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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, 2003 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)

3050 Highland Parkway, Suite 100
Downers Grove, Illinois 60515
(Address, including zip code, of principal executive offices)
(630) 271-3600
(Registrant’s telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __

         Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No X

        On November 4, 2003, the registrant had 7,063,250 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.

HUB GROUP, INC.

INDEX

Page                                        

                                       PART I. Financial Information:

HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

        See notes to unaudited condensed consolidated financial statements.

HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2003
(in thousands, except shares)

See notes to unaudited condensed consolidated financial statements.

HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

        See notes to unaudited condensed consolidated financial statements.

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.

        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, 2003 and 2002.

        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, 2002. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year due partially to seasonality.

        Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 2. Revenue Recognition

        The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition.” Accordingly, revenue is recognized at the time 1) persuasive evidence of an arrangement exists, 2) services have been rendered, 3) the sales price is fixed and determinable and 4) collectibility is reasonably assured. In accordance with EITF 91-9, revenue and related transportation costs are recognized based on relative transit time. Further, the Company reports its revenue on a gross basis in accordance with the criteria in EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” The Company is the primary obligor as the Company is responsible for providing the service desired by the customer. The customer views the Company as responsible for fulfillment including the acceptability of the service. Services requirements may include, for example, on-time delivery, handling freight loss and damage claims, setting up appointments for pick up and delivery and tracing shipments in transit. The Company has discretion in setting sales prices and as a result, the amount the Company earns varies. In addition, the Company has the discretion to select its vendors from multiple suppliers for the services ordered by customers. Finally, the Company has credit risk for its receivables. These three factors, discretion in setting prices, discretion in selecting vendors and credit risk, further support reporting revenue on a gross basis.

NOTE 3. Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 first quarter of 2002, the Company revised its estimate for accrued transportation costs resulting in an increase in pretax income of approximately $2.8 million in the quarter.

NOTE 4. Restructuring Charges

        In the fourth quarter of 2002, the Company recorded a $458,000 liability for the remaining lease obligation related to a closed facility in New Jersey. Approximately $321,000 of the lease obligation remains as of September 30, 2003 as lease payments made during the nine-month period ended September 30, 2003 were $137,000.

        During the quarter ended June 30, 2003, the Company recorded a liability of $180,000 for the estimated remaining lease obligation related to a facility in Detroit. Approximately $150,000 of the lease obligation remains as of September 30, 2003 as lease payments made during the three-month period ended September 30, 2003 were $30,000.

        During the three months ended September 30, 2003, the Company recorded a severance charge for 98 employees of $492,000. During the nine months ended September 30, 2003, the Company recorded a severance charge for 149 employees of $784,000. $693,000 of these severance payments were made as of September 30, 2003.

NOTE 5.      Stock Based Compensation

        Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company grants options at fair market value and therefore recognizes no compensation expense.

        The following table illustrates the effect on the net income and net income per share for the quarters ended September 30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002 if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation (in thousands, except per share data):

        The above table is based upon the valuation of option grants using the Black-Scholes pricing model for traded options with assumed risk-free interest rates of 3.7% and 3.4% for 2003 and 2002, respectively, stock price volatility factor of 40.0% for both 2003 and 2002, and an expected life of the options of six years. Using the foregoing assumptions, the calculated weighted-average fair value of options granted during the three months ended September 30, 2003 and 2002 was $4.69 and $4.26, respectively and for the nine months ended September 30, 2003 and 2002 was $2.60 and $4.00, respectively. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, in management’s opinion, the model does not necessarily provide a reliable single measure of the fair value of its employee stock options.

        The pro forma disclosure is not likely to be indicative of pro forma results which may be expected in future periods because of the fact that options vest over several years, pro forma compensation expense is recognized as the options vest and additional awards may also be granted.

NOTE 6.      Earnings Per Share

        The following is a reconciliation of the Company’s earnings per share:

        Stock options that were not included in diluted weighted-average shares because they would have been anti-dilutive were 731,550 and 1,037,900 for the three months ending September 30, 2003 and 2002, respectively. Stock options that were not included in diluted weighted average shares because they would have been anti-dilutive were 881,217 and 982,483 for the nine months ended September 30, 2003 and 2002, respectively.

NOTE 7.      Property and Equipment

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

        During the nine months ended September 30, 2003, the Company wrote-off the cost and accumulated depreciation associated with fully depreciated retired assets.

NOTE 8.      Debt

The Company’s outstanding debt is as follows (in thousands):

        The Company had $38.0 million and $24.1 million of available borrowings under the revolving line of credit at September 30, 2003 and December 31, 2002, respectively. The Company was in compliance with its debt covenants at September 30, 2003.

NOTE 9.      Income Taxes

        The provision for income taxes for the nine months ended September 30, 2003 includes $800,000 associated with the write off of deferred tax assets related to the Illinois Research and Development credit. On June 20, 2003, the governor of Illinois signed legislation that eliminates the Illinois Research and Development credit and the use of any credit carryforwards for any year ending on or after December 31, 2003.

NOTE 10.      Contingencies

        In 2002, Quality Services of New Jersey, LLC (“QSNJ”), a Company-owned drayage operation, closed its operations in Bensalem, Pennsylvania and Harrison, New Jersey. Two unions filed unfair labor practice charges with the National Labor Relations Board (“NLRB”) alleging that QSNJ, Hub Group, Inc., Hub Group New York-New Jersey, LLC and Hub City Terminals, Inc. violated various federal labor laws in connection with closing these operations. The NLRB conducted an investigation and, on April 30, 2003, issued a complaint with respect to some of the allegations. The NLRB dismissed other allegations contained in the charges.

        In September 2003, the Company reached an agreement with both unions completely settling this matter. In return for a payment, which is included in the Company’s selling, general and administrative expense for the nine months ended September 30, 2003, the complaint and the charges against the Company will be dismissed.

        In addition, the Company is a party to litigation incident to its business, including claims for freight lost or damaged in transit, improperly shipped or improperly billed. Some of the lawsuits to which the Company is party are covered by insurance and are being defended by the Company’s insurance carriers. Some of the lawsuits are not covered by insurance and are being defended by the Company. Management does not believe that the outcome of this litigation will have a materially adverse effect on the Company’s financial position.

NOTE 11.      Subsequent Event

        In October, the Company’s Board of Directors authorized the Company to purchase up to 500,000 shares of its Class A Common Stock from time to time. The Company expects to use a portion of these shares to fund certain restricted stock grants. On October 29, 2003, the Company granted 155,850 shares of restricted stock to certain employees.

HUB GROUP, INC.

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

RESULTS OF OPERATIONS

Three Months Ended September 30, 2003 Compared to the Three Months Ended September 30, 2002

Revenue

        Revenue for Hub Group, Inc. (the “Company”) decreased 4.8% to $339.5 million in 2003 from $356.7 million in 2002. Intermodal revenue decreased 7.0% to $245.3 million from $263.9 million in 2002 due primarily to a decrease in volume. Truckload brokerage revenue decreased 7.6% to $49.5 million from $53.6 million in 2002 due primarily to a strategic decision to support logistics customer growth with traditional brokerage resources. Supply chain solutions logistics revenue increased 98.4% to $36.7 million from $18.5 million in 2002 due primarily to increased volume. In addition, Hub Group Distribution Services (“HGDS”) revenue decreased 61.3% to $8.0 million in 2003 from $20.7 million in 2002 due primarily to the decrease in the installation business and transferring business to other locations in 2002.

        Certain prior year amounts have been reclassified to conform to the current year presentation.

Gross Margin

        Gross margin increased 2.8% to $43.5 million in 2003 from $42.3 million in 2002. As a percent of revenue, gross margin increased to 12.8% in 2003 from 11.9% in 2002. The increase in margin as a percent of revenue is primarily due to changes in customer mix and improvements in purchasing transportation services.

Salaries and Benefits

        Salaries and benefits decreased to $22.5 million in 2003 from $23.3 million in 2002. As a percentage of revenue, salaries and benefits increased to 6.6% from 6.5% in 2002 due primarily to a decrease in revenue.

Selling, General and Administrative

        Selling, general and administrative expenses decreased to $11.0 million in 2003 from $11.8 million in 2002. The selling, general and administrative expense as a percentage of revenue is 3.3%, the same as 2002. The decrease in selling, general and administrative expenses is primarily attributed to a decrease in equipment leases, automotive, meals and entertainment expenses, and bad debt expense partially offset by an increase in insurance expense. Equipment lease expense decreased by approximately $0.5 million primarily due to equipment lease buy-outs. Automotive and meals and entertainment expense decreased by approximately $0.3 million. Bad debt expense decreased approximately $0.3 million primarily due to fewer customer bankruptcies in 2003 versus 2002. Insurance expense increased approximately $0.3 million due to increased premiums.

Depreciation and Amortization of Property and Equipment

        Depreciation and amortization remained flat at $2.7 million in 2003 and 2002. This expense as a percentage of revenue is 0.8% in 2003 and 0.7% in 2002.

Other Income (Expense)

        Interest expense decreased to $1.9 million in 2003 from $2.5 million in 2002. The decrease in interest expense is due primarily to carrying a lower average debt balance this year as compared to the prior year.

Provision for Income Taxes

        The provision for income taxes increased to $2.5 million in 2003 compared to a tax provision of $0.8 million in 2002. The increase in the effective rate is primarily due to tax law changes.

Net Income

        Net income increased to $2.9 million in 2003 compared to $1.4 million in 2002.

Earnings Per Common Share

        Basic and diluted earnings per common share increased to $0.37 in 2003 from $0.18 in 2002.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September 30, 2002

Revenue

        Revenue for the Company increased 1.1% to $1,000.4 million in 2003 from $989.6 million in 2002. Intermodal revenue decreased 1.1% to $713.2 million from $721.4 million in 2002 due to a decrease in volume partially offset by price increases due to increased transportation costs. Truckload brokerage revenue decreased 6.8% to $146.7 million from $157.4 million in 2002 due primarily to a strategic decision to support logistics customer growth with traditional brokerage resources. Supply chain solutions logistics revenue increased 95.2% to $101.1 million from $51.8 million in 2002 due primarily to increased volume from both new and existing customers. In addition, HGDS’ revenue decreased 33.2% to $39.4 million in 2003 from $59.0 million in 2002 due to transferring business to other locations in 2002 and the loss of a logistics customer offset by an increase in the installation business.

        Certain prior year amounts have been reclassified to conform to the current year presentation.

Gross Margin

        Gross margin increased to $129.0 million in 2003 from $119.9 million in 2002. As a percent of revenue, gross margin increased to 12.9% in 2003 from 12.1% in 2002. The increase in margin as a percent of revenue is primarily due to changes in customer mix, competitively pricing increased costs and improvements in purchasing transportation services. During the first quarter of 2002, the Company revised its estimate of accrued transportation costs resulting in an increase in gross margin of approximately $2.8 million in the quarter.

Salaries and Benefits

        Salaries and benefits decreased to $68.7 million in 2003 from $70.2 million in 2002. As a percentage of revenue, salaries and benefits decreased to 6.9% from 7.1% in 2002 due primarily to a decrease in headcount and an increase in revenue.

Selling, General and Administrative

         Selling, general and administrative expenses remained constant at $34.9 million in 2003 and 2002. The selling, general and administrative expense as a percentage of revenue is 3.5%, the same as in 2002. The selling, general and administrative expense remained flat primarily due to an increase in insurance and outside service expenses offset by decreases in automotive, meals and entertainment, equipment lease expense and temporary labor services expense. Insurance expense increased approximately $0.8 million due to increased premiums. Outside services expense increased approximately $0.7 million related to litigation involving various matters including disputes with three former Hub Presidents, a former customer and the NLRB. Automotive and meals and entertainment expenses decreased by $0.7 million. Equipment lease expense decreased by approximately $0.5 million primarily due to equipment lease buy-outs. Temporary labor services decreased by approximately $0.4 million due to staffing efficiencies.

Depreciation and Amortization of Property and Equipment

        Depreciation and amortization decreased to $7.9 million in 2003 from $8.0 million in 2002. This expense as a percentage of revenue in 0.8%, the same as in 2002.

Other Income (Expense)

        Interest expense decreased to $6.0 million in 2003 from $7.3 million in 2002. The decrease in interest expense is due primarily to carrying a lower average debt balance this year as compared to the prior year.

        Interest income decreased to $118,000 in 2003 from $166,000 in 2002 primarily as a result of lower customer finance charges.

Minority Interest

        Minority interest was a $0.5 million benefit in 2002. Minority interest represented the 35% interest in HGDS prior to the Company’s purchase of this interest in August 2002.

Provision for Income Taxes

        The provision for income taxes increased to $5.9 million in 2003 compared to a tax benefit of $0.4 million in 2002. The increase in the effective rate is primarily due to the write-off of $0.8 million of deferred tax assets associated with the Illinois Research and Development tax credit carryforwards which were eliminated by Illinois law enacted on June 20, 2003.

Net Income

        Net income increased to $5.8 million in 2003 compared to $0.1 million in 2002.

Earnings Per Common Share

        Basic earnings per common share increased to $0.75 in 2003 from $0.01 in 2002. Diluted earnings per common share increased to $0.74 in 2003 from $0.01 in 2002.

LIQUIDITY AND CAPITAL RESOURCES

        The Company has funded its operations and capital expenditures through cash flows from operations and bank borrowings.

        Cash provided by operating activities for the nine months ended September 30, 2003, was approximately $23.2 million, compared to $3.7 million for the nine months ended September 30, 2002.

        Net cash used in investing activities for the nine months ended September 30, 2003, was $3.2 million and related to capital expenditures principally made to enhance the Company’s information system capabilities. Net cash used in investing activities for the nine months ended September 30, 2002 was $8.6 million.

        The payments on the revolver of $14.0 million and scheduled payments on the Company’s term debt and capital leases of $6.0 million are included in net cash used in financing activities for the nine months ended September 30, 2003.

        The Company does not believe its working capital deficit impairs its ability to meet obligations as they become due. The Company had $38.0 million and $24.1 million of available borrowings under the revolving line of credit at September 30, 2003 and December 31, 2002, respectively.

OUTLOOK, RISKS AND UNCERTAINTIES

        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 and highway transportation 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, the situation in the Middle East and fluctuations in interest rates.

Revenue and Selling, General and Administrative Expenses

        HGDS’ largest customer, for which HGDS installs point-of-purchase displays, has notified the Company of a significant change in its strategy related to its displays. This has resulted in a significant decrease in revenue for this customer during the third quarter and the fourth quarter to date. Should this customer continue with this strategy, management believes the revenue for this customer will continue at significantly lower levels than those experienced in the second half of 2002 which could negatively impact gross margin and profitability. As a result of the decrease in revenue, the Company implemented a cost reduction program at HGDS. Related severance costs were approximately $196,000 and were recorded during the third quarter of 2003. The Company expects that an HGDS facility in Michigan will be closed during the first quarter of 2004 (at which time the business handled by the Michigan location will be transferred to the Lisle facility), and expects that related restructuring charges of approximately $340,000 may be recorded during the first quarter of 2004.

        The Company expects that supply chain solutions logistics revenue will continue to increase; however, the Company estimates that the growth rate may not continue at the same level that was experienced during the first nine months of 2003.

        Certain railroads are experiencing delays which could adversely affect revenue during the fourth quarter of 2003.

        The Company expects that the wild fires in the west, which have caused service delays, may negatively affect revenue during the fourth quarter of 2003.

Depreciation and Amortization of Property and Equipment

        Management estimates that depreciation and amortization of property and equipment will increase slightly throughout the remainder of the year due primarily to lease buy-outs.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company is exposed to market risk related to changes in interest rates on its bank line of credit and term notes which may adversely affect its results of operations and financial condition. The Company seeks to minimize the risk from interest rate volatility through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for trading purposes.

CONTROLS AND PROCEDURES

        As of September 30, 2003, 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 as of September 30, 2003. 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.

PART II.      Other Information

        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.

EXHIBIT INDEX

Exhibit No.           Description