UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
For the quarterly period ended September 30, 2013
or
For the transition period from to
Commission file number: 0-27754
HUB GROUP, INC.
(Exact name of registrant as specified in its charter)
3050 Highland Parkway, Suite 100
Downers Grove, Illinois 60515
(Address, including zip code, of principal executive offices)
(630) 271-3600
(Registrant’s telephone number, including area code)
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 x 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 (§232.405 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 x No ¨
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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act). Yes ¨ No x
On October 24, 2013, the registrant had 36,979,841 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.
INDEX
PART I. Financial Information:
Hub Group, Inc. – Registrant
Consolidated Balance Sheets – September 30, 2013 (unaudited) and December 31, 2012
Unaudited Consolidated Statements of Income and Comprehensive Income – Three Months and Nine Months Ended September 30, 2013 and 2012
Unaudited Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2013 and 2012
Notes to Unaudited Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Controls and Procedures
PART II. Other Information
2
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable trade, net
Accounts receivable other
Prepaid taxes
Deferred taxes
Prepaid expenses and other current assets
TOTAL CURRENT ASSETS
Restricted investments
Property and equipment, net
Other intangibles, net
Goodwill, net
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable trade
Accounts payable other
Accrued payroll
Accrued other
Current portion of capital lease
Current portion of long term debt
TOTAL CURRENT LIABILITIES
Long term debt
Non-current liabilities
Long term portion of capital lease
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares issued or outstanding in 2013 and 2012
Common stock
Class A: $.01 par value; 97,337,700 shares authorized and 41,224,792 shares issued in 2013 and 2012; 36,979,841 shares outstanding in 2013 and 36,767,485 shares outstanding in 2012
Class B: $.01 par value; 662,300 shares authorized; 662,296 shares issued and outstanding in 2013 and 2012
Additional paid-in capital
Purchase price in excess of predecessor basis, net of tax benefit of $10,306
Retained earnings
Accumulated other comprehensive (loss) income
Treasury stock; at cost 4,244,951 shares in 2013 and 4,457,307 shares in 2012
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See notes to unaudited consolidated financial statements.
3
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
Revenue
Transportation costs
Gross margin
Costs and expenses:
Salaries and benefits
Agent fees and commissions
General and administrative
Depreciation and amortization
Total costs and expenses
Operating income
Other income (expense):
Interest expense
Interest and dividend income
Other, net
Total other expense
Income before provision for income taxes
Provision for income taxes
Net income
Other comprehensive loss:
Foreign currency translation adjustments
Total comprehensive income
Basic earnings per common share
Diluted earnings per common share
Basic weighted average number of shares outstanding
Diluted weighted average number of shares outstanding
4
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Compensation expense related to share-based compensation plans
(Gain) loss on sale of assets
Excess tax benefits from share-based compensation
Changes in operating assets and liabilities:
Accounts receivable, net
Accounts payable
Accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of equipment
Purchases of property and equipment
Cash used in acquisitions
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of debt
Repayments of long term debt
Proceeds from stock options exercised
Stock tendered for payments of withholding taxes
Purchase of treasury stock
Capital lease payments
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents beginning of period
Cash and cash equivalents end of period
Supplemental disclosures of cash paid for:
Interest
Income taxes
5
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Statements
Our accompanying unaudited consolidated financial statements of Hub Group, Inc. (“we”, “us” or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been omitted pursuant to those rules and regulations. However, we believe that the disclosures contained herein are adequate to make the information presented not misleading.
The financial statements reflect, in our opinion, all material adjustments (which include only normal recurring adjustments) necessary to fairly present our financial position as of September 30, 2013 and results of operations for the three months and nine months ended September 30, 2013 and 2012.
These unaudited consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year due partially to seasonality.
NOTE 2. Business Segments
We report two business segments, Hub and Mode, based on the way we manage, evaluate and internally report our business activities.
Hub offers comprehensive intermodal, truck brokerage and logistics services. Our employees operate the freight through a network of operating centers located in the United States and Mexico. Each operating center is strategically located in a market with a significant concentration of shipping customers and one or more railheads. Hub has full time employees located throughout the United States and Mexico.
Mode has independent business owners who sell and operate the business throughout North America, as well as sales only agents. Mode also has a company managed operation and corporate offices in Dallas, TX, a temperature protected services division, Temstar, located in Downers Grove, IL and corporate offices in Memphis, TN.
Mode markets and operates its freight transportation services, consisting of intermodal, truck brokerage and logistics, primarily through agents who enter into contractual arrangements with Mode.
6
The following is a summary of operating results and certain other financial data for our business segments (in thousands):
Capital expenditures
The following tables summarize our revenue by segment and business line (in thousands):
Intermodal
Truck brokerage
Logistics
Total revenue
7
Total assets
Goodwill
8
NOTE 3. Earnings Per Share
The following is a reconciliation of our earnings per share (in thousands, except for per share data):
Net income for basic and diluted earnings per share
Weighted average shares outstanding – basic
Dilutive effect of stock options and restricted stock
Weighted average shares outstanding – diluted
Earnings per share – basic
Earnings per share – diluted
NOTE 4. Fair Value Measurement
The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of September 30, 2013 and December 31, 2012 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 September 30, 2013 and December 31, 2012, our cash is with high quality financial institutions in DDAs (Demand Deposit Accounts).
Restricted investments included $19.1 million and $17.2 million as of September 30, 2013 and December 31, 2012, respectively, of mutual funds which are reported at fair value.
The fair value measurement of these securities is based on quoted prices in active markets for identical assets which are defined as “Level 1” of the fair value hierarchy in the Fair Value Measurements and Disclosures Topic of the Codification.
NOTE 5. Guarantees
As a recruiting tool for our owner-operators, we are guaranteeing certain owner-operators’ lease payments for tractors. The guarantees expire at various dates beginning in 2013 through 2020.
The potential maximum exposure under these lease guarantees was approximately $42.2 million and $48.2 million as of September 30, 2013 and December 31, 2012, respectively. The potential maximum exposure represents the amount of the remaining lease payments on all outstanding guaranteed leases as of September 30, 2013 and December 31, 2012. However, upon default, we have the option to purchase the tractors. We could then sell the tractors and use the proceeds to recover all or a portion of the amounts paid under the guarantees. Alternatively, we can contract with another owner-operator who would assume the lease. There were no material defaults during the periods ended September 30, 2013 and December 31, 2012 and no potential material defaults.
We had a liability of approximately $0.8 million as of September 30, 2013 and $1.0 million as of December 31, 2012, representing the fair value for estimated defaults of the guarantees, based on a discounted cash-flow analysis which is included in current and non-current liabilities in our Consolidated Balance Sheets. We are amortizing the amounts over the remaining lives of the respective guarantees.
9
NOTE 6. Commitments and Contingencies
During the first half of 2013, we entered into equipment purchase contracts for the acquisition of 4,029 53’ containers. We expect the total cost of purchasing the containers to be approximately $45.7 million. As of September 30, 2013, $11.3 million of the remaining $25.8 million to be paid is accrued in our current liabilities. As of October 14, 2013, 3,258 containers have been delivered with the remaining 771 containers to be delivered by the end of 2013.
During the fourth quarter of 2012, we exercised our purchase option on approximately 4,000 containers that are currently leased. In addition, during the second quarter of 2013, we exercised our purchase option on another 200 containers that are currently leased. The purchases, totaling approximately $14.8 million, will occur as the leases expire throughout 2013. As of October 14, 2013, we have purchased 3,193 containers for approximately $11.4 million.
NOTE 7.
We entered into a Master Loan and Security Agreement on April 29, 2013 containing various Equipment Notes (Notes). The Notes provided financing for eighty 2014 Peterbilt tractors. The Notes have terms that expire between May 14, 2018 and June 19, 2018 and bear fixed interest rates between 1.9% and 2.0%. The Notes require quarterly principal and interest payments of $480,000.
Our outstanding debt is as follows (in thousands):
Equipment Notes due by June 19, 2018 with quarterly principal and interest payments of $480,000 commencing on August 14, 2013; interest is paid quarterly at a fixed rate between 1.9% and 2.0%
Less current portion
Total long-term debt
Aggregate principal payments, in thousands, due subsequent to September 30, 2013, are as follows:
2013
2014
2015
2016
2017
2018 and thereafter
We have standby letters of credit that expire on various dates in 2013 and 2014. As of September 30, 2013, our letters of credit were $4.2 million.
Our unused and available borrowings under our bank revolving line of credit were $45.8 million as of September 30, 2013 and $46.3 million as of December 31, 2012. We were in compliance with our debt covenants as of September 30, 2013.
10
NOTE 8. Legal Matters
We are a party to litigation incident to our business, including claims for personal injury and/or property damage, bankruptcy preference claims, 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 material adverse effect on our financial position or results of operations.
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, Comtrak Logistics, Inc. Mr. Robles drove a truck for Comtrak in California, first as an independent contractor and then as an employee. The action seeks class certification on behalf of a class comprised of present and former California-based truck drivers for Comtrak who were classified as independent contractors, from January 2009 to the present. The complaint alleges Comtrak has misclassified such drivers as independent contractors and that such drivers were employees. The complaint asserts various violations of the California Labor Code and claims that Comtrak has engaged in unfair competition practices. The complaint seeks, among other things, declaratory and injunctive relief, compensatory 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 proposed class. In August 2013, the court stayed proceedings in the case pending decisions by the Court of Appeals for the 9th Circuit to decide whether two similar cases should be dismissed on federal preemption grounds. We cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from this lawsuit.
NOTE 9. New Pronouncements
In July 2012, the FASB issued an update to Topic 350 – Intangibles – Goodwill and Other of the Accounting Standards Codification. The objective of this update is to simplify how entities test indefinite lived intangibles for impairment. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. We adopted this guidance effective January 1, 2013 as required, and the adoption did not impact our consolidated financial statements.
NOTE 10. Subsequent Event
In October 2013, we entered into an equipment purchase contract for the acquisition of 200 Freightliner tractors. We expect the cost of purchasing the tractors to be approximately $25.5 million.
11
The information contained in this quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “hopes,” “believes,” “intends,” “estimates,” “anticipates,” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Actual results or experience could differ materially from the forward-looking statements as a result of many factors. We assume no liability to update any such forward-looking statements contained in this quarterly report. Factors that could cause our actual results to differ materially include:
12
EXECUTIVE SUMMARY
Hub Group, Inc. (“we”, “us” or “our”) reports two distinct business segments, Hub and Mode. The Mode segment includes only the business we acquired on April 1, 2011. The Hub segment includes all businesses other than Mode. Hub Group (as opposed to just Hub), refers to the consolidated results for the whole company, including both the Mode and Hub segments. For the segment financial results, refer to Note 2 of the consolidated financial statements.
We are the largest intermodal marketing company (“IMC”) in the United States and a full service transportation provider offering intermodal, truck brokerage and logistics services. We operate through a nationwide network of operating centers and independent business owners.
As an IMC, we arrange for the movement of our customers’ freight in containers and trailers over long distances. We contract with railroads to provide transportation for the long-haul portion of the shipment and with local trucking companies, known as “drayage companies,” for local pickup and delivery. As part of the intermodal services, we negotiate rail and drayage rates, electronically track shipments in transit, consolidate billing and handle claims for freight loss or damage on behalf of our customers.
As of September 30, 2013, approximately 66% of Hub’s drayage needs were met by our subsidiary, Comtrak Logistics, Inc. (“Comtrak”), which assists us in providing reliable, cost effective intermodal services to our customers. Comtrak has terminals in Atlanta, Birmingham, Charlotte, Chattanooga, Chicago, Cleveland, Columbus (OH), Dallas, Harrisburg, Huntsville, Indianapolis, Jacksonville, Kalamazoo, Kansas City, Milwaukee, Memphis, Nashville, Newark, Los Angeles, Perry (FL), Philadelphia, Portland (OR), Savannah, Seattle, St. Louis, Stockton, and Titusville (FL). As of September 30, 2013, Comtrak leased or owned 333 tractors, leased or owned 448 trailers, employed 405 drivers and contracted with 2,290 owner-operators.
We also arrange for the transportation of freight by truck, providing customers with another option for their transportation needs. We match the 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 logistics service 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.
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 yield management group works with pricing and operations to enhance Hub’s customer margins. We are working on margin enhancement projects including matching up inbound and outbound loads, reducing empty miles, improving our recovery of accessorial costs, using Comtrak more, and reviewing and improving low margin loads.
Hub’s top 50 customers represent approximately 63% of the Hub segment revenue for the nine months ended September 30, 2013. 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, cost per load and daily sales outstanding by customer account. Vendor cost changes and vendor service issues are also monitored closely.
13
Mode has approximately 235 agents, consisting of 96 sales/operating agents, known as Independent Business Owners (“IBOs”), who sell and operate the business throughout North America and 139 sales only agents. Mode also has a company managed operation and corporate offices in Dallas, a temperature protected services division, Temstar, located in Downers Grove, IL and corporate offices in Memphis. Mode’s top 20 customers represent approximately 36% of the Mode segment revenue for the nine months ended September 30, 2013. We closely monitor revenue and margin for these customers. We believe Mode brings us highly complementary service offerings, more scale and a talented sales channel that allows us to better reach small and midsize customers.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012
The following table summarizes our revenue by segment and business line (in thousands) for the three months ended September 30:
Hub Group’s revenue increased 9.7% to $883.0 million in 2013 from $804.9 million in 2012.
The Hub segment revenue increased 9.6% to $678.6 million. Hub intermodal revenue increased 5% to $466.8 million due to a 5% increase in loads. Price was up, but was offset by the impact of lower fuel surcharges and unfavorable mix. Hub truck brokerage revenue increased 1% to $88.3 million due primarily to a 4% increase in loads partially offset by unfavorable mix, which was primarily due to a 6% decrease in length of haul. Hub logistics revenue increased 42% to $123.4 million related primarily to new customer growth.
Mode’s revenue increased 8.8% to $217.4 million in 2013 from $199.9 million in 2012. Mode intermodal revenue increased 10% while Mode truck brokerage and logistics revenues increased 2% and 22%, respectively. Mode’s intermodal loads increased 16% while logistics revenue increased due to 19% growth in less than truckload business.
Gross Margin
Hub Group’s gross margin increased 1.7% to $93.1 million in 2013 from $91.6 million in 2012.
The Hub segment gross margin decreased 0.1% to $67.2 million. Logistics’ gross margin increased but was offset by a decline in truck brokerage gross margin. Intermodal gross margin was flat. Logistics’ gross margin is up due to new customer growth. Truck brokerage gross margin is down because of unfavorable traffic mix, including growth in short-haul lanes. Intermodal margin was flat as volume and modest price increases were offset by higher transportation costs and unfavorable mix. Hub’s gross margin as a percentage of sales decreased to 9.9% as compared to last year’s 10.9% margin. This decrease is due to lower yields in all three business lines.
14
Mode’s gross margin increased 6.5% to $25.9 million in 2013 from $24.3 million in 2012 due primarily to growth in intermodal. Mode’s gross margin as a percentage of revenue decreased to 11.9% in 2013 from 12.2% in 2012.
CONSOLIDATED OPERATING EXPENSES
The following table includes certain items in the consolidated statements of income as a percentage of revenue:
Salaries and Benefits
Hub Group’s salaries and benefits increased to $31.9 million in 2013 from $31.4 million in 2012. As a percentage of revenue, Hub Group’s salaries and benefits decreased to 3.6% in 2013 from 3.9% in 2012 due to increased revenue.
The Hub segment increase of $0.4 million was due to increases in salaries of $2.2 million, due to higher headcount and merit increases, compensation related to restricted stock awards of $0.2 million and employee benefits of $0.1 million. These increases were offset by a decrease in employee bonuses of $2.1 million.
Mode’s salaries and benefits expense increased to $3.6 million in 2013 from $3.5 million in 2012. The increase was due primarily to increases in salaries of $0.1 million and compensation related to restricted stock awards of $0.1 million, offset by a decrease in employee bonuses of $0.1 million.
Hub Group’s headcount as of September 30, 2013 was 1,413, which excludes drivers, as driver costs are included in transportation costs. As of September 30, 2013, Mode had 129 employees.
Agent Fees and Commissions
Hub Group’s agent fees and commissions expenses increased to $14.6 million in 2013 from $13.8 million in 2012. These expenses as a percentage of revenue decreased to 1.6% in 2013 from 1.7% in 2012.
The Hub segment agent fees and commissions expense remained consistent at $0.4 million in both 2013 and 2012.
The Mode segment agent fees and commissions expense increase of $0.7 million was due to the increase in gross margin.
15
General and Administrative
Hub Group’s general and administrative expenses decreased to $13.8 million in 2013 from $14.4 million in 2012. As a percentage of revenue, these expenses decreased to 1.6% in 2013 from 1.8% in 2012.
The Hub segment decrease of $0.5 million was due primarily to a decrease in claims expense of $1.5 million and a decrease in outside consultant expenses of $0.7 million. These decreases were partially offset by increases in bad debt expense of $0.4 million, repairs and maintenance expense of $0.4 million, general insurance expense of $0.3 million, rent expense of $0.2 million and meals and entertainment, office expense, temporary labor and employee training each for $0.1 million.
Mode’s general and administrative expenses decreased to $1.7 million in 2013 from $1.9 million in 2012. The decrease was primarily due to a decrease in outside consultant expense of $0.2 million.
Depreciation and Amortization
Hub Group’s depreciation and amortization remained consistent at $1.6 million in both 2013 and 2012.
The Hub segment’s depreciation expense was consistent at $1.1 million in both 2013 and 2012.
Mode’s depreciation expense was consistent at $0.5 million in both 2013 and 2012
Other Income (Expense)
Hub Group’s interest expense remained consistent at $0.3 million in both 2013 and 2012.
Provision for Income Taxes
The provision for income taxes increased to $12.4 million in 2013 from $11.6 million in 2012. This increase was the combined result of greater income in 2013 and the enactment of Pennsylvania income tax changes in July 2013 which increased our effective rate to 39.9% in 2013 from 38.5% in 2012.
Net Income
Net income increased to $18.6 million in 2013 from $18.5 million in 2012 due primarily to higher gross margin.
Earnings Per Common Share
Basic earnings per share were $0.50 in both 2013 and 2012.
Diluted earnings per share were $0.50 in both 2013 and 2012.
16
Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012
The following table summarizes our revenue by segment and business line (in thousands) for the nine months ended September 30:
Hub Group’s revenue increased 7.1% to $2.5 billion in 2013 from $2.3 billion in 2012.
The Hub segment revenue increased 7.7% to $1.9 billion. Hub’s intermodal revenue increased 5% to $1.3 billion due to a 3% increase in loads and an increase in price partially offset by slightly lower fuel surcharges. Hub truck brokerage revenue increased 3% to $255.7 million primarily due to a 5% increase in loads partially offset by unfavorable mix, which was primarily due to a 5% reduction in length of haul. Hub logistics revenue increased 27% to $317.8 million related primarily to new customer growth.
Mode’s revenue increased 4.7% to $608.8 million in 2013 from $581.4 million in 2012. Mode’s intermodal revenue increased 9% while Mode’s truck brokerage revenue decreased by 3%. Mode’s logistics revenue increased by 13%. Mode’s` intermodal loads increased 13% while logistics revenue increased due to 11% growth in less than truckload business.
Hub Group’s gross margin increased 5.0% to $275.9 million in 2013 from $262.7 million in 2012.
The Hub segment gross margin increased 5.3% to $203.8 million. Hub’s $10.2 million gross margin increase came primarily from intermodal and logistics. Intermodal margin grew primarily due to 3% volume growth. Logistics margin growth was driven primarily by new customers. As a percentage of Hub segment revenue, gross margin decreased to 10.6% in 2013 from 10.9% in 2012. This decrease is due to lower yield in intermodal and truck brokerage.
Mode’s gross margin increased 4.3% to $72.1 million in 2013 from $69.1 million in 2012 due primarily to growth in intermodal gross margin. Mode’s gross margin as a percentage of revenue decreased slightly to 11.8% in 2013 from 11.9% in 2012.
17
Hub Group’s salaries and benefits increased to $101.5 million in 2013 from $96.1 million in 2012. As a percentage of revenue, salaries and benefits remained consistent at 4.1% in both 2013 and 2012.
The Hub segment salaries and benefits increase of $5.7 million was due primarily to increases in salaries of $4.3 million, compensation related to restricted stock awards of $0.6 million, employee benefits of $0.5 million, payroll taxes of $0.4 million and employee bonuses of $0.1 million. These increases were partially offset by a decrease in commissions of $0.2 million.
Mode’s salaries and benefits decrease of $0.4 million was due primarily to a decrease in salaries of $0.4 million and employee benefits of $0.2 million partially offset by increases in employee bonuses and compensation related to restricted stock awards of $0.1 million each.
Hub Group’s agent fees and commissions expenses increased to $41.5 million in 2013 from $41.1 million in 2012. These expenses as a percentage of revenue decreased to 1.6% in 2013 from 1.8% in 2012.
The Hub segment agent fees and commissions decrease of $0.3 million was due to a smaller Hub agent program.
The Mode segment agent fees and commissions increase of $0.7 million was due to the increase in Mode’s gross margin.
Hub Group’s general and administrative expenses increased to $41.7 million in 2013 from $39.7 million in 2012. As a percentage of revenue, these expenses remained consistent at 1.7% in both 2013 and 2012.
The Hub segment increase of $3.1 million was due primarily to increases in; professional fees associated with an unsuccessful acquisition of $1.0 million, rent expense of $0.9 million, bad debt expense of $0.7 million, general insurance expense of $0.6 million, repairs and maintenance expense of $0.5 million and meals and entertainment, equipment leases and other taxes of $0.2 million each. These increases were partially offset by a decrease in claims expense of $1.5 million in 2013.
18
Mode’s general and administrative expenses decreased by $1.2 million to $4.6 million in 2013. The decrease was primarily due to a decrease in outside consultant expense of $0.7 million and an increase in the gain on the sale of equipment of $0.5 million.
Hub Group’s depreciation and amortization decreased to $4.8 million in 2013 from $5.0 million in 2012. This expense as a percentage of revenue remained constant at 0.2% in both 2013 and 2012.
The Hub segment expense was $3.2 million for 2013 and $3.3 million in 2012.
Mode’s depreciation expense was $1.6 million for 2013 and $1.7 million in 2012.
Hub Group’s interest expense remained consistent at $0.9 million in both 2013 and 2012.
The provision for income taxes increased to $33.1 million in 2013 from $30.7 million in 2012. Our effective rate was 38.6% in 2013 and 38.5% in 2012. The 2013 rate was higher primarily due to the enactment of Pennsylvania income tax changes in July 2013.
Net income increased to $52.6 million in 2013 from $49.1 million in 2012 due primarily to higher gross margin.
Basic earnings per share increased to $1.43 in 2013 from $1.32 in 2012. Basic earnings per share increased primarily due to the increase in net income.
Diluted earnings per share increased to $1.42 in 2013 from $1.32 in 2012. Diluted earnings per share increased primarily due to the increase in net income.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2013, we funded operations, capital expenditures, purchase of treasury stock and stock buy backs related to employee withholding upon vesting of restricted stock through cash flows from operations, cash on hand and proceeds from the issuance of long-term debt. We believe that our cash, cash flow 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 nine months ended September 30, 2013 was approximately $81.9 million, which resulted primarily from income of $52.6 million and adjustments for non-cash charges of $31.7 million partially offset by the change in operating assets and liabilities of $2.4 million.
Net cash used in investing activities for the nine months ended September 30, 2013 was $64.3 million, which includes proceeds from the sale of equipment of $1.8 million. Capital expenditures of $66.1 million related primarily to the construction of our new corporate headquarters of $15.0 million, computer hardware and software of $6.9 million, containers and transportation equipment of $42.7 million and leasehold improvements of $1.3 million. We expect capital expenditures to be between $40 million and $60 million in the fourth quarter of 2013. Fourth quarter capital expenditures will primarily consist of our new corporate headquarters, which should be completed by the end of 2013, containers and technology related investments.
19
Net cash provided by financing activities for the nine months ended September 30, 2013 was $3.8 million. We used $2.6 million of cash for stock tendered for payments of withholding taxes, $1.7 million for capital lease payments, $0.9 million to purchase treasury stock and $0.4 million for repayment of long term debt. These payments were offset by proceeds from the issuance of debt of $9.1 million and excess tax benefits from share-based compensation of $0.3 million as a financing cash in-flow.
We have standby letters of credit that expire at various dates in 2013 and 2014. As of September 30, 2013, our letters of credit were $4.2 million.
Our unused and available borrowings under our bank revolving line of credit were $45.8 million as of September 30, 2013. We were in compliance with our debt covenants as of September 30, 2013.
We believe that our cash, cash flow from operations and borrowings available under our Credit Agreement will be sufficient to meet our cash needs for at least the next twelve months.
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. We have no significant exposure to foreign currency exchange rate changes. No derivative financial instruments were outstanding as of September 30, 2013 and December 31, 2012. We do not use financial instruments for trading purposes.
As of September 30, 2013 and December 31, 2012, other than our outstanding letters of credit, the Company had no outstanding obligations under its bank line of credit arrangement.
As of September 30, 2013, 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. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of September 30, 2013. There have been no changes in our internal control over financial reporting identified in connection with such evaluation that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
20
PART II. OTHER INFORMATION
On November 26, 2012, our Board of Directors authorized the purchase of up to $25.0 million of our Class A Common Stock. This authorization expires December 31, 2013. We purchased 26,593 shares during the nine months ended September 30, 2013. We may make purchases from time to time as market conditions warrant, and any repurchased shares are expected to be held in treasury for future use.
The following table displays the number of shares purchased during the quarter and the maximum value of shares that may yet be purchased under the plan:
January 1 to March 31
April 1 to June 30
July 1 to September 30
Total
This table excludes 75,626 shares we purchased for $2.6 million during the nine months ended September 30, 2013 related to employee withholding upon vesting of restricted stock.
The exhibits included as part of the Form 10-Q are set forth in the Exhibit Index immediately preceding such Exhibits and are incorporated herein by reference.
21
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
DATE: October 31, 2013
/s/ Terri A. Pizzuto
22
EXHIBIT INDEX
23