# Hub Group, Inc. (HUBG) FY 2020 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Hub Group, Inc.'s 10-K for fiscal year 2020.

SEC filing source: https://www.sec.gov/Archives/edgar/data/940942/000156459021009409/hubg-10k_20201231.htm
Accession: 0001564590-21-009409
Filing date: 2021-02-26
Report date: 2020-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HUBG/
All MD&A years: /company/HUBG/mda/
Next year: /company/HUBG/mda/fy2021/ (FY 2021)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section of the Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which is incorporated herein by reference.

EXECUTIVE SUMMARY

We are a world class provider of multimodal transportation solutions. Our vision is to be the industry’s premier supply chain solutions provider. We offer comprehensive intermodal, logistics, truck brokerage and dedicated trucking services.

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

Our logistics line of business consists of complex transportation management services, including load consolidation, mode optimization and carrier management, as well as warehousing and consolidation services and residential last mile delivery services. 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. The CaseStack Acquisition added consolidation and warehousing services that are marketed primarily to consumer goods companies who serve the North American retail channel. Our recent acquisition of NSD in 2020 added a residential last mile delivery service capability for our customers.

Our truck brokerage line of business arranges for the transportation of freight, providing customers with another option for their transportation needs. We match our customers’ needs with trucking carriers’ capacity to provide the most effective service and price combination. 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, contracts with customers who require high level of service transportation using equipment dedicated to their 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.

We employ sales and 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.

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

Our top 50 customers represent approximately 69% of revenue for the year ended December 31, 2020 with one customer responsible for more than 10% of our revenue. We use various performance indicators to manage our business. We closely monitor profit margins 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 December 9, 2020, we acquired 100% of the equity interest of NSD. Total consideration for the transaction was $103.3 million which consisted of cash paid of $89.7 million and the settlement of Hub’s accounts receivable due from NSD of $13.6 million.  

On December 3, 2018, we completed the CaseStack Acquisition. Total consideration for the transaction was $252.9 million, consisting of $249.4 million in cash and $3.5 million in a deferred purchase consideration, which was paid equally over the twenty-four months following the transaction. Prior to being paid, it was included in Accrued Other in our Consolidated Balance Sheet.

On August 31, 2018, we sold Mode. 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.

23

RESULTS OF OPERATIONS

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

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

[[GREPCENT_TABLE]]
[["","Twelve Months Ended"],["","December 31,"],["","2020","","","2019"],["Intermodal","$","2,091,984","","","$","2,166,382"],["Logistics","","704,824","","","","769,195"],["Truck brokerage","","431,127","","","","433,793"],["Dedicated","","267,709","","","","298,747"],["Total revenue","$","3,495,644","","","$","3,668,117"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Twelve Months Ended"],["","December 31,"],["","2020","","","2019"],["Revenue","$","3,495,644","","","100.0%","","","$","3,668,117","","","100.0%"],["Transportation costs","","3,070,207","","","87.8%","","","","3,147,047","","","85.8%"],["Gross margin","","425,437","","","12.2%","","","","521,070","","","14.2%"],["Costs and expenses:"],["Salaries and benefits","","188,777","","","5.4%","","","","235,963","","","6.4%"],["General and administrative","","99,597","","","2.9%","","","","104,206","","","2.8%"],["Depreciation and amortization","","31,237","","","0.9%","","","","28,481","","","0.8%"],["Total costs and expenses","","319,611","","","9.2%","","","","368,650","","","10.0%"],["Operating income","$","105,826","","","3.0%","","","$","152,420","","","4.2%"]]
[[/GREPCENT_TABLE]]

Revenue

Revenue decreased 4.7% to $3.5 billion in 2020 from $3.7 billion in 2019. Intermodal revenue decreased 3.4% to $2.1 billion primarily due to a 4.2% decrease in revenue per load, partially offset a 0.8% increase in volume. Logistics revenue decreased 8.4% to $704.8 million as the growth of CaseStack retail supplier solutions and the acquisition of NSD in December was more than offset by the impact of lost customers. Truck brokerage revenue decreased 0.6% to $431.1 million due to a 10.1% decrease in volume, partially offset by a 9.5% increase in revenue per load. Dedicated’s revenue decreased 10.4% to $267.7 million primarily due to the impact of business we exited, partially offset by growth with new accounts. Our business was significantly impacted by the COVID-19 pandemic and its impact on North American economic conditions, with revenue for the first half of 2020 down 13% as compared to the first half of 2019. Business conditions improved in the second half of 2020, with revenue growing 4% as compared to the prior year. Intermodal volume declined 7% in the first half of 2020 as compared to the prior year but grew 9% in the second half of 2020 as compared to the prior year.

Transportation Costs

Transportation costs were $3.1 billion in both 2020 and 2019. Transportation costs in 2020 consisted of purchased transportation costs of $2.4 billion and equipment and driver related costs of $643.5 million compared to 2019, which consisted of purchased transportation costs of $2.5 billion and equipment and driver related costs of $652.3 million. The 3.0% decrease in purchased transportation costs was primarily due to decreases in truck brokerage volume, decreases in logistics activity, and improved purchasing, partially offset by rail cost increases. Equipment and driver related costs decreased 1.4% in 2020 primarily due to lower driver wages, partially offset by increased equipment depreciation expense.  

Gross Margin

Gross margin decreased 18.4% to $425.4 million in 2020 from $521.1 million in 2019. The $95.6 million gross margin decrease was the result of decreases in all lines of business. Intermodal gross margin decreased primarily due to lower customer pricing, higher equipment repositioning costs, and increased rail costs. Partially offsetting the intermodal gross margin decline was volume growth and the benefits from operational improvements at HGT. Logistics gross margin decreased due to lower revenue, partially offset by growth with new customers and the acquisition of NSD. Truck brokerage gross margin decreased due to lower revenue and volume,

24

partially offset by higher margin spot freight and decreased purchased transportation costs on our contractual freight. Dedicated gross margin decreased due to lost customers, partially offset with growth from new customers.

As a percentage of revenue, gross margin decreased to 12.2% in 2020 from 14.2% in 2019. Intermodal gross margin as a percentage of sales decreased 290 basis points due to lower pricing and higher purchased transportation costs. Truck brokerage gross margin as a percentage of sales decreased 140 basis points primarily due to changes in customer mix and higher purchased transportation costs. Logistics gross margin as a percentage of sales was flat as the benefits of continuous improvement initiatives were offset by higher purchased transportation costs. Dedicated gross margin as a percentage of sales decreased 150 basis points due to higher transportation costs, partially offset by improved operational discipline.

CONSOLIDATED OPERATING EXPENSES

Salaries and Benefits

Salaries and benefits decreased to $188.8 million in 2020 from $236.0 million in 2019. As a percentage of revenue, salaries and benefits decreased to 5.4% in 2020 from 6.4% in 2019. The decrease of $47.2 million was primarily due to lower variable compensation and lower headcount, including reductions in bonus expense of $26.8 million, salaries expense of $14.7 million, employee benefits expense of $3.3 million and payroll tax expense of $2.3 million. Headcount as of December 31, 2020 and 2019 was 1,989 and 2,024, respectively, which excludes driver headcount, the costs for which are included in transportation costs. The decrease in headcount is primarily due to technology driven efficiencies and improved processes, partially offset by an increase in headcount due to the acquisition of NSD.  

General and Administrative

General and administrative expenses decreased to $99.6 million in 2020 from $104.2 million in 2019. As a percentage of revenue, these expenses increased to 2.9% in 2020 from 2.8% in 2019. The decrease of $4.6 million in general and administrative expense was due primarily to decreases in travel, meals and entertainment expenses of $5.0 million, a decrease in claims expense related to a $4.8 million settlement of a claim during 2019, decreases in temporary labor expense of $1.2 million, office expense of $1.0 million, telephone expense of $0.9 million and the impact of our cost reduction efforts. These decreases were partially offset by $5.9 million of expense related to donations of refrigerated trailers in support of COVID-19 efforts, a $2.2 million increase in professional services related primarily to a consulting project, professional costs related to the acquisition of NSD of $1.0 million, lower gains on the sale of equipment of $1.7 million and an impairment of a lease right-of-use asset of $0.8 million due to the abandonment of a leased property.

Depreciation and Amortization

Depreciation and amortization increased to $31.2 million in 2020 from $28.5 million in 2019 related primarily to the deployment of IT initiatives. This expense as a percentage of revenue increased to 0.9% in 2020 from 0.8% in 2019.

Other Expense, Net

Other expense increased to $9.7 million in 2020 from $8.5 million in 2019 due to lower interest income on cash balances due to the decrease in interest rates and lower foreign currency gains partially offset by lower interest expense related to lower borrowings.

Provision for Income Taxes

Provision for income taxes decreased to $22.5 million in 2020 from $36.7 million in 2019 due primarily to a decrease in taxable income and a reduction of our effective tax rate in 2020. Our effective tax rate was 23.5% in 2020 and 25.5% in 2019. The effective tax rate decreased in 2020 due to a combination of a favorable adjustment related to stock-based compensation and state tax credits from amended returns. 

Net Income

Net income decreased to $73.6 million in 2020 from $107.2 million in 2019 due primarily to decreases in gross margin, partially offset by lower costs and operating expenses, and income tax expenses.

LIQUIDITY AND CAPITAL RESOURCES

During 2020, we funded operations, capital expenditures, payments for acquisition, payments for finance leases, repayments of debt and the purchase of our stock related to employee withholding upon vesting of restricted stock through cash flows from operations, proceeds from the issuance of long-term debt including our revolver and cash on hand. In March 2020, we elected to borrow $100 million under our credit facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. We repaid the $100 million of

25

borrowings in June 2020. We believe that our cash balance, cash flows from operations and borrowings available under our credit facility 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, 2020 was approximately $175.0 million, which resulted primarily from income of $73.6 million, non-cash charges of $155.5 million and changes in operating assets and liabilities of $54.1 million.

Cash provided by operating activities decreased $79.6 million in 2020 versus 2019. The decrease was due to the change in operating assets and liabilities of $67.2 million and the decrease in net income of $33.6 million, partially offset by the change in non-cash items of $21.2 million. The decrease in the change in operating assets and liabilities of $67.2 million was caused by decreases in the changes in accounts receivable of $79.9 million, prepaid expenses of $6.0 million, accrued expenses of $4.3 million, non-current liabilities of $1.0 million and prepaid taxes of $0.7 million. The decreases were partially offset by increases in the changes in accounts payable of $20.5 million, restricted investments of $2.6 million and other assets of $1.6 million. The increase in the change in non-cash charges of $21.2 million resulted from higher depreciation and amortization of $6.8 million, other operating activities of $6.4 million, deferred taxes of $5.6 million, lower gains on the sale of fixed assets of $1.6 million and higher compensation related to stock-based plans of $0.8 million.

Net cash used in investing activities for the year ended December 31, 2020 was $196.9 million which includes capital expenditures of $115.3 million and acquisition payments related to NSD of $84.8 million. Proceeds included $3.2 million from the sale of equipment. Capital expenditures of $115.3 million included container purchases of $39.4 million, tractors of $31.8 million, construction of our corporate headquarters of $19.8 million, technology investments of $13.5 million, transportation equipment of $9.9 million and the remainder for leasehold improvements.  

Capital expenditures increased by approximately $20.5 million in 2020 as compared to 2019. The 2020 increase was due to increases in container purchases of $14.0 million, tractors of $5.2 million, transportation equipment of $4.3 million, our corporate headquarters of $3.5 million and leasehold improvements of $0.4 million. These increases were partially offset by a decrease in technology investments of $6.9 million.

In 2021, we estimate capital expenditures will range from $150 million to $170 million. We expect equipment purchases to range from $140 million to $155 million, and technology and other investments will range from $14 million to $18 million. We plan to fund these expenditures with a combination of cash and debt.

Net cash used in financing activities for the year ended December 31, 2020 was $22.3 million which includes repayments of long-term debt of $198.7 million, cash for stock tendered for payments of withholding taxes of $8.0 million and finance lease payments of $3.1 million partially offset by the proceeds from the issuance of debt $187.5 million. The repayments of long-term debt and proceeds from the issuance of debt amounts include the $100 million we elected to borrow under our credit facility in March 2020 that was fully repaid in June 2020.

The $58.8 million decrease in cash used in financing activities for 2020 versus 2019 was primarily due to the increase in proceeds from the issuance of debt of $31.0 million, the decrease in treasury shares purchased of $25.0 million and the decrease in debt payments of long-term debt of $6.9 million, partially offset by increases in cash used for purchase of our stock related to employee withholding taxes of $4.0 million and finance lease payments of $0.1 million. In March 2020, we elected to borrow $100 million under our credit facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of then-current uncertainty in the global markets resulting from the COVID-19 pandemic. We repaid the $100 million of borrowings in June 2020.

In 2020, cash paid for income taxes was $18.4 million, of which $2.6 million related to 2019 and $15.8 million related to 2020. Income tax expense was $22.5 million in 2020, which exceeded the cash paid for income taxes related to 2020 of $15.8 million which was due to favorable timing differences related to depreciation.

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 2021. As of December 31, 2020, our letters of credit were $37.7 million.

As of December 31, 2020, we had no borrowings under our bank revolving line of credit and our unused and available borrowings were $312.3 million. Our unused and available borrowings were $318.5 million as of December 31, 2019. 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, 2020.

26

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, 2020 is presented in the following table (in thousands).

Future Payments Due:

[[GREPCENT_TABLE]]
[["","Operating","","","Finance","","","","","","","Interest"],["","Leases","","","Leases","","","Debt","","","on Debt","","","Total"],["Year 1","$","11,082","","","$","1,817","","","$","93,562","","","$","6,242","","","$","112,703"],["Year 2","","9,714","","","","8","","","","77,205","","","","3,775","","","","90,702"],["Year 3","","7,607","","","","-","","","","58,373","","","","1,580","","","","67,560"],["Year 4","","6,369","","","","-","","","","26,863","","","","498","","","","33,730"],["Year 5","","6,312","","","","-","","","","14,356","","","","126","","","","20,794"],["Thereafter","","8,803","","","","-","","","","-","","","","-","","","","8,803"],["","$","49,887","","","$","1,825","","","$","270,359","","","$","12,221","","","$","334,292"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["Year 1","$","3,022"],["Year 2","","2,806"],["Year 3","","1,780"],["Year 4","","1,432"],["Year 5","","1,746"],["Thereafter","","12,567"],["","$","23,353"]]
[[/GREPCENT_TABLE]]

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with United States 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.

Revenue Recognition

In accordance with the Accounting Standards Codification (ASC) topic 606, Revenue from Contracts with Customers, our significant accounting policy for revenue is as follows:

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

27

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

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 either of those collection percentages would not have a material impact on our financial statements. Our level of reserves for customer accounts receivable fluctuates 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.

Capitalized Internal Use Software and Cloud Computing Costs

We capitalize internal and external costs, which include costs related to the development of our cloud computing or hosting arrangements, incurred to develop internal use software per ASC Subtopic 350-40.  Internal use software has both the of the following characteristics: the software is acquired, internally developed, or modified solely to meet our needs and during the development or modification, no substantive plan exists or is being developed to market the software externally.  Only costs incurred during the application development stage and costs to develop or obtain software that allows for access to or conversion of old data by new systems are capitalized.  Capitalization of costs begins when the preliminary project stage is complete, management has committed to funding the project and it is probable the project will be completed, and the software will be used to perform its intended function.  The measurement of the costs to capitalize include fees paid to third parties, costs incurred to obtain software from third parties, travel expenses by employees in their duties associated with developing software, payroll related costs for employees who devote time spent directly on the project and interest costs incurred while developing internal-use software or implementing a hosting arrangement. Capitalization ceases no later than when the project is substantially complete and ready for its intended use, after all substantial testing is complete.

Claims Accruals

We purchase insurance coverage for a portion of expenses related to employee injuries, vehicular collisions, accidents, and cargo damage. Certain insurance arrangements include high self-insurance retention limits or deductibles applicable to each claim. We have umbrella policies to limit our exposure to large claim costs.

Our claims accrual policy for all self-insured claims is to recognize a liability at the time of the incident based on our analysis of the nature and severity of the claims and analyses provided by third-party claims administrators, as well as legal and regulatory factors. Our safety and claims personnel work directly with representatives from the insurance companies and third-party administrators to continually update the estimated cost of each claim. The ultimate cost of a claim develops over time as additional information regarding the nature, timing, and extent of damages claimed becomes available. Accordingly, we use an actuarial method to develop current claim information to derive an estimate of our ultimate claim liability. This process involves the use of loss-development factors based on our historical claims experience. In doing so, the recorded liability considers future claims growth and provides an allowance for incurred-but-not-reported claims. Our claim accrual liability is classified as either current or non-current in the consolidated balance sheet based on an estimate of when the claims are expected to be paid. We do not discount our estimated losses.  In addition, we record receivables for amounts expected to be reimbursed for payments made in excess of self-insurance levels on covered claims.

28

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, aggressive pricing by new or existing competitors, poor customer retention, inadequate drayage and intermodal service and inadequate equipment supply and the ongoing coronavirus outbreak or other health concerns.

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, competitor pricing actions, 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 related changes in accounting estimates.  

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, employee insurance costs, 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. Additionally, the gains or losses on sales of used assets can result in fluctuating general and administrative expenses.

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 financing 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.

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.

29

Other Expense

We expect interest expense to increase in 2021 because we financed our 2020 tractor and container purchases with debt and we expect to incur debt for our 2021 capital expenditures.  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 23% and 25% in 2021.