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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the quarterly period ended September 30, 2002 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission file number: 0-27754
HUB GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-4007085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
377 EAST BUTTERFIELD ROAD, SUITE 700
LOMBARD, ILLINOIS 60148
(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 __
On November 5, 2002, the registrant had 7,046,250 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.
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HUB GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
HUB GROUP, INC. - REGISTRANT
Unaudited Condensed Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001 3
Unaudited Condensed Consolidated Statements of Operations - Three Months
and Nine Months Ended September 30, 2002 and 2001 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity - Nine
Months Ended September 30, 2002 5
Unaudited Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2002 and 2001 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II. OTHER INFORMATION 17
2
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
SEPTEMBER 30, DECEMBER 31,
--------------- ---------------
2002 2001
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ -
Accounts receivable, net 153,070 149,765
Deferred taxes 12,081 11,147
Prepaid expenses and other current assets 4,629 3,840
---------------- --------------
TOTAL CURRENT ASSETS 169,780 164,752
PROPERTY AND EQUIPMENT, net 35,826 39,098
GOODWILL, net 215,190 208,166
OTHER ASSETS 1,448 1,507
MINORITY INTEREST - 2,501
---------------- --------------
TOTAL ASSETS $ 422,244 $ 416,024
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 136,772 $ 135,588
Other 3,632 1,275
Accrued expenses
Payroll 11,478 11,195
Other 9,632 14,020
Current portion of long-term debt 8,046 8,054
---------------- --------------
TOTAL CURRENT LIABILITIES 169,560 170,132
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 101,027 96,059
DEFERRED TAXES 18,723 17,380
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares
issued or outstanding in 2002 and 2001 - -
Common stock,
Class A: $.01 par value; 12,337,700 shares authorized; 7,046,250
shares issued and outstanding in 2002 and 2001 70 70
Class B: $.01 par value; 662,300 shares authorized; 662,296 shares
issued and outstanding in 2002 and 2001 7 7
Additional paid-in capital
Purchase price in excess of predecessor basis, net of tax benefit 110,819 110,819
of $10,306 (15,458) (15,458)
Retained earnings 37,496 37,404
Accumulated other comprehensive loss - (389)
---------------- --------------
TOTAL STOCKHOLDERS' EQUITY 132,934 132,453
---------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 422,244 $ 416,024
================ ==============
See notes to unaudited condensed consolidated financial statements.
3
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- --------------------------
2002 2001 2002 2001
------------ -------------- ----------- --------------
(NOT REVIEWED) (NOT REVIEWED)
Revenue $ 356,666 $ 323,046 $ 989,560 $ 987,004
Transportation costs 314,385 278,475 869,674 851,066
------------ -------------- ----------- --------------
Gross margin 42,281 44,571 119,886 135,938
Costs and expenses:
Salaries and benefits 23,294 23,461 70,239 71,663
Selling, general and administrative 11,822 16,989 34,945 41,541
Depreciation and amortization of property and equipment 2,652 2,147 7,859 8,117
Amortization of goodwill - 1,435 - 4,305
Impairment of property and equipment - - - 3,401
------------ -------------- ----------- --------------
Total costs and expenses 37,768 44,032 113,043 129,027
Operating income 4,513 539 6,843 6,911
------------ -------------- ----------- --------------
Other income (expense):
Interest expense (2,539) (2,426) (7,307) (7,793)
Interest income 45 189 166 522
Other, net 153 93 275 (185)
------------ -------------- ----------- --------------
Total other expense (2,341) (2,144) (6,866) (7,456)
Income (loss) before minority interest and provision for income taxes 2,172 (1,605) (23) (545)
------------ -------------- ----------- --------------
Minority interest - 280 (524) 680
------------ -------------- ----------- --------------
Income (loss) before provision for (benefit from) income taxes 2,172 (1,885) 501 (1,225)
Provision for (benefit from) income taxes 793 (773) 409 (502)
------------ -------------- ----------- --------------
Net income (loss) $ 1,379 $ (1,112) $ 92 $ (723)
============ ============== =========== ==============
Basic earnings (loss) per common share $ 0.18 $ (0.14) $ 0.01 $ (0.09)
============ ============== =========== ==============
Diluted earnings (loss) per common share $ 0.18 $ (0.14) $ 0.01 $ (0.09)
============ ============== =========== ==============
See notes to unaudited condensed consolidated financial statements.
4
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2002
(in thousands, except shares)
SEPTEMBER 30,
2002
-----------------
Class A & B Common Shares
Beginning of year 7,708,546
-----------------
Ending balance 7,708,546
-----------------
Class A & B Common Stock Amount
Beginning of year $ 77
-----------------
Ending balance 77
-----------------
Additional Paid-in Capital
Beginning of year 110,819
-----------------
Ending balance 110,819
-----------------
Purchase Price in Excess of Predecessor Basis, Net of Tax
Beginning of year (15,458)
-----------------
Ending balance (15,458)
-----------------
Retained Earnings
Beginning of year 37,404
Net income 92
-----------------
Ending balance 37,496
-----------------
Accumulated Other Comprehensive (Loss) Income
Beginning of year (389)
Other comprehensive income 389
-----------------
Ending balance -
-----------------
TOTAL STOCKHOLDERS' EQUITY $ 132,934
=================
Comprehensive Income
Net income $ 92
Unrealized interest rate swap income net of tax expense of $153 389
-----------------
Total comprehensive income $ 481
=================
See notes to unaudited condensed consolidated financial statements.
5
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2002 2001
---------------- ---------------
(NOT REVIEWED)
Cash flows from operating activities:
Net income (loss) $ 92 $ (723)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 7,952 8,612
Amortization of goodwill - 4,305
Impairment of property and equipment - 3,401
Deferred taxes 409 (502)
Minority interest (524) 680
(Gain) loss on sale of assets (39) 410
Other assets 59 440
Changes in working capital:
Accounts receivable, net (3,305) 450
Prepaid expenses and other current assets (789) (942)
Accounts payable 3,541 (11,762)
Accrued expenses (3,716) 2,397
---------------- ---------------
Net cash provided by operating activities 3,680 6,766
---------------- ---------------
Cash flows from investing activities:
Purchase of minority interest (4,000) -
Purchases of property and equipment, net (4,640) (8,469)
---------------- ---------------
Net cash used in investing activities (8,640) (8,469)
---------------- ---------------
Cash flows from financing activity:
Net borrowings on long-term debt 4,960 1,703
---------------- ---------------
Net cash provided by financing activity 4,960 1,703
---------------- ---------------
Net increase (decrease) in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
---------------- ---------------
Cash and cash equivalents, end of period $ - $ -
================ ===============
Supplemental disclosures of cash flow information Cash paid for:
Interest $ 6,333 $ 7,488
Income taxes - 60
Non-cash activity:
Unrealized income (loss) on derivative instrument $ 389 $ (440)
See notes to unaudited condensed consolidated financial statements.
6
HUB GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
of Hub Group, Inc. (the "Company") 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
condensed or omitted pursuant to those rules and regulations. However, the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading.
As previously reported in the Company's Form 10-K for the year ended
December 31, 2001, the Company's independent auditors were unable to review the
quarterly financial data from 2001 in accordance with standards established by
the American Institute of Certified Public Accountants because the Company did
not restate its results on a quarterly basis.
The financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to present fairly the Company's financial position and results of operations for
the three months and nine months ended September 30, 2002. In the fourth quarter
of 2001, the Company recorded adjustments which resulted in a decline of $0.7
million in net income to properly report the annual results for the year as a
result of accounting irregularities at the Company's 65% owned subsidiary, Hub
Group Distribution Services (HGDS). The Company was unable to determine in which
quarters in 2001 the adjustments should have been made and the amount to be
recorded in each quarter. Consequently, the results for the three and nine
months ended September 30, 2002 are not comparable to the results for the three
months and nine months ended September 30, 2001.
These condensed consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. Results of operations in interim periods are not
necessarily indicative of results to be expected for a full year.
NOTE 2. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include the
allowance for doubtful accounts, costs of purchased transportation and services
and reserves for pricing and billing adjustments. Actual results could differ
from those estimates. During the three months ended March 31, 2002, the Company
revised its estimate of accrued transportation costs resulting in an increase in
pretax income of approximately $2.8 million.
NOTE 3. PURCHASE OF MINORITY INTEREST
HGDS was a 65% owned partnership until August of 2002 when Hub
purchased the minority partners' interest in HGDS. Pursuant to the HGDS
Partnership Agreement, each of the partners had a legal obligation to the
partnership for any deficit balance in their respective capital accounts.
Accordingly, there was a debit balance reflected in minority interest in the
accompanying condensed consolidated balance sheets related to the minority
partner's deficit capital account balance of approximately $2.5 million at
December 31, 2001. Management believed that the balance in the minority account
was collectable at December 31, 2001. Hub had a legal right to pursue the
minority partner for the deficit balance in the capital account. In August of
2002, the Company entered into a settlement agreement and release with the
minority partner that resulted in the relinquishment of the minority partner's
35% interest in HGDS and release of the minority partner's claims against the
7
Company in exchange for $4.0 million in cash and release of Hub's claims against
the minority partner including the $3.0 million balance in minority interest.
The acquisition resulted in goodwill of approximately $7.0 million which was
recorded in the three months ended September 30, 2002.
NOTE 4. EARNINGS (LOSS) PER SHARE
The following is a reconciliation of the Company's Earnings (Loss) per
Share (in thousands except per share amounts):
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
----------------------------- -----------------------------
Per-Share Per-Share
INCOME SHARES AMOUNT LOSS SHARES AMOUNT
-------- -------- ----------- -------- --------- ----------
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) available to
common stockholders $1,379 7,709 $0.18 $(1,112) 7,709 $(0.14)
------ ----- ----- -------- ----- ---------
EFFECT OF DILUTIVE SECURITIES
Stock options - - - - - -
------ ----- ----- -------- ----- ---------
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) available to
common stockholders
plus assumed exercises $1,379 7,709 $0.18 $(1,112) 7,709 $(0.14)
------ ----- ----- -------- ----- ---------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
----------------------------- ----------------------------
Per-Share Per-Share
INCOME SHARES AMOUNT LOSS SHARES AMOUNT
-------- -------- ----------- -------- -------- ----------
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) available to
common stockholders $ 92 7,709 $0.01 $ (723) 7,709 $(0.09)
-------- ----- ----- ------- ----- -------
EFFECT OF DILUTIVE SECURITIES
Stock options - 5 - - - -
-------- ----- ----- ------- ----- -------
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) available to
common stockholders
plus assumed exercises $ 92 7,714 $0.01 $ (723) 7,709 $(0.09)
-------- ----- ----- ------- ----- -------
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------
2002 2001
------------------- ------------------
Building and improvements $ 57 $ 57
Leasehold improvements 1,306 2,126
Computer equipment and software 53,234 49,373
Furniture and equipment 7,692 7,542
Transportation equipment and automobiles 2,135 3,690
-------------------- ------------------
64,424 62,788
Less: Accumulated depreciation and amortization (28,598) (23,690)
-------------------- ------------------
PROPERTY AND EQUIPMENT, net $ 35,826 $ 39,098
==================== ==================
8
NOTE 6. DEBT
The Company's outstanding debt is as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
---------------- ----------------
2002 2001
---------------- ----------------
Bank line of credit $ 30,000 $ 19,000
Term notes, with quarterly payments of $2,000,000 with a balloon payment
payment of $19,000,000 due March 31, 2004; interest is due quarterly at a
floating rate based upon LIBOR (London Interbank Offered Rate) or Prime rate.
At September 30, 2002 and December 31, 2001, the
weighted average interest rate was 4.80% and 4.66%, respectively 29,000 35,000
Notes, mature on June 25, 2009 with annual payments of $10,000,000 commencing on
June 25, 2005; interest is paid quarterly at a fixed rate
of 9.14% during 2002 and 2001 50,000 50,000
Capital lease obligations, collateralized by certain equipment
73 113
---------------- ----------------
Total long-term debt 109,073 104,113
Less current portion (8,046) (8,054)
---------------- ----------------
$ 101,027 $ 96,059
---------------- ----------------
Fair value approximates book value at the balance sheet dates.
On October 15, 2002, amendments to the Company's credit and note
agreements were executed to modify the fixed charge coverage ratio, minimum
earnings before interest, taxes, depreciation, amortization and minority
interest and the cash flow leverage ratio for all periods subsequent to December
31, 2002. In addition, the capital expenditure limitation was reduced from $15.0
million to $9.0 million for the year ended December 31, 2003. Further, effective
October 15, 2002, the loans are secured by substantially all assets of the
Company. The Company was in compliance with its debt covenants, as amended, as
of September 30, 2002.
NOTE 7. RENT EXPENSE AND USER CHARGES
Rent expense included in selling, general and administrative expense is
$3.8, $3.8, $11.4 and $11.2 million for the three months ended September 30,
2002 and 2001 and the nine months ended September 30, 2002 and 2001,
respectively. Hub also incurs user charges for its use of a fleet of dedicated
containers which are included in transportation costs. Such charges included in
transportation costs are $6.9, $7.3, $20.8 and $23.1 million for the three
months ended September 30, 2002 and 2001 and the nine months ended September 30,
2002 and 2001, respectively.
NOTE 8. RECENT ACCOUNTING PRONOUNCEMENT
On June 30, 2001, the Financial Accounting Standards Board issued
Statement 142. Under Statement 142, goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. The Company adopted Statement
142 as of January 1, 2002.
In connection with SFAS 142, the Company completed the first step of
transitional goodwill impairment testing. This transitional testing used
discounted cash flow and market capitalization methodologies to determine a fair
market value for the reporting unit. The results of the transitional testing
indicated no impairment.
The transitional impairment testing is based upon the Company's
estimates of the value of the reporting unit, future operating performance and
discount rates. Should the estimates differ materially from actual results, the
Company may be required to record impairment charges in future periods. The
9
Company will continue to test the value of its goodwill for any impairment at
least annually and impairment, if any, will be recorded as expense in the period
of impairment.
The following table presents net income (loss) for 2002 in comparison
to 2001 exclusive of amortization expense recognized in the previous year
related to goodwill which will no longer be amortized. Amounts are in thousands
except per share information:
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------
2002 2001
----------------- ----------------
Net income (loss) as reported $ 1,379 $ (1,112)
Add back amortization of goodwill, net of tax - 846
----------------- ----------------
Adjusted net income (loss) 1,379 (266)
================= ================
Basic and diluted earnings (loss) per share, as reported 0.18 (0.14)
Add back amortization of goodwill, net of tax - 0.10
----------------- ----------------
Adjusted basic and diluted earnings (loss) per share $ 0.18 $ (0.04)
================= ================
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2002 2001
----------------- ----------------
Net income (loss) as reported $ 92 $ (723)
Add back amortization of goodwill, net of tax - 2,540
----------------- ----------------
Adjusted net income 92 1,817
================= ================
Basic and diluted earnings (loss) per share, as reported 0.01 (0.09)
Add back amortization of goodwill, net of tax - 0.33
----------------- ----------------
Adjusted basic and diluted earnings per share $ 0.01 $ 0.24
================= ================
NOTE 9. CONTINGENCIES
On February 19, 2002, a purported class action lawsuit was filed by
Riggs Partners, LLC in the United States District Court for the Northern
District of Illinois, Eastern Division. The complaint names as defendants the
Company, the Company's officers and former officers that signed the Company's
periodic reports filed with the Securities and Exchange Commission and the
Company's former auditors. The complaint alleges that the defendants violated
Section 10 (b) and Rule 10b-5 there under and section 20 (a) of the Securities
Exchange Act of 1934 by filing or causing to be filed with the Securities and
Exchange Commission periodic reports that contained inaccurate financial
statements. The complaint seeks unspecified compensatory damages, reimbursement
of reasonable costs and expenses, including counsel fees and expert fees, and
such other relief as the court deems proper. On June 7, 2002, the plaintiffs
filed a consolidated amended complaint. On July 18, 2002, the Company and is
officers and former officers filed a motion to dismiss the amended complaint in
its entirety. The Company's former auditors also filed a motion to dismiss the
amended complaint. On October 23, 2002, the federal district court granted the
Company's motion to dismiss the complaint in its entirety for failing to allege
facts sufficient to state a claim. The court also granted the motion of the
Company's former auditors. The Court's order requires plaintiffs to file any
amended complaint by November 22, 2002. If no further claims are filed, the
lawsuit will terminate. If any further claims are filed, the Company will
continue to vigorously defend itself and its officers. An adverse judgment based
on comparable claims, if filed, could have a material adverse effect on the
Company's financial position and results of operations.
10
HUB GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING ADJUSTMENT
In the fourth quarter of 2001, the Company recorded adjustments which
resulted in a decline of $0.7 million in net income to properly report the
annual results for the year as a result of accounting irregularities at the
Company's 65% owned subsidiary, Hub Group Distribution Services ("Hub
Distribution"). The Company was unable to determine in which quarters in 2001
the adjustments should have been made and the amount to be recorded in each
quarter. Consequently, the results for the three months ended and nine months
ended September 30, 2002 are not comparable to the results for the three months
and nine months ended September 30, 2001.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUE
Revenue for Hub Group, Inc. increased 10.4% to $356.7 million in 2002
from $323.0 million in 2001. Intermodal revenue increased 13.3% and truckload
brokerage revenue increased 6.3% over 2001 due primarily to increased volume.
Supply chain solutions logistics services revenue increased 22.7% to $27.4
million in 2002 from $22.3 million in 2001 as a result of adding new customers
and increased business from existing customers. HGDS's revenue decreased 17.0%
to $20.7 million in 2002 from $25.0 million in 2001. HGDS experienced a
significant revenue decline primarily due to the loss of a large logistics
customer.
GROSS MARGIN
Gross margin decreased to $42.3 million in 2002 from $44.6 million in
2001. As a percent of revenue, gross margin decreased to 11.9% from 13.8% in
2001. The decrease in gross margin as a percent of revenue is due primarily to
lower intermodal margins due to customer mix, price competition and higher
transportation costs than in 2001.
SALARIES AND BENEFITS
Salaries and benefits decreased 0.7% to $23.3 million in 2002 from
$23.5 million in 2001. As a percentage of revenue, salaries and benefits
decreased to 6.5% from 7.3% in 2001. The decrease is attributed primarily to a
decrease in both headcount and incentive compensation, partially offset by
increased costs for health benefits.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased 30.4% to $11.8
million in 2002 from $17.0 million in 2001. As a percentage of revenue, these
expenses decreased to 3.3% in 2002 from 5.3% in 2001. This decrease is primarily
attributed to a $4.7 million write-off of a receivable from a Korean steamship
line customer in 2001.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment increased 23.5%
to $2.7 million in 2002 from $2.1 million in 2001. This expense as a percentage
of revenue remained constant at 0.7%. The increase in depreciation and
amortization is due to the software applications placed into service throughout
2001.
11
AMORTIZATION OF GOODWILL
As of January 1, 2002, the Company adopted Financial Accounting
Standards Board Statement No. 142, "Goodwill and Other Intangible Assets
("Statement 142"). Under Statement 142, goodwill and intangible assets that have
indefinite useful lives are no longer amortized. Accordingly, amortization of
goodwill decreased to $0.0 million in 2002 from $1.4 million in 2001.
OTHER INCOME (EXPENSE)
Interest expense increased 4.7% to $2.5 million in 2002 from $2.4
million in 2001. The increase in interest expense is due primarily to increased
interest relating to the deferred compensation plan.
Interest income decreased 76.2% to $45,000 in 2002 from $189,000 in
2001 primarily as a result of lower customer finance charges.
MINORITY INTEREST
As a result of the Company purchasing the minority partner's interest
in August of 2002, the minority interest decreased to $0.0 million in 2002 from
$0.3 million in 2001. Pursuant to the HGDS Partnership Agreement, each of the
partners had a legal obligation to the partnership for any deficit balance in
their respective capital accounts. Accordingly, there was a debit balance
reflected in minority interest in the accompanying condensed consolidated
balance sheets related to the minority partner's deficit capital account balance
of approximately $2.5 million at December 31, 2001. Management believed that the
balance in the minority account was collectable at December 31, 2001. Hub had a
legal right to pursue the minority partner for the deficit balance in the
capital account. In August of 2002, the Company entered into a settlement
agreement and release with the minority partner that resulted in the
relinquishment of the minority partner's 35% interest in HGDS and release of the
minority partner's claims against the Company in exchange for $4.0 million in
cash and release of Hub's claims against the minority partner including the $3.0
million balance in minority interest. The acquisition resulted in goodwill of
approximately $7 million.
INCOME TAX PROVISION
The income tax provision increased to $0.8 million in 2002 compared to
a benefit of $0.8 million in 2001. The Company recorded income taxes using an
effective rate of 41.0% in 2001 and 36.5% in 2002. The rate changed because of
changes in permanent differences between book and taxable income (loss) and the
impact of state net operating losses.
NET INCOME (LOSS)
Net income increased to $1.4 million in 2002 from a net loss of $1.1
million in 2001.
EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per common share increased to $0.18
in 2002 from a loss of $0.14 in 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUE
Revenue for Hub Group, Inc. increased 0.3% to $989.6 million in 2002
from $987.0 million in 2001. Intermodal revenue decreased 0.3% from 2001. The
decline is primarily attributed to a $32.8 million reduction in demand from the
Company's steamship customers when comparing the first quarter of 2002 with the
first quarter of 2001. As previously disclosed, these customers ceased doing
business with the Company early in the second quarter of 2001. Without the
12
decrease in revenue related to the loss of the steamship customers, intermodal
revenue would have increased 4.6%. Truckload brokerage revenue increased 9.9%
from 2001 primarily due to increased volume. Revenue from supply chain solutions
logistics services increased 24.2% to $79.9 million in 2002 from $64.4 million
in 2001 as a result of adding new customers and increased business from existing
customers. Hub Group Distribution Services' revenue decreased 31.2% to $59.0
million in 2002 from $85.7 million in 2001 primarily as a result of lower demand
in the installation business during the first part of the year and the loss of a
large logistics customer.
GROSS MARGIN
Gross margin decreased to $119.9 million in 2002 from $135.9 million in
2001. As a percent of revenue, gross margin decreased to 12.1% from 13.8% in
2001. The decrease in gross margin as a percent of revenue is primarily
attributed to Hub Distribution experiencing lower volumes and lower margins in
the installation business. Intermodal gross margin as a percentage of revenue
decreased due to changes in customer mix, competitive pricing, and increased
transportation costs as compared to 2001. During the three months ended March
31, 2002, the Company revised its estimate of accrued transportation costs
resulting in an increase in pretax income of approximately $2.8 million.
SALARIES AND BENEFITS
Salaries and benefits decreased 2.0% to $70.2 million in 2002 from
$71.7 million in 2001. As a percentage of revenue, salaries and benefits
decreased to 7.1% from 7.3% in 2001. The decrease is attributed primarily to a
decrease in both headcount and incentive compensation, partially offset by
increased costs for health benefits.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased 15.9% to $34.9
million in 2002 from $41.5 million in 2001. As a percentage of revenue, these
expenses decreased to 3.5% in 2002 from 4.2% in 2001. This decrease is primarily
attributed to a $4.7 million write-off of a receivable from a Korean steamship
line customer in 2001. In the first nine months of 2002, the Company incurred a
$1.4 million expense for professional fees related to the investigation and
restatement at HGDS.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization decreased 3.2% to $7.9 million in 2002
from $8.1 million in 2001. This expense as a percentage of revenue remained
constant at 0.8%. Depreciation expense in the prior year included $1.5 million
of higher depreciation expense due primarily to a reduction in estimated useful
lives of various assets. This expense as a percentage of revenue increased to
0.8% in 2002 from 0.7% in 2001. The expense increased as a result of new
software applications placed in service throughout 2001.
AMORTIZATION OF GOODWILL
Amortization of goodwill decreased to $0.0 million in 2002 from $4.3
million in 2001. As of January 1, 2002, the Company adopted Financial Accounting
Standards Board Statement No. 142, "Goodwill and Other Intangible Assets
("Statement 142"). Under Statement 142, goodwill and intangible assets that have
indefinite useful lives are no longer amortized.
IMPAIRMENT OF PROPERTY AND EQUIPMENT
The $3.4 million impairment charge in 2001 was due to Hub
Distribution's exit from its initiative surrounding the home delivery of large
box items purchased over the internet.
OTHER INCOME (EXPENSE)
Interest expense decreased 6.2% to $7.3 million in 2002 from $7.8
million in 2001. The decrease in interest expense is due primarily to carrying a
lower average debt balance and lower interest rates this year as compared to the
prior year.
13
Interest income decreased 68.2% to $166,000 in 2002 from $522,000 in
2001 primarily as result of lower finance charges.
MINORITY INTEREST
The minority interest was a $0.5 benefit in 2002 compared with a $0.7
million charge in 2001.
INCOME TAX PROVISION
The income tax provision increased to $0.4 million in 2002 compared to
a benefit of $0.5 million in 2001. The Company recorded income taxes using an
effective rate of 41.0% in 2001 and 39.9% in 2002. The rate changed because of
changes in permanent differences between book and taxable income (loss), the
impact of state net operating losses and as a result of the Company recording
the minority partner's portion of the loss for HGDS during the quarter ended
June 30, 2002.
NET INCOME (LOSS)
Net income increased to $0.1 million in 2002 from a net loss of $0.7
million in 2001.
EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per common share increased to $0.01
in 2002 from a loss of $0.09 in 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board issued
Statement 142. Under Statement 142, goodwill and intangible assets that have
indefinite useful lives are no longer amortized but rather will be tested at
least annually for impairment. Intangible assets that have finite useful lives
will continue to be amortized over their useful lives. The Company adopted
Statement 142 as of January 1, 2002.
In connection with SFAS 142, the Company completed the first step of
transitional goodwill impairment testing. The transitional testing used
discounted cash flow and market capitalization methodologies to determine a fair
market value for the reporting unit. The results of the transitional testing
indicated no impairment.
The transitional testing is based upon the Company's estimates of the
value of the reporting unit, future operating performance and discount rates.
Should the estimates differ materially from actual results, the Company may be
required to record impairment charges in future periods. The Company will
continue to test the value of its goodwill for any impairment at least annually
and impairment, if any, will be recorded as expense in the period of impairment.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and capital expenditures through
cash flows from operations and bank borrowings.
Cash provided by operations for the nine months ended September 30,
2002 was approximately $3.7 million which resulted primarily from net income
from operations before non-cash charges of $7.9 million and a net decrease in
working capital $4.3 million.
Net cash used in investing activities for the nine months ended
September 30, 2002 was $8.6 million and relates to $4.6 million of capital
expenditures as well as the $4.0 million purchase of the minority interest in
HGDS. The capital expenditures were primarily related to enhancing the Company's
operating system and various software applications.
14
The net cash provided by financing activity for the nine months ended
September 30, 2002 was $5.0 million. This is comprised of $11.0 million of
borrowings on the Company's line of credit and $6.0 million of scheduled
payments on the Company's term debt and capital leases.
The Company maintains a multi-bank credit facility. The facility is
comprised of term debt and a revolving line of credit. As of September 30, 2002,
there was $29.0 million of outstanding term debt and $30.0 million outstanding
and $19.0 million unused and available under the line of credit. Borrowings
under the revolving line of credit have a five-year term that began on April 30,
1999, with a floating interest rate based upon the LIBOR (London Interbank
Offered Rate) or Prime Rate. The term debt has quarterly principal payments of
$2,000,000 with a balloon payment of $19.0 million due on March 31, 2004.
The Company maintains $50.0 million of private placement debt (the
"Notes"). These Notes have an eight-year average life. Interest is paid
quarterly. These Notes mature on June 25, 2009, with annual principal payments
of $10.0 million commencing June 25, 2005.
On October 15, 2002, amendments to the Company's credit and note
agreements were executed to modify the fixed charge coverage ratio, minimum
earnings before interest, taxes, depreciation, amortization and minority
interest and the cash flow leverage ratio for all periods subsequent to December
31, 2002. In addition, the capital expenditure limitation was reduced from $15.0
million to $9.0 million for the year ended December 31, 2003. Further, effective
October 15, 2002, the loans are secured by substantially all assets of the
Company. The Company was in compliance with its debt covenants, as amended, as
of September 30, 2002.
OUTLOOK, RISKS AND UNCERTAINTIES
In October 2002, the Company announced an expense reduction program,
which includes a reduction in force. The costs associated with this program will
be recorded during the three month period ending December 31, 2002 when the
program is implemented.
Due to the lockout of West Coast dock workers during the first part of
October, a shortened time frame for moving imported merchandise into place will
occur during the fourth quarter 2002. The Company believes that any diversion
from land based intermodal transportation or future labor disputes or residual
impact from the lockout could have a negative impact on volume and could have a
material adverse affect on the Company's results of operations.
Except for historical data, the information contained in this Quarterly
Report constitutes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 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. Forward-looking
statements in this report include, but are not limited to, those contained in
this "Outlook, Risks and Uncertainties" section regarding expectations, hopes,
beliefs, estimates, intentions or strategies regarding the future. The Company
assumes no liability to update any such forward-looking statements. In addition
to those mentioned elsewhere in this section, such risks and uncertainties
include the impact of competitive pressures in the marketplace, including the
entry of new, web-based competitors and direct marketing efforts by the
railroads, the degree and rate of market growth in the intermodal, brokerage and
logistics markets served by the Company, changes in rail and truck capacity,
further consolidation of rail carriers, deterioration in relationships with
existing rail carriers, rail service conditions, changes in governmental
regulation, adverse weather conditions, fuel shortages, changes in the cost of
services from rail, drayage and other vendors and fluctuations in interest
rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that cash to be provided by operations, cash
available under its line of credit and the Company's ability to obtain
additional credit will be sufficient to meet the Company's short-term working
capital and capital expenditure needs. The Company believes that the
aforementioned items are sufficient to meet its anticipated long-term working
15
capital, capital expenditure and debt repayment needs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest
rates which may adversely affect its results of operations and financial
condition. The majority of the Company's debt is at a fixed interest rate.
The Company had an interest rate swap agreement designated as a hedge
on a portion of the Company's variable rate debt that expired on September 30,
2002.
CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures were effective. No
significant changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of this
evaluation.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On February 19, 2002, a purported class action lawsuit was
filed by Riggs Partners, LLC in the United States District
Court for the Northern District of Illinois, Eastern Division.
The complaint names as defendants the Company, the Company's
officers and former officers that signed the Company's
periodic reports filed with the Securities and Exchange
Commission and the Company's former auditors. The complaint
alleges that the defendants violated Section 10 (b) and Rule
10b-5 there under and section 20 (a) of the Securities
Exchange Act of 1934 by filing or causing to be filed with the
Securities and Exchange Commission periodic reports that
contained inaccurate financial statements. The complaint seeks
unspecified compensatory damages, reimbursement of reasonable
costs and expenses, including counsel fees and expert fees,
and such other relief as the court deems proper. On June 7,
2002, the plaintiffs filed a consolidated amended complaint.
On July 18, 2002, the Company and is officers and former
officers filed a motion to dismiss the amended complaint in
its entirety. The Company's former auditors also filed a
motion to dismiss the amended complaint. On October 23, 2002,
the federal district court granted the Company's motion to
dismiss the complaint in its entirety for failing to allege
facts sufficient to state a claim. The court also granted the
motion of the Company's former auditors. The Court's order
requires plaintiffs to file any amended complaint by November
22, 2002. If no further claims are filed, the law suit will
terminate. If any further claims are filed, the Company will
continue to vigorously defend itself and its officers. An
adverse judgment based on comparable claims, if filed, could
have a material adverse effect on the Company's financial
position and results of operations.
Item 6. Exhibits.
A list of exhibits included as part of this Report is set
forth in the Exhibit Index appearing elsewhere herein by this
reference.
17
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly authorized this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUB GROUP, INC.
DATE: November 5, 2002 /S/ THOMAS M. WHITE
-------------------
Thomas M. White
Senior Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATE
I, David P. Yeager, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Hub Group, Inc.;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 5, 2002
/S/ DAVID P. YEAGER
-----------------------------------
Name: David P. Yeager
Title: Chief Executive Officer
CERTIFICATE
I, Thomas M. White, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Hub Group, Inc.;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 5, 2002
/S/ THOMAS M. WHITE
--------------------------------------
Name: Thomas M. White
Title: Chief Financial Officer
EXHIBIT INDEX
Exhibit No.
10.24 Amendment to $100 million Credit Agreement among the Registrant, Hub
City Terminals, Inc. and Harris Trust and Savings Bank dated
October 15, 2002.
10.25 Amendment to $50 million Note Purchase Agreement among the Registrant,
Hub City Terminals, Inc. and various purchasers dated October 15, 2002.
10.26 Security Agreement among the Registrant, Hub City Terminals, Inc.,
Harris Trust and Savings Bank and various Note Holders dated
October 15, 2002.
99.2 Section 906 Certification.