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2018-12-31

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2018

OR

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 0-27754

 

HUB GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

36-4007085

(State or other jurisdiction

of incorporation of organization)

(I.R.S. Employer

Identification No.)

 

 

2000 Clearwater Drive

Oak Brook, Illinois 60523

(Address and zip code of principal executive offices)

(630) 271-3600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $.01 par value

(Title of Class)

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

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.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer

 

Accelerated Filer

 

Non-Accelerated Filer

 

Smaller Reporting Company

Emerging Growth Company

 

 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      No  

The aggregate market value of the Registrant’s voting stock held by non-affiliates on June 30, 2018, based upon the last reported sale price on that date on the NASDAQ Global Select Market of $49.80 per share, was $1,613,285,990.

On February 18, 2019, the Registrant had 34,111,819 outstanding shares of Class A Common Stock, par value $.01 per share, and 662,296 outstanding shares of Class B Common Stock, par value $.01 per share.

Documents Incorporated by Reference

The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2019 (the “Proxy Statement”) is incorporated by reference in Part III of this Form 10-K to the extent stated herein. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.

 

 

 

 


 

PART I

 

FORWARD LOOKING STATEMENTS

This annual report contains, and our officers and representatives may from time to time make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “hopes,” “believes,” “intends,” “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 “Business,” “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.  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 annual 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 described in detail under Items 1A “Risk Factors,” include the following:

 

the degree and rate of market growth in the domestic intermodal, truck brokerage, dedicated and logistics markets served by us;

 

deterioration in our relationships, service conditions or provision of equipment with existing railroads or adverse changes to the railroads’ operating rules;

 

inability to recruit and retain company drivers and owner-operators;

 

the impact of competitive pressures in the marketplace, including entry of new competitors, direct marketing efforts by the railroads or marketing efforts of asset-based carriers;

 

unanticipated changes in rail, drayage, warehousing and trucking company capacity or costs of services;

 

increases in costs related to any reclassification or change in our treatment of drivers, owner-operators or other workers due to regulatory, judicial and legal decisions;

 

joint employer claims alleging that the Company is a co-employer of any workers providing services to a Company contractor;

 

labor unrest in the rail, drayage or trucking company communities;

 

significant deterioration in our customers’ financial condition, particularly in the retail, consumer products and durable goods sectors;

 

inability to identify, close and successfully integrate any future business combinations;

 

fuel shortages or fluctuations in fuel prices;

 

increases in interest rates;

 

acts of terrorism and military action and the resulting effects on security;

 

difficulties in maintaining or enhancing our information technology systems, implementing new systems or protecting against cyber-attacks;

 

increases in costs associated with changes to or new governmental regulations;

 

significant increases to employee health insurance costs;

 

loss of several of our largest customers;

 

awards received during annual customer bids not materializing;

 

changes in insurance costs and claims expense;

 

union organizing efforts and changes to current laws which will aid in these efforts;  

 

further consolidation of railroads;

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imposition of new tariffs or trade barriers or withdrawal from or renegotiation of existing free trade agreements which could reduce international trade and economic activity; and

 

losses sustained on insured matters where the liability materially exceeds available insurance proceeds.

 

Item  1.

BUSINESS

General

Hub Group, Inc. (the “Company”, “Hub”, “we”, “us” or “our”) is a leading, world class supply chain management company that provides value-added multi-modal transportation and logistics solutions by offering reliability, visibility and value to our customers. Our service offerings include comprehensive intermodal, truck brokerage, dedicated trucking, managed transportation, freight consolidation, warehousing, international transportation and other logistics services. The Company is a Delaware corporation that was incorporated on March 8, 1995 as successor to a business that was founded in 1971.

Today we are one of the largest freight transportation providers in the United States. Through our network, we have the ability to arrange for the movement of freight in and out of every major city in the United States, Canada and Mexico. We utilize an asset-light strategy that employs a combination of our company-operated equipment as well as assets operated by third parties to transport and store our customers’ goods, which allows us to minimize our investment in equipment and facilities and reduce our capital requirements. Hub services a large and diversified customer base in a broad range of industries, including consumer products, retail 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.

Our strategy includes the following elements:

 

Deepen and diversify our customer relationships through a best-in-class customer experience across all solutions

 

Acquire and organically develop new service offerings for our customers that will diversify our revenue streams and deliver sophisticated supply chain logistics solutions

 

Selectively invest in assets to drive organic growth and reduce our costs

 

Build a world class information technology platform to drive growth and efficiency and support future innovation

 

Develop a culture that continues to enable innovation, service and teamwork

In support of our mission to provide multi-modal transportation and logistics solutions we regularly evaluate strategic transactions to enhance our core business lines and diversify our service offerings.  Our recent strategic transactions include the following:

Estenson Acquisition.  On July 1, 2017, our subsidiary Hub Group Trucking, Inc. (“HGT”), acquired the outstanding equity interests of Estenson Logistics, LLC (“Estenson”), a leading North American dedicated trucking company that operated over 1,000 trucks and employed approximately 1,300 drivers.  Estenson now operates under the name Hub Group Dedicated (“Dedicated”).  

Mode Sale.  On August 31, 2018, we sold the membership interests of our Mode Transportation, LLC (“Mode”) subsidiary to an affiliate of York Capital Management (“Purchaser”).  Mode’s temperature protected division (“Temstar”) was not included in the transaction and is now included in our intermodal line of business.   Mode provided transportation management services to its customers through a network of approximately 170 agents.  

CaseStack Acquisition.  On December 3, 2018, a subsidiary of Hub Group, Inc. completed a merger with CaseStack, Inc. (“CaseStack”).  CaseStack is a non-asset based transportation and logistics provider operating in two lines of business.  CaseStack’s logistics business provides warehouse and transportation logistics services, including retailer-driven collaborative consolidation programs, to its customers who primarily consist of consumer-packaged goods companies selling into the North American retail channel. CaseStack’s transportation brokerage business offers truck brokerage services with a focus on less-than-truckload services.  CaseStack does not own or operate any warehouses or transportation equipment. The financial results of CaseStack are included in our logistics line of business, except for their transportation brokerage business which is included in our truck brokerage line of business.

Services Provided

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Our lines of business can be categorized as follows:

Intermodal. As an intermodal provider, we arrange for the movement of our customers’ freight in containers and trailers, 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 HGT subsidiary and third-party local trucking companies.  

In a typical intermodal transaction, the customer contacts Hub to place an order. We determine the price, arrange for the necessary intermodal equipment (which includes a container and chassis or a trailer) to be delivered to the customer by HGT or a third-party drayage company and, after the freight is loaded, arrange for the transportation of the container or trailer to the rail terminal where it is transported by the railroad to the destination rail terminal. Our predictive track and trace technology then monitors the shipment to ensure that it arrives as scheduled and alerts our customer service personnel if there are service delays. We then arrange for and confirm delivery by a drayage company at the destination. After unloading, the empty equipment is made available for reloading.

As of December 31, 2018, we owned approximately 37,000 53-foot containers and we had exclusive access to approximately 1,200 rail-owned containers for our dedicated use on the Union Pacific (“UP”) and the Norfolk Southern (“NS”) railroads.

During 2018, HGT accounted for approximately 53% of Hub’s drayage needs by providing reliable, cost effective intermodal services to our customers. As of December 31, 2018, HGT had terminals in the Atlanta, Birmingham, Charlotte, Chattanooga, Chicago, Dallas, Harrisburg, Huntsville, Indianapolis, Jacksonville, Kalamazoo, Kansas City, Milwaukee, Memphis, Nashville, Newark, Philadelphia, Portland (OR), Salt Lake City, Seattle, St. Louis, Stockton and Wilmington (IL) metro areas. As of December 31, 2018, HGT leased or owned approximately 1,200 tractors and 200 trailers, employed approximately 1,300 drivers and contracted with approximately 1,300 owner-operators.

Dedicated Trucking. Our dedicated operation contracts with customers who seek to outsource a portion of their trucking transportation needs. We offer a dedicated fleet of equipment and drivers to each customer, as well as the management and infrastructure to operate according to the customer’s high service expectations. Contracts with customers generally include fixed and variable pricing arrangements and may include charges for early termination which serves to reduce the financial risk we bear with respect to the utilization of our equipment.  Our dedicated operation currently operates a fleet of approximately 1,400 tractors and 4,500 trailers at 130 locations throughout the United States.  As of December 31, 2018, Dedicated employed approximately 1,900 drivers.

Truck Brokerage. We operate one of the largest truck brokerage operations in the U.S., providing customers with an over the road service option for their transportation needs. Our brokerage does not operate any trucks; instead we match customers’ needs with carriers’ capacity to provide the most effective service and price combination. We have contracts with a substantial base of carriers allowing us to meet the varied needs of our customers.

In a typical truck brokerage transaction, the customer contacts Hub to obtain a price quote for a particular freight movement. We make the delivery appointment and arrange with the appropriate carrier to pick up the freight. Once we receive confirmation that the freight has been picked up, we monitor the movement of the shipment until it reaches its destination and the delivery has been confirmed.

In 2018, we expanded our truck brokerage service offering through the acquisition of CaseStack. CaseStack’s truck brokerage provides us with additional capabilities, particularly with respect to less-than-truckload freight.

Logistics. Hub’s logistics business operates under the names Unyson Logistics and CaseStack. Unyson Logistics is comprised of a network of logistics professionals dedicated to developing, implementing and operating customized logistics solutions for customers. Unyson Logistics 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 web-based shipment visibility. Our multi-modal transportation capabilities include small parcel, heavyweight, expedited, less-than-truckload, truckload, intermodal, railcar and international shipping. Our CaseStack logistics business leverages proprietary technology along with collaborative partnerships with retailers and logistics providers to deliver cost savings and performance-enhancing supply chain services to consumer-packaged goods clients.  CaseStack contracts with third-party warehouse providers in seven markets across North America to which its customers ship their goods to be stored and eventually consolidated, along with goods from other CaseStack customers, into full truckload shipments destined to major North American retailers.  CaseStack offers its customers shipment visibility, transportation cost savings, high service and compliance with retailers’ increasingly stringent supply chain requirements.

Marketing and Customers

As one of the leading transportation management companies in North America, Hub Group’s mission is to be a world-class supply chain management company that provides innovative, value-added multi-modal solutions including intermodal, dedicated trucking,

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truck brokerage and logistics services.  We have transformed our organization from a traditional intermodal marketing company (“IMC”) into a multi-modal solutions provider delivering reliability, visibility and value to our customers every day.

The focus on this mission has revolutionized our offerings and the way we service our customers.  We seek to understand and analyze our customers’ entire network to provide innovative multi-modal solutions to drive savings, improve service and offer full visibility into their supply chains. 

After 48 years in business, we continue to live by the simple mantra that "good" is not good enough. To ensure we grow and improve, we focus intently on our customers, listening to their needs, developing comprehensive transportation solutions and delivering superior service. We invest in our people, equipment and technology to maintain our competitive edge in order to be the best transportation provider for our customers.

The supply-chain needs of our customers have become more complex, efficient and lean. We are committed to helping our customers meet these needs. A particular focus has been providing our customers with increased speed and improved visibility into their supply chains.  Our state-of-the-art technology and satellite tracking of intermodal containers helps to maintain our high levels of service while aiding capacity planning and providing 24/7 visibility into any shipment; and our people have the skills, training and information to quickly respond to our customers' changing supply chain networks. Every customer has a dedicated team of professionals ready to service all of their needs. We refer to this exceptional service approach the "One Hub" experience.

The majority of our business is in the retail, consumer products and durable goods.  No one customer represents more than 10% of our total revenue in 2018 and 2017.  

Information Technology Systems

Leveraging strong technology at the core and emerging technologies on the edge to achieve our business goals and to keep pace with customer demands remains the basis of our technology strategy.  We purchase commercially available technology for commodity capabilities, we extend to create additional value leveraging emerging technologies, and we build solutions where we can create differentiated experiences for our customers, drivers, carriers and employees.  In 2018 we initiated our multi-year investment and process enhancement initiative that we refer to as “Elevate” which includes implementing core foundational technologies, Oracle enterprise resource planning (“ERP”) and Oracle Human Capital Management (“HCM”) and Oracle Transportation Management (“OTM”) all of which are deployed in the cloud.  Anchored on those common platforms our technology strategy includes the deployment of differentiating solutions facing our customers and carriers through our Hub Connect application and for our drivers through our Hub Pro application.  In addition, we have many initiatives focused on internal productivity and efficiency that will be a dramatic change from the processes and technology used today.

In 2018, we converted two of our HGT terminals to our newly designed process and technology solutions for fleet operations.  This included changes to the technology used for the recruiting, qualifying, and onboarding of drivers.  This allows drivers to immediately begin using the entire suite of solutions on their first day of employment.  We also deployed our state-of-the-art transportation management system, OTM, allowing us to optimally plan drivers and loads.  This positively impacts both driver and asset utilization while improving the customer experience with more efficient, responsive operations.  This deployment also added a significant set of capabilities to Hub Pro, our mobile solution for company drivers and owner operator drivers.   These new capabilities include visibility to work assignments, direct communication to their manager, verification of work completed, hours of service compliance, vehicle inspection and other features focused on value to our drivers.  This end to end solution was deployed leveraging both purchased and custom-built solutions integrated through our API platform.   The deployment of this solution to each of our fleet terminals will be completed by the end of 2019.

Benefits of our Cloud First technology strategy include improvements to the rate and pace at which we can deliver technology solutions, while lowering the cost to serve and maintaining our high level of service quality. We also expect to deploy in 2019 ERP as our financial management solution as well as enabling HCM Cloud for driver payroll allowing us to leverage both solutions to improve efficiency and gain valuable insight. These and other new technology solutions are planned for 2019.  

Relationship with Railroads

A key element of our business strategy is to strengthen our close working relationships with the major intermodal railroads in North America. Due to our size and relative importance, some railroads have dedicated support personnel to focus on our day-to-day service requirements. On a regular basis, our senior executives and each of the railroads meet to discuss major strategic issues concerning intermodal transportation.

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We have relationships with each of the following major railroads:

 

Burlington Northern Santa Fe

  

Florida East Coast

Canadian National

  

Kansas City Southern

Canadian Pacific

  

Norfolk Southern

CSX

  

Union Pacific

Ferromex

  

 

Relationship with Drayage Companies

Hub has a “Quality Drayage Program,” under which participants commit to provide high quality drayage service along with clean and safe equipment, maintain a defined on-time performance level and follow specified procedures designed to minimize freight loss and damage. We negotiate drayage rates for transportation between specific origin and destination points.

We also provide drayage services with our own drayage operations, which we operate through our subsidiary HGT. Our drayage operations employ their own drivers and also contract with owner-operators who supply their own trucks.

Relationship with Trucking Companies

We contract with a large number of trucking companies that we use to transport freight. Our relationships with these trucking companies are important since these relationships determine pricing, load coverage and overall service.

Risk Management and Insurance

We require all of our trucking company vendors to carry general liability insurance, truckman’s auto liability insurance and cargo insurance. Railroads, which are self-insured, provide limited cargo protection. To cover freight loss or damage when a carrier’s liability cannot be established or a carrier’s insurance is insufficient to cover the claim, we carry our own cargo insurance. We also carry general liability insurance with a companion umbrella policy on this general liability insurance.

We maintain separate insurance policies to cover potential exposure from our company-owned drayage and dedicated operations. We carry commercial general liability insurance subject to a policy aggregate limit, and trucker’s automobile liability insurance with a limit per occurrence. Additionally, we have an umbrella excess liability policy and maintain motor truck cargo liability insurance.

Government Regulation

The Company and several of our subsidiaries, including Dedicated and CaseStack, are licensed by the Department of Transportation as brokers in arranging for the transportation of general commodities by motor vehicle. To the extent that we perform truck brokerage services, they do so under these licenses. The Department of Transportation prescribes qualifications for acting in this capacity, including a $75,000 surety bond that we have posted. In addition, Hub has customs bonds. To date, compliance with these regulations has not had a material adverse effect on our results of operations or financial condition; however, the transportation industry is subject to legislative or regulatory changes that can affect the economics of the industry by requiring changes in operating practices or influencing the demand for, and cost of providing, transportation services.

Custom-Trade Partnership Against Terrorism

One of our operating subsidiaries achieved Custom-Trade Partnership Against Terrorism (C-TPAT) certification in 2013 and have maintained it since then. C-TPAT is a voluntary supply chain security program led by U.S. Customs and Border Protection focused on improving the security of private companies’ supply chains with respect to terrorism. Companies who achieve C-TPAT certification must have a documented process for determining and alleviating risks throughout their international supply chain. This certification allows us to be considered low risk, resulting in expedited processing of our customers’ cargo, including fewer customs examinations.

Competition

The transportation services industry is highly competitive. We compete against intermodal providers, as well as logistics companies, third party brokers, trucking companies and railroads that market their own services. Several larger trucking companies have entered into agreements with railroads to market intermodal services nationwide. Competition is based primarily on freight rates, quality of service, reliability, transit time and scope of operations. Several transportation service companies and trucking companies, and all of the major railroads, may have substantially greater financial and other resources than we do.

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General

Employees: As of December 31, 2018, Hub Group had approximately 5,400 employees, which included approximately 3,100 drivers.  We are not a party to any collective bargaining agreements and consider our relationship with our employees to be satisfactory.

Other: No material portion of our operations is subject to renegotiation of profits or termination of contracts at the election of the federal government. Our business is seasonal to the extent that certain customer groups, such as retail, are seasonal.

Periodic Reports

Our annual report to the Securities and Exchange Commission (“SEC”) on Form 10-K, our quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to such reports, are available free of charge on our website at www.hubgroup.com as soon as reasonably practicable after we electronically file or furnish such reports to the SEC. Information on our website does not constitute part of this annual report on Form 10-K. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC. Any materials we file with, or furnish to, the SEC may also be read and/or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Item  1A.

RISK FACTORS

Our ability to expand our business or maintain our profitability may be adversely affected by a shortage of drivers and capacity.

We derive significant revenue from our intermodal, truck brokerage, dedicated and logistics services. Driver shortages and reliance on third-party companies for the operation of our intermodal, truck brokerage, dedicated and logistics services could adversely affect our profitability and limit our ability to expand our business or retain customers. Driver shortages may require increases to drivers’ compensation that we may be unable to pass on to our customers, thereby increasing our cost of providing services and lowering our margins. Most drayage and certain less than truckload companies operate relatively small fleets and have limited access to capital for fleet expansion. Particularly during periods of economic expansion, it may be difficult for Dedicated, HGT and third-party trucking companies to expand their fleets due to chronic driver shortages.

Because we depend on railroads for our operations, our operating results and financial condition are likely to be adversely affected by any increase in rates, reduction or deterioration in rail service or change in the railroads’ reliance on us to market their intermodal transportation services.

We depend on the major railroads in the United States for virtually all of the intermodal services we provide. In many markets, rail service is limited to one or a few railroads. Consequently, a reduction in, or elimination of, rail service to a particular market is likely to adversely affect our ability to provide intermodal transportation services to some of our customers. Rate increases would result in higher intermodal transportation costs, reducing the attractiveness of intermodal transportation compared to truck or other transportation modes, which could cause a decrease in demand for our services. Further, our ability to continue to expand our intermodal transportation business is dependent upon the railroads’ ability to increase capacity for intermodal freight and provide consistent and reliable service. Our business could also be adversely affected by a work stoppage at one or more railroads or by adverse weather conditions or other factors that hinder the railroads’ ability to provide reliable transportation services.

To date, the railroads have chosen to rely on us and other intermodal competitors to market their intermodal services rather than fully developing their own marketing capabilities. If one or more of the major railroads were to decide to reduce their dependence on us, the volume of intermodal shipments we arrange would likely decline, which could have a material adverse effect on our results of operations and financial condition.

If we fail to maintain and enhance our information technology systems, or if we fail to successfully implement new technology or enhancements, we may be at a competitive disadvantage and lose customers.

Hub Group continues to see technology as key to driving internal efficiencies as well as providing additional capabilities to customers and carriers. In addition, Hub Group’s systems are critical to our operations and our ability to compete effectively as an intermodal provider, dedicated and drayage carrier, truck broker and logistics provider. We expect our customers to continue to demand more sophisticated technology-driven solutions from their suppliers and we must enhance or replace our information technology systems in response. This may involve significant research and development costs, implementation costs and potential challenges. To keep pace with changing technologies and customer demand, we are making investments in our technology, as well as investing in emerging

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technology to further drive innovation and efficiency. The back-office investments include implementing new order management, transportation management, contract management and financial management processes and systems.  In a transformation of this size and scope we must mitigate risk by engaging external expertise and hiring internal experts. If we fail to successfully implement critical technology, if it does not provide the anticipated benefits or it does not meet market demands, we may be placed at a competitive disadvantage and could lose customers, materially adversely impacting our financial condition and results of operations. 

Technology and new market entrants may also disrupt the way we and our competitors operate.  As technology improves and new companies enter the freight brokerage market, our customers may be able to find alternatives to our services for matching shipments with available freight hauling capacity.  We must continue to develop innovative emerging technologies to source, track and provide visibility to capacity while exploiting machine learning and artificial intelligence to further improve customer outcomes.

The inability to successfully implement our new enterprise resource planning system could materially adversely affect our business.

We may experience difficulties implementing our new ERP. We are engaged in a multi-year implementation of a new enterprise resource planning system. The ERP is designed to efficiently maintain our books and records and provide information important to the operation of our business to our management team. The ERP will continue to require significant investment of human and financial resources. In implementing the ERP, we may experience significant delays, increased costs and other difficulties. Any significant disruption or deficiency in the design and implementation of the ERP could adversely affect our ability to process orders, service customers, send invoices and track payments, fulfill contractual obligations, meet financial reporting obligations or otherwise operate our business.

Our information technology systems are subject to breaches in data security and other risks and the inability to use our information technology systems could materially adversely affect our business.

Our information technology systems are dependent upon global communications and cloud service providers, as well as their respective vendors, all of whom have at some point experienced significant system failures and outages in the past. These providers’ systems are susceptible to outages from fire, floods, power loss, telecommunications failures, break-ins and similar events. Our infrastructure may also be vulnerable to computer viruses, malicious intrusion, random attacks and similar disruptions from unauthorized tampering with our computer systems. Failure to prevent or mitigate data loss or system intrusions from cyber-attacks or other security breaches, system failures or outages could expose us, our vendors, customers or third parties to a risk of loss or misuse of such information, which may adversely affect our operating results, result in litigation or otherwise harm our reputation or business.  Likewise, data privacy breaches by employees and others who access our systems may pose a risk that sensitive customer, vendor or employee data may be exposed to unauthorized persons or to the public, materially adversely impacting our customer service, employee, customer and vendor relationships and our reputation.  

The Company is continuously working to install new, and upgrade its existing, information technology systems and provide employee awareness training around phishing, malware, and other cyber risks to ensure that the Company is protected against cyber risks and security breaches. While we believe that we have taken appropriate security measures to protect our data and information technology systems and prevent data loss, there can be no assurance that our efforts may not prevent breakdowns or breaches in our systems that could result in a loss of customers or a reduction in demand for our services, or otherwise have a material adverse effect on our business.

We derive a significant portion of our revenue from our largest customers and the loss of one or more of these customers could have a material adverse effect on our revenue and business.

Our 10 largest customers accounted for approximately 41% of our total revenue in 2018, 36% in 2017 and 33% in 2016. While our dedicated and logistics businesses may involve long-term contracts, those contracts may contain cancellation clauses, and there is no assurance that our current customers will continue to utilize our services or continue at the same levels.  A reduction in or termination of our services by one or more of our largest customers could have a material adverse effect on our revenue and business.

Our obligation to pay our carriers is not contingent upon receipt of payment from our clients and we extend credit to certain clients as part of our business model.

In most cases, we take full risk of credit loss for the transportation services we procure from carriers.  Our obligation to pay our carriers is not contingent upon receipt of payment from our clients.  If any of our key clients fail to pay for our services, our profitability would be negatively impacted.

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Because our business is concentrated on intermodal services, any decrease in demand for intermodal transportation services compared to other transportation services could have an adverse effect on our results of operations.

We derived 60% of our revenue from our intermodal services in 2018, 60% in 2017 and 66% in 2016. As a result, any decrease in demand for intermodal transportation services compared to other transportation services could have a material adverse effect on our results of operations.

We operate in a highly competitive industry and our business may suffer if we are unable to adequately address potential downward pricing pressures and other competitive factors.

There are numerous competitive factors which could impair our ability to maintain our current profitability. We compete with many other transportation and logistics service providers, some of which have greater capital resources than we do. Some of our competitors periodically reduce their prices to gain business, and some of our competitors may have lower cost structures than we do, which may limit our ability to maintain or increase prices to preserve market share. Additionally, our customers may decide to in-source the services we currently provide for them using their own assets.

Relatively small increases in our transportation costs that we are unable to pass through to our customers are likely to have a significant effect on our gross margin and operating income.

Transportation costs represented 88% of our consolidated revenue in 2018, 89% in 2017 and 88% in 2016. Because transportation costs represent such a significant portion of our costs, any increases in the operating costs of railroads, trucking companies or drayage companies can be expected to result in higher freight rates.  Transportation costs may increase if we are unable to sign on owner-operators or recruit employee drivers as this may increase driver costs or force us to use more expensive purchased transportation.  The inability to pass cost increases to our customers is likely to have a significant effect on our gross margin and operating income.  

An economic downturn and cyclical fluctuations in the economy could materially adversely affect our business.

Our operations and performance depend significantly on economic conditions. Uncertainty about United States and global economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on demand for transportation services. We are unable to predict the likely duration and severity of disruptions in the financial markets and adverse economic conditions, and our business and results of operations could be materially and adversely affected. Other factors that could influence demand include fluctuations in fuel costs, labor costs, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. We have little or no control over any of these factors or their effects on the transportation industry.  Economic recession or a downturn in customers’ business cycles also may have an adverse effect on our results of operations and growth by reducing demand for our services.  Therefore, our results of operations, like the entire freight transportation industry, are cyclical and subject to significant period-to-period fluctuations.  There could be a number of follow-on effects from a credit crisis on our business, including the insolvency of key transportation providers and the inability of our customers to obtain credit to finance development and/or manufacture products resulting in a decreased demand for transportation services. Our revenues and gross margins are dependent upon this demand, and if demand for transportation services declines, our revenues and gross margins could be adversely affected.

Although we believe we have adequate liquidity and capital resources to fund our operations internally, our inability to access the capital markets on favorable terms, or at all, may adversely affect our ability to engage in strategic transactions. The inability to obtain adequate financing from debt or capital sources could force us to self-fund strategic initiatives or even forgo certain opportunities, which in turn could potentially harm our performance.

Uncertainty about global economic conditions could also increase the volatility of our stock price.

We use a significant number of independent contractors, such as owner operators, in our businesses.  Legislative, judicial and regulatory authorities may continue to take actions or render decisions that could affect the independent contractor classification, which could have a significant impact on our gross margin and operating income.

We do business with a large number of independent contractors, such as HGT owner-operators, consistent with longstanding industry practices. Legislative, judicial, and regulatory (including tax) authorities have taken actions and rendered decisions that could affect the independent contractor classifications.  Class action and individual lawsuits have been filed against us and others in our industries, challenging the independent contractor classifications.  See Item 3 - Legal Proceedings for further discussion and see Note 15 to the consolidated financial statements under “Legal Matters” for a description of material pending litigation and regulatory matters affecting us and certain risks to our business presented by such matters.  If independent contractors are determined to be employees, or the Company a joint-employer of warehousemen used for our consolidation business, then we may incur legal liabilities associated with that determination, such as liability for unpaid wages, overtime, employee health insurance and taxes.  If we were to change how

8


 

we treat independent contractors or reclassify independent contractors to employees, then we would likely incur expenses associated with that reclassification and could incur additional ongoing expenses.  The costs associated with these matters could have a material adverse effect on results of operations and our financial position.

Insurance and claims expenses could significantly reduce our earnings.

We maintain insurance, with a high self-insured retention, with licensed insurance companies.  Our future insurance and claims expenses might exceed historical levels, which could reduce our earnings. If the number or severity of claims increases, our operating results could be adversely affected and the cost to renew our insurance could increase when our current coverage expires. If these expenses increase, and we are unable to offset the increase with higher freight rates to our customers, our earnings could be materially and adversely affected.

We are partially self-insured for certain losses related to employee medical coverage. Our self-insurance reserves may not be adequate to cover our medical claim liabilities.

We are partially self-insured for certain losses related to employee medical coverage, excluding employees covered by health maintenance organizations. We generally have an individual stop loss deductible per enrollee unless specific exposures are separately insured. We accrue a contingent liability based upon examination of historical trends, historical actuarial analysis, our claims experience, total plan enrollment (including employee contributions), population demographics, and other various estimates. Self-insurance reserves, net income, and cash flows could be materially affected if future claims differ significantly from our historical trends and assumptions.

We depend on third parties for equipment essential to operate our business, and if we fail to secure sufficient equipment, we could lose customers and revenue.

We depend on third parties for transportation equipment, such as tractors, containers, chassis, trailers and cross docks necessary for the operation of our business. Our industry has experienced equipment shortages in the past, particularly during the peak shipping season in the fall. A substantial amount of intermodal freight originates at or near the major West Coast ports, which have historically had the most severe equipment shortages. As an asset-light freight transportation management company, if we cannot secure sufficient transportation equipment at a reasonable price from third parties to meet our customers’ needs, our customers may seek to have their transportation needs met by other providers with their own assets. This could have a material adverse effect on our business, results of operations and financial position.

The ability to hire or retain management and other key personnel is critical to our continued success, and the loss of or inability to hire such personnel could have a material adverse effect on our business, financial condition and results of operations.

There is substantial competition for qualified personnel in the transportation services industry. Many individuals in the industry are required to sign non-competition agreements, severely limiting our ability to hire qualified personnel to compete in the market-place. As all key personnel devote their full time to our business, the loss of any member of our management team, or other key persons, or the inability to hire key persons, could have an adverse effect on us. We do not have written employment agreements with any of our executive officers and do not maintain key man insurance on any of our executive officers, although we do have non-competition agreements with them.  If we lose key members of our senior management team or are unable to effect smooth transitions from one executive to another as part of our succession plan, we may not be able to effectively manage our current operations or meet ongoing and future business challenges, and this could have a material adverse effect on our business, financial condition and results of operations.

Our growth could be adversely affected if we are not able to successfully integrate acquisition prospects.

We believe that the failure to integrate an acquired business or assets could significantly impact financial results.  We cannot guarantee that we will be able to execute and integrate acquisitions on commercially acceptable terms.  Financial results most likely to be impacted include, but are not limited to, revenue, gross margin, salaries and benefits, selling general and administrative expenses, depreciation and amortization, interest expense, net income and our debt level.

Our business could be adversely affected by strikes or work stoppages by draymen, truckers, warehousemen, port workers and railroad workers.

There may be labor unrest, including strikes and work stoppages, among workers at various transportation providers and in industries affecting the transportation industry, such as port workers. We could lose business due to any significant work stoppage or slowdown

9


 

and, if labor unrest results in increased rates for transportation providers such as draymen, we may not be able to pass these cost increases on to our customers. Strikes among longshoreman and clerical workers at ports in the past few years have slowed down the ports for a time, creating a major impact on the transportation industry.  Work stoppages occurring among owner-operators in a specific market have increased our operating costs periodically in the past. In the past several years, there have been strikes involving railroad workers. Future strikes by railroad workers in the United States, Canada or anywhere else that our customers’ freight travels by railroad would impact our operations. Any significant work stoppage, slowdown or other disruption involving port workers, railroad workers, truckers or draymen could adversely affect our business and results of operations.

The transportation industry is subject to government regulation, and regulatory changes could have a material adverse effect on our operating results or financial condition.

The Company and various subsidiaries, including Dedicated and CaseStack, are licensed by the Department of Transportation (“DOT”) as motor carrier freight brokers. The DOT prescribes qualifications for acting in this capacity, including surety bond requirements. Our HGT and Dedicated subsidiaries are licensed by the DOT to act as motor carriers.  The transportation industry is subject to DOT regulations regarding, among other things, driver breaks and “restart” rules that can affect the economics of the industry by requiring changes in operating practices or influencing the demand for, and cost of providing, transportation services. We are audited periodically by the DOT to ensure that we are in compliance with various safety, hours-of-service, and other rules and regulations. If we were found to be out of compliance, the DOT could levy fines and restrict or otherwise impact our operations. To date, compliance with these regulations has not had a material adverse effect on our results of operations or financial condition. We may also become subject to new or more restrictive regulations relating to carbon emissions under climate change legislation or limits on vehicle weight and size. Future laws and regulations may be more stringent and require changes in operating practices, influence the demand for transportation services or increase the cost of providing transportation services, any of which could materially adversely affect our business and results of operations.

We are not able to accurately predict how new governmental laws and regulations, or changes to existing laws and regulations, will affect the transportation industry generally, or us in particular. We are also unable to predict how the change in administration will affect government regulation of the transportation industry.  Although government regulation that affects us and our competitors may simply result in higher costs that can be passed along to customers, that may not be the case.

Our operations may be subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.

From time to time, we arrange for the movement of hazardous materials at the request of our customers. As a result, we may be subject to various environmental laws and regulations relating to the handling of hazardous materials. If we are involved in a spill or other accident involving hazardous materials, or if we are found to be in violation of applicable laws or regulations, we could be subject to substantial fines or penalties and to civil and criminal liability, any of which could have an adverse effect on our business and results of operations. The Company is also subject to certain Environmental Protection Agency (“EPA”) and California Air Resources Board (“CARB”) regulations.  We may become subject to enforcement actions, new or more restrictive regulations, or differing interpretations of existing regulations, which may increase the cost of providing transportation services or adversely affect our results of operations.  

Any attempt by the current administration to impose new tariffs, the future withdrawal from NAFTA or the withdrawal from or material modification of other international trade arrangements could adversely affect our business, financial condition and results of operations.

We arrange for the movement of freight, much of which originates from China, into and out of every major city in Mexico and Canada, and we import 53-foot intermodal containers manufactured in China. The potential withdrawal from the North American Free Trade Agreement (“NAFTA”) and entry into the United States-Mexico-Canada Agreement (“USMCA”), any future withdrawal from other international trade arrangements, or the imposition of tariffs on imports of foreign-manufactured goods into the United States, could adversely affect our business, financial condition and results of operations.  Additionally, the imposition of substantial tariffs on foreign-made intermodal containers or other products we utilize may increase the cost of providing transportation services or adversely affect our results of operations.

Changes in immigration laws could increase the costs of doing business or otherwise disrupt our operations.

We have hired individuals, including Information Technology (“IT”) employees, from outside the United States.  We have employee drivers and owner-operator drivers who are immigrants to the U.S.  We engage third party consultants, including for various IT projects, who may utilize personnel from outside the United States.  If immigration laws are changed or if new more restrictive government regulations are enacted or increased, our access to qualified and skilled personnel may be limited, the costs of doing business may increase and our operations may be disrupted.

10


 

We face litigation risks that could have a material adverse effect on the operation of our business.

We face litigation risks regarding a variety of issues, including without limitation, accidents involving our trucks and employees, alleged violations of federal and state labor and employment laws, securities laws, environmental liability and other matters. These proceedings may be time-consuming, expensive and disruptive to normal business operations. The defense of such lawsuits could result in significant expense and the diversion of our management’s time and attention from the operation of our business. In recent years, several insurance companies have stopped offering coverage to trucking companies as a result of increases in the severity of automobile liability claims and higher costs of settlements and verdicts. This trend could adversely affect our ability to obtain suitable insurance coverage or could significantly increase our cost for obtaining such coverage, which would adversely affect our financial condition, results of operations, liquidity and cash flows. Costs we incur to defend or to satisfy a judgment or settlement of these claims may not be covered by insurance or could exceed the amount of that coverage or increase our insurance costs and could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

Item 1B.

UNRESOLVED STAFF COMMENTS

None.

Item 1C.EXECUTIVE OFFICERS OF THE REGISTRANT

In reliance on General Instruction G to Form 10-K, information on executive officers of the Registrant is included in this Part I. The table sets forth certain information as of February 1, 2019 with respect to each person who is an executive officer of the Company.

 

Name

  

Age

  

Position

 

 

 

David P. Yeager

  

65

  

Chairman of the Board of Directors and Chief Executive Officer

 

 

 

Donald G. Maltby

  

64

  

President, Chief Operating Officer and Director

 

 

 

Phillip D. Yeager

 

31

 

Chief Commercial Officer

 

 

 

 

 

Terri A. Pizzuto

 

60

 

Executive Vice President, Chief Financial Officer and Treasurer

 

 

 

Vava R. Dimond

  

52

  

Executive Vice President, Chief Information Officer

 

 

 

 

 

John C. Vesco

  

56

  

Executive Vice President, President of Hub Group Trucking

 

 

 

Brian D. Alexander

  

39

  

Executive Vice President, Unyson Logistics

 

 

 

Vincent C. Paperiello

  

48

  

Executive Vice President, Pricing and Yield Management

 

 

 

 

 

Douglas G. Beck

  

52

  

Executive Vice President, Secretary and General Counsel

 

 

 

 

 

Nicholas J. Hannigan

 

39

 

Executive Vice President, Truck Brokerage

 

 

 

 

 

David P. Yeager has served as our Chairman of the Board since November 2008 and as Chief Executive Officer since March 1995. From March 1995 through November 2008, Mr. Yeager served as Vice Chairman of the Board. From October 1985 through December 1991, Mr. Yeager was President of Hub Chicago. From 1983 to October 1985, he served as Vice President, Marketing of Hub Chicago. Mr. Yeager founded the St. Louis Hub in 1980 and served as its President from 1980 to 1983. Mr. Yeager founded the Pittsburgh Hub in 1975 and served as its President from 1975 to 1977. Mr. Yeager received a Masters in Business Administration degree from the University of Chicago in 1987 and a Bachelor of Arts degree from the University of Dayton in 1975. Mr. Yeager is the father of Phillip D. Yeager.

Donald G. Maltby was appointed a Director of the Company in May 2016 and President and Chief Operating Officer in September 2015.  Mr. Maltby served as Chief Supply Chain Officer of Hub Supply Chain Solutions from January 2011 to May 2014.  From February 2004 to December 2010, Mr. Maltby served as Executive Vice President-Logistics Services.  Mr. Maltby previously served as President of Hub Online, our e-commerce division, from February 2000 through January 2004.  Mr. Maltby also served as President of Hub Cleveland from July 1990 through January 2000 and from April 2002 to January 2004.  Prior to joining Hub Group, Mr. Maltby served as President of Lyons Transportation, a wholly owned subsidiary of Sherwin Williams Company, from 1988 to 1990.  In his career at Sherwin Williams, which began in 1981 and continued until he joined us in 1990, Mr. Maltby held a variety of management positions including Vice-President of Marketing and Sales for its Transportation Division. Mr. Maltby has been in the transportation and logistics industry since 1976, holding various executive and management positions.  Mr. Maltby received a Masters

11


 

in Business Administration from Baldwin Wallace College in 1982 and a Bachelor of Science degree from the State University of New York in 1976.

Phillip D. Yeager was named Chief Commercial Officer in January 2018 after serving as Executive Vice President, Account Management and Intermodal Operations since January 2016.  Mr. Yeager previously served as Vice President of Account Management and Business Development from February 2014 to January 2016. Mr. Yeager is responsible for managing Hub Group’s overall customer experience, including customer service, intermodal operations and rail relationships. Mr. Yeager joined Hub Group in 2011 as the Director of Strategy and Acquisitions to focus on strategic initiatives and acquisitions throughout the company. Prior to joining Hub Group, Mr. Yeager served as Assistant Vice President of Commercial Banking at BMO Harris Bank, and as an investment banking analyst for Lazard Freres & Co. Mr. Yeager earned his Bachelor of Arts degree from Trinity College in Hartford, Connecticut, and a Master of Business Administration from the University of Chicago Booth School of Business. Mr. Yeager is the son of David P. Yeager.

Terri A. Pizzuto has been our Executive Vice President, Chief Financial Officer and Treasurer since March 2007. Prior to this promotion, Ms. Pizzuto was Vice President of Finance from July 2002 through February 2007. Prior to joining us, Ms. Pizzuto was a partner in the Assurance and Business Advisory Group at Arthur Andersen LLP. Ms. Pizzuto worked for Arthur Andersen LLP for 22 years holding various positions and serving numerous transportation companies. Ms. Pizzuto received a Bachelor of Science in Accounting from the University of Illinois in 1981. Ms. Pizzuto is a CPA and a member of the American Institute of Certified Public Accountants.

Vava R. Dimond was named an Executive Vice President of the Company in May 2016 and Chief Information Officer in April 2015 after serving as the Interim Chief Information Officer since September 2014. Ms. Dimond began her career with Hub Group in June 2013 as the Vice President of Business Engineering, responsible for overseeing Hub Group’s Business Intelligence, Business Engineering and Program Management projects and processes. Previously, Ms. Dimond spent 16 years with Schneider National and held several leadership positions within IT, most recently serving as Vice President of Technology Services. Ms. Dimond earned her Bachelor of Science degree in Economics from South Dakota State University in 1991.  Ms. Dimond is the spouse of Mr. John C. Vesco.

John C. Vesco was named Executive Vice President, President of Hub Group Trucking in January 2016. Mr. Vesco has led Hub Group Trucking’s operations as its President since January 2015, after serving as Executive Vice President of Hub Group Trucking from March 2012 to December 2014. Prior to joining Hub Group, Mr. Vesco held several management positions with Schneider National, most recently as Vice President and General Manager of Schneider Logistics. Mr. Vesco earned a Bachelor of Arts degree in Finance and Business Administration from Walsh University and a Master of Business Administration degree from Silver Lake College.  Mr. Vesco is the spouse of Ms. Vava R. Dimond.

Brian D. Alexander was named Executive Vice President of Unyson Logistics in September 2015.  Before being named Executive Vice President, Mr. Alexander served as Vice President of Operations of Unyson Logistics from December 2010 to September 2015 and was responsible for the operational execution and excellence for Fortune 500 manufacturing, retail and consumer packaged goods clients. Prior to that, Mr. Alexander was Unyson’s Senior Director of Strategic Accounts, where he had a ten-year history of managing and directing continuous improvement initiatives for key accounts. Mr. Alexander earned a Bachelor’s degree in Business Administration from Marquette University and Master of Business Administration degree from Cardinal Stritch University.

Vincent C. Paperiello was named Executive Vice President, Pricing and Yield Management in February 2016 after serving as Vice President, Pricing and Yield Management from March 2014 to February 2016. Since joining Hub Group in 1993, Mr. Paperiello has held a variety of operational, logistics management and business intelligence positions with the Company. In his current role, he is responsible for intermodal and regional trucking pricing strategy and execution, along with rail relations. Mr. Paperiello received a Bachelor of Arts degree in History from Western Illinois University and a Master of Business Administration – Finance degree from DePaul University, graduating with honors both times.

Douglas G. Beck was named Executive Vice President, Secretary and General Counsel in May 2016, after serving as Vice President, Secretary and General Counsel since July 2015, and Interim General Counsel since January 2015. In his role, Mr. Beck is responsible for managing the Legal, Human Resources and Compliance departments. Mr. Beck began his career with Hub Group in June 2011 as Assistant General Counsel. Prior to joining Hub Group, Mr. Beck was a Senior Attorney with Alberto-Culver Company from 2007 to 2011. Mr. Beck previously held counsel positions at Navistar International Corporation, Allegiance Healthcare Corporation and Seyfarth Shaw. Mr. Beck earned a Bachelor of Arts degree from the University of Illinois in 1987 graduating summa cum laude and received his Juris Doctor from Northwestern University School of Law in 1992.

Nicholas J. Hannigan was named Executive Vice President, Truck Brokerage in September 2018 after serving as Senior Vice President, Account Management since February 2018, and Vice President, Account Management upon joining Hub Group in January 2016. Mr. Hannigan joined Hub Group from Echo Global Logistics, where he held several roles including developing and executing Echo’s Managed Transportation solution and, most recently, as Vice President of Corporate Development. Prior to joining Echo, Mr.

12


 

Hannigan was a management consultant with a boutique firm in Chicago and participated in management development program with McMaster-Carr. Mr. Hannigan graduated from University of Chicago with an AB in Economics.

Directors of the Registrant

In addition to David P. Yeager and Donald G. Maltby, the following six individuals are also on our Board of Directors: James C. Kenny – Director of Kenny Industries, LLC, an asset holding company, and Director of Kerry Group, PLC, a company traded on the London and Dublin stock exchanges; Peter B. McNitt – former Vice Chair of BMO Harris Bank, a United States bank; Charles R. Reaves – Chief Executive Officer of Reaves Enterprises, Inc., a real estate development company; Martin P. Slark – former Chief Executive Officer of Molex Incorporated, a manufacturer of electronic, electrical and fiber optic interconnection products and systems; Jonathan P. Ward – Operating Partner at Kohlberg & Co., a leading U.S. private equity firm; and Mary H. Boosalis – President and CEO of Premier Health, a health network in the Dayton, OH region.

 

 

Item 2.

PROPERTIES

As of December 31, 2018, we directly, or indirectly through our subsidiaries, operated 33 offices throughout the United States, Canada and Mexico, including our headquarters in Oak Brook, Illinois and our HGT terminals located throughout the United States.  We have corporate offices in Mesa, AZ, Fayetteville, AR and Santa Monica, CA. All of our office space except for our corporate headquarters is leased. Most office leases have initial terms of more than one year, and many include options to renew. While some of our leases expire in the near term, we do not believe that we will have difficulty in renewing them or in finding alternative office space. We believe that our offices are adequate for the purposes for which they are currently used.

Item  3.

LEGAL PROCEEDINGS

We are a party to litigation incident to our business, including claims for personal injury and/or property damage, bankruptcy preference claims, and claims regarding freight lost or damaged in transit, improperly shipped or improperly billed. Some of the lawsuits to which we are party are covered by insurance and are being defended by our insurance carriers. Some of the lawsuits are not covered by insurance and we defend those ourselves. We do not believe that the outcome of this litigation will have a materially adverse effect on our financial position or results of operations. See Item 1 Business—Risk Management and Insurance and see Note 15 to the consolidated financial statements under “Legal Matters” for a detailed discussion of our ongoing legal proceedings.

Item  4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

 

 

13


 

PART II

Item  5.

MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Class A Common Stock (“Class A Common Stock”) trades on the NASDAQ Global Select Market tier of the NASDAQ Stock Market under the symbol “HUBG.” There is no established trading market for shares of our Class B Common Stock (the “Class B Common Stock” together with the Class A Common Stock, the “Common Stock”). Set forth below are the high and low closing prices for shares of the Class A Common Stock for each full quarterly period in 2018 and 2017.

 

 

2018

 

 

2017

 

 

High

 

Low

 

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

$

52.25

 

$

40.30

 

 

$

52.50

 

$

41.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter

$

54.46

 

$

38.40

 

 

$

47.80

 

$

33.45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter

$

56.60

 

$

44.90

 

 

$

43.85

 

$

33.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter

$

49.35

 

$

34.02

 

 

$

48.90

 

$

37.90

 

On February 22, 2019, there were approximately 459 stockholders of record of the Class A Common Stock and, in addition, there were an estimated 8,972 beneficial owners of the Class A Common Stock whose shares were held by brokers and other fiduciary institutions. On February 22, 2019, there were 9 holders of record of our Class B Common Stock.

We were incorporated in 1995 and have never paid cash dividends on either the Class A Common Stock or the Class B Common Stock. The declaration and payment of dividends are subject to the discretion of the Board of Directors. Any determination as to the payment of dividends will depend upon our results of operations, capital requirements and financial condition of the Company, and such other factors as the Board of Directors may deem relevant. Accordingly, there can be no assurance that the Board of Directors will declare or pay cash dividends on the shares of Common Stock in the future. Our certificate of incorporation requires that any cash dividends must be paid equally on each outstanding share of Class A Common Stock and Class B Common Stock. Our credit facility prohibits us from paying dividends on the Common Stock if there has been, or immediately following the payment of a dividend there would be, a default or an event of default under the credit facility. We are currently in compliance with the covenants contained in the credit facility.

14


 

Performance Graph

The following line graph compares the Company’s cumulative total stockholder return on its Class A Common Stock since December 31, 2013 with the cumulative total return of the Nasdaq Stock Market Index (NQUSBT) and the Nasdaq Trucking and Transportation Index (NQUSB27707). These comparisons assume the investment of $100 on December 31, 2013 in each index and in the Company’s Class A Common Stock and the reinvestment of dividends.

 

 

15


 

Item 6.

SELECTED FINANCIAL DATA

Selected Financial Data

(in thousands except per share data)

 

 

 

Years Ended December 31,

 

 

2018 (1)

 

 

2017 (2)

 

 

2016

 

 

2015

 

 

2014

 

Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

3,683,593

 

 

$

3,123,063

 

 

$

2,750,449

 

 

$

2,699,236

 

 

$

2,747,188

 

Gross margin

 

445,601

 

 

 

337,630

 

 

 

331,319

 

 

 

295,725

 

 

 

264,313

 

Operating income

 

124,919

 

 

 

72,669

 

 

 

96,557

 

 

 

90,983

 

 

 

61,525

 

Income from continuing operations before provision for income taxes

 

116,726

 

 

 

66,931

 

 

 

94,027

 

 

 

85,973

 

 

 

59,557

 

Income from continuing operations, net of income taxes

 

87,661

 

 

 

120,014

 

 

 

57,646

 

 

 

54,954

 

 

 

37,677

 

Income from discontinued operations net of income taxes

 

114,079

 

 

 

15,139

 

 

 

17,159

 

 

 

15,995

 

 

 

13,881

 

Net income

 

201,740

 

 

 

135,153

 

 

 

74,805

 

 

 

70,949

 

 

 

51,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

2.62

 

 

$

3.61

 

 

$

1.70

 

 

$

1.53

 

 

$

1.03

 

Diluted

$

2.61

 

 

$

3.60

 

 

$

1.70

 

 

$

1.53

 

 

$

1.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

3.42

 

 

$

0.46

 

 

$

0.51

 

 

$

0.45

 

 

$

0.38

 

Diluted

$

3.40

 

 

$

0.45

 

 

$

0.51

 

 

$

0.44

 

 

$

0.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

6.04

 

 

$

4.07

 

 

$

2.21

 

 

$

1.98

 

 

$

1.41

 

Diluted

$

6.01

 

 

$

4.05

 

 

$

2.20

 

 

$

1.97

 

 

$

1.40

 

 

 

 

As of December 31,

 

 

2018 (1)

 

 

2017 (2)

 

 

2016

 

 

2015

 

 

2014

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,924,898

 

 

$

1,670,941

 

 

$

1,360,259

 

 

$

1,301,146

 

 

$

1,212,127

 

Long-term debt, including capital lease

 

233,810

 

 

 

222,504

 

 

 

126,105

 

 

 

114,194

 

 

 

88,397

 

Stockholders' equity

 

980,834

 

 

 

769,872

 

 

 

628,179

 

 

 

647,840

 

 

 

600,784

 

 

 

(1)

Includes the results of operations for CaseStack from December 3, 2018, the date of its merger with a subsidiary of Hub Group, Inc.

 

(2)

Includes the results of operations for Dedicated from July 1, 2017, the date of its acquisition by HGT.

On August 31, 2018, Hub entered into the Purchase Agreement with Purchaser, pursuant to which the Company sold all of the issued and outstanding membership interests of Mode to Purchaser.  In our 2018 consolidated financial statements Mode is presented as discontinued operations for that year and all prior periods presented.  The balance sheet data above includes Mode’s assets for the years 2016, 2015 and 2014.  In 2017, Mode’s assets were classified as held for sale.  The selected financial data for 2018 and prior years reflect Mode as discontinued operations.  Refer to the Note 4 Discontinued Operations for additional information regarding the sale of Mode.

 

 

16


 

Item 7.

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

EXECUTIVE SUMMARY

We are a world class provider of multimodal logistics solutions. We offer comprehensive intermodal, truck brokerage, dedicated trucking and logistics services.  We operate through a nationwide network of operating centers.

As an intermodal provider, we arrange for the movement of our customers’ freight in containers and trailers, typically over 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 HGT subsidiary and third-party local trucking companies.

We also arrange for the transportation of freight by truck, providing customers with another option for their transportation needs.   We match our customers’ needs with carriers’ capacity to provide the most effective service and price combinations.  As part of our truck brokerage services, we negotiate rates, track shipments in transit and handle claims for freight loss or damage on behalf of our customers.

Our dedicated service line, Dedicated, contracts with customers looking to outsource a portion of their transportation needs. We offer a dedicated fleet of equipment and drivers, as well as the management and infrastructure to operate according to the customers’ high service expectations.

Our logistics line of business consists of complex transportation management services, including load consolidation, mode optimization and carrier management.  These service offerings are designed to take advantage of the increasing trend for shippers to outsource all or a greater portion of their transportation needs.  Our acquisition of CaseStack added consolidation and warehousing services that are marketed to consumer-packaged goods companies who serve the North American retail channel.

Hub has full time marketing representatives throughout North America who service local, regional and national accounts.  We believe that fostering long-term customer relationships is critical to our success and allows us to better understand our customers’ needs and specifically tailor our transportation services to them.

Hub’s multimodal solutions group works with pricing, account management and operations to enhance Hub’s customer margins across all lines of business.  We are working on margin enhancement projects including pricing optimization, matching of inbound and outbound loads, reducing empty miles, improving our recovery of accessorial costs, optimizing our drayage costs, reducing repositioning costs, providing holistic solutions and reviewing and improving low profit freight.

Hub’s top 50 customers represent approximately 68% of revenue for the year ended December 31, 2018. 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 issues are also monitored closely.

Strategic Transactions

On August 31, 2018, we sold the membership interests of our Mode Transportation, LLC (“Mode”) subsidiary to an affiliate of York Capital Management (“Purchaser”).  Mode’s temperature protected division (“Temstar”) was not included in the transaction and is now included in our intermodal line of business.  

Prior to the decision to sell Mode, Hub historically reported two distinct and reportable business segments.  As a result of the decision to sell Mode, which is now classified as discontinued operations, we have one reporting segment.  Revenue and costs related to Hub’s business that did not comprise Mode are reported within results from continuing operations.  All revenues and costs related to Mode’s business are presented in results from discontinued operations.  Prior year information has been adjusted to conform with the current presentation.  Unless otherwise stated, the information disclosed in Management’s Discussion and Analysis refers to continuing operations.  See Note 4 of the Consolidated Financial Statements for additional information regarding results from discontinued operations.

On December 3, 2018, a subsidiary of Hub Group, Inc. closed on the Agreement and Plan of Merger (the “Merger Agreement”) to acquire CaseStack, Inc. (“CaseStack”).  Total consideration for the transaction is $252.1 million.  To facilitate the acquisition we paid $248.7 million in cash and $3.5 million was a deferred purchase consideration to be paid equally over twenty four months.  

17


 

RESULTS OF OPERATIONS

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following table summarizes our revenue by business line (in thousands):

 

 

Twelve Months

 

 

Twelve Months

 

 

Ended December 31, 2018

 

 

Ended December 31, 2017

 

Intermodal

$

2,195,316

 

 

$

1,870,873

 

Truck brokerage

 

497,282

 

 

 

481,635

 

Logistics

 

698,138

 

 

 

655,543

 

Dedicated

 

292,857

 

 

 

115,012

 

Total revenue

$

3,683,593

 

 

$

3,123,063

 

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

 

 

Twelve Months Ended

 

 

December 31,

 

 

2018

 

 

2017

 

Revenue

$

3,683,593

 

 

100.0%

 

 

$

3,123,063

 

 

100.0%

 

Transportation costs

 

3,237,992

 

 

87.9%

 

 

 

2,785,433

 

 

89.2%

 

Gross margin

 

445,601

 

 

12.1%

 

 

 

337,630

 

 

10.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

222,786

 

 

6.0%

 

 

 

175,567

 

 

5.6%

 

General and administrative

 

81,272

 

 

2.2%

 

 

 

77,239

 

 

2.5%

 

Depreciation and amortization

 

16,624

 

 

0.5%

 

 

 

12,155

 

 

0.4%

 

Total costs and expenses

 

320,682

 

 

8.7%

 

 

 

264,961

 

 

8.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

$

124,919

 

 

3.4%

 

 

$

72,669

 

 

2.3%

 

Revenue

Hub’s revenue increased 17.9% to $3.7 billion in 2018 from $3.1 billion in 2017.  Intermodal revenue increased 17.3% to $2.2 billion primarily due to improved pricing, 4.3% higher volume, and higher fuel revenue.  Truck brokerage revenue increased 3.2% to $497.3 million due to a 5.8% increase in fuel, mix and price combined, partially offset by a 2.6% decrease in volume.  Logistics revenue increased 6.5% to $698.1 million related primarily to growth with existing customers and the addition of CaseStack. Dedicated’s revenue increased 154.6% to $292.9 million due primarily to having a full year of results in 2018 versus six months of results in 2017 and growth with new customers.  

Transportation Costs

Hub’s transportation costs increased to $3.2 billion in 2018 from $2.8 billion in 2017.  Transportation costs in 2018 consisted of purchased transportation costs of $2.6 billion and equipment and driver related costs of $607.8 million compared to 2017, which consisted of purchased transportation costs of $2.3 billion and equipment and driver related costs of $449.8 million. The 12.6% increase in purchased transportation costs was due primarily to rail cost increases, an increase in fuel costs, higher third-party carrier costs, higher volumes primarily in intermodal, and the addition of CaseStack. Equipment and driver related costs increased 35.1% in 2018 due primarily to having a full year of results in 2018 versus six months of results in 2017 for Dedicated.

Gross Margin

Hub’s gross margin increased 32.0% to $445.6 million in 2018 from $337.6 million in 2017. The $108.0 million gross margin increase was the result of increases in all lines of business. Intermodal gross margin increased primarily due to improved pricing and higher volume. Partially offsetting the intermodal margin growth were higher rail and drayage costs.  Truck brokerage gross margin increased due to growth with strategic customers and increased spot activity.  Logistics gross margin increased due to the addition of CaseStack partially offset by lost customers and changes in customer mix.  Dedicated gross margin increased due to having a full year of results in 2018 versus six months of results in 2017.

As a percentage of revenue, gross margin increased to 12.1% in 2018 from 10.8% in 2017.  Intermodal gross margin as a percentage of sales increased 220 basis points due to improved prices, partially offset by rail and drayage cost increases.  Average rail transit times were up 0.7 days which negatively impacted our results.  Truck brokerage gross margin as a percentage of sales was flat due

18


 

primarily increased purchase transportation costs and changes in customer mix.  Logistics gross margin as a percentage of sales was flat due to changes in customer mix.  Dedicated gross margin as a percentage of sales decreased 550 basis points due to increased costs for third party carriers, temporary drivers, rented trucks and higher start-up costs associated with new customers.

CONSOLIDATED OPERATING EXPENSES

Salaries and Benefits

Hub’s salaries and benefits increased to $222.8 million in 2018 from $175.6 million in 2017. As a percentage of revenue, Hub’s salaries and benefits increased to 6.0% in 2018 from 5.6% in 2017.

Hub’s salaries and benefits increase of $47.2 million was due primarily to an increase in bonus expense of $23.9 million, a $13.6 million increase related to including Dedicated employees for twelve months in 2018 versus six months in 2017, increases of $4.6 million for restricted stock, an increase of $2.5 million for payroll taxes, and additional increases of $1.7 million for commissions, $0.6 million for employee benefits and $0.3 million for salaries.

Hub’s headcount as of December 31, 2018 and 2017 was 2,312 and 1,923, respectively, which excludes drivers, as driver costs are included in transportation costs. The increase in Hub’s headcount is primarily due to the acquisition of CaseStack.  

General and Administrative

Hub’s general and administrative expenses increase to $81.3 million in 2018 from $77.2 million in 2017. As a percentage of revenue, these expenses decreased to 2.2% in 2018 from 2.5% in 2017.

The increase of $4.1 million in general and administrative expense was due primarily to the $10.8 million increase for the addition of Dedicated for twelve months in 2018 versus six months in 2017, partially offset by income from a decrease of $4.7 million in the Dedicated contingent consideration, a decrease in travel expense of $1.0 million, a decrease in IT maintenance and office equipment expense of $0.7 million and a decrease in bad debt expense of $0.4 million.

Depreciation and Amortization

Hub’s depreciation and amortization increased to $16.6 million in 2018 from $12.2 million in 2017. This expense as a percentage of revenue increased to 0.5% in 2018 from 0.4% in 2017.  This increase is primarily due to an additional $1.8 million of amortization due to Dedicated having twelve months of results in 2018 versus six months in 2017, amortization of $0.9 million for the addition of CaseStack, as well as an increase of $1.7 million of software depreciation expense.

Other Income (Expense)

Hub’s other expense increased to $8.2 million in 2018 from $5.7 million in 2017 due primarily to an increase in interest expense due to the addition of Dedicated’s equipment loans for twelve months in 2018 versus six months in 2017, partially offset by an increase in interest income.  The interest income resulted from having a large cash balance between the sale of Mode on August 31, 2018 and the purchase of CaseStack on December 3, 2018.

Provision for Income Taxes

The provision for income taxes increased to an expense of $29.1 million in 2018 from a benefit $53.1 million in 2017 due primarily to the favorable impact on income tax expense from the revaluation of deferred tax liabilities as a result of the enactment of the U.S. Tax Cuts and Jobs Act (the “Act”) in 2017.  Our effective tax rate was an expense of 24.9% in 2018 and a benefit of 79.3% in 2017. 

Net Income

Net income decreased to $87.7 million in 2018 from $120.0 million in 2017 due primarily to the revaluation of deferred tax liabilities in connection with the Act, resulting in an income tax benefit in 2017 and higher operating expenses, partially offset by higher margin.

 

 

Twelve months ended December 31

 

 

2018

 

 

2017

 

 

2016

 

Income from discontinued operations before gain on sale of Mode

$

16,454

 

 

$

24,006

 

 

$

27,394

 

Gain on sale of Mode

 

132,448

 

 

 

-

 

 

 

-

 

Income from discontinued operations before income taxes

 

148,902

 

 

 

24,006

 

 

 

27,394

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

34,823

 

 

 

8,867

 

 

 

10,235

 

Income from discontinued operations

$

114,079

 

 

$

15,139

 

 

$

17,159

 

19


 

 

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

The following table summarizes our revenue by business line (in thousands):

 

 

 

Twelve Months Ended December 31,

 

 

2017

 

 

2016

 

Intermodal

$

1,870,873

 

 

$

1,803,974

 

Truck brokerage

 

481,635

 

 

 

389,700

 

Logistics

 

655,543

 

 

 

556,775

 

Dedicated

 

115,012

 

 

 

-

 

Total revenue

$

3,123,063

 

 

$

2,750,449

 

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

 

 

Twelve Months Ended December 31,

 

 

2017

 

 

2016

 

Revenue

$

3,123,063

 

 

100.0%

 

 

$

2,750,449

 

 

100.0%

 

Transportation costs

 

2,785,433

 

 

89.2%

 

 

 

2,419,130

 

 

88.0%

 

Gross margin

 

337,630

 

 

10.8%

 

 

 

331,319

 

 

12.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

175,567

 

 

5.6%

 

 

 

166,118

 

 

6.0%

 

General and administrative

 

77,239

 

 

2.5%

 

 

 

60,932

 

 

2.2%

 

Depreciation and amortization

 

12,155

 

 

0.4%

 

 

 

7,712

 

 

0.3%

 

Total costs and expenses

 

264,961

 

 

8.5%

 

 

 

234,762

 

 

8.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

$

72,669

 

 

2.3%

 

 

$

96,557

 

 

3.5%

 

Revenue

Hub’s revenue increased 13.5% to $3.1 billion in 2017 from $2.8 billion in 2016.  Intermodal revenue increased 3.7% primarily due to higher fuel revenue, 1.1% higher volume and favorable mix, partially offset by a decrease in customer pricing.  Truck brokerage revenue increased 23.6% to $481.6 million due to an 8.8% increase volume and a 14.8% increase in fuel, mix and price combined.  Logistics revenue increased 17.7% to $655.5 million related primarily to new customers on-boarded during the year.  Dedicated revenue was $115.0 million from the date of acquisition to December 31, 2017.  

Transportation Costs

Hub’s transportation costs increased to $2.8 billion in 2017 from $2.4 billion in 2016.  The increase was primarily due to an increase in rail and fuel costs and higher volumes.  Transportation costs in 2017 consisted of purchased transportation costs of $2.3 billion and equipment and driver related costs of $449.8 million compared to 2016 which consisted of purchased transportation costs of $2.1 billion and equipment and driver related costs of $360.4 million.   This increase is primarily due to the equipment and driver related costs of Dedicated.

Gross Margin

Hub’s gross margin increased 1.9% to $337.6 million in 2017 from $331.3 million in 2016. Hub Group’s gross margin as a percentage of revenue decreased to 10.8% in 2017 from 12.0% in 2016.

Hub Group’s gross margin increase resulted from the addition of Dedicated and growth in truck brokerage margin, partially offset by decreases in intermodal and logistics margin.  Truck brokerage gross margin increased due to changes in customer mix and more spot business. Intermodal gross margin decreased primarily because of lower customer prices than last year and rail cost increases partially offset by slightly improved volume.  Logistics gross margin decreased due to tighter truck capacity that resulted in higher purchased transportation costs and changes in customer mix.

20


 

CONSOLIDATED OPERATING EXPENSES

Salaries and Benefits

Hub’s salaries and benefits increased to $175.6 million in 2017 from $166.1 million in 2016. The increase was due primarily to the acquisition of Dedicated.  In addition, increases in salaries expense of $9.0 million, related to employee raises and higher severance expense of $3.1 million, an increase in compensation expense related to restricted stock awards of $1.3 million and an increase in employee benefits expense of $1.0 million, which were partially offset by decreases in employee bonus expense of $14.3 million, payroll taxes of $0.5 million and sales commissions of $0.3 million.  As a percentage of revenue, Hub’s salaries and benefits decreased to 5.6% from 6.0% in 2016.

Hub’s headcount as of December 31, 2017 and 2016 was 1,923 and 1,667, respectively, which excludes drivers, as driver costs are included in transportation costs.  The increase was primarily a result of the Dedicated acquisition.

General and Administrative

Hub’s general and administrative expenses increased to $77.2 million in 2017 from $60.9 million in 2016. As a percentage of revenue, these expenses increased to 2.5% in 2017 from 2.2% in 2016.

The increase of $16.3 million in general and administrative expense was due partly to the acquisition of Dedicated and increases in IT consulting and professional service expense of $4.0 million, expenses related to due diligence and acquisition costs of $1.7 million, increases in temporary labor expense of $1.1 million, increased IT maintenance expense of $0.9 million, a change in the gain/loss on sale of assets of $0.9 million, expenses related to a network optimization study of $0.6 million in 2017, increases in rent expense of $0.6 million, equipment lease expense of $0.3 million, and bad debt expense of $0.2 million, partially offset by decreases in outside sales commissions of $0.4 million and meals and entertainment of $0.2 million.

Depreciation and Amortization

Hub’s depreciation and amortization increased to $12.2 million in 2017 from $7.7 million in 2016. This increase was related primarily to the amortization of the Dedicated trade name and customer relationships as well as depreciation of additional computer software.

Other Income (Expense)

Hub’s other expense increased to $5.7 million in 2017 from $2.5 million in 2016 due primarily to the additional interest expense related to the acquisition of Dedicated, an increase in interest expense related to our equipment debt and less foreign currency translation gains in 2017.

Provision for Income Taxes

The provision for income taxes decreased to a benefit of $53.1 million in 2017 from an expense of $36.4 million in 2016 due primarily to the favorable impact on income tax expense from the revaluation of deferred tax liabilities as a result of the enactment of the U.S. Tax Cuts and Jobs Act (the “Act”).  Our effective tax rate was a benefit of 79.3% in 2017 and an expense of 38.7% in 2016. 

Net Income

Net income increased to $120.0 million in 2017 from $57.6 million in 2016 to the revaluation of deferred tax liabilities in connection with the Act, resulting in an income tax benefit in 2017 and increased margin, partially offset by higher operating expenses.

Results from discontinued operations

Results associated with Mode are classified as income from discontinued operations, net of taxes, in our Consolidated Statements of Income.  Prior year results have been adjusted to conform to current presentation.  Below is a summary of results from discontinued operations for the twelve months ended December 31, 2018, 2017 and 2016.

 

 

Twelve months ended December 31

 

 

2018

 

 

2017

 

 

2016

 

Income from discontinued operations before gain on sale of Mode

$

16,454

 

 

$

24,006

 

 

$

27,394

 

Gain on sale of Mode

 

132,448

 

 

 

-

 

 

 

-

 

Income from discontinued operations before income taxes

 

148,902

 

 

 

24,006

 

 

 

27,394

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

34,823

 

 

 

8,867

 

 

 

10,235

 

Income from discontinued operations

$

114,079

 

 

$

15,139

 

 

$

17,159

 

21


 

LIQUIDITY AND CAPITAL RESOURCES

During 2018, we funded operations, capital expenditures, capital leases, repayments of debt, the acquisition of CaseStack and the purchase of our stock related to employee withholding upon vesting of restricted stock through cash flows from operations, proceeds from the sale of Mode, issuance of long-term debt and cash on hand.  We believe that our cash, cash flows from operations and borrowings available under our Credit Agreement will be sufficient to meet our cash needs for at least the next twelve months.

Cash provided by operating activities for the year ended December 31, 2018 was approximately $210.8 million, which resulted primarily from income of $201.7 million and operating assets and liabilities of $16.2 million, offset by the transaction costs for the disposition of $5.8 million and non-cash charges of $1.3 million.

Cash provided by operating activities increased $85.6 million in 2018 versus 2017. The increase was due to higher net income in 2018 of $66.6 million and a $57.2 million change in operating assets and liabilities, partially offset by $32.4 million of non-cash items and $5.8 million of transaction costs related to the Disposition in 2018. The positive change in operating assets and liabilities of $57.2 million was caused by increases in the change of accounts receivable of $53.3 million, accrued expenses of $46.4 million, prepaid expenses of $5.8 million and restricted investments of $4.1 million as well as a decrease in the cash used for prepaid taxes of $23.3 million. These increases were partially offset by decreases in accounts payable of $53.5 million due to the timing of vendor payments, non-current liabilities of $14.1 million and other assets of $8.1 million. The decrease in non-cash charges primarily resulted from the gain on Disposition of $132.5 million plus the $4.7 million contingent consideration adjustment and the higher gain of the sale of equipment of $1.4 million, partially offset by increases in deferred taxes of $80.9 million, depreciation and amortization of $21.7 million and compensation expense related to stock-based compensation plans of $3.6 million.  

Cash provided by operating activities increased $22.7 million in 2017 versus 2016. The increase was due primarily to higher net income in 2017 of $60.3 million resulting primarily from a revaluation of deferred tax liabilities in connection with the recently enacted Tax Cuts and Job Act. As a result of this deferred tax revaluation, non-cash charges decreased by $34.6 million which included a change in deferred tax liabilities of $55.1 million partially offset by an increase in depreciation and amortization expense of $17.5 million. The negative change in operating assets and liabilities of $3.0 million was caused by a decrease in the change of accrued expenses of $12.2 million, an increase in the cash used for prepaid taxes of $11.9 million and prepaid expenses of $8.7 million, partially offset by an increase in the change of accounts payable of $23.3 million due to the timing of vendor payments.

Net cash used in investing activities for the year ended December 31, 2018 was $209.5 million which includes acquisition payments related to CaseStack of $248.7 million and capital expenditures of $199.8 million. Proceeds included $228.0 million from the Disposition and $11.0 million from the sale of equipment. Capital expenditures of $199.8 million included tractor purchases of $96.0 million, containers of $42.5 million, transportation equipment of $33.6 million, technology investments of $26.5 million and the remainder for leasehold improvements.  

Capital expenditures increased by approximately $125.3 million in 2018 as compared to 2017.  The 2018 increase was due to increases in tractor purchases of $80.6 million, transportation equipment of $20.8 million, containers of $17.5 million and technology investments of $7.5 million, offset by less leasehold improvements.

Net cash used in investing activities for the year ended December 31, 2017 was $235.1 million which includes acquisition payments related to Dedicated of $165.9 million, capital expenditures of $74.5 million and proceeds from the sale of equipment of $5.3 million. Capital expenditures of $74.5 million included containers of $25.0 million, technology investments of $19.0 million, tractor purchases of $15.4 million, transportation equipment of $12.8 million, and the remainder for leasehold improvements.  

In 2019, we estimate capital expenditures will range from $90 million to $100 million. We expect equipment purchases to range from $70 million to $75 million and technology investments will range from $20 million to $25 million.

Net cash provided by financing activities for the year ended December 31, 2018 was $31.6 million which includes proceeds from the issuance of debt $172.1 million, offset by repayments of long-term debt of $133.4 million, cash for stock tendered for payments of withholding taxes of $4.3 million and capital lease payments of $2.8 million.

The $20.5 million increase in cash provided by financing activities for 2018 compared to 2017 was primarily due to the increase in proceeds from the issuance of debt of $73.6 million and less debt issuance costs of $1.4 million, partially offset by increases in debt payments of $53.6 million and cash used for purchase of our stock related to employee withholding taxes of $0.9 million.

Net cash provided by financing activities for the year ended December 31, 2017 was $11.1 million which includes proceeds from the issuance of debt $98.5 million, offset by repayments of long-term debt of $79.9 million, cash for stock tendered for payments of withholding taxes of $3.4 million, capital lease payments of $2.8 million and payment of debt issuance costs of $1.4 million.

22


 

Cash paid for income taxes of $13.6 million was less than our income tax expense of $29.1 million.  This was a result of significant favorable timing differences, primarily related to depreciation.  We expect our cash paid for income taxes in 2019 to be less than our income tax expense as a result of favorable timing differences.

See Note 11 of the consolidated financial statements for details related to interest rates and commitment fees.

We have standby letters of credit that expire in 2019. As of December 31, 2018, our letters of credit were $27.0 million.

As of December 31, 2018, we had no borrowings under our bank revolving line of credit and our unused and available borrowings were $323.0 million.  Our unused and available borrowings were $284.9 million as of December 31, 2017. We believe our line of credit is adequate to meet our cash needs.  We were in compliance with our debt covenants as of December 31, 2018.

CONTRACTUAL OBLIGATIONS

Aggregated information about our obligations and commitments to make future contractual payments, such as debt and lease obligations, and contingent commitments as of December 31, 2018 is presented in the following table (in thousands).

Future Payments Due: 

 

 

 

 

 

 

Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leases and

 

 

Long

 

 

 

 

 

 

Capital

 

 

Other

 

 

Term

 

 

 

 

 

 

Lease

 

 

Commitments

 

 

Debt

 

 

Total

 

2019

$

3,091

 

 

$

14,942

 

 

$

101,713

 

 

$

119,746

 

2020

 

3,099

 

 

 

11,879

 

 

 

83,589

 

 

 

98,567

 

2021

 

1,795

 

 

 

9,308

 

 

 

65,521

 

 

 

76,624

 

2022

 

-

 

 

 

8,350

 

 

 

49,327

 

 

 

57,677

 

2023

 

-

 

 

 

6,770

 

 

 

29,507

 

 

 

36,277

 

2024 and thereafter

 

-

 

 

 

9,831

 

 

 

1,127

 

 

 

10,958

 

 

$

7,985

 

 

$

61,080

 

 

$

330,784

 

 

$

399,849

 

Deferred Compensation

Under our Nonqualified Deferred Compensation Plan (the “Plan”), participants can elect to defer certain compensation. Payments under the Plan are due as follows (in thousands):

Future Payments Due:

 

2019

$

2,523

 

2020

 

2,593

 

2021

 

1,633

 

2022

 

1,135

 

2023

 

833

 

2024 and thereafter

 

10,227

 

 

$

18,944

 

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. In certain circumstances, those estimates and assumptions can affect amounts reported in the accompanying consolidated financial statements. We have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The following is a brief discussion of the more significant accounting policies and estimates.  These critical accounting policies are further discussed in Note 1 of the consolidated financial statements.

23


 

Revenue Recognition

On January 1, 2018 we adopted the Accounting Standards Codification (ASC) topic 606, Revenue from Contracts with Customers.  Under this new standard our significant accounting policy for revenue is as follows:

Revenue: Revenue is recognized when we transfer services to our customers in an amount that reflects the consideration we expect to receive. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.  We generally recognize revenue over time because of continuous transfer of control to the customer.  Since control is transferred over time, revenue and related transportation costs are recognized based on relative transit time, which is based on the extent of progress towards completion of the related performance obligation.  We enter into contracts that can include various combinations of services, which are capable of being distinct and accounted for as separate performance obligations.  Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.  Further, in most cases, we report our revenue on a gross basis because we are the primary obligor as we are responsible for providing the service desired by the customer. Our customers view us as responsible for fulfillment including the acceptability of the service. Service requirements may include, for example, on-time delivery, handling freight loss and damage claims, setting up appointments for pick-up and delivery and tracing shipments in transit. We have discretion in setting sales prices and as a result, the amount we earn varies. In addition, we have the discretion to select our vendors from multiple suppliers for the services ordered by our customers.  These factors, discretion in setting prices and discretion in selecting vendors, further support reporting revenue on a gross basis for most of our revenue.  

Allowance for Uncollectible Trade Accounts Receivable

We extend credit to customers after a review of each customer’s credit history.  An allowance for uncollectible trade accounts has been established through an analysis of the accounts receivable aging, an assessment of collectability based on historical trends and an evaluation based on current economic conditions.  Annually we review, in hindsight, the percentage of receivables that are collected that aged over one year, those that are not one year old and the accounts that went into bankruptcy.  We reserve for accounts less than one year old based on specifically identified uncollectible balances and our historic collection percentage, including receivable adjustments charged through revenue for items such as billing disputes.  In establishing a reserve for certain account balances specifically identified as uncollectible, we consider the aging of the customer receivables, the specific details as to why the receivable has not been paid, the customer’s current and projected financial results, the customer’s ability to meet and sustain its financial commitments, the positive or negative effects of the current and projected industry outlook and the general economic conditions.  Our historical collection percentage has been over 98% for receivables that are less than a year old.  Once a receivable ages over one year, our collection percentage is much lower, thus a separate calculation is done for open receivables that have aged over one year.   We also review our collection percentage after a customer has gone into bankruptcy.  Although these collection percentages may change both negatively and positively, since only a small portion of our receivables are aged over one year or are involved in a bankruptcy case, a large change in the either of those collection percentages would not have a material impact on our financial statements.  Our level of reserves for customer accounts receivable fluctuate depending upon all the factors mentioned above.  Historically, our reserve for uncollectible accounts has approximated actual accounts written off and we do not expect the reserve for uncollectible accounts to change significantly relative to our accounts receivable balance.  The allowance for uncollectible accounts is reported on the balance sheet in net accounts receivable.  Recoveries of receivables previously charged off are recorded when received.

New Pronouncements

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This standard was adopted on January 1, 2018.  

In 2016, the FASB issued new guidance that requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred lossesThe new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 is permitted. We plan to adopt this standard on January 1, 2020, as required.  We are evaluating the impact of adopting this new accounting guidance on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize a right-of-use asset (“ROU”) and a lease obligation for all leases. We adopted the standard as of January 1, 2019, as required.  The standard also provides an additional transition method to assist entities with the implementation.  Entities that elect this option would adopt the new standard using a modified retrospective transition method, but they would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. We elected to apply a package of practical expedients and did not reassess at the date of initial adoption (1) whether any expired or existing contracts are or contain leases, (2) the lease

24


 

classification for any expired or existing leases, or (3) initial direct costs for existing leases.  Lessees can also make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less which we elected.

In January 2017, the FASB issued ASU No. 2017-04 Intangibles – Goodwill and other (Topic 350): simplifying the test for goodwill impairment. This ASU simplifies how all entities assess goodwill for impairment by eliminating step two from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.  The standard is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  We have evaluated the adopting of this new accounting guidance and do not believe it will have a material effect on our financial statements upon adoption.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing (Hosting) Arrangement That Is a Service Contract.  The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.  The amendment is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.   Early adoption is permitted, including adoption in any interim period, for all entities and should be applied either retrospectively or prospectively.  We early adopted the amendment in the fourth quarter of 2018 and applied prospectively to all implementation costs incurred after the date of adoption. In accordance with this ASU, capitalized implementation costs are classified as Other assets and related amortization of capitalized implementation costs are classified as general and administrative expense in the same line item as the expense for fees for the associated hosting arrangement.  In addition, the cash flows from capitalized implementation costs are classified as a change in other assets in the same manner as the cash flows for the fees for the associated hosting arrangement.

As a result of the early adoption of this ASU, capitalized implementation costs of $10.6 million incurred in our hosting arrangements for various corporate software services that were previously presented as part of property and equipment are included in Other assets in our consolidated balance sheet as of December 31, 2018.

The corresponding cash flows from capitalized implementation costs incurred in our hosting arrangements of $7.1 million for the year ended December 31, 2018 is classified as a change in other assets in cash flows from operating activities.  The capitalized implementation costs incurred in our hosting arrangements are amortized, once ready for intended use, over the term of the associated hosting arrangement of 3 to 10 years, representing the fixed non-cancelable term of each of the hosting arrangements plus the periods covered by the options to extend that the Company is reasonably certain to exercise.

OUTLOOK, RISKS AND UNCERTAINTIES

Business Combinations/Divestitures

We believe that any future acquisitions or divestitures that we may make could significantly impact financial results. Financial results most likely to be impacted include, but are not limited to, revenue, gross margin, salaries and benefits, selling general and administrative expenses, depreciation and amortization, interest expense, net income and our debt level.

Revenue

We believe that the performance of our railroad vendors and a severe or prolonged slow-down of the economy are the most significant factors that could negatively influence our revenue growth rate. Should there be further consolidation in the rail industry causing a service disruption, we believe our intermodal business would likely be negatively impacted. Should there be a significant service disruption, we expect that there may be some customers who would switch from using our intermodal service to other transportation services that may not be provided by Hub. We expect that these customers may choose to continue to utilize other services even when intermodal service levels are restored. Other factors that could negatively influence our growth rate include, but are not limited to, the elimination of fuel surcharges, lower fuel prices, the entry of new competitors, poor customer retention, inadequate drayage and intermodal service and inadequate equipment supply.

Gross Margin

We expect fluctuations in gross margin as a percentage of revenue from quarter-to-quarter caused by various factors including, but not limited to, changes in the transportation business mix, start-up costs for new business, changes in logistics services between transactional business and management fee business, changes in truck brokerage services between spot, committed and special, insurance and claim costs, driver recruiting costs, driver compensation changes, impact of regulations on drayage costs, trailer and container capacity, vendor cost increases, fuel costs, equipment utilization, intermodal industry growth, intermodal industry service levels, accessorials, competitive pricing and accounting estimates.  

25


 

Salaries and Benefits

We estimate that salaries and benefits as a percentage of revenue could fluctuate from quarter-to-quarter as there are timing differences between volume increases and changes in levels of staffing. Factors that could cause the percentage not to stay in the recent historical range include, but are not limited to, revenue growth rates significantly higher or lower than forecasted, a management decision to invest in additional personnel to stimulate new or existing businesses, changes in customer requirements, changes in our operating structure, severance, how well we perform against our EPS and other bonus goals, and changes in railroad intermodal service levels which could result in a lower or higher cost of labor per move.  

General and Administrative

We believe there are several factors that could cause general and administrative expenses to fluctuate as a percentage of revenue. As customer expectations and the competitive environment require the development of new technology interfaces and the restructuring of our information systems and related platforms, we believe there could be significant expenses incurred. Other factors that could cause general and administrative expense to fluctuate include, but are not limited to, changes in insurance premiums, technology expense related to software and services, claim expense, bad debt expense, professional services expense and costs related to acquisitions or divestitures.

Equipment, Depreciation and Amortization

We operate tractors and utilize containers, trailers and chassis in connection with our business. This equipment may be purchased or leased as part of an operating or capital lease. In addition, we rent equipment from third parties and various railroads under short term rental arrangements. Equipment which is purchased is depreciated on the straight-line method over the estimated useful life. Our equipment leases have five to ten-year terms and, in some cases, contain renewal options.

We estimate that depreciation and amortization of property and equipment will increase significantly due to technology related investments and equipment investments for replacement and growth, as well as intangible assets acquired in connection with the acquisition of CaseStack.

Impairment of Property and Equipment, Goodwill and Indefinite-Lived Intangibles

On an ongoing basis, we assess the realizability of our assets. If, at any point during the year, we determine that an impairment exists, the carrying amount of the asset is reduced by the estimated impairment with a corresponding charge to earnings which could have a material adverse impact on earnings.

Other Income (Expense)

We expect interest expense to increase in 2019 because we financed our 2018 tractor and container purchases with debt.  Factors that could cause a change in interest expense include, but are not limited to, change in interest rates, change in investments, funding working capital needs, funding capital expenditures, funding an acquisition and purchase of treasury stock.

Provision for Income Taxes

Based on current tax legislation, we estimate that our effective tax rate will be between 25% and 26% in 2019.

Leasing on Owner-Operators

Our HGT drivers are comprised of 50% independent contractors and 50% employees.  Dedicated drivers are comprised of 100% employees. In 2017 and 2018 we encountered difficulties in recruiting and retaining owner-operators and we were more successful recruiting and retaining employee drivers.  Owner-operator retention and recruiting has been showing improvement in 2019.

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates on our bank line of credit which may adversely affect our results of operations and financial condition.  

The Company has both fixed and variable rate debt as described in Note 11 to the Consolidated Financial Statements. Any material increase in market interest rates would not have a material impact on the results of operations for the year ended December 31, 2018.

We have standby letters of credit that expire in 2019. As of December 31, 2018, our letters of credit were $27.0 million.

26


 

As of December 31, 2018, we had no borrowings under our bank revolving line of credit and our unused and available borrowings were $323.0 million.  We were in compliance with our debt covenants as of December 31, 2018.

Although we conduct business in foreign countries, international operations are not material to our consolidated financial position, results of operations, or cash flows. Additionally, foreign currency transaction gains and losses were not material to our results of operations for the year ended December 31, 2018. Accordingly, we are not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign investment. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.   We do not use financial instruments for trading purposes.

 

 


27


 

Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE

 

Report of Independent Registered Public Accounting Firm

  

29

 

 

 

Consolidated Balance Sheets – December 31, 2018 and December 31, 2017

  

30

 

 

Consolidated Statements of Income and Comprehensive Income – Years ended December 31, 2018, December 31, 2017 and December 31, 2016

  

31

 

 

Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2018, December 31, 2017 and
December 31, 2016

  

32

 

 

Consolidated Statements of Cash Flows – Years ended December 31, 2018, December 31, 2017 and December 31, 2016

  

33

 

 

Notes to Consolidated Financial Statements

  

34

 

 

Schedule II – Valuation and Qualifying Accounts

  

S-1

 

 

 

28


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors of Hub Group, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Hub Group, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(b) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2019 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ ERNST & YOUNG LLP

 

We have served as the Company’s auditor since 2002.

Chicago, Illinois

March 1, 2019

 

 

 

29


 

HUB GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

 

December 31,

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

$

61,435

 

 

$

28,557

 

Accounts receivable trade, net

 

477,088

 

 

 

424,679

 

Other receivables

 

22,021

 

 

 

5,704

 

Prepaid taxes

 

616

 

 

 

12,088

 

Prepaid expenses and other current assets

 

27,533

 

 

 

25,414

 

Current assets held for sale

 

-

 

 

 

159,616

 

TOTAL CURRENT ASSETS

 

588,693

 

 

 

656,058

 

 

 

 

 

 

 

 

 

Restricted investments

 

19,236

 

 

 

20,143

 

Property and equipment, net

 

681,859

 

 

 

561,214

 

Other intangibles, net

 

134,788

 

 

 

64,747

 

Goodwill, net

 

483,584

 

 

 

319,272

 

Other assets

 

16,738

 

 

 

5,491

 

Non-current assets held for sale

 

-

 

 

 

44,016

 

TOTAL ASSETS

$

1,924,898

 

 

$

1,670,941

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable trade

$

272,859

 

 

$

238,230

 

Accounts payable other

 

10,906

 

 

 

13,903

 

Accrued payroll

 

55,535

 

 

 

26,674

 

Accrued other

 

82,900

 

 

 

53,508

 

Current portion of capital lease

 

2,845

 

 

 

2,777

 

Current portion of long-term debt

 

101,713

 

 

 

77,266

 

Current liabilities held for sale

 

-

 

 

 

107,185

 

TOTAL CURRENT LIABILITIES

 

526,758

 

 

 

519,543

 

 

 

 

 

 

 

 

 

Long-term debt

 

229,071

 

 

 

214,808

 

Non-current liabilities

 

29,619

 

 

 

33,599

 

Long-term portion of capital lease

 

4,739

 

 

 

7,696

 

Deferred taxes

 

153,877

 

 

 

121,095

 

Non-current liabilities held for sale

 

-

 

 

 

4,328

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Preferred stock, $.01 par value;  2,000,000 shares authorized;  no shares issued or outstanding in 2018 and 2017

-

 

 

-

 

Common stock

 

 

 

 

 

 

 

Class A:  $.01 par value;  97,337,700 shares authorized and 41,224,792 shares issued in 2018 and 2017; 33,793,709 shares outstanding in 2018 and 33,447,070 shares outstanding in 2017

 

412

 

 

 

412

 

Class B:  $.01 par value; 662,300 shares authorized; 662,296 shares issued and outstanding in 2018 and 2017

 

7

 

 

 

7

 

Additional paid-in capital

 

172,220

 

 

 

173,011

 

Purchase price in excess of predecessor basis, net of tax benefit of $10,306

 

(15,458

)

 

 

(15,458

)

Retained earnings

 

1,072,456

 

 

 

870,716

 

Accumulated other comprehensive loss

 

(182

)

 

 

(194

)

Treasury stock; at cost, 7,431,083 shares in 2018 and 7,777,722 shares in 2017

 

(248,621

)

 

 

(258,622

)

TOTAL STOCKHOLDERS' EQUITY

 

980,834

 

 

 

769,872

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

1,924,898

 

 

$

1,670,941

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

30


 

HUB GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(in thousands, except per share amounts).

 

 

Years Ended December 31,

 

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

3,683,593

 

 

$

3,123,063

 

 

$

2,750,449

 

Transportation costs

 

3,237,992

 

 

 

2,785,433

 

 

 

2,419,130

 

Gross margin

 

445,601

 

 

 

337,630

 

 

 

331,319

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

222,786

 

 

 

175,567

 

 

 

166,118

 

General and administrative

 

81,272

 

 

 

77,239

 

 

 

60,932

 

Depreciation and amortization

 

16,624

 

 

 

12,155

 

 

 

7,712

 

Total costs and expenses

 

320,682

 

 

 

264,961

 

 

 

234,762

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

124,919

 

 

 

72,669

 

 

 

96,557

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(9,611

)

 

 

(6,754

)

 

 

(3,625

)

Interest income

 

1,359

 

 

 

349

 

 

 

346

 

Other, net

 

58

 

 

 

667

 

 

 

749

 

Total other income (expense)

 

(8,194

)

 

 

(5,738

)

 

 

(2,530

)

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

116,725

 

 

 

66,931

 

 

 

94,027

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

29,064

 

 

 

(53,083

)

 

 

36,381

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

87,661

 

 

 

120,014

 

 

 

57,646

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of income taxes

$

114,079

 

 

$

15,139

 

 

$

17,159

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

201,740

 

 

$

135,153

 

 

$

74,805

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

12

 

 

 

79

 

 

 

(95

)

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

$

201,752

 

 

$

135,232

 

 

$

74,710

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations

 

 

 

 

 

 

 

 

 

 

 

Basic

$

2.62

 

 

$

3.61

 

 

$

1.70

 

Diluted

$

2.61

 

 

$

3.60

 

 

$

1.70

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

Basic

$

3.42

 

 

$

0.46

 

 

$

0.51

 

Diluted

$

3.40

 

 

$

0.45

 

 

$

0.51

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share net income

 

 

 

 

 

 

 

 

 

 

 

Basic

$

6.04

 

 

$

4.07

 

 

$

2.21

 

Diluted

$

6.01

 

 

$

4.05

 

 

$

2.20

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average number of shares outstanding

 

33,393

 

 

 

33,220

 

 

 

33,841

 

Diluted weighted average number of shares outstanding

 

33,560

 

 

 

33,350

 

 

 

33,949

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

31


 

HUB GROUP, INC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A & B

 

 

 

 

 

 

of Excess of

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Predecessor

 

 

 

 

 

 

Other

 

 

Treasury

 

 

 

 

 

 

Shares

 

 

 

 

 

 

Paid-in

 

 

Basis, Net

 

 

Retained

 

 

Comprehensive

 

 

Stock

 

 

 

 

 

 

Issued

 

 

Amount

 

 

Capital

 

 

of Tax

 

 

Earnings

 

 

Income

 

 

Shares

 

 

Amount

 

 

Total

 

Balance December 31, 2015

 

41,887,088

 

 

$

419

 

 

$

174,285

 

 

$

(15,458

)

 

$

660,758

 

 

$

(178

)

 

 

(5,590,831

)

 

$

(171,986

)

 

$

647,840

 

Purchase of treasury shares

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,672,227

)

 

 

(100,000

)

 

 

(100,000

)

Stock tendered for payments of  withholding taxes

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(73,546

)

 

 

(2,489

)

 

 

(2,489

)

Issuance of restricted stock awards, net of forfeitures

 

-

 

 

 

-

 

 

 

(8,838

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

304,794

 

 

 

8,838

 

 

 

-

 

Share-based compensation expense

 

-

 

 

 

-

 

 

 

8,479

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,479

 

Tax benefit of share-based compensation plans

 

-

 

 

 

-

 

 

 

(361

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(361

)

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

74,805

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

74,805

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(95

)

 

 

-

 

 

 

-

 

 

 

(95

)

Balance December 31, 2016

 

41,887,088

 

 

$

419

 

 

$

173,565

 

 

$

(15,458

)

 

$

735,563

 

 

$

(273

)

 

 

(8,031,810

)

 

$

(265,637

)

 

$

628,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock tendered for payments of  withholding taxes

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(77,988

)

 

 

(3,412

)

 

 

(3,412

)

Issuance of restricted stock awards, net of forfeitures

 

-

 

 

 

-

 

 

 

(10,427

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

332,076

 

 

 

10,427

 

 

 

-

 

Share-based compensation expense

 

-

 

 

 

-

 

 

 

9,873

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,873

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

135,153

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

135,153

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

79

 

 

 

-

 

 

 

-

 

 

 

79

 

Balance December 31, 2017

 

41,887,088

 

 

$

419

 

 

$

173,011

 

 

$

(15,458

)

 

$

870,716

 

 

$

(194

)

 

 

(7,777,722

)

 

$

(258,622

)

 

$

769,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock tendered for payments of  withholding taxes

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(87,381

)

 

 

(4,270

)

 

 

(4,270

)

Issuance of restricted stock awards, net of forfeitures

 

-

 

 

 

-

 

 

 

(14,271

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

434,020

 

 

 

14,271

 

 

 

-

 

Share-based compensation expense

 

-

 

 

 

-

 

 

 

13,480

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

13,480

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

201,740

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

201,740

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12

 

 

 

-

 

 

 

-

 

 

 

12

 

Balance December 31, 2018

 

41,887,088

 

 

$

419

 

 

$

172,220

 

 

$

(15,458

)

 

$

1,072,456

 

 

$

(182

)

 

 

(7,431,083

)

 

$

(248,621

)

 

$

980,834

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

 

32


 

HUB GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

Years Ended December 31,

 

 

2018

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

    Net Income

$

201,740

 

 

$

135,153

 

 

$

74,805

 

    Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

      Depreciation and amortization

 

83,910

 

 

 

62,173

 

 

 

44,712

 

      Deferred taxes

 

39,499

 

 

 

(41,351

)

 

 

13,801

 

      Compensation expense related to share-based compensation plans

 

13,480

 

 

 

9,873

 

 

 

8,479

 

   Contingent consideration adjustment

 

(4,703

)

 

 

-

 

 

 

-

 

      (Gain) loss on sale of assets

 

(1,007

)

 

 

441

 

 

 

(573

)

  Excess tax benefits from share based compensation

 

-

 

 

 

-

 

 

 

(733

)

Gain on Disposition

 

(132,448

)

 

 

-

 

 

 

-

 

Transaction costs for Disposition

 

(5,798

)

 

 

-

 

 

 

-

 

       Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

          Restricted investments

 

827

 

 

 

(3,304

)

 

 

231

 

          Accounts receivable, net

 

(31,475

)

 

 

(84,775

)

 

 

(87,629

)

          Prepaid taxes

 

11,472

 

 

 

(11,794

)

 

 

66

 

          Prepaid expenses and other current assets

 

(1,750

)

 

 

(7,543

)

 

 

1,099

 

          Other assets

 

(8,029

)

 

 

56

 

 

 

570

 

          Accounts payable

 

5,521

 

 

 

59,037

 

 

 

35,709

 

          Accrued expenses

 

43,476

 

 

 

(2,931

)

 

 

9,238

 

          Non-current liabilities

 

(3,876

)

 

 

10,185

 

 

 

2,698

 

            Net cash provided by operating activities

 

210,839

 

 

 

125,220

 

 

 

102,473

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

   Proceeds from sale of equipment

 

10,975

 

 

 

5,327

 

 

 

2,061

 

   Purchases of property and equipment

 

(199,791

)

 

 

(74,541

)

 

 

(107,409

)

   Acquisitions, net of cash acquired

 

(248,656

)

 

 

(165,933

)

 

 

-

 

   Proceeds from the disposition of discontinued operations

 

227,986

 

 

 

-

 

 

 

-

 

            Net cash used in investing activities

 

(209,486

)

 

 

(235,147

)

 

 

(105,348

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

   Proceeds from issuance of debt

 

172,146

 

 

 

98,544

 

 

 

62,155

 

   Repayments of long-term debt

 

(133,436

)

 

 

(79,869

)

 

 

(34,767

)

   Stock tendered for payments of withholding taxes

 

(4,270

)

 

 

(3,412

)

 

 

(2,489

)

   Purchase of treasury stock

 

-

 

 

 

-

 

 

 

(100,000

)

   Capital lease payments

 

(2,889

)

 

 

(2,800

)

 

 

(2,634

)

   Excess tax benefits from share based compensation

 

-

 

 

 

-

 

 

 

372

 

   Payment of debt issuance costs

 

-

 

 

 

(1,397

)

 

 

-

 

            Net cash provided by (used in) financing activities

 

31,551

 

 

 

11,066

 

 

 

(77,363

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Effect of exchange rate changes on cash and cash equivalents

 

(26

)

 

 

14

 

 

 

(107

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

32,878

 

 

 

(98,847

)

 

 

(80,345

)

Cash and cash equivalents beginning of the year

 

28,557

 

 

 

127,404

 

 

 

207,749

 

Cash and cash equivalents end of the year

$

61,435

 

 

$

28,557

 

 

$

127,404

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash paid for:

 

 

 

 

 

 

 

 

 

 

 

     Interest

$

9,677

 

 

$

6,162

 

 

$

3,665

 

     Income taxes

$

13,606

 

 

$

13,149

 

 

$

33,233

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

33


 

HUB GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1. Description of Business and Summary of Significant Accounting Policies

For all periods presented in our Consolidated Statements of Income and Comprehensive Income, all sales, costs, expenses, gains and income taxes attributable to Mode have been reported under the captions, “Income from Discontinued Operations, Net of Income Taxes.”  Cash flows used in or provided by Mode have been reported in the Consolidated Statements of Cash Flows under operating and investing activities.  

Business: Hub Group, Inc. (“Hub”, “we”, “us” or “our”) provides intermodal transportation services utilizing primarily third party arrangements with railroads. Drayage can be provided by our subsidiary, Hub Group Trucking, Inc., or a third party company. We offer a dedicated fleet of equipment and drivers through Hub Group Dedicated. We also arrange for transportation of freight by truck and perform logistics services.

On August 31, 2018, Hub Group, Inc. entered into the Purchase Agreement with Mode Transportation, LLC (“Mode”), a direct wholly-owned subsidiary of the Company, and Mode Purchaser, Inc., an affiliate of York Capital Management (“Purchaser”) pursuant to which the Company sold all of the issued and outstanding membership interests of Mode to Purchaser (the “Disposition”). Refer to Note 4 – Discontinued Operations for additional information regarding results from discontinued operations.

On December 3, 2018, a subsidiary of Hub Group, Inc. closed on the Agreement and Plan of Merger (the “Merger Agreement”) to acquire CaseStack, Inc. (“CaseStack”).  Refer to Note 5 – Acquisition for additional information regarding CaseStack.

Principles of Consolidation: The consolidated financial statements include our accounts and all entities in which we have more than a 50% equity ownership or otherwise exercise unilateral control. All significant intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents: We consider as cash equivalents all highly liquid instruments with an original maturity of three months or less. As of December 31, 2018 and 2017, our cash and temporary investments were with high quality financial institutions in demand deposit accounts (“DDAs”), savings accounts and an interest bearing checking account.

Accounts Receivable and Allowance for Uncollectible Accounts: In the normal course of business, we extend credit to customers after a review of each customer’s credit history. An allowance for uncollectible trade accounts has been established through an analysis of the accounts receivable aging, an assessment of collectability based on historical trends, including receivable adjustments charged through revenue for items such as disputes, and an evaluation based on current economic conditions. Specifically, we reserve a portion of every account balance that has aged over one year, a portion of receivables for customers in bankruptcy and certain account balances specifically identified as uncollectible. On an annual basis, we perform a hindsight analysis to determine experience in collecting account balances over one year old and account balances in bankruptcy. We then use this hindsight analysis to establish our reserves for receivables over one year and in bankruptcy. In establishing a reserve for certain account balances specifically identified as uncollectible, we consider the aging of the customer receivables, the specific details as to why the receivable has not been paid, the customer’s current and projected financial results, the customer’s ability to meet and sustain its financial commitments, the positive or negative effects of the current and projected industry outlook and the general economic conditions. The allowance for uncollectible accounts is reported on the balance sheet in net accounts receivable. Our reserve for uncollectible accounts was approximately $6.7 million and $6.0 million as of December 31, 2018 and 2017, respectively. Receivables are written off once collection efforts have been exhausted. Recoveries of receivables previously charged off are recorded when received.

Property and Equipment: Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method at rates adequate to depreciate the cost of the applicable assets over their expected useful lives: building and improvements, up to 40 years; leasehold improvements, the shorter of useful life or lease term; computer equipment and software, up to 10 years; furniture and equipment, up to 10 years; and transportation equipment up to 15 years. Direct costs related to internally developed software projects are capitalized and amortized over their expected useful life on a straight-line basis not to exceed 10 years. Interest is capitalized on qualifying assets under development for internal use. Maintenance and repairs are charged to operations as incurred and major improvements are capitalized. The cost of assets retired or otherwise disposed of and the accumulated depreciation thereon are removed from the accounts with any gain or loss realized upon sale or disposal charged or credited to operations. We review long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event that the undiscounted future cash flows resulting from the use of the asset is less than the carrying amount, an impairment loss equal to the excess of the assets carrying amount over its fair value, less cost to dispose, is recorded.

34


 

Goodwill and Other Intangibles: Goodwill represents the excess of purchase price over the fair market value of net assets acquired in connection with our business combinations. Goodwill and intangible assets that have indefinite useful lives are not amortized but are subject to annual impairment tests.

We test goodwill for impairment annually in the fourth quarter or when events or changes in circumstances indicate the carrying value of this asset might exceed the current fair value. We test goodwill for impairment at the reporting unit level. Due to the Disposition, we only have one reporting unit.  We assess qualitative factors such as current company performance and overall economic factors to determine if it is more-likely-than-not that the fair value of our reporting unit was less than its carrying value and whether it is necessary to perform the quantitative goodwill impairment test. In the quantitative goodwill test, a company compares the carrying value of a reporting unit to its fair value.  If the carrying value of the reporting unit exceeds the estimated fair value, a second step is performed, which compares the implied fair value of goodwill to the carrying value, to determine the amount of impairment. In 2018 and 2017, we performed the qualitative assessment and determined it was not, more-likely-than-not, that the fair value of our reporting unit was less than its carrying value.

We evaluate the potential impairment of finite-lived acquired intangible assets when impairment indicators exist. If the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, the amount of the impairment is the difference between the carrying amount and the fair value of the asset.

Concentration of Credit Risk: Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and temporary investments with high quality financial institutions in DDAs, savings accounts and an interest bearing checking account. We primarily serve customers located throughout the United States with no significant concentration in any one region. No one customer accounted for more than 10% of revenue in 2018, 2017 or 2016. We review a customer’s credit history before extending credit. In addition, we routinely assess the financial strength of our customers and, as a consequence, believe that our trade accounts receivable risk is limited.

Revenue Recognition: On January 1, 2018 we adopted the Accounting Standards Codification (ASC) topic 606, Revenue from Contracts with Customers using the full retrospective method.  Under this new standard our significant accounting policy for revenue is as follows:

Revenue is recognized when we transfer services to our customer in an amount that reflects the consideration we expect to receive.  We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We generally recognize revenue over time because of continuous transfer of control to the customer.  Since control is transferred over time, revenue and related transportation costs are recognized based on relative transit time, which is based on the extent of progress towards completion of the related performance obligation.  We enter into contracts that can include various combinations of services, which are capable of being distinct and accounted for as separate performance obligations. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.  Further, in most cases, we report our revenue on a gross basis because we are the primary obligor as we are responsible for providing the service desired by the customer. Our customers view us as responsible for fulfillment including the acceptability of the service. Service requirements may include, for example, on-time delivery, handling freight loss and damage claims, setting up appointments for pick-up and delivery and tracing shipments in transit. We have discretion in setting sales prices and as a result, the amount we earn varies. In addition, we have the discretion to select our vendors from multiple suppliers for the services ordered by our customers.  These factors, discretion in setting prices and discretion in selecting vendors, further support reporting revenue on a gross basis for most of our revenue.  

Provision for Income Taxes: Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. We believe that it is more likely than not that our deferred tax assets will be realized based on future taxable income projections with two exceptions for which we have established valuation allowances.  We have established valuation allowances of forty-nine thousand dollars related to state tax net operating losses and $3.1 million related to state incentive tax credit carryforwards.  In the event the probability of realizing the remaining deferred tax assets do not meet the more likely than not threshold in the future, a valuation allowance would be established for the deferred tax assets deemed unrecoverable.

Tax liabilities are recorded when, in management’s judgment, a tax position does not meet the more likely than not threshold for recognition as prescribed by the guidance. For tax positions that meet the more likely than not threshold, a tax liability may be recorded depending on management’s assessment of how the tax position will ultimately be settled. We recognize interest expense and penalties related to income tax liabilities in our provision for income taxes.

35


 

Earnings Per Common Share: Basic earnings per common share are based on the average quarterly weighted average number of Class A and Class B shares of common stock outstanding. Diluted earnings per common share are adjusted for the assumed exercise of dilutive stock options and for restricted stock which are both computed using the treasury stock method.

Stock Based Compensation: Share-based compensation includes the restricted stock awards expected to vest based on the grant date fair value. Compensation expense is amortized straight-line over the vesting period and is included in salaries and benefits. In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. We adopted ASU 2016-09 in the first quarter of 2017 and the adoption did not have a material impact on our consolidated financial statements.  

New Pronouncements: In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This standard was adopted on January 1, 2018 and did not have a material impact to our accounting for the acquisition of CaseStack.

In 2016, the FASB issued new guidance that requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred lossesThe new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 is permitted. We plan to adopt this standard on January 1, 2020, as required.  We are evaluating the impact of adopting this new accounting guidance on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize a right-of-use asset (“ROU”) and a lease obligation for all leases. We adopted the standard as of January 1, 2019, see Note 12 for the effect of the adoption.  The standard also provides an additional transition method to assist entities with the implementation.  Entities that elect this option would adopt the new standard using a modified retrospective transition method, but they would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. We elected to apply a package of practical expedients and did not reassess at the date of initial adoption (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, or (3) initial direct costs for existing leases.  Lessees can also make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less, which we elected.  See Note 12 for more information.

In January 2017, the FASB issued ASU No. 2017-04 Intangibles – Goodwill and other (Topic 350): simplifying the test for goodwill impairment. This ASU simplifies how all entities assess goodwill for impairment by eliminating step two from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.  The standard is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  We have evaluated the adopting of this new accounting guidance and do not believe it will have a material effect on our financial statements upon adoption.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing (Hosting) Arrangement That Is a Service Contract.  The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.  The amendment is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.   Early adoption is permitted, including adoption in any interim period, for all entities and should be applied either retrospectively or prospectively.  We early adopted the amendment in the fourth quarter of 2018 and applied prospectively to all implementation costs incurred after the date of adoption. In accordance with this ASU, capitalized implementation costs are classified as Other assets and related amortization of capitalized implementation costs are classified as general and administrative expense in the same line item as the expense for fees for the associated hosting arrangement.  In addition, the cash flows from capitalized implementation costs are classified as a change in other assets in the same manner as the cash flows for the fees for the associated hosting arrangement.

As a result of the early adoption of this ASU, capitalized implementation costs of $10.6 million incurred in our hosting arrangements for various corporate software services that were previously presented as part of property and equipment are included in Other assets in our consolidated balance sheet as of December 31, 2018.

36


 

The corresponding cash flows from capitalized implementation costs incurred in our hosting arrangements of $7.1 million for the year ended December 31, 2018 is classified as a change in other assets in cash flows from operating activities.  The capitalized implementation costs incurred in our hosting arrangements are amortized, once ready for intended use, over the term of the associated hosting arrangement of 3 to 10 years, representing the fixed non-cancelable term of each of the hosting arrangements plus the periods covered by the options to extend that the Company is reasonably certain to exercise.

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates include the allowance for doubtful accounts, exposure under our insurance policies and useful lives of assets. Actual results could differ from those estimates.

 

NOTE 2. Capital Structure

We have authorized common stock comprised of Class A Common Stock and Class B Common Stock. The rights of holders of Class A Common Stock and Class B Common Stock are identical, except each share of Class B Common Stock entitles its holder to 84 votes, while each share of Class A Common Stock entitles its holder to one vote. We have authorized 2,000,000 shares of preferred stock.

 

 

NOTE 3. Earnings Per Share

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

 

 

Years Ended, December 31,

 

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations for basic and diluted earnings per share

$

87,661

 

 

$

120,014

 

 

$

57,646

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from discontinued operations for basic and diluted earnings per share

 

114,079

 

 

 

15,139

 

 

 

17,159

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

201,740

 

 

 

135,153

 

 

 

74,805

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

33,393

 

 

 

33,220

 

 

 

33,841

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options and restricted stock

 

167

 

 

 

130

 

 

 

108

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

33,560

 

 

 

33,350

 

 

 

33,949

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations

 

 

 

 

 

 

 

 

 

 

 

Basic

$

2.62

 

 

$

3.61

 

 

$

1.70

 

Diluted

$

2.61

 

 

$

3.60

 

 

$

1.70

 

Earnings per share from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

Basic

$

3.42

 

 

$

0.46

 

 

$

0.51

 

Diluted

$

3.40

 

 

$

0.45

 

 

$

0.51

 

Earnings per share net income

 

 

 

 

 

 

 

 

 

 

 

Basic

$

6.04

 

 

$

4.07

 

 

$

2.21

 

Diluted

$

6.01

 

 

$

4.05

 

 

$

2.20

 

 

 

 

 

37


 

NOTE 4.

Discontinued Operations  

On August 31, 2018, Hub Group, Inc. entered into the Purchase Agreement with Mode, a direct wholly-owned subsidiary of the Company, and Mode Purchaser, Inc., an affiliate of York Capital Management (“Purchaser”) pursuant to which the Company sold all of the issued and outstanding membership interests of Mode to Purchaser (the “Disposition”). Total consideration received by the Company for the Disposition in the third quarter of 2018 was $238.5 million in cash, subject to customary purchase price adjustments.  An additional $19.0 million consideration receivable was recorded in the fourth quarter of 2018 due to net working capital and other contractual adjustments.  The receivable is recorded in other receivables in the Consolidated Balance Sheet and the additional gain is recorded as other income in discontinued operations.

During the eight months we owned Mode in 2018, Mode had revenue of $42.2 million from Hub and Hub had revenue of $17.9 million from Mode LLC.  For the twelve months ended December 31, 2017 and 2016, respectively, Mode had revenue of $50.6 million and $34.4 million from Hub and Hub had $51.0 million and $76.1 million from Mode.  These sales were eliminated on our Consolidated Statements of Income.  In connection with the Disposition, the Company and Mode have entered into a transition services agreement pursuant to which both the Company and Mode will provide certain immaterial transition services to the other party for a period of time following the closing.

Results associated with Mode are classified as income from discontinued operations, net of income taxes, in our Consolidated Statements of Income.  Prior year results have been adjusted to conform with the current presentation.  Income from discontinued operations is comprised of the following:

 

Years Ended December 31,

 

 

2018

 

 

2017

 

 

2016

 

Revenue

$

739,534

 

 

$

908,870

 

 

$

819,572

 

Transportation costs

 

648,986

 

 

 

788,982

 

 

 

696,107

 

Gross margin

 

90,548

 

 

 

119,888

 

 

 

123,465

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

11,043

 

 

 

12,821

 

 

 

14,340

 

Agent fees and commissions

 

56,631

 

 

 

73,955

 

 

 

72,754

 

General and administrative

 

5,795

 

 

 

8,071

 

 

 

7,841

 

Depreciation and amortization

 

632

 

 

 

1,158

 

 

 

1,253

 

Total costs and expenses

 

74,101

 

 

 

96,005

 

 

 

96,188

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income from discontinued operations

 

16,447

 

 

 

23,883

 

 

 

27,277

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

22

 

 

 

67

 

 

 

47

 

Other, net

 

(15

)

 

 

56

 

 

 

70

 

Gain on Disposition

 

132,448

 

 

 

-

 

 

 

-

 

Total other income

 

132,455

 

 

 

123

 

 

 

117

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

148,902

 

 

 

24,006

 

 

 

27,394

 

Provision for income taxes

 

34,823

 

 

 

8,867

 

 

 

10,235

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

$

114,079

 

 

$

15,139

 

 

$

17,159

 

 

Selling, general and administrative expenses recorded in discontinued operations include corporate costs incurred directly in support of Mode.

38


 

 

See the table below for a reconciliation of the gain recorded on the sale of Mode:

 

Net proceeds received from Disposition (1)

$

227,986

 

Consideration receivable due from Mode (2)

 

18,981

 

Adjusted proceeds from Disposition

$

246,967

 

 

 

 

 

Mode assets:

 

 

 

Accounts receivable

 

173,669

 

Accounts receivable other

 

22

 

Prepaid expenses

 

260

 

Property and equipment

 

2,501

 

Restricted investments

 

4,467

 

Other intangibles, net

 

9,033

 

Goodwill, net

 

29,389

 

Other assets

 

209

 

Total Mode assets

 

219,550

 

 

 

 

 

Mode liabilities:

 

 

 

 

 

 

 

Accounts payable (3)

 

97,536

 

Accrued payroll

 

3,072

 

Accrued other

 

6,285

 

Non-current liabilities

 

3,936

 

Total Mode liabilities

 

110,829

 

 

 

 

 

Transaction costs for Disposition (4)

 

5,798

 

 

 

 

 

Gain on sale of the Mode business before income taxes

$

132,448

 

 

 

(1)

The proceeds received from the Disposition are net of working capital adjustments outlined in the Disposition agreement.

 

(2)

Additional consideration to be received as a result of post close contractual adjustments

 

(3)

Includes $2.3 million of bank overdrafts assumed by the Purchaser.

 

(4)

Costs include advisory fees, legal fees and professional fees.

Due to the Disposition, the related assets and liabilities transferred to the Purchaser were reclassified as held for sale in the Consolidated Balance Sheet as of December 31, 2017 based on the nature of the asset or liability.

39


 

 

Assets and liabilities classified as held for sale in our Consolidated Balance Sheet are comprised of the following:

 

 

December 31,

 

 

 

2017

 

Accounts receivable, net

 

$

159,314

 

Accounts receivable, other

 

 

19

 

Prepaid expenses and other current assets

 

 

283

 

Total current assets held for sale

 

 

159,616

 

 

 

 

 

 

Restricted investments

 

 

4,038

 

Property and equipment, net

 

 

937

 

Other intangibles, net

 

 

9,601

 

Goodwill, net

 

 

29,389

 

Other assets

 

 

51

 

Total non-current assets held for sale

 

 

44,016

 

 

 

 

 

 

Total assets held for sale

 

$

203,632

 

 

 

 

 

 

Accounts payable

 

$

99,067

 

Accrued payroll

 

 

2,320

 

Accrued other

 

 

5,798

 

Total current liabilities held for sale

 

 

107,185

 

 

 

 

 

 

Non-current liabilities

 

 

4,328

 

 

 

 

 

 

Total liabilities held for sale

 

$

111,513

 

 

Proceeds from the sale of Mode have been presented in the Consolidated Statements of Cash Flows under investing activities for the twelve months ended December 31, 2018.  Total operating and investing cash flows of discontinued operations for the twelve months ended December 31, 2018, 2017 and 2016 are comprised of the following, which exclude the effect of income taxes:

 

(in thousands)

2018

 

 

2017

 

 

2016

 

Net cash (used in) provided by operating activities

 

(4,318

)

 

 

25,147

 

 

 

25,183

 

Net cash provided by (used in) investing activities

 

245,339

 

 

 

(823

)

 

 

(127

)

 

NOTE 5.

Acquisitions  

Hub Group Trucking, Inc. (“HGT”), a wholly owned subsidiary of Hub Group, Inc., acquired all of the outstanding equity interests of Estenson Logistics, LLC (“Estenson”) on July 1, 2017 (the “Estenson Acquisition”).  Estenson is now our wholly owned subsidiary, operating under the name Hub Group Dedicated (“Dedicated”).  As a result of the Estenson Acquisition, HGT acquired substantially all of the assets of Estenson, which include tractors and trailers, as well as assumed certain liabilities, including equipment debt.

Dedicated has an operating fleet of approximately 1,400 tractors and 4,500 trailers.  Dedicated services have been requested by our customers and we believe Dedicated is an excellent service offering that we can provide to our customers.

The base purchase price for Estenson was approximately $284.7 million, including contingent consideration related to an earn-out provision included in the Estenson Acquisition purchase agreement, which will not exceed $6.0 million and is based on Estenson’s EBITDA results through June 30, 2019.  In accordance with the agreement, the base purchase price was adjusted by the assumed debt to arrive at the final consideration of $172.0 million.  To facilitate the Estenson Acquisition, we assumed $112.7 million of Estenson debt and paid $165.9 million in cash, including $55.0 million of cash which was borrowed under our credit agreement.

The following table summarizes the total purchase price allocated to the net assets acquired (in thousands):

Cash paid

$

165,945

 

Consideration payable

 

1,366

 

Contingent consideration, fair value

 

4,703

 

Total consideration

 

172,014

 

Equipment debt assumed

 

112,677

 

Total base purchase price

$

284,691

 

40


 

The following table summarizes the preliminary allocation of the total consideration to the assets acquired and liabilities assumed as of the date of the acquisition (in thousands):

 

July 1, 2017

 

Cash and cash equivalents

$

12

 

Accounts receivable trade

 

26,830

 

Other receivables

 

165

 

Prepaid expenses and other current assets

 

1,500

 

Property and equipment

 

128,477

 

Other intangibles

 

66,400

 

Goodwill

 

86,504

 

Other assets

 

64

 

Total assets acquired

$

309,952

 

 

 

 

 

Accounts payable trade

$

4,542

 

Accrued payroll

 

5,661

 

Accrued other

 

15,058

 

Equipment debt

 

112,677

 

Total liabilities assumed

$

137,938

 

 

 

 

 

Total consideration

$

172,014

 

The Estenson 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 July 1, 2017 with the excess of purchase price over fair value of net assets acquired recorded as goodwill. The goodwill recognized in the Estenson acquisition was primarily attributable to potential expansion and future development of the acquired business.  The fair value assigned to the customer relationships identifiable intangible was determined using an income approach based on management’s estimates and assumptions. The fair value assigned to the property and equipment was determined based on a market approach. A probability weighted expected return model was used to estimate the value of the contingent consideration., see Note 9 for more information.  Equipment debt was valued using a discounted cash flow analysis whereby future contractual principal repayments and interest payments for each instrument were discounted to the purchase date at a risk-adjusted discount rate.

We incurred approximately $1.6 million of acquisition costs associated with this transaction prior to the closing date that are reflected in general and administrative expense in the accompanying Consolidated Statements of Income for the twelve months ended December 31, 2017.

On December 3, 2018, a subsidiary of Hub Group, Inc. closed on the Agreement and Plan of Merger (the “Merger Agreement”) to acquire CaseStack, Inc. (“CaseStack”).  Total consideration for the transaction was $252.1 million.  To facilitate the acquisition we paid $248.7 million in cash and $3.5 million was a deferred purchase consideration.  The deferred purchase consideration is included in Accrued Other and will be paid equally over twenty-four months.  

The acquisition of CaseStack expanded our logistics service offering to include transportation and warehousing consolidation solutions for consumer packaged goods companies selling into the North American retail channel.  The acquisition also added scale to our truck brokerage service offering, particularly in the less-than-truckload segment of the market.

The following table summarizes the total purchase price allocated to the net assets acquired (in thousands):

 

Cash paid

$

248,656

 

Deferred purchase consideration

 

3,469

 

Total consideration

$

252,125

 

 

The initial accounting for the acquisition of CaseStack is incomplete as we, with the support of our valuation specialist, are still in the process of finalizing the fair market value calculations of the acquired net assets.  In addition, the Company is in the preparation and final review process of the applicable future cash flows used in determining the purchase accounting.  Finally, certain post-closing activities outlined in the merger agreement need to be completed.  As a result, the amounts recorded in the consolidated financial statements related to the CaseStack merger are preliminary the measurement period remains open.  The following table summarizes the preliminary allocation of the total consideration to the assets acquired and liabilities assumed as of the date of the acquisition (in thousands):

41


 

 

 

December 3, 2018

 

Accounts receivable trade

$

32,057

 

Prepaid expenses and other current assets

 

694

 

Property and equipment

 

3,247

 

Deferred tax assets

 

6,433

 

Goodwill, net

 

164,976

 

Other intangibles

 

75,600

 

Other assets

 

120

 

Total assets acquired

$

283,127

 

 

 

 

 

Accounts payable trade

$

24,541

 

Accrued payroll

 

2,811

 

Accrued other

 

3,650

 

Total liabilities assumed

$

31,002

 

 

 

 

 

Total consideration

$

252,125

 

 

The CaseStack 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 December 3, 2018 with the remaining unallocated purchase price recorded as goodwill.  The goodwill recognized in the CaseStack acquisition was primarily attributable to potential expansion and future development of the acquired business.

Tax history and attributes including net operating loss carryovers and other deferred tax assets are inherited in an equity purchase such as this, while goodwill is not tax deductible.

We incurred approximately $1.4 million of transaction costs associated with this transaction prior to the closing date that are reflected in general and administrative expense in the accompanying Consolidated Statements of Income for the twelve months ended December 31, 2018.

The components of “Other intangibles” listed in the above table as of the acquisition date are preliminarily estimated as follows (in thousands):

 

 

 

 

 

Accumulated

 

 

Balance at

 

 

Estimated Useful

 

Amount

 

 

Amortization

 

 

December 31, 2018

 

 

Life

Customer relationships - logistics services

$

65,600

 

 

$

547

 

 

$

65,053

 

 

10 years

Customer relationships - transportation services

$

8,700

 

 

$

145

 

 

$

8,555

 

 

5 years

Trade name

$

1,300

 

 

$

72

 

 

$

1,228

 

 

18 months

The above intangible assets are amortized using the straight -line method.  Amortization expense related to this acquisition for the twelve month period ended December 31, 2018 was $0.8 million.  The intangible assets have a weighted average useful life of approximately 9 years.  Amortization expense related to CaseStack for the next five years is as follows (in thousands):

 

 

Total

 

2019

 

$

9,167

 

2020

 

$

8,661

 

2021

 

$

8,300

 

2022

 

$

8,300

 

2023

 

$

8,155

 

 

From the date of the acquisition through December 31, 2018, CaseStack’s revenue was $20.8 million and operating income of $0.7 million.

 

The following unaudited pro forma consolidated results of operations presents the effects of CaseStack as though it had been acquired as of January 1, 2017 and Dedicated as though it had been acquired as of January 1, 2016 (in thousands, except for per share amounts):

42


 

 

Twelve Months Ended

 

 

December 31, 2018

 

 

December 31, 2017

 

 

December 31, 2016

 

Revenue

$

3,912,745

 

 

$

3,449,373

 

 

$

2,965,032

 

Income from continuing operations

$

133,310

 

 

$

122,532

 

 

$

64,825

 

Earnings per share (1)

 

 

 

 

 

 

 

 

 

 

 

Basic

$

2.81

 

 

$

3.69

 

 

$

1.91

 

Diluted

$

2.79

 

 

$

3.67

 

 

$

1.90

 

 

(1)

Earnings per share is from continuing operations.

 

The unaudited pro forma consolidated results for the annual periods were prepared using the acquisition method of accounting and are based on the historical financial information of Hub, Dedicated and CaseStack. 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 acquisition on January 1, 2017 and January 1, 2016, respectively.

 

 

NOTE 6. Revenue from Contracts with Customers

On January 1, 2018, we adopted the Accounting Standards Codification (ASC) topic 606, Revenue from Contracts with Customers.  See Note 1 – Description of Business and Summary of Significant Accounting Policies for significant accounting policy for revenue.

The Company capitalizes commissions incurred in connection with obtaining a contract.  The Company capitalized commissions associated with dedicated services of $0.2 million at December 31, 2018.  Capitalized commission fees are amortized based on the transfer of services to which the assets relate and are included in selling, general and administrative expenses.  In 2018, the amount of amortization was approximately $0.1 million.

Costs incurred to obtain an intermodal, truck brokerage or logistics contract are expensed as incurred according to the practical expedient that allows contract acquisition costs to be recognized immediately if the deferral period is one year or less.  

The Company applied Topic 606 retrospectively using the practical expedient in paragraph 606-10-65-1(f)(3), under which the Company does not disclose the amount of consideration allocated to the remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for all reporting periods presented before January 1, 2018.  We do not generally have a remaining performance obligation due to revenue generally being recognized using relevant transit time.  We only had one significant accounting policy change that is disclosed below.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by Hub Group from a customer were previously recorded on a gross basis. Under Topic 606, these taxes are excluded from revenue.  This change had an effect of $3.0 million and $2.8 million on revenue and transportation costs for the twelve months ended December 31, 2017 and 2016, respectively.

Hub offers comprehensive multimodal solutions including intermodal, truck brokerage, logistics and dedicated services. Hub has full time employees located throughout the United States, Canada and Mexico.

Intermodal. As an intermodal provider, we arrange for the movement of our customers’ freight in containers and trailers, 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 HGT subsidiary and third-party local trucking companies.

Truck Brokerage. We operate one of the largest truck brokerage operations, providing customers with an over the road service option for their transportation needs. Our brokerage does not operate any trucks; instead we match customers’ needs with carriers’ capacity to provide the most effective service and price combination. We have contracts with a substantial base of carriers allowing us to meet the varied needs of our customers.

Logistics. Hub’s logistics business operates under the names Unyson Logistics and CaseStack. Unyson Logistics is comprised of a network of logistics professionals dedicated to developing, implementing and operating customized logistics solutions for customers. Unyson Logistics 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 web-based shipment visibility.

43


 

Our multi-modal transportation capabilities include small parcel, heavyweight, expedited, less-than-truckload, truckload, intermodal, railcar and international shipping. Our CaseStack logistics business leverages proprietary technology along with collaborative partnerships with retailers and logistics providers to deliver cost savings and performance-enhancing supply chain services to consumer-packaged goods clients.  CaseStack contracts with third-party warehouse providers in seven markets across North America to which its customers ship their goods to be stored and eventually consolidated, along with goods from other CaseStack customers, into full truckload shipments destined to major North American retailers.  CaseStack offers its customers shipment visibility, transportation cost savings, high service and compliance with retailers’ increasingly stringent supply chain requirements.

Dedicated Trucking. Our dedicated operation contracts with customers who seek to outsource a portion of their trucking transportation needs. We offer a dedicated fleet of equipment and drivers to each customer, as well as the management and infrastructure to operate according to the customer’s high service expectations. Contracts with customers generally include fixed and variable pricing arrangements and may include charges for early termination which serves to reduce the financial risk we bear with respect to the utilization of our equipment.  

The following table summarizes our disaggregated revenue by business line (in thousands) for the years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

2016

 

Intermodal

$

2,195,316

 

 

$

1,870,873

 

 

$

1,803,974

 

Truck brokerage

 

497,282

 

 

 

481,635

 

 

 

389,700

 

Logistics

 

698,138

 

 

 

655,543

 

 

 

556,775

 

Dedicated

 

292,857

 

 

 

115,012

 

 

 

-

 

Total revenue

$

3,683,593

 

 

$

3,123,063

 

 

$

2,750,449

 

 

44


 

 

 

NOTE 7. Goodwill and Other Intangible Assets

In accordance with the FASB issued guidance in the Intangibles-Goodwill and Other Topic of the Codification, we completed the required annual impairment tests. We performed a qualitative assessment on goodwill and determined it was not, more-likely-than-not, that the fair value of our reporting unit was less than its carrying value.  There were no accumulated impairment losses of goodwill at the beginning of the period.

The following table presents the carrying amount of goodwill (in thousands):

 

Total

 

Balance at January 1, 2017

$

262,376

 

Acquisition

 

86,504

 

Other

 

(219

)

Balance at December 31, 2017 before adjustment to conform goodwill to current presentation

 

348,661

 

Goodwill associated with Disposition

 

(29,389

)

Balance at December 31, 2017

 

319,272

 

Acquisition

 

164,976

 

Other

 

(664

)

Balance at December 31, 2018

$

483,584

 

 

The changes noted as “other” in the table above for both 2018 and 2017 refer to the amortization of the income tax benefit of tax goodwill in excess of financial statement goodwill and the changes in purchase accounting.

 

The components of the “Other intangible assets” are as follows (in thousands):

 

 

 

 

 

 

 

Net

 

 

 

Gross

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Value

 

Life

As of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

144,123

 

$

(10,563

)

$

133,560

 

5-15  years

 

 

 

 

 

 

 

 

 

 

 

Trade name

$

1,300

 

$

(72

)

$

1,228

 

18 months

 

 

 

 

 

 

 

 

 

 

 

Total

$

145,423

 

$

(10,635

)

$

134,788

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

Gross

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Value

 

Life

As of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

71,581

 

$

(6,834

)

$

64,747

 

7-15  years

 

 

The above intangible assets are amortized using the straight-line method. Amortization expense for year ended December 31, 2018 and 2017 was $5.7 million and $3.0 million, respectively. The remaining weighted average life of all definite lived intangible assets as of December 31, 2018 was 11.07 years. Amortization expense for the next five years is as follows (in thousands):

 

Total

 

2019

$

13,822

 

2020

 

13,316

 

2021

 

12,742

 

2022

 

12,700

 

2023

 

12,555

 

 

 

45


 

NOTE 8. Income Taxes

The Tax Cuts and Jobs Act (“The Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21% and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.  The Act also contained provisions that include the repeal of the domestic production activity deduction, established a new tax on Global Intangible Low-Taxed Income (“GILTI”), new base erosion and anti-abuse tax provisions (“BEAT”), a new deduction for Foreign-Derived Intangible Income (“FDII”), and increased limitations on the deductibility of certain executive compensation.  

Due to the complexities involved in accounting for the enactment of the Act, the SEC Staff Accounting Bulletin No. 118 (“SAB 118”) allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017.  Where reasonable estimates could be made, the provisional accounting was based on such estimates. In situations where no reasonable estimate could be made, the provisional accounting could be based on the tax law in effect before the Act. The Company was required to complete its tax accounting for the Act within a one-year period, when it has obtained, prepared, and analyzed the information to complete the accounting.  Throughout 2018, we continued to refine our calculations and we finalized our accounting for the Act during the fourth quarter of 2018 when we filed our U.S. tax returns for the period ended December 31, 2017.  The changes to the tax positions for temporary differences compared to the provisional amounts used at December 31, 2017 resulted in a $0.5 million adjustment of the income tax expense recorded as of December 31, 2018.  Despite the completion of our accounting for the Act under SAB 118, many aspects of the law remain unclear and we expect ongoing guidance to be issued at both the federal and state levels.  We will continue to monitor and assess the impact of any new developments.

Deferred tax assets and liabilities:   In 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.  We recorded a provisional tax benefit related to the remeasurement of our deferred tax balance as of December 31, 2017 of $75.2 million.  

Transition tax:  Under the Act, the Company was subject to a one-time transition tax on the untaxed foreign earnings of its foreign subsidiaries by deeming those earnings to be repatriated.  Foreign earnings held in the form of cash and cash equivalents were taxed at a 15.5% rate and the remaining earnings were taxed at an 8.0% rate. In calculating the Transition Tax, we were required to calculate the cumulative earnings and profits of all non-U.S. subsidiaries back to 1987.  We elected to pay the entire tax of thirty thousand dollars, in accordance with the Act, with our 2017 U.S. tax return.

Global Intangible Low-Taxed Income (“GILTI”):  We are required to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred or (2) factoring such amounts into our measurement of deferred taxes. We made an accounting policy election to account for GILTI as a component of tax expense in the period in which we are subject and therefore will not provide any deferred tax impacts of GILTI in our consolidated financial statements.  The Company does not expect GILTI to be material or to be subject to the tax.

Base erosion and anti-abuse provisions (“BEAT”):  The ACT introduced BEAT for companies that meet certain thresholds by effectively excluding deductions on certain payments to foreign related entities.  The BEAT provisions eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax.  The Company does not expect to be subject to the tax.

Foreign-derived intangible income (“FDII”):  The ACT introduced FDII which, through deductions, effectively creates a preferential tax rate for income derived by domestic corporations from serving foreign markets.  The FDII rules are complex and while we are still interpreting them, the Company does not expect a significant benefit from FDII.

The following is a reconciliation of our effective tax rate to the federal statutory tax rate:

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

U.S. federal statutory rate

 

21.0

 

%

 

34.9

 

%

 

35.0

 

%

Federal tax law changes

 

0.5

 

 

 

(112.2

)

 

 

-

 

 

State taxes, net of federal benefit

 

3.7

 

 

 

2.8

 

 

 

2.7

 

 

Federal and state incentives

 

(0.9

)

 

 

(7.0

)

 

 

(0.4

)

 

State law changes

 

-

 

 

 

2.0

 

 

 

0.4

 

 

Permanent differences

 

0.6

 

 

 

0.2

 

 

 

1.0

 

 

Net effective rate

 

24.9

 

%

 

(79.3

)

%

 

38.7

 

%

46


 

The following is a summary of our provision for income taxes (in thousands):

 

 

Years Ended December 31,

 

 

2018

 

 

2017

 

 

2016

 

Current

 

 

 

 

 

 

 

 

 

 

 

    Federal

$

(13,750

)

 

$

(10,426

)

 

$

21,527

 

    State and local

 

1,740

 

 

 

1,542

 

 

 

3,053

 

    Foreign

 

(234

)

 

 

59

 

 

 

108

 

 

 

(12,244

)

 

 

(8,825

)

 

 

24,688

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

    Federal

 

36,968

 

 

 

(46,922

)

 

 

10,867

 

    State and local

 

4,134

 

 

 

2,667

 

 

 

890

 

    Foreign

 

206

 

 

 

(3

)

 

 

(64

)

 

 

41,308

 

 

 

(44,258

)

 

 

11,693

 

 

 

 

 

 

 

 

 

 

 

 

 

              Total provision

$

29,064

 

 

$

(53,083

)

 

$

36,381

 

 

The following is a summary of our deferred tax assets and liabilities (in thousands):  

 

 

December 31,

 

 

2018

 

 

2017

 

Accrued compensation

 

10,538

 

 

 

9,441

 

Other reserves

 

8,568

 

 

 

6,736

 

Tax credit carryforwards

 

5,062

 

 

 

3,411

 

Operating loss carryforwards

 

6,914

 

 

 

1,388

 

Total gross deferred income taxes

 

31,082

 

 

 

20,976

 

Valuation allowances

 

(3,128

)

 

 

(1,681

)

Total deferred tax assets

 

27,954

 

 

 

19,295

 

 

 

 

 

 

 

 

 

Prepaids

 

(5,409

)

 

 

(3,587

)

Other receivables

 

(1,588

)

 

 

(2,462

)

Property and equipment

 

(119,716

)

 

 

(79,224

)

Goodwill

 

(55,118

)

 

 

(55,117

)

Total deferred tax liabilities

 

(181,831

)

 

 

(140,390

)

 

 

 

 

 

 

 

 

        Total deferred taxes

$

(153,877

)

 

$

(121,095

)

 

We are subject to income taxation in the U.S., numerous state jurisdictions, Mexico and Canada.  Because income tax return formats vary among the states, we file both unitary and separate company state income tax returns.  We do not permanently reinvest our foreign earnings, all amounts are accrued and accounted for, though not material.

We acquired a federal net operating loss carryforward of $4.1 million through our acquisition of CaseStack.  IRS loss limitation rules allowed us to utilize $0.1 million in 2018.  The remaining net operating loss of $4.0 million has no expiration date.  Our state tax net operating losses of $2.9 million includes $1.0 million from the acquisition of CaseStack.  Those state net operating losses expire between December 31, 2019 and December 31, 2038.  Management believes it is more likely than not that the loss carryforward deferred tax assets will be realized, except for forty-nine thousand dollars of state losses.   A valuation allowance of forty-nine thousand dollars has been established.

Our federal incentive tax credit carryforward of forty-five thousand dollars expires between December 31, 2025 and December 31, 2027.  Our state incentive tax credit carryforwards of $5.0 million expire between December 31, 2019 and December 31, 2023.  Management believes it is more likely than not that the incentive carryforward deferred tax assets will be realized, except for $3.1 million of state tax credits.  A valuation allowance of $3.1 million has been established.

47


 

As of December 31,2018 and December 31, 2017, the amount of unrecognized tax benefits was $3.9 million and $3.8 million, respectively.  Of these amounts, our income tax provision would decrease $3.3 million and $2.8 million, respectively, if recognized. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

 

2018

 

 

2017

 

Gross unrecognized tax benefits - beginning of the year

$

3,827

 

 

$

1,832

 

Gross (decreases) increases related to prior year tax positions

 

(397

)

 

 

1,830

 

Gross increases related to current year tax positions

 

959

 

 

 

290

 

Lapse of applicable statute of limitations

 

(495

)

 

 

(125

)

Gross unrecognized tax benefits - end of year

$

3,894

 

 

$

3,827

 

 

We estimate it is reasonably possible that our reserve could either increase or decrease by up to $1.0 million during the next twelve months.

We recognize interest expense and penalties related to income tax liabilities in our provision for income taxes.  In our 2018 provision for income taxes, we recognized approximately $0.1 million dollars of interest income on tax refunds and approximately one thousand dollars of income tax penalty expense.

 In 2018, we were selected for examinations by Wisconsin for our 2014 through 2016 tax years, by Tennessee for our 2014 through 2016 tax years, and by Massachusetts for our 2016 and 2017 tax years.  The Massachusetts and Wisconsin examinations are still ongoing.  The Tennessee audit and audits by California for our 2012 and 2013 tax years and by Minnesota for our 2013 through 2015 tax years closed with no additional tax due.

 

 

NOTE 9. Fair Value Measurement

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and debt materially approximated fair value as of December 31, 2018 and 2017 due to their short-term nature.

We consider as cash equivalents all highly liquid instruments with an original maturity of three months or less. As of December 31, 2018 and 2017, our cash and temporary investments were with high quality financial institutions in DDAs, savings accounts and an interest bearing checking account.

Restricted investments included $19.2 million and $20.1 million as of December 31, 2018 and 2017, respectively, of mutual funds which are reported at fair value.  These investments relate to the nonqualified deferred compensation plan that is described in Note 14.

The fair value of the contingent consideration related to the 2017 acquisition of Estenson was reduced to zero during the third quarter of 2018.  The fair value was based on significant inputs that are not observable in the market, which are referred to as Level 3 inputs. Key assumptions include the likelihood of the acquired business achieving target levels of EBITDA using a probability-weighted expected return method.  The following table sets forth a reconciliation of changes in the fair value of the contingent consideration:

Balance at December 31, 2017

$

4,703

 

Change in fair value in the second quarter 2018 (1)

 

(3,571

)

Change in fair value in the third quarter 2018 (1)

 

(1,132

)

Balance at December 31, 2018

$

-

 

 

(1)

We recorded adjustments to the contingent consideration liability in the second and third quarters of 2018, resulting in an increase in income from operations.  The income was recorded under “General and Administrative” in the Consolidated Statement of Income.  The adjustment was the result of a change in the fair value of the contingent liability, which reflected two year EBITDA targets established prior to the close of the acquisition.

Our assets and liabilities measured at fair value are based on valuation techniques which 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, accounts receivable and accounts payable are defined as “Level 1,” while long-term debt is defined as “Level 2”, and the Estenson contingent consideration is defined as “Level 3” of the fair value hierarchy in the Fair Value Measurements and Disclosures Topic of the Codification.  

 

 

48


 

NOTE 10. Property and Equipment

Property and equipment consist of the following (in thousands):

 

 

December 31,

 

 

2018

 

 

2017

 

Land

$

24,708

 

 

$

24,708

 

Building and improvements

 

36,644

 

 

 

36,459

 

Leasehold improvements

 

7,252

 

 

 

6,232

 

Computer equipment and software

 

118,723

 

 

 

103,827

 

Furniture and equipment

 

14,421

 

 

 

14,180

 

Transportation equipment

 

787,187

 

 

 

620,951

 

Construction in process

 

1,499

 

 

 

1,460

 

 

 

990,434

 

 

 

807,817

 

Less:  Accumulated depreciation and amortization

 

(308,575

)

 

 

(246,603

)

Property and Equipment, net

$

681,859

 

 

$

561,214

 

The increase in transportation equipment to $787.2 million in 2018 from $621.0 million in 2017 was due primarily to the purchase of containers, tractors and trailers.

The increase in computer software and hardware to $118.7 million in 2018 from $103.8 million in 2017 was related to our transportation management systems.

Included in the transportation equipment is a capital lease obligation entered into for $26.4 million in 2011. The balances as of December 31, 2018 and 2017, net of accumulated amortization, were $7.7 million and $10.0 million, respectively.

Depreciation and amortization expense related to property and equipment was $77.3 million, $57.8 million and $43.0 million for 2018, 2017 and 2016, respectively, which includes amortization expense associated with the capital lease of $2.2 million for both 2018 and 2017 and $2.3 million for 2016. The capital lease amortization expense and transportation equipment depreciation is included in transportation costs.

 

 

NOTE 11. Long-Term Debt and Financing Arrangements

On July 1, 2017, we entered into a $350 million unsecured credit agreement (the "Credit Agreement"). The Credit Agreement replaces the Amended and Restated Credit Agreement dated December 12, 2013 (“2013 Credit Agreement”). The Company used the Credit Agreement to finance, in part, the Estenson Acquisition.

Borrowings under the Credit Agreement generally bear interest at a variable rate equal to (i) LIBOR plus a specified margin based upon the Borrowers' total net leverage ratio (as defined in the Credit Agreement) (the "Total Net Leverage Ratio"), or (ii) the base rate (which is the highest of (a) the administrative agent's prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin based upon the Total Net Leverage Ratio. The specified margin for Eurodollar loans varies from 100.0 to 200.0 basis points per annum. The specified margin for base rate loans varies from 0.0 to 100.0 basis points per annum. The Borrowers must also pay (1) a commitment fee ranging from 10.0 to 25.0 basis points per annum (based upon the Total Net Leverage Ratio) on the aggregate unused commitments and (2) a letter of credit fee ranging from 100.0 to 200.0 basis points per annum (based upon the Total Net Leverage Ratio) on the undrawn amount of letters of credit.

We have standby letters of credit that expire in 2019. As of December 31, 2018, our letters of credit were $27.0 million.

As of December 31, 2018, we had no borrowings under our bank revolving line of credit and our unused and available borrowings were $323.0 million.  Our unused and available borrowings were $284.9 million as of December 31, 2017. We were in compliance with our debt covenants as of December 31, 2018.

We have entered into various Equipment Notes (“Notes”) for the purchase of tractors, trailers and containers.  The Notes are secured by the underlying equipment financed in the agreements.    

49


 

Our outstanding debt is as follows (in thousands):

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(in thousands except principal and interest payments)

 

 

 

 

 

 

 

 

 

Revolving line of credit

$

-

 

 

$

45,000

 

 

 

 

 

 

 

 

 

Secured Equipment Notes due on various dates in 2024 with monthly principal and interest payments between $403 and $83,000 commencing on various dates in 2017; interest is paid monthly at a fixed annual rate between 2.85% and 3.41%

 

11,658

 

 

 

13,586

 

 

 

 

 

 

 

 

 

Secured Equipment Notes due on various dates in 2023 with monthly principal and interest payments between $669 and $341,341 commencing on various dates in 2016, 2017 and 2018; interest is paid monthly at a fixed annual rate between 2.23% and 4.08%

 

192,858

 

 

 

36,981

 

 

 

 

 

 

 

 

 

Secured Equipment Notes due on various dates in 2022 with monthly principal and interest payments between $3,030 and $254,190 commencing on various dates from 2015 to 2017; interest is paid monthly at a fixed annual rate of between 2.16% and 2.87%

 

24,092

 

 

 

30,301

 

 

 

 

 

 

 

 

 

Secured Equipment Notes due on various dates in 2021 with monthly principal and interest payments between $1,940 and $352,655 commencing on various dates from 2014 to 2017; interest is paid monthly at a fixed annual rate between 2.04% and 2.96%

 

55,855

 

 

 

76,885

 

 

 

 

 

 

 

 

 

Secured Equipment Notes due on various dates in 2020 with monthly principal and interest payments between $3,614 and $398,496 commencing on various dates from 2013 to 2016; interest is paid monthly at a fixed annual rate between 1.72% and 2.78%

 

32,904

 

 

 

50,737

 

 

 

 

 

 

 

 

 

Secured Equipment Notes due on various dates in 2019 with monthly principal and interest payments between $3,243 and $322,780 commencing on various dates from 2013 to 2015; interest is paid monthly at a fixed annual rate between 1.87% and 2.62%

 

13,417

 

 

 

36,178

 

 

 

 

 

 

 

 

 

Secured Equipment Notes due on various dates in 2018 with monthly principal and interest payments between $6,480 and $163,428 commencing on various dates in 2013 and 2014; interest is paid monthly at a fixed annual rate between 2.05% and 2.7%

 

-

 

 

 

2,406

 

 

 

 

 

 

 

 

 

 

 

330,784

 

 

 

292,074

 

 

 

 

 

 

 

 

 

Less current portion

 

(101,713

)

 

 

(77,266

)

Total long-term debt

$

229,071

 

 

$

214,808

 

Aggregate principal payments, in thousands, due subsequent to December 31, 2018, are as follows:

2019

$

101,713

 

2020

 

83,589

 

2021

 

65,521

 

2022

 

49,327

 

2023

 

29,507

 

2024 and thereafter

 

1,127

 

 

$

330,784

 

 

 

In 2011, we entered into a lease agreement for 3,126 chassis for a period of 10 years. We are accounting for this lease as a capital lease. Interest on this capital lease obligation is based on interest rates that approximate currently available interest rates; therefore, indebtedness under this capital lease obligation approximates fair value.  We paid interest of $0.4 million, $0.5 million and $0.6 million in 2018, 2017 and 2016, respectively, related to this capital lease.

 

 

 

50


 

NOTE 12. Leases, User Charges and Commitments

Minimum annual capital and operating lease payments, as of December 31, 2018, under non-cancelable leases, principally for chassis, other equipment and real estate, as well as other commitments are payable as follows (in thousands):

Future Payments Due:

 

 

 

 

 

 

Operating

 

 

 

 

 

 

 

 

 

 

Leases and

 

 

 

 

 

 

Capital

 

 

Other

 

 

 

 

 

 

Lease

 

 

Commitments

 

 

Total

 

2019

$

3,091

 

 

$

14,942

 

 

$

18,033

 

2020

 

3,099

 

 

 

11,879

 

 

 

14,978

 

2021

 

1,795

 

 

 

9,308

 

 

 

11,103

 

2022

 

-

 

 

 

8,350

 

 

 

8,350

 

2023

 

-

 

 

 

6,770

 

 

 

6,770

 

2024 and thereafter

 

-

 

 

 

9,831

 

 

 

9,831

 

 

$

7,985

 

 

$

61,080

 

 

$

69,065

 

Less: Imputed interest

 

(401

)

 

 

 

 

 

 

 

 

Net capital lease liability

$

7,584

 

 

 

 

 

 

 

 

 

 

Total rental expense included in general and administrative expense, which relates primarily to real estate, was approximately $10.6 million in 2018, $9.5 million in 2017 and $8.1 million in 2016. Many of the real estate leases contain renewal options and escalation clauses which require payments of additional rent to the extent of increases in the related operating costs. We straight-line rental expense in accordance with the FASB guidance in the Leases Topic of the Codification.

We incur rental expense for our leased containers, tractors and trailers that are included in transportation costs and totaled $10.7 million, $6.0 million, and $3.6 million for 2018, 2017 and 2016, respectively.

We incur user charges for use of a fleet of rail owned chassis, chassis under capital lease and dedicated rail owned containers on the Union Pacific and Norfolk Southern railroads which are included in transportation costs. Such charges were $80.4 million, $77.6 million and $73.7 million for 2018, 2017 and 2016, respectively. We have the ability to return the majority of the containers and pay for the rail owned chassis only when we are using them under these agreements. As a result, no minimum commitments related to these rail owned chassis and containers have been included in the table above.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize a right-of-use asset (“ROU”) and a lease obligation for all leases. We adopted the standard as of January 1, 2019, as required.

We anticipate the adoption of this standard will result in the recognition of approximately $29 million to $37 million of ROU assets and liabilities on our consolidated balance sheet.  The lease liabilities to be recognized will be measured based upon the present value of minimum future payments and the ROU assets to be recognized will be equal to lease liabilities, adjusted for prepaid and accrued rent balances which are recorded in the Consolidated Balance Sheets as of December 31, 2018.

Hub currently does not have any variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate). Additionally, some leases have options to extend or terminate, which Management will determine if exercised or not.  If any of the options are exercised, this will be reflected in the ROU asset and lease liability accordingly.  As of January 1, 2019, the ROU asset and lease liabilities do not reflect any options to extend or terminate any of the leases as management is not reasonably certain it will exercise any of these options.  Also, current leases do not contain any restrictions or covenants imposed by the leases or residual value guarantees.

Occasionally, Hub will sublease office space or parking spaces. The subleases do not relieve Hub of any of its primary obligations under the original agreement.  Currently, Hub has subleases with an expected annual income totaling $0.5 million.

Subsequent to January 1, 2019, Hub signed property lease contracts which have not commenced yet but that creates significant rights and obligations for Hub.  Based on the present value of the lease payments, the estimated ROU assets and lease liabilities related to this contract will total approximately $6.7 million.

 

51


 

 

 

 

 

 

 

NOTE 13. Stock-Based Compensation Plans

The 2017 Long-Term Incentive Plan (the “2017 Incentive Plan”) was approved by the Board of Directors and subsequently approved by the Company’s stockholders at the 2017 annual meeting. The 2017 Incentive Plan authorizes a broad range of awards including stock options, stock appreciation rights, restricted stock and restricted stock units, performance shares or units, other stock-based awards, and cash incentive awards to all employees (including the Company’s executive officers), directors, consultants, independent contractors or agents of us or a related company. The 2017 Incentive Plan is effective as of March 15, 2017.

The 2017 Incentive Plan replaced the Company’s 2002 Long-Term Incentive Plan, as amended (the “2002 Incentive Plan”). Under the 2002 Incentive Plan, stock options, stock appreciation rights, restricted stock, restricted stock units and performance units could be granted for the purpose of attracting and motivating our key employees and non-employee directors. As of the effective date of the 2017 Incentive Plan, there were a total of 707,273 shares of our Class A common stock (“Common Stock”) under the 2002 Incentive Plan available to be issued upon exercise or settlement of outstanding awards.

As of December 31, 2018, 1,499,137 shares were available for future grant under the 2017 Incentive Plan.

We have awarded time-based restricted stock to our employees and the Company’s non-employee Directors.  This restricted stock vests over a three to five -year period for all recipients other than the Company’s non-employee Directors.  The non-employee Directors restricted stock vests over a one to three-year period.  In 2018, in addition to the time-based restricted stock we granted performance-based restricted stock to our Executive Officers.  The performance-based restricted stock cliff vests after the third anniversary year if certain EBITDA targets are achieved.  We have not granted any stock options since 2003 and have no stock options outstanding.

Share-based compensation expense for 2018, 2017 and 2016 was $13.5 million, $8.6 million and $7.3 million or $10.1 million, $5.8 million and $4.4 million, net of taxes, respectively. Included in the 2018 share-based compensation expense is $1.8 million of performance-based share expenses or $1.3 million, net of taxes.

The following table summarizes the non-vested restricted stock activity for the year ended December 31, 2018:

 

 

 

 

 

 

Time-Based

 

 

 

 

 

 

Performance-Based

 

 

 

 

 

 

Restricted Stock

 

 

 

 

 

 

Restricted Stock

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

Time-Based

 

 

Average

 

 

Performance-Based

 

 

Average

 

 

Restricted Stock

 

 

Grant Date

 

 

Restricted Stock

 

 

Grant Date

 

 

Shares

 

 

Fair Value

 

 

Shares

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-vested January 1, 2018

 

875,326

 

 

$

38.88

 

 

 

-

 

 

$

-

 

Granted

 

500,943

 

 

$

47.34

 

 

 

89,143

 

 

$

49.20

 

Vested

 

(272,877)

 

 

$

38.42

 

 

 

-

 

 

$

-

 

Forfeited

 

(139,923)

 

 

$

41.91

 

 

 

(16,143)

 

 

$

49.20

 

Non-vested at December 31, 2018

 

963,469

 

 

$

42.98

 

 

 

73,000

 

 

$

49.20

 

 

The following table summarizes the restricted stock granted during the respective years:

 

Time-based restricted stock grants

2018

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees

 

463,818

 

 

 

396,708

 

 

 

394,243

 

Outside directors

 

37,125

 

 

 

31,625

 

 

 

26,125

 

Total

 

500,943

 

 

 

428,333

 

 

 

420,368

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average grant date fair value

$

47.34

 

 

$

43.31

 

 

$

33.46

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting period

1-5 years

 

 

1-5 years

 

 

3-5 years

 

 

52


 

 

In addition to the time-based restricted stock, we granted 89,143 shares of performance-based restricted stock to employees in 2018.  The weighted average grant date fair value of these shares was $49.20 with a cliff vest after three years.

The fair value of non-vested restricted stock is equal to the market price of our stock at the date of grant.

The total fair value of restricted shares vested during the years ended December 31, 2018, 2017 and 2016 was $13.3 million, $10.4 million and $7.5 million, respectively.

As of December 31, 2018, there was $31.5 million of unrecognized compensation cost related to non-vested share-based compensation that is expected to be recognized over a weighted average period of 2.81 years.  Additionally, as of December 31, 2018, there was $2.4 million of unrecognized compensation cost related to the non-vested performance-based restricted stock compensation that is expected to be recognized over a weighted average period of 2.00 years.

During January 2019, we granted 388,843 shares of restricted stock, which includes 76,500 performance-based shares and 312,343 time-based shares, to certain employees and 32,262 shares of restricted stock to outside directors with a weighted average grant date fair value of $37.20. The stock vests over a three to five year period for employees and one year for outside directors, except for the performance-based shares that cliff vest after three years.

 

 

NOTE 14. Employee Benefit Plans

We have a profit-sharing plan as of December 31, 2018, 2017 and 2016, under section 401(k) of the Internal Revenue Code. At our discretion, we partially match qualified contributions made by employees to the plan. We incurred expense of $2.6 million related to this plan in 2018, $2.8 million in 2017 and $2.2 million in 2016.

In January 2005, we established the Hub Group, Inc. Nonqualified Deferred Compensation Plan (the “Plan”) to provide added incentive for the retention of certain key employees. Under the Plan, which was amended in 2008, participants can elect to defer certain compensation. Accounts will grow on a tax-deferred basis to the participant. Restricted investments included in the Consolidated Balance Sheets represent the fair value of the mutual funds and other security investments related to the Plan as of December 31, 2018 and 2017. Both realized and unrealized gains and losses are included in income and expense and offset the change in the deferred compensation liability. We provide a 50% match on the first 6% of employee compensation deferred under the Plan, with a maximum match equivalent to 3% of base salary. In addition, we have a legacy deferred compensation plan. There are no new contributions being made into this legacy plan.

We incurred expense of $0.3 million per year related to the employer match for these plans in 2018, 2017 and 2016. The liabilities related to these plans as of December 31, 2018 and 2017 were $18.9 million and $20.4 million, respectively.

 

 

NOTE 15. Legal Matters

Robles

On January 25, 2013, a complaint was filed in the U.S. District Court for the Eastern District of California (Sacramento Division) by Salvador Robles against our subsidiary Hub Group Trucking, Inc (“HGT”).  The action is brought on behalf of a class comprised of present and former California-based truck drivers for HGT who were classified as independent contractors, from January 2009 to August 2014.  It alleges HGT has misclassified such drivers as independent contractors and that such drivers were employees.  It asserts various violations of the California Labor Code and claims that HGT has engaged in unfair competition practices.  The complaint seeks, among other things, declaratory and injunctive relief, monetary damages and attorney’s fees.  In May 2013, the complaint was amended to add similar claims based on Mr. Robles’ status as an employed company driver.  These additional claims are only on behalf of Mr. Robles and not a putative class.  

The Company believes that the California independent contractor truck drivers were properly classified as independent contractors at all times.  Nevertheless, because lawsuits are expensive, time-consuming and could interrupt our business operations, HGT decided to make settlement offers to individual drivers with respect to the claims alleged in this lawsuit, without admitting liability.  As of September 30, 2018, 96% of the California drivers have accepted the settlement offers.  In late 2014, HGT decided to convert its model from independent contractors to employee drivers in California (the “Conversion”).  In early 2016, HGT closed its operations in Southern California.

On April 3, 2015, the Robles case was transferred to the U.S. District Court for the Western District of Tennessee (Western Division) in Memphis.  In May 2015, the plaintiffs in the Robles case filed a Second Amended Complaint (“SAC”) which names 334 current and former Hub Group Trucking drivers as “interested putative class members.”  In addition to reasserting their existing claims, the

53


 

SAC includes claims post-Conversion, added two new plaintiffs and seeks a judicial declaration that the settlement agreements are unenforceable.  In June 2015, Hub Group Trucking filed a motion to dismiss the SAC and on July 19, 2016, Hub Group Trucking’s motion to dismiss was granted in part, and denied in part, by the District Court.  The motion to dismiss was granted for the claims of all purported class members who have signed settlement agreements and on plaintiffs’ claims based on quantum merit and it was denied with respect to federal preemption and choice of law.  On August 11, 2016, Plaintiffs filed a motion to clarify whether the Court’s dismissal of the claims of all purported class members who signed settlement agreements was with or without prejudice and, if the dismissal was with prejudice, Plaintiffs moved the Court to revise and reconsider the order.  On July 2, 2018, the Court denied the Plaintiffs’ Motion for Clarification or Reconsideration and stated that the dismissal of the claims of all purported class members who signed settlement agreements was with prejudice.   

Adame

On August 5, 2015, the Plaintiffs’ law firm in the Robles case filed a lawsuit in state court in San Bernardino County, California on behalf of 63 named Plaintiffs against Hub Group Trucking and five Company employees.  The lawsuit makes claims similar to those being made in Robles and seeks monetary penalties under the Private Attorneys General Act.  Of the 63 named Plaintiffs, at least 58 previously accepted the settlement offers referenced above.

On October 29, 2015, Defendants filed a notice of removal to move the case from state court in San Bernardino to federal court in the Central District of California. On November 19, 2015, Plaintiffs filed a motion to remand the case back to state court, claiming that the federal court lacks jurisdiction over the case because there is not complete diversity of citizenship between the parties and the amount in controversy threshold is not satisfied.  The court granted Plaintiffs’ motion to remand to the state court in San Bernardino County on April 7, 2016.

On July 11, 2016, Defendants filed dismissal papers in state court, asking the court to dismiss Plaintiffs’ suit for various reasons, including that the agreement between HGT and its former California owner operators requires that this action be brought in Memphis, Tennessee, or stay the action pending the outcome of Robles. Defendants also asked the court to dismiss the individual defendants because PAGA’s language does not allow for individual liability.  During a hearing on October 5, 2016, the judge issued an oral tentative ruling stating that the choice of forum provision was unenforceable.  On February 17, 2017, with the stipulation of the parties, the Court entered an order dismissing, without prejudice, all of the individual Defendants and accepting the parties’ agreement that jurisdiction and venue are proper in the San Bernardino Superior Court and that Defendants will not seek to remove the case to federal district court.  On April 12, 2017, the Court denied Defendant’s motion to dismiss based on insufficiency of the PAGA letter notice.  On October 19, 2017, Plaintiffs filed an amended complaint, dismissing the previously named individuals as Defendants.  On December 4, 2017, Defendants filed an Answer to Plaintiffs’ First Amended Complaint and a Memorandum of Points and Authorities in Support of their Motion for Judgment on the Pleadings arguing that judgement should be entered for Defendants because Plaintiffs’ claims are preempted by the Federal Truth-In-Leasing regulations.  On January 31, 2018, a hearing was held on the motion to dismiss, and on February 1, 2018, the motion was denied.  On March 27, 2018, Defendants filed a petition for a writ of mandate with the Court of Appeals.  On June 12, 2018, the Court of Appeals denied the petition.  On June 21, 2018, Defendants filed a petition for review with the California Supreme Court.  On August 8, 2018, the Supreme Court of California denied the petition for review.

 

 

NOTE 16. Stock Buy Back Plans

On February 2, 2016, our Board of Directors authorized the purchase of up to $100 million of our Class A Common Stock. This authorization expired on December 31, 2016. We purchased 2,672,227 shares under this authorization during the year ended December 31, 2016, completing the authorization.  There was no purchase authorized in 2018 and 2017.  

We purchased 87,381 shares for $4.3 million and 77,988 shares for $3.4 million during the years ended December 31, 2018 and 2017, respectively, related to employee withholding upon vesting of restricted stock.

 

 

 

 

54


 

 

NOTE 17. Selected Quarterly Financial Data (Unaudited)

The following table sets forth the selected quarterly financial data for each of the quarters in 2018 (in thousands, except per share amounts):

 

Quarter Ended

 

 

March 31,

 

 

June 30,

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2018

 

 

2018

 

 

2018

 

Year Ended December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

837,342

 

 

$

894,734

 

 

$

933,224

 

 

$

1,018,293

 

Gross margin

 

91,039

 

 

 

100,991

 

 

 

114,984

 

 

 

138,587

 

Operating income

 

16,535

 

 

 

25,406

 

 

 

34,734

 

 

 

48,244

 

Income from continuing operations before provision for income taxes

 

14,393

 

 

 

23,051

 

 

 

32,914

 

 

 

46,367

 

Income from continuing operations

 

11,069

 

 

 

17,154

 

 

 

25,764

 

 

 

33,674

 

Income from discontinued operations, net of income taxes

 

5,099

 

 

 

4,897

 

 

 

88,846

 

 

 

15,237

 

Net income

 

16,168

 

 

 

22,051

 

 

 

114,610

 

 

 

48,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.33

 

 

$

0.51

 

 

$

0.77

 

 

$

1.01

 

Diluted

$

0.33

 

 

$

0.51

 

 

$

0.77

 

 

$

1.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.15

 

 

$

0.15

 

 

$

2.66

 

 

$

0.45

 

Diluted

$

0.15

 

 

$

0.15

 

 

$

2.64

 

 

$

0.45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.48

 

 

$

0.66

 

 

$

3.43

 

 

$

1.46

 

Diluted

$

0.48

 

 

$

0.66

 

 

$

3.41

 

 

$

1.46

 

 

The following table sets forth the selected quarterly financial data for each of the quarters in 2017 (in thousands, except per share amounts):

 

Quarter Ended

 

 

March 31,

 

 

June 30,

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2017

 

 

2017

 

 

2017

 

Year Ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

680,443

 

 

$

708,572

 

 

$

824,809

 

 

$

909,239

 

Gross margin

 

71,791

 

 

 

72,906

 

 

 

86,327

 

 

 

106,606

 

Operating income

 

11,313

 

 

 

10,465

 

 

 

15,824

 

 

 

35,067

 

Income from continuing operations before provision for income taxes

 

10,511

 

 

 

9,605

 

 

 

13,877

 

 

 

32,938

 

Income from continuing operations

 

6,543

 

 

 

5,724

 

 

 

11,665

 

 

 

96,082

 

Income from discontinued operations, net of income taxes

 

3,791

 

 

 

3,818

 

 

 

3,669

 

 

 

3,861

 

Net income

 

10,334

 

 

 

9,542

 

 

 

15,334

 

 

 

99,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.20

 

 

$

0.17

 

 

$

0.35

 

 

$

2.89

 

Diluted

$

0.20

 

 

$

0.17

 

 

$

0.35

 

 

$

2.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.11

 

 

$

0.12

 

 

$

0.11

 

 

$

0.12

 

Diluted

$

0.11

 

 

$

0.12

 

 

$

0.11

 

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.31

 

 

$

0.29

 

 

$

0.46

 

 

$

3.01

 

Diluted

$

0.31

 

 

$

0.29

 

 

$

0.46

 

 

$

2.99

 

 

 

 

On August 31, 2018, Hub entered into the Purchase Agreement with Mode, pursuant to which the Company sold all of the issued and outstanding membership interest of Mode to Purchaser.  In 2018, we adjusted our consolidated financial statements to reflect Mode as

55


 

a discontinued operation for that year and all prior periods presented.  The selected financial data for 2018 and prior years reflect Mode as a discontinued operation.  Refer to the Note 4 Discontinued Operations for additional information regarding the sale of Mode.

 

 

 

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item  9A.

CONTROLS AND PROCEDURES

MANAGEMENT’S REPORT ON DISCLOSURE CONTROLS AND PROCEDURES

As of December 31, 2018, 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 defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.

No significant changes were made in our internal control over financial reporting during the fourth quarter of 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate controls over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018. Based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria), management believes our internal control over financial reporting was effective as of December 31, 2018.

On December 3, 2018, we completed the acquisition of CaseStack. We are currently integrating processes, employees, technologies and operations. As permitted by the rules and regulations of the SEC, we excluded CaseStack from our assessment of our internal control over financial reporting as of December 31, 2018.  Management will continue to evaluate our internal controls over financial reporting as we complete our integration.  As of December 31, 2018, CaseStack represented 14% of total assets and 25% of net assets. For the year ended December 31, 2018, CaseStack represented 1% of revenues and 1% of net income.

Management believes, however, that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Ernst & Young LLP, an independent registered public accounting firm, who audited and reported on the consolidated financial statements, included in this report, has issued an attestation report on the Company’s internal control over financial reporting.

 

 

 

56


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Hub Group, Inc.  

 

Opinion on Internal Control over Financial Reporting

We have audited Hub Group, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hub Group, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

 

As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of CaseStack, Inc., which is included in the 2018 consolidated financial statements of the Company and constituted 14% and 25% of total assets and net assets, respectively, as of December 31, 2018 and 1% and 1% of revenues and net income, respectively, for the year then ended.  Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of CaseStack, Inc.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Hub Group, Inc. as of December 31, 2018 and 2017, the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(b), and our report dated March 1, 2019 expressed an unqualified opinion thereon.

 

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Ernst & Young LLP

Chicago, Illinois

March 1, 2019

 

 

 

57


 

 

 

Item 9B.

OTHER INFORMATION

None.

 

PART III

 

Item  10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

A list of our executive officers and biographical information appears in Part I of this report. Information about our directors, and additional information about our executive officers, may be found under the caption "Election of Directors" in our proxy statement for the 2019 annual meeting of stockholders to be held May 23, 2019 (the "Proxy Statement").  Information about our Audit Committee may be found under the captions "Meetings and Committees of the Board "and "Audit Committee Report” in the Proxy Statement. Information about the procedures by which security holders may recommend nominees to the Board may be found under the caption "Nomination of Directors" in the Proxy Statement. That information is incorporated herein by reference.

The information in the Proxy Statement set forth under the captions "Section 16(a) Beneficial Ownership Reporting Compliance" and "Code of Ethics" is incorporated herein by reference.

Item  11.

EXECUTIVE COMPENSATION

The section entitled “Compensation of Directors and Executive Officers” appearing in our Proxy Statement sets forth certain information with respect to the compensation of our management and is incorporated herein by reference.

Item  12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The section entitled “Ownership of the Capital Stock of the Company” appearing in our Proxy Statement sets forth certain information with respect to the ownership of our Common Stock and are incorporated herein by reference.

Equity Compensation Plan Information

The following chart contains certain information regarding the Company’s Long-Term Incentive Plans:

 

Plan Category

  

Number of securities
to be issued
upon exercise of
outstanding options,
warrants and rights
(a)

 

  

Weighted-average
exercise price of
outstanding options,
warrants and rights

 

  

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))

 

Equity compensation plans approved by security holders

 

 

  

  

$

 —

  

  

 

1,499,137

  

Equity compensation plans not approved by security holders

  

 

  

  

 

  

  

 

  

Total

  

 

  

  

$

  

  

 

1,499,137

  

 

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The sections entitled “Review of Related Party Transactions,” Transactions with Related Persons” and “Meetings and Committees of the Board” appearing in our Proxy Statement set forth certain information with respect to certain business relationships and transactions between us and our directors and officers and the independence of our directors and is incorporated herein by reference.

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The section entitled “Principal Accountant Fees and Services” appearing in our Proxy Statement sets forth certain information with respect to certain fees we have paid to our principal accountant for services and is incorporated herein by reference.

 

 

58


 

PART IV

 

 

Item  15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements

The following consolidated financial statements of the Registrant are included under Item 8 of this Form 10-K:

Report of Independent Registered Public Accounting Firm   

Consolidated Balance Sheets - December 31, 2018 and December 31, 2017   

Consolidated Statements of Income and Comprehensive Income - Years ended December 31, 2018, December 31, 2017 and December 31, 2016   

Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2018, December 31, 2017 and December 31, 2016   

Consolidated Statements of Cash Flows - Years ended December 31, 2018, December 31, 2017 and December 31, 2016 

Notes to Consolidated Financial Statements   

(b) Financial Statement Schedules

The following financial statement schedules of Hub Group, Inc. are filed as part of this report and should be read in conjunction with the consolidated financial statements of Hub Group, Inc.:

 

 

  

Page

II. Valuation and qualifying accounts and reserves

  

S-1

All other schedules are omitted because they are not required, are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.

(c) Exhibits

The exhibits included as part of this Form 10-K are set forth in the Exhibit Index immediately preceding such Exhibits and are incorporated herein by reference.

Item 16.

FORM 10-K SUMMARY

None.

 

 

 

 

59


 

 

SCHEDULE II

HUB GROUP, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Allowance for uncollectible trade accounts

 

 

Balance at

 

 

Charged to

 

 

Charged to

 

 

 

 

 

 

Balance at

 

Year Ended

Beginning of

 

 

Costs &

 

 

Other

 

 

 

 

 

 

End of

 

December 31:

Year

 

 

Expenses

 

 

Accounts (1)

 

 

Deductions (2)

 

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

5,996,000

 

 

$

54,000

 

 

$

680,000

 

 

$

(2,000

)

 

$

6,728,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

$

3,463,000

 

 

$

457,000

 

 

$

2,079,000

 

 

$

(3,000

)

 

$

5,996,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

2,906,000

 

 

$

46,000

 

 

$

(13,000

)

 

$

524,000

 

 

$

3,463,000

 

 

Deferred tax valuation allowance

 

 

Balance at

 

 

Charged to

 

 

Balance at

 

Year Ended

Beginning of

 

 

Costs &

 

 

End of

 

December 31:

Year

 

 

Expenses

 

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

1,681,000

 

 

$

1,447,000

 

 

$

3,128,000

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

$

456,000

 

 

$

1,225,000

 

 

$

1,681,000

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

108,000

 

 

$

348,000

 

 

$

456,000

 

(1)

Expected customer account adjustments charged to revenue and write-offs, net of recoveries.

(2)

Represents bad debt recoveries.

 

On August 31, 2018, Hub Group entered into the Purchase Agreement with Mode, pursuant to which the Company sold all of the issued and outstanding membership interest of Mode to Purchaser.  In 2018, we adjusted our consolidated financial statements to reflect Mode as a discontinued operation for that year and all prior periods presented.  The allowances shown above for 2018 and prior years reflect Mode as a discontinued operation.  Refer to the Note 4 Discontinued Operations for additional information regarding the sale of Mode.

 

 

 

 

S-1


 

INDEX TO EXHIBITS

 

Number

  

Exhibit

 

3.1

  

 

Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s quarterly report on Form 10-Q filed July 23, 2007, File No. 000-27754)

 

3.2

  

 

By-Laws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s report on Form 8-K dated February 18, 2016 and filed February 23, 2016, File No. 000-27754)

 

10.1

  

 

Amended and Restated Stockholders’ Agreement (incorporated by reference to Exhibit 10.1 to the Registrants report on Form 10-Q dated and filed July 30, 2014, File No 000-27754)

 

10.2

  

 

Class B Common Stock Issuance Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s report on Form 10-Q dated and filed July 30, 2014, File No. 000-27754)

 

10.3*

  

 

Hub Group’s Nonqualified Deferred Compensation Plan Basic Plan Document as amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.4 to the Registrant’s report on Form 10-K dated February 21, 2008 and filed February 22, 2008, File No. 000-27754)

 

10.4*

  

 

Hub Group’s Nonqualified Deferred Compensation Plan Adoption Agreement as amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.5 to the Registrant’s report on Form 10-K dated February 21, 2008 and filed February 22, 2008, File No. 000-27754)

 

10.7*

  

 

Hub Group’s 2002 Long Term Incentive Plan (as amended and restated effective May 7, 2007) (incorporated by reference from Appendix B to the Registrant’s definitive proxy statement on Schedule 14A dated and filed March 26, 2007)

 

10.8

  

 

Credit Agreement, dated July 1, 2017, among the Registrant, Hub City Terminals, Inc., the Guarantors, the Lenders and Bank of Montreal (incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K dated July 1, 2017 and filed July 7, 2017, File No. 000-27754)

 

10.10

  

 

Guaranty of Corporation, dated as of May 10, 2005, made by Registrant to, and for the benefit of, Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s report on Form 8-K dated May 10, 2005 and filed May 16, 2005, File No. 000-27754)

 

10.11*

  

 

Form of Terms of Restricted Stock Award under Hub Group, Inc. 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s report on Form 8-K dated May 22, 2006 and filed May 26, 2006, File No. 000-27754)

 

10.12

 

 

Hub Group’s 2017 Long Term Incentive Plan (incorporated by reference from Exhibit A to the Registrant’s definitive proxy statement on Schedule 14A dated and filed March 22, 2017)

 

10.13*

 

 

Form of Terms of Restricted Stock Award to Directors under Hub Group, Inc. 2017 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K dated May 10, 2017 and filed May 16, 2017, File No. 000-27754)

 

10.14*

 

 

Form of Terms of Restricted Stock Award to non-directors under Hub Group, Inc. 2017 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s report on Form 8-K dated May 10, 2017 and filed May 16, 2017, File No. 000-27754)

 

10.15*

 

 

Form of Terms of Performance Based Restricted Stock Award under Hub Group, Inc. 2017 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s report on Form 8-K dated January 2, 2018 and filed January 5, 2018, File No. 000-27754)

 

14

 

 

Hub Group’s Code of Business Conduct and Ethics (incorporated by reference from Exhibit 14 to the Registrant’s report on Form 8-K dated February 17, 2017 and filed on February 23, 2017, File No. 000-27754)

 


 

Number

  

Exhibit

 

21

  

 

Subsidiaries of the Registrant

 

23.1

  

 

Consent of Ernst & Young LLP

 

31.1

  

 

Certification of David P. Yeager, Chairman and Chief Executive Officer, Pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934

 

31.2

  

 

Certification of Terri A. Pizzuto, Executive Vice President, Chief Financial Officer and Treasurer, Pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934

 

32.1

  

 

Certification of David P. Yeager and Terri A. Pizzuto, Chief Executive Officer and Chief Financial Officer respectively, Pursuant to 18 U.S.C. Section 1350

 

101

  

 

The following financial statements from our Annual Report on Form 10-K for the year ended December 31, 2018, filed on March 1, 2019, formatted in XBRL: (i) Consolidated Balance Sheets as of December 31, 2018 and 2017, (ii) Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2018, 2017, and 2016, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016, (iv) Consolidated Statements of Stockholders’ Equity for the years ended 2018, 2017, and 2016, and (v) the Notes to the Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

*Management contract or compensatory plan or arrangement.


 


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: March 1, 2019

 

HUB GROUP, INC.

 

 

 

 

 

By

 

/s/ DAVID P. YEAGER

 

 

 

 

David P. Yeager

 

 

 

 

Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:

 

 

  

Title

 

Date

 

 

 

 

 

/s/ David P. Yeager

 

David P. Yeager

  

Chairman and Chief Executive Officer

 

March 1, 2019

 

 

 

/s/ Donald G. Maltby

 

Donald G. Maltby

  

President and Chief Operating Officer

 

March 1, 2019

 

 

 

/s/ Terri A. Pizzuto

 

Terri A. Pizzuto

  

Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

 

March 1, 2019

 

 

 

/s/ Charles R. Reaves

 

Charles R. Reaves

  

Director

 

March 1, 2019

 

 

 

/s/ Martin P. Slark

 

Martin P. Slark

  

Director

 

March 1, 2019

 

 

 

/s/ Jonathan P. Ward

 

Jonathan P. Ward

  

Director

 

March 1, 2019

 

 

 

 

 

/s/ James Kenny

 

James Kenny

  

Director

 

March 1, 2019

 

/s/ Peter McNitt

 

Peter McNitt

  

Director

 

March 1, 2019

 

/s/ Mary Boosalis

 

Mary Boosalis

  

Director

 

March 1, 2019

 

 

hubg-ex21_7.htm

EXHIBIT 21

Subsidiaries of Hub Group, Inc.

 

SUBSIDIARIES

 

JURISDICTION OF INCORPORATION/ORGANIZATION

 

Hub City Terminals, Inc.

 

 

Delaware

Hub Group Atlanta, LLC

 

Delaware 

Hub Group Associates, Inc.

 

Illinois 

Hub Chicago Holdings, Inc.

 

Delaware 

Hub Group Transport, LLC

 

Delaware 

Hub Freight Services, Inc.

 

Delaware 

Hub Group Trucking, Inc.

 

Delaware 

HGNA Group de Mexico, S. de RL de C.V.

 

Mexico 

HGNA Services, S. de RL de C.V.

Mode Transportation, LLC

 

Mexico

Delaware

Mode Freight Services, LLC

 

Delaware

Hub Group Canada Inc.

 

Ontario

 

hubg-ex231_10.htm

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements Form S-8 Nos. 333-218509 pertaining to the Hub Group, Inc. 2017 Long Term Incentive Plan and Form S-8 No. 333-107745 pertaining to the Hub Group Employee Profit Sharing Plan and Trust of our reports dated March 1, 2019, with respect to the consolidated financial statements and schedule of Hub Group, Inc., and the effectiveness of internal control over financial reporting of Hub Group, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2018.

 

/s/ Ernst & Young LLP

Chicago, Illinois

March 1, 2019

hubg-ex311_9.htm

EXHIBIT 31.1

CERTIFICATION

I, David P. Yeager, certify that:

1)

I have reviewed this report on Form 10-K of Hub Group, Inc.;

2)

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting and;

5)

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

 

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 1, 2019

 

/s/ David P.Yeager

Name:

 

David P. Yeager

Title:

 

Chairman and Chief Executive Officer

 

hubg-ex312_6.htm

EXHIBIT 31.2

CERTIFICATION

I, Terri A. Pizzuto, certify that:

1)

I have reviewed this report on Form 10-K of Hub Group, Inc.;

2)

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting and;

5)

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

 

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 1, 2019

 

/s/ Terri A. Pizzuto

Name:

 

Terri A. Pizzuto

Title:

 

Executive Vice President,

 

 

Chief Financial Officer and Treasurer

 

hubg-ex321_8.htm

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 Annual Report on Form 10-K for the year ended December 31, 2018 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-K 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-K fairly presents, in all material respects, the financial condition and results of operations of Hub Group, Inc.

Date: March 1, 2019

 

/s/David P. Yeager

 

/s/Terri A. Pizzuto

David P. Yeager

 

Terri A. Pizzuto

Chairman and Chief Executive Officer

 

Executive Vice President, Chief Financial Officer and Treasurer