Hub Group, Inc.: Form 10-Q for the period ended Mar 31, 2025

Forward-Looking Information

Statements in this section and other parts of this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements, provided pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that might cause the actual performance of the Company to differ materially from those expressed or implied by this discussion and, therefore, should be viewed with caution. Further information on the risks that may affect the Company’s business is included in filings it makes with the SEC from time to time, including those discussed under the “Risk Factors” section in the 2024 10-K and subsequent filings. The Company assumes no obligation to update any such forward-looking statements.

EXECUTIVE SUMMARY

We are a leading supply chain solutions provider in North America that offers comprehensive transportation and logistics management services focused on reliability, visibility and value for our customers. Our service offerings include a full range of freight transportation and logistics services, some of which are provided by assets we own and operate, and some of which are provided by third parties with whom we contract. Our services include intermodal, truckload, less-than-truckload, flatbed, temperature-controlled, dedicated and regional trucking. Other services include full outsource logistics solutions, transportation management services, freight consolidation, warehousing and fulfillment, final mile delivery, parcel and international services.

We service a large and diversified customer base in a broad range of industries, including retail, consumer products and durable goods. We believe our strategy to offer multi-modal supply chain management solutions serves to strengthen and deepen our relationships with our customers and allows us to provide a more cost effective and higher service solution.

We concluded we have two reportable segments, Intermodal and Transportation Solutions (“ITS”) and Logistics, which are based primarily on the services each segment provides.

Intermodal and Transportation Solutions. Our ITS segment offers high service, nationwide door-to-door intermodal transportation, providing value, visibility and reliability in both transcontinental and local lanes by combining rail transportation with local trucking. This segment includes our trucking operations which provides our customers with local pickup and delivery as well as high service local and regional trucking transportation using equipment dedicated to their needs. In the first quarter of 2025, approximately 76% of our drayage services was provided by our own fleet. We arrange for the movement of our customers’ freight in one of our approximately 50,000 containers. We contract with railroads to provide transportation for the long-haul portion of the shipment between rail terminals. Drayage between origin or destination and rail terminals are provided by our own trucking operations and third parties with whom we contract. Our dedicated service operation offers fleets of equipment and drivers to each customer on a contract basis, as well as the management and infrastructure to operate according to the customer’s high service expectations. As of March 31, 2025, our trucking transportation operation consisted of approximately 2,300 tractors, 3,300 employee drivers and 4,600 trailers. We also contract for services with approximately 500 independent owner-operators. These assets and contractual services are used to support drayage for our intermodal service offering and to serve our customers who require high service local and regional trucking transportation using equipment dedicated to their needs. Our dedicated service operation offers fleets of equipment and drivers to each customer on a contract basis, as well as the management and infrastructure to operate according to the customer’s high service expectations.

Logistics. Our Logistics segment offers a wide range of non-asset-based services including transportation management, freight brokerage services, shipment optimization, load consolidation, mode selection, carrier management, load planning and execution, cross-docking, consolidation and fulfillment services and final mile delivery. Logistics includes our brokerage business which consists of a full range of trucking transportation services, including dry van, expedited, less-than-truckload (“LTL”), refrigerated and flatbed, all of which is provided by third-party carriers with whom we contract. We leverage proprietary technology along with collaborative relationships with third-party service providers to deliver cost savings and performance-enhancing supply chain services to our clients. Our transportation management offering also serves as a source of volume for our ITS segment. Many of the customers for these solutions are consumer goods companies who sell into the retail channel. Our final mile delivery offering provides residential final mile delivery and installation of appliances and big and bulky goods. Final mile operates through a network of independent service providers in company, customer and third-party facilities throughout the continental United States. Our business operates or has access to approximately 7 million square feet of warehousing and cross-dock space across North America, to which our customers ship their goods to be stored and distributed to destinations including residences, retail stores and other commercial locations. These services offer our customers shipment visibility, transportation cost savings, high service and compliance with retailers’ increasingly stringent supply chain requirements.

We are focused on several margin enhancement projects including network optimization, matching of inbound and outbound loads, reducing empty miles, improving our recovery of accessorial costs, increasing our driver and asset utilization, reducing repositioning costs, providing holistic solutions and improving low profit freight. Hub’s top 50 customers represent approximately 66% of revenue for the three months ended March 31, 2025, while one customer accounted for more than 10% of our quarterly revenue in both segments in both 2025 and 2024. We use various performance indicators to manage our business. We closely monitor profit levels for our customers. We also evaluate on-time performance, customer service, cost per load and daily sales outstanding by customer account. Vendor cost changes and vendor service levels are also monitored closely.

The following table includes the one customer that represented 10% or more of our quarterly revenue by segment for the three months ending March 31, 2025 and 2024, respectively:

Uncertainties and risks to our outlook include inflation, increased healthcare costs, a slowdown in consumer spending (driven by, among other factors, tariffs, inflation, increases in interest rates, an economic recession and geopolitical concerns), a shift by consumers to spending on services at the expense of goods, an increase of retailers’ inventory levels, the ability of customers to pay our accounts receivable, a significant increase in transportation supply in the marketplace, aggressive pricing actions by our competitors and any inability to pass cost increases, such as transportation and warehouse costs, through to our customers, economic factors such as the impact of potentially increasing tariffs between trading partners, all of which could have a materially negative impact on our revenue, profitability and cash flow in 2025. Exiting of truckload capacity, retail inventory levels declining leading to restocking demand, a return of typical shipping peak season demands and a stronger used tractor market could have a materially positive impact on our revenue, profitability and cash flows in 2025.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2025 Compared to the Three Months Ended March 31, 2024

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

Operating Revenue and Operating Income

Total consolidated operating revenue decreased 8% to $915 million in 2025 from $999 million in 2024.

Intermodal and Transportation Solutions (“ITS”) revenue decreased 4% to $530 million primarily due to mix, price and fuel partially offset by higher intermodal volumes of 8%. ITS operating income increased to $14 million, or 2.7% of revenue, as compared to $13 million, 2.4% of revenue in the prior year, due to cost control efforts, lower dedicated start-up costs, and improved insurance and claims expenses.

Logistics revenue decreased 14% to $411 million primarily due to lower volume and revenue per load in our brokerage business, exiting of unprofitable business in consolidation and fulfillment, and seasonal softness in managed transportation and final mile businesses. Logistics operating income decreased to $23 million, 5.7% of revenue, as compared to $24 million, 5.0% of revenue, due to positive contribution from consolidation and fulfillment, managed transportation, and final mile fully offset a lower brokerage margin.

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

CONSOLIDATED OPERATING EXPENSES, OTHER EXPENSES AND INCOME TAXES

Purchased Transportation and Warehousing

Purchased transportation and warehousing costs decreased 11% to $658 million in 2025 from $740 million in 2024. As a percentage of revenue, purchased transportation and warehousing costs decreased to 71.9% in 2025 from 74.1% in 2024.

Purchased transportation and warehousing costs declined as compared to the prior year due to lower rail and third-party warehouse costs. The reduction in warehouse costs is primarily driven by the completion of our network optimization project in 2024.

Salaries and Benefits

Salaries and benefits increased to $149 million in 2025 from $144 million in 2024. As a percentage of revenue, salaries and benefits increased to 16.3% in 2025 from 14.4% in 2024.

The salaries and benefits increase of $5 million was primarily due to an increase in driver compensation and warehouse labor costs driven by additional warehouse and driver team members and the addition of EASO.

Headcount, which includes drivers, warehouse personnel and office employees, was 6,386 as of March 31, 2025 and 5,897 as of March 31, 2024, respectively. The increase in headcount related primarily to additional warehouse and driver team members as well as office employees and drivers due to the EASO transaction.

Depreciation and Amortization

Depreciation and amortization expense decreased to $33 million in 2025 from $38 million in 2024. This expense decrease was related primarily to decreased container depreciation expense resulting from changes made in the third quarter of 2024 to the estimated useful lives of our containers. This expense, as a percentage of revenue, decreased to 3.6% in 2025 from 3.8% in 2024. Depreciation expense includes transportation equipment, technology investments, leasehold improvements, warehouse equipment, office equipment and building improvements.

Insurance and Claims

Insurance and claims expense decreased to $11 million in 2025 from $13 million in 2024. This decrease was primarily due to less claim expenses related to auto liability claims in 2025. These expenses, as a percentage of revenue, decreased to 1.2% in 2025 from 1.3% in 2024.

General and Administrative

General and administrative expenses remained consistent at $27 million in both 2025 and 2024. These expenses, as a percentage of revenue, increased to 2.9% in 2025 from 2.7% in 2024.

Gain on Sale of Assets, Net

Net gains on the sale of equipment decreased to $0.1 million in 2025 from $0.5 million in 2024. This decrease resulted from both less units sold and a lower average gain per unit sold in 2025 as compared to 2024.

Other Income (Expense), Net

Other Expense decreased to $2 million in 2025 from $3 million in 2024. Interest expense decreased to $3 million in 2025 from $4 million in 2024 due primarily to lower average debt balances. Interest income remained consistent at $1 million in both 2025 and 2024.

Provision for Income Taxes

The provision for income taxes increased to $8 million in 2025 from $7 million in 2024. We provided for income taxes using an effective rate of 23.7% in 2025 and an effective rate of 21.5% in 2024. The first quarter 2025 effective tax rate exceeded the rate from 2024 as we had a smaller rate benefit related to stock-based compensation in 2025 than in 2024.

LIQUIDITY AND CAPITAL RESOURCES

Our financing and liquidity strategy is to fund operating cash payments and future dividends through cash received from the provision of services, cash on hand, and to a lesser extent, from cash received from the sale of equipment. As of March 31, 2025, we had $113 million of cash. In addition, we had $18 million of restricted investments and $28 million of restricted cash, which are held for payments of long-term liabilities and the deferred cash consideration from the EASO transaction, respectively. We generally fund our purchases of transportation equipment through the issuance of secured, fixed rate Equipment Notes. In prior years, we have funded our business acquisitions from cash on hand. Payments for our other investing activities, such as our capitalized technology investments, have been funded by cash on hand or cash flows from operations. Cash used in financing activities, including the purchase of treasury stock and dividend payments have been funded by cash from operations or cash on hand. We have not historically used our Credit Facility to fund our operating, investing, or financing cash needs, though it is available to fund future cash requirements as needed. Based on past performance and current expectations, we believe cash on hand and cash received from the provision of services, along with other financing sources, will provide us the necessary capital to fund transactions and achieve our planned growth for the next twelve months and the foreseeable future.

Cash provided by operating activities for the three months ended March 31, 2025 was $70 million, which resulted primarily from net income of $27 million, non-cash charges of $50 million partially offset by changes in operating assets and liabilities of $7 million.

Cash provided by operating activities totaled $70 million in 2025 compared to $81 million in 2024. The $11 million decrease in cash flow was primarily due to decreases in non-cash charges of $1 million plus a decrease in the change of assets and liabilities of $10 million.

Net cash used in investing activities for the three months ended March 31, 2025 was $16 million which resulted from capital expenditures of $19 million, partially offset by proceeds from the sale of equipment of $3 million. Capital expenditures of $19 million related primarily to tractors of $13 million, technology investments of $4 million, and warehouse equipment of $2 million.

Capital expenditures increased by approximately $2 million in 2025 as compared to 2024. The 2025 increase was due primarily to increased spend on tractors of $3 million and warehouse equipment of $1 million, partially offset by less spend on containers of $2 million.

In 2025, we estimate capital expenditures will range from $40 million to $50 million. We expect to focus these expenditures on replacements for tractors that have reached the end of their useful life as well as technology investments. We do not plan to purchase containers in 2025.

Net cash used in financing activities for the three months ended March 31, 2025 was $40 million which includes repayments of long-term debt of $26 million, purchase of treasury stock of $14 million, dividends paid and cash for stock tendered for payments of withholding taxes of $7 million each, partially offset by the proceeds from the issuance of debt of $14 million. Debt incurred in 2025 was used to fund the purchase of transportation equipment.

The $18 million decrease in cash used in financing activities for 2025 versus 2024 was primarily due to a decrease in the purchase of treasury stock of $12 million, increased proceeds from the issuance of debt of $3 million, a decrease in stock tendered for payments of withholding taxes of $2 million, and a decrease in repayments of long-term debt of $1 million.

As a result of anticipated unfavorable timing differences, primarily related to depreciation and compensation, we expect our cash paid for income taxes in 2025 to exceed our income tax expense.

See Note 6 of the condensed consolidated financial statements for details related to interest rates and commitment fees.

We have standby letters of credit that expire in 2025. As of both March 31, 2025 and December 31, 2024, our letters of credit were $1 million.

At March 31, 2025, and December 31, 2024, we had no borrowings under our respective credit agreements. Our unused and available borrowings were $349 million. We were in compliance with the financial covenants in our credit agreements as of March 31, 2025 and December 31, 2024.

We are continually evaluating the possible effects of current economic conditions and reasonable and supportable economic forecasts in operational cash flows, including the risks of declines in the overall freight market and our customers’ liquidity and ability to pay. We are monitoring working capital on a daily basis and are in frequent communications with our customers.

We do not have any off-balance sheet transactions, arrangements, obligations (including contingent obligations) or liabilities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Refer to the company's 2024 Annual Report on Form 10-K for a complete discussion regarding our critical accounting policies and estimates. As of March 31, 2025, there were no material changes to our critical accounting policies and estimates.

(a) Disclosure Controls and Procedures. As of March 31, 2025, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2025.

(b) Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the fiscal quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On October 23, 2024, we entered into an investment agreement with Corporación Interamericana de Logística, S.A. de C.V. and certain associated entities (commonly known as “EASO”), to acquire a controlling interest in EASO. We are currently integrating processes, employees, technologies and operations. Management will continue to evaluate our internal controls over financial reporting as we complete our integration.

Investing in shares of our stock involves certain risks, including those identified and described in Part I, Item 1A of our 2024 10-K under the heading “Risk Factors.” When any one or more of these risks materialize from time to time, the Company’s business and stock price can be materially and adversely affected. There have been no material changes to the Company’s risk factors since the 2024 Form 10-K.