomplete as we, with the support of our valuation specialist, are in the process of finalizing the fair market value calculations of the acquired net assets. In addition, we are in the preparation and review process of the applicable future cash flows used in determining the purchase accounting. Finally, certain post-closing activities outlined in the acquisition agreement remain incomplete. As a result, the amounts recorded in the consolidated financial statements related to the TAGG acquisition are preliminary and the measurement period remains open.
|
August 22, 2022 |
|
|
Cash and cash equivalents |
$ |
|
|
Accounts receivable trade |
|
|
|
Prepaid expenses and other current assets |
|
|
|
Property and equipment |
|
|
|
Right of use assets - operating leases |
|
|
|
Other intangibles |
|
|
|
Goodwill |
|
|
|
Other assets |
|
|
|
Total assets acquired |
$ |
|
|
|
|
|
|
Accounts payable trade |
$ |
|
|
Accrued payroll |
|
|
|
Accrued other |
|
|
|
Lease liability - operating leases short-term |
|
|
|
Lease liability - operating leases long-term |
|
|
|
Total liabilities assumed |
$ |
|
|
|
|
|
|
Total consideration |
$ |
|
|
|
|
|
|
Cash paid, net |
$ |
|
|
7
The TAGG acquisition was accounted for as a purchase business combination in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of August 22, 2022 with the remaining unallocated purchase price recorded as goodwill. The goodwill recognized in the TAGG acquisition was primarily attributable to potential expansion and future development of the acquired business.
Tax history and attributes are not inherited in an equity purchase of this kind, however, the goodwill and other intangibles recognized in this purchase will be fully tax deductible over a period of
We incurred approximately $
The components of “Other intangibles” listed in the above table as of the acquisition date are summarized as follows (in thousands):
|
|
|
|
Accumulated |
|
|
Balance at |
|
|
Estimated Useful |
|||
|
Amount |
|
|
Amortization |
|
|
September 30, 2022 |
|
|
Life |
|||
Customer relationships |
$ |
|
|
$ |
|
|
$ |
|
|
||||
Developed technology |
$ |
|
|
$ |
|
|
$ |
|
|
||||
Trade name |
$ |
|
|
$ |
|
|
$ |
|
|
||||
The above intangible assets are amortized using the straight-line method. Amortization expense related to this acquisition for both the three and nine months ended September 30, 2022 was $
|
|
Total |
|
|
Remainder of 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
From the date of the acquisition through September 30, 2022, TAGG's revenue was $
Choptank Transport, LLC Acquisition
On
The acquisition of Choptank enhanced our refrigerated trucking transportation solutions offering and complemented our growing fleet of refrigerated intermodal containers. Choptank has developed a proprietary technology platform that we will leverage to enhance our truck brokerage service line.
The following table summarizes the total purchase consideration to the net assets acquired and liabilities assumed as of the date of the acquisition (in thousands):
8
|
October 19, 2021 |
|
|
Cash and cash equivalents |
$ |
|
|
Accounts receivable trade |
|
|
|
Prepaid expenses and other current assets |
|
|
|
Property and equipment |
|
|
|
Right of use assets - operating leases |
|
|
|
Other intangibles |
|
|
|
Goodwill |
|
|
|
Total assets acquired |
$ |
|
|
|
|
|
|
Accounts payable trade |
$ |
|
|
Accrued payroll |
|
|
|
Accrued other |
|
|
|
Lease liability - operating leases short-term |
|
|
|
Lease liability - operating leases long-term |
|
|
|
Total liabilities assumed |
$ |
|
|
|
|
|
|
Total consideration |
$ |
|
|
|
|
|
|
Cash paid, net |
$ |
|
|
The Choptank acquisition was accounted for as a purchase business combination in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of October 19, 2021 with the remaining unallocated purchase price recorded as goodwill. The goodwill recognized in the Choptank acquisition was primarily attributable to potential expansion and future development of the acquired business.
Tax history and attributes are not inherited in an equity purchase of this kind, however, the goodwill and other intangibles recognized in this purchase will be fully tax deductible over a period of
The components of “Other intangibles” listed in the above table as of the acquisition date are summarized as follows (in thousands):
|
|
|
|
Accumulated |
|
|
Balance at |
|
|
Estimated Useful |
|||
|
Amount |
|
|
Amortization |
|
|
September 30, 2022 |
|
|
Life |
|||
Customer relationships |
$ |
|
|
$ |
|
|
$ |
|
|
||||
Carrier network |
$ |
|
|
$ |
|
|
$ |
|
|
||||
Developed technology |
$ |
|
|
$ |
|
|
$ |
|
|
||||
Trade name |
$ |
|
|
$ |
|
|
$ |
|
|
||||
The above intangible assets are amortized using the straight-line method. Amortization expense related to this acquisition for the three and nine months ended September 30, 2022 was $
|
|
Total |
|
|
Remainder of 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
The following table presents the total carrying amount of goodwill (in thousands):
|
Total |
|
|
Balance at December 31, 2021 |
$ |
|
|
Acquisition |
|
|
|
Balance at September 30, 2022 |
$ |
|
|
The changes noted as "acquisition" in the above table refer to the purchase accounting for the TAGG acquisition and purchase accounting adjustments related to the Choptank acquisition.
9
While TAGG's actual results are included since August 22, 2022 and Choptank's actual results are included since October 19, 2021, the following unaudited pro forma consolidated results of operations present the effects of TAGG and Choptank as though they had been acquired as of January 1, 2021 (in thousands, except for per share amounts):
|
Three Months Ended |
|
|
Nine Months Ended |
|
||
|
September 30, 2022 |
|
|
September 30, 2022 |
|
||
Revenue |
$ |
|
|
$ |
|
||
Net income |
$ |
|
|
$ |
|
||
Earnings per share |
|
|
|
|
|
||
Basic |
$ |
|
|
$ |
|
||
Diluted |
$ |
|
|
$ |
|
||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||
|
September 30, 2021 |
|
|
September 30, 2021 |
|
||
Revenue |
$ |
|
|
$ |
|
||
Net income |
$ |
|
|
$ |
|
||
Earnings per share |
|
|
|
|
|
||
Basic |
$ |
|
|
$ |
|
||
Diluted |
$ |
|
|
$ |
|
||
The unaudited pro forma consolidated results for the periods were prepared using the acquisition method of accounting and are based on the historical financial information of Hub, TAGG and Choptank. The historical financial information has been adjusted to give effect to the pro forma adjustments that are: (i) directly attributable to the acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the TAGG and Choptank acquisitions as of January 1, 2021.
NOTE 3. Earnings Per Share
The following is a reconciliation of our earnings per share (in thousands, except for per share data):
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding - basic |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of stock options and restricted stock |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share - basic |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share - diluted |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
NOTE 4. Revenue from Contracts with 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.
As part of our profit improvement initiatives, we have focused on realizing efficiencies between our drayage trucking operation (which supports our intermodal service) and our dedicated trucking operation, including through the sharing of equipment and drivers, and by leveraging a combined set of driver support services including driver recruiting, asset management and safety functions. Our dedicated and drayage teams are now one combined organization. As a result, beginning in the first quarter of 2022, we reported revenue for these operations under the “Intermodal and Transportation Solutions” line of business. We have recast the prior period information to conform with current year presentation.
Intermodal and Transportation Solutions. We offer 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. Our service offering is well positioned to assist our customers in reducing their transportation spend and achieving their carbon emissions objectives.
10
As an intermodal provider, we arrange for the movement of our customers’ freight in containers, typically over long distances of 750 miles or more. We contract with railroads to provide transportation for the long-haul portion of the shipment between rail terminals. Local pickup and delivery services between origin or destination and rail terminals (referred to as “drayage”) are provided by our own trucking operation and third-party local trucking companies.
As of September 30, 2022, our trucking transportation operation consisted of approximately
Truck Brokerage. We operate one of the largest truck brokerage operations in the United States, providing customers with a trucking option for their transportation needs. Our brokerage operation does not operate any trucks; instead we match customers’ needs with trucking carriers’ capacity to provide the most effective combination of service and price. We have contracts with a substantial base of carriers allowing us to meet the varied needs of our customers. Approximately half of our truck brokerage volume is generated from transactions in which we offer lane-based pricing at a fixed rate for periods of up to one year. The remaining portion of our volume is generated based on shorter term transactional lane-based rates which expire in a short time.
We offer a full range of trucking transportation services, including dry van, expedited, less-than-truckload, refrigerated and flatbed. We substantially increased the size of our brokerage service line and increased our refrigerated transportation capabilities through the acquisition of Choptank in October 2021.
Logistics. Our logistics business offers a wide range of transportation management services and technology solutions including shipment optimization, load consolidation, mode selection, carrier management, load planning and execution, and shipment visibility. We offer multi-modal transportation services including full truckload, less-than-truckload (“LTL”), intermodal, final mile, railcar, small parcel and international transportation. 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 intermodal and transportation solutions and truck brokerage service lines.
Our logistics offering also includes warehousing, fulfillment, cross-docking and consolidation services. We operate our own warehouse facilities, and contract for the use of those operated by third parties, to store our customers’ goods which are then transported for delivery to residential and commercial locations. These services offer our customers shipment visibility, transportation cost savings, high service and compliance with retailers’ increasingly stringent supply chain requirements.
The TAGG acquisition bolsters our presence in the consolidation and fulfillment space and adds a complementary e-commerce offering to serve our customers' multimodal transportation and logistics needs. The acquisition adds scale to our logistics service line and is expected to result in numerous complementary cross-selling opportunities.
The following table summarizes our disaggregated revenue by business line (in thousands):
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Intermodal and transportation solutions |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Logistics |
|
|
|
|
|
|
|
|
|
|
|
||||
Truck brokerage |
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
NOTE 5. Fair Value Measurement
The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of September 30, 2022 and December 31, 2021. As of September 30, 2022, the fair value of the Company’s fixed-rate borrowings was $
We consider as cash equivalents all highly liquid instruments with an original maturity of three months or less. As of September 30, 2022 and December 31, 2021, our cash and temporary investments were with high quality financial institutions in Demand Deposit Accounts, savings accounts and an interest-bearing checking account.
Restricted investments included $
11
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). Cash and cash equivalents, mutual funds, accounts receivable and accounts payable are defined as “Level 1,” while long-term debt is defined as “Level 2” of the fair value hierarchy in the Fair Value Measurements and Disclosures Topic of the Codification.
NOTE 6. Long-Term Debt and Financing Arrangements
In February 2022, we entered into a
We had standby letters of credit that expire in
As of September 30, 2022 and December 31, 2021, we had
We have entered into various Equipment Notes (“Notes”) for the purchase of tractors, trailers, containers and refrigeration units. The Notes are secured by the underlying equipment financed in the agreements.
Our outstanding Notes are as follows (in thousands):
|
September 30, |
|
|
December 31, |
|
||
|
2022 |
|
|
2021 |
|
||
|
(in thousands) |
|
|||||
|
|
|
|
|
|
||
Interim funding for equipment received and expected to be converted to an equipment note in subsequent year; interest paid at a variable rate |
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Secured Equipment Notes due on various dates in |
|
|
|
|
|
||
|
|
|
|
|
|
||
Secured Equipment Notes due on various dates in |
|
|
|
|
|
||
|
|
|
|
|
|
||
Secured Equipment Notes due on various dates in |
|
|
|
|
|
||
|
|
|
|
|
|
||
Secured Equipment Notes due on various dates in |
|
|
|
|
|
||
|
|
|
|
|
|
||
Secured Equipment Notes due on various dates in |
|
|
|
|
|
||
|
|
|
|
|
|
||
Secured Equipment Notes due on various dates in |
|
|
|
|
|
||
|
|
|
|
|
|
||
|
|
|
|
|
|
||
|
|
|
|
|
|
||
Less current portion |
|
( |
) |
|
|
( |
) |
Total long-term debt |
$ |
|
|
$ |
|
||
12
NOTE 7. Legal Matters
The Company is involved in certain claims and pending litigation arising from the normal conduct of business, including putative class-action lawsuits in which the plaintiffs are current and former drivers. Based on management's present knowledge, management does not believe that any potential unrecorded loss contingencies arising from these pending matters are likely to have a material adverse effect on the Company's overall financial position, operating results, or cash flows after taking into account any existing accruals for settlements or losses determined to be probable and estimable. However, actual outcomes could be material to the Company's financial position, operating results, or cash flows for any particular period.
NOTE 8. Related Party Transactions
In August 2022, the Company entered into a Common Stock Exchange and Repurchase Agreement (the “Agreement”) with entities affiliated with David P. Yeager, the Company’s Chairman of the Board of Directors and Chief Executive Officer (collectively, the “DPY Entities”) and entities affiliated with Mark A. Yeager, the brother of David P. Yeager (collectively, the “MAY Entities”).
Pursuant to the Agreement, the MAY Entities transferred
The Transaction was approved by the Company’s Audit Committee of the Board pursuant to the Company’s Related Person Transaction Policy approval procedures.
NOTE 9. Subsequent Event
In October 2022, our Board of Directors (the "Board") authorized the purchase of up to $
13
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
The information contained in this quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “hopes,” “believes,” “intends,” “targets,” “estimates,” “anticipates,” “predicts,” “projects,” “potential,” “may,” “could,” “might,” “should,” and variations of these words and similar expressions are intended to identify these forward-looking statements. In particular, information appearing under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements are neither historical facts nor assurance of future performance. Instead, they are based on our beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Such factors include, but are not limited to, uncertainties caused by adverse economic conditions, including, without limitation, as a result of extraordinary events or circumstances such as the coronavirus (COVID-19) pandemic, and their impact on our customers’ businesses and workforce levels, disruptions of our business and operations, or the operations of our customers.
Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. All forward-looking statements made by us in this report are based upon information available to us on the date of this report and speak only as of the date in which they are made. Except as required by law, we expressly disclaim any obligations to publicly update any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, in addition to those identified in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 10-K”) include the following, each of which may be affected, either individually, or in the aggregate, by the effect of the ongoing COVID-19 pandemic, including any spikes, outbreaks or variants of the virus, as well as any future government actions taken in response to the pandemic, including on our business operations, as well as its impact on general economic and financial market conditions and on our customers, counterparties, employees and third-party service providers:
14
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 transportation services include intermodal, truckload, less-than-truckload, flatbed, temperature-controlled, dedicated and regional trucking. Our logistics 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.
As part of our profit improvement initiatives, we have focused on realizing efficiencies between our drayage trucking operation (which supports our intermodal service) and our dedicated trucking operation, including through the sharing of equipment and drivers, and by leveraging a combined set of driver support services including driver recruiting, asset management and safety functions. Our dedicated and drayage teams are now one combined organization. As a result, beginning in first quarter of 2022, we reported revenue for these operations under the “Intermodal and Transportation Solutions” line of business.
We provide services in three lines of business. Our intermodal and transportation solutions line of business 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. We arrange for the movement of our customers’ freight in one of our approximately 48,000 containers. 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 September 30, 2022, our trucking transportation operation consisted of approximately 2,300 tractors, 2,700 employee drivers and 4,600 trailers. We also contract for services with approximately 800 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.
Our truck brokerage operation offers a full range of trucking transportation on a non-asset basis, as we match customers’ shipping needs with trucking carriers’ capacity to provide the most effective combination of service and price. Our services include dry van, expedited, less-than-truckload, refrigerated and flatbed. We substantially increased the size of our brokerage service line, and increased our refrigerated transportation capabilities, through the acquisition of Choptank Transport, LLC (“Choptank”) in October 2021.
15
Approximately half of our truck brokerage volume is generated from committed pricing transactions, with the remainder consisting of loads that are priced on a transactional basis.
Our logistics business offers a wide range of transportation and logistics management services and technology solutions including shipment optimization, load consolidation, mode selection, carrier management, load planning and execution, warehousing, fulfillment and shipment visibility. We offer multi-modal transportation services including full truckload, less-than-truckload, intermodal, final mile, railcar, small parcel and international transportation. The acquisition of TAGG Logistics, LLC (“TAGG”) enhances our presence in the consolidation and fulfillment space and adds a complementary e-commerce offering to serve our customers' multimodal transportation and logistics needs. The acquisition adds scale to our logistics service line and is expected to result in complementary cross-selling opportunities.
In the first nine months of 2022, we experienced favorable market conditions for our services. Demand for our services continued to show strength, as North American consumer spending, particularly on the types of goods that our customers offer, remained robust. The response to the COVID-19 pandemic caused many changes in consumer behavior, including a propensity for consumers to shift spending from services toward goods, and also to increase spending on household goods. During the third quarter many of our customers, particularly our retailer customers, began to experience rising inventory levels which led to a reduction in their demand for shipping services.
Available transportation capacity in North America continues to be constrained by high levels of demand, shortages of available drivers, and challenges with the production of new tractors and other equipment. These factors resulted in strong demand for our transportation capacity in the first half of 2022, as well as rising prices for certain of our services and those of our competitors. Beginning in the second quarter of 2022, pricing for certain types of transportation, including transactionally priced freight, began to decline from levels that existed during the first quarter.
In order to meet customer demand, we have taken several important actions. We are increasing our capacity to handle additional volume by ordering approximately 6,000 new containers, substantially all of which we expect will be delivered in 2022. Included in this order is a significant expansion of our refrigerated intermodal container fleet, as we believe there is a large opportunity to sell this expanded service to our existing customer base.
We are working 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 64% of revenue for the nine months ended September 30, 2022 while one customer accounted for more than 10% of our revenue for the nine months ended September 30, 2022. We use various performance indicators to manage our business. We closely monitor margin and gains and losses for our top 50 customers. We also evaluate on-time performance, customer service, cost per load and daily sales outstanding by customer account. Vendor cost changes and vendor service levels are also monitored closely.
Uncertainties and risks to our outlook include the following: a slowdown in consumer spending (driven by, among other factors, rising inflation, rapid increases in gasoline prices, 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 the remainder of 2022.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021
The following table summarizes our revenue by business line (in thousands):
|
Three Months Ended September 30, |
|
|||||
|
2022 |
|
|
2021 |
|
||
Intermodal and transportation solutions |
$ |
853,490 |
|
|
$ |
697,701 |
|
Logistics |
|
251,887 |
|
|
|
224,136 |
|
Truck brokerage |
|
250,030 |
|
|
|
153,270 |
|
Total revenue |
$ |
1,355,407 |
|
|
$ |
1,075,107 |
|
16
The following is a summary of operating results and certain items in the consolidated statements of income as a percentage of revenue:
|
Three Months Ended September 30, |
||||||||||
|
2022 |
|
2021 |
||||||||
Revenue |
$ |
1,355,407 |
|
|
100.0% |
|
$ |
1,075,107 |
|
|
100.0% |
Transportation costs |
|
1,132,174 |
|
|
83.5% |
|
|
917,507 |
|
|
85.3% |
Gross margin |
|
223,233 |
|
|
16.5% |
|
|
157,600 |
|
|
14.7% |
|
|
|
|
|
|
|
|
|
|
||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
||
Salaries and benefits |
|
65,502 |
|
|
4.8% |
|
|
65,370 |
|
|
6.1% |
General and administrative |
|
28,109 |
|
|
2.1% |
|
|
23,445 |
|
|
2.2% |
Depreciation and amortization |
|
11,884 |
|
|
0.9% |
|
|
8,912 |
|
|
0.8% |
Total costs and expenses |
|
105,495 |
|
|
7.8% |
|
|
97,727 |
|
|
9.1% |
|
|
|
|
|
|
|
|
|
|
||
Operating income |
$ |
117,738 |
|
|
8.7% |
|
$ |
59,873 |
|
|
5.6% |
Revenue
Revenue increased 26% to $1,355 million in 2022 from $1,075 million in 2021. Intermodal and Transportation Solutions (“ITS”) revenue increased 22% to $853 million due to a 31% increase in intermodal revenue per load (price, fuel, and mix), offset by a 6% decrease in intermodal volume. Logistics revenue increased 12% to $252 million due to growth of our managed transportation, final mile and consolidation services, as well as the acquisition of TAGG. Truck brokerage revenue increased 63% to $250 million primarily due to the addition of Choptank as well as growth in the existing operations resulting from higher revenue per load.
Transportation Costs
Transportation costs increased 23% to $1,132 million in 2022 from $918 million in 2021. Transportation costs in 2022 consisted of purchased transportation and warehousing costs of $917 million and equipment and driver related costs of $215 million. Transportation costs in 2021 consisted of purchased transportation and warehousing costs of $737 million and equipment and driver related costs of $181 million. The 25% increase in purchased transportation and warehousing costs was primarily due to increased rail costs, increased fuel costs, higher third-party carrier costs, and increased repositioning costs, offset by lower volumes. Equipment and driver related costs increased 19% in 2022 due to higher driver wages, increased equipment depreciation expense, increased repairs and maintenance expense, and increased usage of our internal drayage resources to 55% of total drayage moves in 2022 from 47% in 2021.
Gross Margin
Gross margin increased 42% to $223 million in 2022 from $158 million in 2021. The $66 million gross margin increase was the result of increases in all lines of business. Gross margin as a percentage of revenue increased to 16.5% in 2022 from 14.7% in 2021.
ITS gross margin increased primarily due to a 31% increase in intermodal revenue per load, partially offset by a 6% decrease in intermodal volume and increased purchased transportation costs. ITS gross margin as a percentage of revenue increased 180 basis points. Truck brokerage gross margin increased primarily due to the Choptank acquisition and growth in revenue in our existing operations, partially offset by the impact of higher purchased transportation costs. Truck brokerage gross margin as a percentage of revenue decreased 60 basis points. Logistics gross margin increased primarily due to growth with existing customers, new business onboardings, yield management initiatives and the acquisition of TAGG, partially offset by higher warehousing and transportation costs. Logistics gross margin as a percentage of revenue increased 370 basis points.
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CONSOLIDATED OPERATING EXPENSES
Salaries and Benefits
Salaries and benefits expense remained consistent at $65 million in both 2022 and 2021.
As a percentage of revenue, salaries and benefits decreased to 4.8% in 2022 from 6.1% in 2021.
The additions of TAGG and Choptank were offset by decreases in employee bonuses of $5 million, salary expense and commissions expense of $2 million each and restricted stock expense of $1 million, primarily related to a reduction in headcount excluding the additions of TAGG and Choptank employees.
Headcount as of September 30, 2022 and 2021 was 2,144 and 1,971 respectively, which excludes drivers and warehouse employees, as these costs are included in transportation costs. The increase in headcount is due to the additions of both TAGG and Choptank employees.
General and Administrative
General and administrative expenses increased to $28 million in 2022 from $23 million in 2021.
These expenses, as a percentage of revenue, decreased to 2.1% in 2022 from 2.2% in 2021.
The increase of $5 million in general and administrative expense was primarily due to the additions of TAGG and Choptank as well as increases in legal expense for related claims, higher use tax expense, the impairment write-off of a leased asset, partially offset by higher gains recognized from the sale of equipment in 2022.
Depreciation and Amortization
Depreciation and amortization expense increased to $12 million in 2022 from $9 million in 2021.
This increase was related primarily to the amortization of intangibles related to the additions of TAGG and Choptank as well as increases in depreciation related to our new building and capitalized technology.
These expenses as a percentage of revenue increased to 0.9% in 2022 from 0.8% in 2021.
Other Expense
Other expense increased to $3 million in 2022 from $2 million in 2021 due to higher average borrowings and higher average interest rates on existing borrowings.
Provision for Income Taxes
The provision for income taxes increased to $28 million in 2022 from $15 million in 2021, due to significantly higher pre-tax income in 2022.
We provided for income taxes using an effective rate of 24.2% in 2022 and an effective rate of 25.3% in 2021.
The lower effective tax rate in 2022 was the result of the favorable impact of discrete adjustments in 2022 and permanent differences having a small impact on the tax rate due to higher pre-tax income in 2022. We expect our effective tax rate for the full year of 2022 to be between 23.5% and 24.5%.
Net Income
Net income increased to $87 million in 2022 from $43 million in 2021 due primarily to increases in gross margin, partially offset by higher costs and expenses and higher income tax expense.
18
Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
The following table summarizes our revenue by business line (in thousands):
The following is a summary of operating results and certain items in the consolidated statements of income as a percentage of revenue:
|
Nine Months Ended September 30, |
|
|||||
|
2022 |
|
|
2021 |
|
||
Intermodal and transportation solutions |
$ |
2,499,567 |
|
|
$ |
1,891,837 |
|
Logistics |
|
743,924 |
|
|
|
663,620 |
|
Truck brokerage |
|
811,496 |
|
|
|
420,523 |
|
Total revenue |
$ |
4,054,987 |
|
|
$ |
2,975,980 |
|
|
Nine Months Ended September 30, |
||||||||||
|
2022 |
|
2021 |
||||||||
Revenue |
$ |
4,054,987 |
|
|
100.0% |
|
$ |
2,975,980 |
|
|
100.0% |
Transportation costs |
|
3,369,899 |
|
|
83.1% |
|
|
2,589,072 |
|
|
87.0% |
Gross margin |
|
685,088 |
|
|
16.9% |
|
|
386,908 |
|
|
13.0% |
|
|
|
|
|
|
|
|
|
|
||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
||
Salaries and benefits |
|
202,469 |
|
|
5.0% |
|
|
176,696 |
|
|
5.9% |
General and administrative |
|
78,249 |
|
|
1.9% |
|
|
63,058 |
|
|
2.1% |
Depreciation and amortization |
|
33,936 |
|
|
0.9% |
|
|
26,282 |
|
|
0.9% |
Total costs and expenses |
|
314,654 |
|
|
7.8% |
|
|
266,036 |
|
|
8.9% |
|
|
|
|
|
|
|
|
|
|
||
Operating income |
$ |
370,434 |
|
|
9.1% |
|
$ |
120,872 |
|
|
4.1% |
Revenue
Revenue increased 36% to $4,055 million in 2022 from $2,976 million in 2021. ITS revenue increased 32% to $2,500 million due to a 36% increase in intermodal revenue per load. Truck brokerage revenue increased 93% to $811 million due primarily due to the addition of Choptank as well as growth in the existing operations. Logistics revenue increased 12% to $744 million primarily due to the acquisition of TAGG and growth of our managed transportation, final mile and consolidation services.
Transportation Costs
Transportation cost increased 30% to $3,370 million in 2022 from $2,589 million in 2021. Transportation costs in 2022 consisted of purchased transportation costs of $2,782 million and equipment and driver related costs of $588 million compared to 2021, which consisted of purchased transportation costs of $2,080 million and equipment and driver related costs of $509 million. The 34% increase in purchased transportation costs was primarily due to increased rail costs, increased fuel costs, higher brokerage volume, higher third-party carrier costs, and increased repositioning costs. Equipment and driver related costs increased 16% in 2022 primarily due to higher driver wages and increased equipment depreciation expense, increased repairs and maintenance expense, and increased usage of our internal drayage resources to 52% of total drayage moves in 2022 from 51% in 2021.
Gross Margin
Gross margin increased 77% to $685 million in 2022 from $387 million in 2021. The $298 million gross margin increase was the result of increases in all lines of business lines. Gross margin as a percentage of revenue increased to 16.9% in 2022 from 13.0% in 2021. ITS gross margin increased compared to the prior year primarily due to a 36% increase in intermodal revenue per load, partially offset by increased purchased transportation costs. ITS gross margin as a percentage of revenue increased 540 basis points. Truck brokerage gross margin increased primarily due to the Choptank acquisition and growth in revenue in our existing operations, partially offset by the impact of higher purchased transportation costs. Truck brokerage gross margin as a percentage of revenue declined 130 basis points. Logistics gross margin increased primarily due to growth with existing customers, new business onboardings, and yield management initiatives and the TAGG acquisition, partially offset by higher warehousing and transportation costs. Logistics gross margin as a percentage of revenue expanded by 330 basis points.
19
CONSOLIDATED OPERATING EXPENSES
Salaries and Benefits
Salaries and benefits expense increased to $202 million in 2022 from $177 million in 2021.
As a percentage of revenue, Hub’s salaries and benefits decreased to 5.0% in 2022 from 5.9% in 2021.
The increase of $25 million was primarily due to the additions of TAGG and Choptank and increases in employee bonuses of $4 million, partially offset by reductions in salary expense of $4 million and restricted stock expense of $2 million, related to a reduction in headcount, which does not include the additions of TAGG and Choptank.
General and Administrative
General and administrative expense increased to $78 million in 2022 from $63 million in 2021.
These expenses, as a percentage of revenue, decreased to 1.9% in 2022 from 2.1% in 2021.
The increase of $15 million was primarily due to the additions of TAGG and Choptank as well as increases in legal expense for related claims, higher use tax expense, the impairment write-off of a leased asset and higher outside services expense, partially offset by higher gains recognized from the sale of equipment of $12 million in 2022.
Depreciation and Amortization
Depreciation and amortization expense increased to $34 million in 2022 from $26 million in 2021
This increase was related primarily to the amortization of intangibles related to the additions of TAGG and Choptank as well as increases in depreciation related to our new building and capitalized technology.
This expense as a percentage of revenue remained consistent at 0.9% in both 2022 and 2021.
Other Expense
Other expense remained consistent at $6 million in both 2022 and in 2021.
Provision for Income Taxes
The provision for income taxes increased to $87 million in 2022 from $28 million in 2021 due to significantly higher pre-tax income in 2022.
We provided for income taxes using an effective rate of 23.9% in 2022 and an effective rate of 24.2% in 2021.
The lower effective tax rate in 2022 was the result of the favorable impact of discrete adjustments related to new state tax legislation in 2022. We expect our effective tax rate for the full year of 2022 to be between 23.5% and 24.5%.
Net Income
Net income increased to $278 million in 2022 from $87 million in 2021 due primarily to increases in revenue and gross margin, partially offset by higher operating costs and expenses and higher income tax expense.
.
20
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 September 30, 2022, we had $212 million of cash and $17 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 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. 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 nine months ended September 30, 2022 was $350 million, which resulted primarily from net income of $278 million plus non-cash charges of $109 million, partially offset by changes in operating assets and liabilities of $37 million.
Cash provided by operating activities totaled $350 million in 2022 compared to $178 million in 2021. The $172 million increase in cash flow was primarily due to an increase in net income of $191 million and an increase in non-cash charges of $20 million, partially offset by decreases in the change in assets and liabilities of $39 million.
Net cash used in investing activities for the nine months ended September 30, 2022 was $226 million which included capital expenditures of $158 million and cash used in acquisitions of $103 million, partially offset by proceeds from the sale of equipment of $34 million. Capital expenditures of $158 million related primarily to containers of $73 million, tractors of $48 million, technology investments of $19 million and building and furniture spend for our corporate headquarters of $18 million.
Capital expenditures increased by approximately $74 million in 2022 as compared to 2021. The 2022 increase was due to increases in container purchases of $38 million, tractor purchases of $20 million, spend on our corporate headquarters of $13 million and technology investments of $6 million. These increases were partially offset by less purchases of other transportation equipment of $3 million in 2022.
In 2022, we estimate capital expenditures will range from $240 million to $250 million. We expect transportation equipment purchases to range from $210 million to $220 million and building and technology investments will range from $30 million to $35 million. We plan to fund these expenditures with a combination of cash and debt.
Net cash used in financing activities for the nine months ended September 30, 2022 was $72 million which includes proceeds from the issuance of debt of $127 million, offset by the repayments of long-term debt of $82 million, cash used for the purchase of treasury stock of $75 million, cash used for the purchase of treasury stock from related party of $35 million, cash used for stock tendered for payments of withholding taxes of $6 million and finance lease payments of $2 million. Debt incurred in 2022 was used to fund the purchase of transportation equipment.
The $54 million increase in cash used in financing activities for 2022 versus 2021 was primarily due to the increase in the purchase of treasury stock of $75 million, the purchase of treasury stock from a related party of $35 million and cash paid for stock related to employee withholding taxes of $2 million, partially offset by the increase in proceeds from the issuance of debt of $56 million as well as decreases in repayments of long-term debt and finance lease payments of $1 million each.
In 2022, we expect our cash paid for income taxes to be significantly more than in 2021 due to significantly higher pre-tax income in 2022. We expect our cash paid for taxes to be slightly less than our income tax expense in 2022 due to net favorable timing differences related to depreciation and the sale of equipment.
The Coronavirus Aid, Relief, and Economic Security ("CARES") Act allowed us to defer $11.3 million of 2020 payroll taxes until future years. Half of those payroll taxes were remitted in December 2021 and the other half will be remitted in December 2022.
On August 16, 2022, the Inflation Reduction Act of 2022 was signed into U.S. law. Under this law, there is a new 15% corporate minimum tax, which will not have an impact on the Company. In addition, beginning after December 31, 2022 there will be a 1% excise tax on certain share repurchases, which is not expected to have a material impact on the Company’s Consolidated Financial Statements. There are other aspects within this new law that the Company is evaluating but none are expected to have a material impact on the Company’s Consolidated Financial Statements.
See Note 6 of the consolidated financial statements for details related to interest rates and commitment fees.
We have standby letters of credit that expire in 2022 and 2023. As of September 30, 2022 and December 31, 2021, our letters of credit were $42 million and $41 million, respectively.
21
As of September 30, 2022, and December 31, 2021, we had no borrowings under the Credit Agreement and our unused and available borrowings were $308 million and $309 million, respectively. We were in compliance with our debt covenants as of September 30, 2022 and December 31, 2021.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk as of September 30, 2022 from that presented in our 202110-K.
Item 4. CONTROLS AND PROCEDURES
a) Disclosure Controls and Procedures. As of September 30, 2022, 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, 2022.
(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 September 30, 2022 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.
22
PART II. Other Information
Item 1. Legal Proceedings
For information regarding legal proceedings, see Note 7 “Legal Matters” to the Consolidated Financial Statements included in Item 1. “Financial Statements.”
Item 1A. Risk Factors
Investing in shares of our stock involves certain risks, including those identified and described in Part I, Item 1A of our 2021 10-K, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Forward-Looking Information” in Part I, Item 2 here of and in our other filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In May 2019, our Board of Directors (the “Board”) authorized the purchase of up to $100 million of our Class A Common Stock pursuant to a share repurchase program (the “2019 Program”). Under the 2019 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 extended, modified, suspended, or discontinued at any time.
Approximately $75 million of capacity remained available under the 2019 Program before giving effect to the Agreement as discussed in Note 8 of the Consolidated Financial Statements, which reduced availability thereunder. In connection with the Agreement discussed in Note 8 of the Consolidated Financial Statements, the Board approved an amendment to increase capacity under the 2019 Program so that $75 million shares of Class A Common Stock remained authorized for repurchase. We purchased 1,375,618 shares under this authorization during the first nine months of 2022 while no purchases were made during the first nine months of 2021. As of September 30, 2022, the full $75 million authorized under the 2019 Program had been purchased.
In October 2022, the Board authorized the purchase of up to $200 million of our Class A Common Stock pursuant to a share repurchase program (the “2022 Program”). Under the 2022 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.
We purchased 892 shares for $0.1 million during the third quarter of 2022 and 968 shares for $0.1 million during the third quarter of 2021 related to employee withholding upon vesting of restricted stock. The table below provides information on a monthly basis regarding the number of shares delivered to us by employees to satisfy the mandatory tax withholding requirement upon vesting of restricted stock during the third quarter of 2022:
|
|
|
|
|
|
|
|
|
|
Approximate Dollar Value of |
|
||||
|
Total |
|
|
|
|
|
Total Number of |
|
|
Shares that May Yet |
|
||||
|
Number of |
|
|
Average |
|
|
Shares Purchased as |
|
|
Be Purchased Under |
|
||||
|
Shares |
|
|
Price Paid |
|
|
Part of Publicly |
|
|
the Plan |
|
||||
|
Purchased |
|
|
Per Share |
|
|
Announced Plan |
|
|
(in 000’s) |
|
||||
7/1/2022 - 7/31/2022 |
|
769 |
|
|
$ |
71.17 |
|
|
|
- |
|
|
$ |
75,002 |
|
8/1/2022 - 8/31/2022 |
|
835,877 |
|
|
$ |
82.67 |
|
|
|
835,849 |
|
|
$ |
40,667 |
|
9/1/2022 - 9/30/2022 |
|
539,864 |
|
|
$ |
75.34 |
|
|
|
539,769 |
|
|
$ |
- |
|
Total |
|
1,376,510 |
|
|
$ |
79.79 |
|
|
|
1,375,618 |
|
|
$ |
- |
|
23
Item 6. Exhibits
The exhibits included as part of this Form 10-Q are set forth in the Exhibit Index.
EXHIBIT INDEX
Exhibit No. |
Description |
|
|
10.1 |
Common Stock Exchange and Repurchase Agreement, dated August 8, 2022 (incorporated by reference to Exhibit 10.1 to Registrant’s report on Form 8-K dated and filed on August 9, 2022). |
|
|
10.2 |
DPY Stockholders’ Agreement, dated August 8, 2022 (incorporated by reference to Exhibit 10.1 to Registrant’s report on Form 8-K dated and filed on August 9, 2022). |
|
|
31.1 |
|
|
|
31.2 |
|
|
|
32.1 |
|
|
|
101 |
Interactive data files for Hub Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) the Consolidated Balance Sheets (unaudited); (ii) the Unaudited Consolidated Statements of Income and Comprehensive Income; (iii) the Unaudited Consolidated Statements of Stockholders’ Equity; (iv) the Unaudited Consolidated Statements of Cash Flows (unaudited); and (v) the Notes to Unaudited Consolidated Financial Statements. XBRL Instance Document-the XBRL Instance Document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document. |
|
|
104 |
The cover page from Hub Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (formatted in Inline XBRL and included in Exhibit 101). |
24
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
HUB GROUP, INC. |
|
|
|
|
DATE: |
November 4, 2022 |
/s/ Geoffrey F. DeMartino |
|
Geoffrey F. DeMartino |
|
|
Executive Vice President, Chief Financial |
|
|
Officer and Treasurer |
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
/s/ Kevin W. Beth |
|
Kevin W. Beth |
|
|
Executive Vice President, Chief Accounting |
|
|
Officer |
|
|
(Principal Accounting Officer) |
|
25
Exhibit 31.1
CERTIFICATION
I, David P. Yeager, certify that:
Date: November 4, 2022 |
|
|
|
|
/s/ David P. Yeager |
|
Name: David P. Yeager |
|
Title: Chairman and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Geoffrey F. DeMartino, certify that:
Date: November 4, 2022 |
|
|
|
|
/s/ Geoffrey F. DeMartino |
|
Name: Geoffrey F. DeMartino |
|
Title: Executive Vice President, Chief Financial |
|
Officer and Treasurer |
|
(Principal Financial Officer) |
Exhibit 32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following statement is provided by the undersigned to accompany the Form 10-Q for the quarter ended September 30, 2022 of Hub Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and shall not be deemed filed pursuant to any provision of the Exchange Act of 1934 or any other securities law.
Each of the undersigned certifies that the foregoing Report on Form 10-Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Hub Group, Inc.
Date: November 4, 2022
/s/ David P. Yeager |
|
/s/ Geoffrey F. DeMartino |
David P. Yeager |
|
Geoffrey F. DeMartino |
Chairman and Chief Executive Officer |
|
Executive Vice President, Chief Financial Officer and Treasurer |
Hub Group, Inc. |
|
Hub Group, Inc. |