Attached files
| file | filename |
|---|---|
| EX-31.1 - HUB GROUP CEO CERTIFICATION - Hub Group, Inc. | hgceocertification.htm |
| EX-31.2 - HUB GROUP CFO CERTIFICATION - Hub Group, Inc. | hgcfocertification.htm |
| EX-32.1 - HUB GROUP SARBANES OXLEY CERTIFICATION - Hub Group, Inc. | hgsection906certification.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
fiscal year ended December 31, 2009
OR
[ ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission
File No. 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
of organization)
|
Identification
No.)
|
3050 Highland Parkway, Suite
100
Downers
Grove, Illinois 60515
(Address
and zip code of principal executive offices)
(630)
271-3600
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Class
A Common Stock, $.01 par value
(Title of
Class)
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes X No
__
Indicate
by check mark if Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes X No
__
Impairment of Property and Equipment, Goodwill and Indefinite-Lived Intangibles
We are subject to income tax in the U.S. federal jurisdiction and numerous state
jurisdictions. Our 2006 tax year was the subject of our most recent
IRS examination. The examination was concluded in 2009 and resulted
in the issuance of a no-change letter. The examination by Illinois of
our 2005 and 2006 tax years concluded in 2009 and resulted in our payment of
approximately $17,000 to Illinois of combined income tax, penalty and
interest. Maryland commenced an examination of our 2006 through 2008
tax years in December 2009. Although no other significant
examinations are currently in effect, tax years 2006 through 2008 generally
remain open to examination (with the exceptions noted above for the federal and
Illinois jurisdictions) by the major tax jurisdictions to which we are
subject. During the next twelve months, it is reasonably possible we
will both reduce unrecognized tax benefits by approximately $0.1 million as a
result of expiration of state statutes of limitations and increase unrecognized
tax benefits by approximately $0.1 million as a result of state income tax
apportionment uncertainty.
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
__
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
__ No __
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. X
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated
Filer X
Accelerated
Filer Non-Accelerated
Filer Smaller
Reporting Company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
No X
The
aggregate market value of the Registrant’s voting stock held by non-affiliates
on June 30, 2009, based upon the last reported sale price on that date on the
NASDAQ Global Select Market of $20.64 per share, was $740,375,975.
On February 12, 2010, the Registrant had 37,405,371 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.
Documents
Incorporated by Reference
The
Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on May 6, 2010 (the “Proxy Statement”) is incorporated by reference
in Part III of this Form 10-K to the extent stated herein. Except with respect
to information specifically incorporated by reference in this Form 10-K, the
Proxy Statement is not deemed to be filed as a part hereof.
PART
I
Item
1.
BUSINESS
General
Hub
Group, Inc. (“Company”, “we”, “us” or “our”) is a Delaware corporation that was
incorporated on March 8, 1995. We are one of North America’s leading
asset-light freight transportation management companies. We offer
comprehensive intermodal, truck brokerage and logistics
services. Since our founding in 1971, we have grown to become the
largest intermodal marketing company (“IMC”) in the United States and one of the
largest truck brokers.
We
operate through a network of operating centers throughout the United States,
Canada and Mexico. Each operating center is strategically located in
a market with a significant concentration of shipping customers and one or more
railheads. Through our network, we have the ability to move freight
in and out of every major city in the United States, Canada and
Mexico. We service a large and diversified customer base in a broad
range of industries, including consumer products, retail and durable
goods. We utilize an asset-light strategy in order to minimize our
investment in equipment and facilities and reduce our capital
requirements. We arrange freight movement for our customers through
transportation carriers and equipment providers.
Services
Provided
Our
transportation services can be broadly placed into the following
categories:
Intermodal. As an
IMC, we arrange for the movement of our customers’ freight in containers and
trailers, typically over long distances of 750 miles or more. We
contract with railroads to provide transportation for the long-haul portion of
the shipment and with local trucking companies, known as “drayage companies,”
for pickup and delivery. In certain markets, we supplement third
party drayage services with Company-owned drayage operations. As part
of our intermodal services, we negotiate rail and drayage rates, electronically
track shipments in transit, consolidate billing and handle claims for freight
loss or damage on behalf of our customers.
We use our network to access
containers and trailers owned by leasing companies, railroads and steamship
lines. We are able to track trailers and containers entering a
service area and reuse that equipment to fulfill the customers’ outbound
shipping requirements. This effectively allows us to “capture”
containers and trailers and keep them within our network. As of
December 31, 2009, we also have exclusive access to approximately 7,355
rail-owned containers for our dedicated use on the Union Pacific (“UP”) and the
Norfolk Southern (“NS”) rail networks and approximately 1,375 rail-owned
containers for our dedicated use on the Burlington Northern Santa Fe (“BNSF”)
and the NS rail networks. In addition to these rail-owned containers,
we currently have a total of 6,225 53’ private containers for use on the UP and
NS. We financed these containers with operating leases. These
arrangements are included in Note 8 to the consolidated financial
statements.
Our
drayage services are provided by our subsidiary, Comtrak, which assists us in
providing reliable, cost effective intermodal services to our
customers. Comtrak has terminals in Atlanta, Bensalem (Philadelphia),
Birmingham, Charleston, Charlotte, Chattanooga, Chicago, Cleveland, Columbus,
Dallas, Harrisburg, Huntsville, Jacksonville, Kansas City, Memphis, Nashville,
Ontario (Los Angeles), Perry, Saint Louis, Savannah, Stockton, and
Tampa. As of December 31, 2009, Comtrak owned 283 tractors, leased 20
tractors, leased or owned 553 trailers, employed 301 drivers and contracted with
1,007 owner-operators.
Truck Brokerage (Highway
Services). We are one of the largest truck brokers in the
United States, providing customers with another option for their transportation
needs. We match the customers’ needs with carriers’ capacity to
provide the most effective service and price combinations. We have
contracts with a substantial base of carriers allowing us to meet the varied
needs of our customers. As part of the truck brokerage services, we
negotiate rates, track shipments in transit and handle claims for freight loss
and damage on behalf of our customers.
Our truck brokerage operation also
provides customers with specialized programs. Through the Dedicated
Trucking Program, certain carriers have informally agreed to move freight for
our customers on a continuous basis. This arrangement allows us to
effectively meet our customers’ needs without owning the equipment.
Logistics. Our logistics business operates under the name of
Unyson Logistics. Unyson Logistics is comprised of a network of
logistics professionals dedicated to developing, implementing and operating
customized logistics solutions. Unyson offers a wide range of
transportation management services and technology solutions including shipment
optimization, load consolidation, mode selection, carrier management, load
planning and execution and web-based shipment visibility. Our
multi-modal transportation capabilities include small parcel, heavyweight,
expedited, less-than-truckload, truckload, intermodal and
railcar. Unyson Logistics operates throughout North America,
providing operations through its main operating location in St. Louis with
additional support locations in Boston, Chicago, Cleveland and
Minneapolis.
2
Hub
Network
Our
entire network is interactively connected through our proprietary Network
Management System. This enables us to move freight into and out of every major
city in the United States, Canada and Mexico.
In a typical intermodal transaction, the customer contacts one of our intermodal
operating centers to place an order. The operating center consults with the
centralized pricing group, obtains the necessary intermodal equipment, arranges
for it to be delivered to the customer by a drayage company and, after the
freight is loaded, arranges for the transportation of the container or trailer
to the rail ramp. Relevant information is entered into our Network Management
System by the assigned operating center. Our predictive track and trace
technology then monitors the shipment to ensure that it arrives as scheduled and
alerts the customer service personnel if there are service delays. The assigned
operating center then arranges for and confirms delivery by a drayage company at
destination. After unloading, the empty equipment is made available for
reloading by the operating center for the delivery market.
We provide truck brokerage services to our customers in a similar manner. In a
typical truck brokerage transaction, the customer contacts one of our highway
operating centers to obtain a price quote for a particular freight movement. The
customer then provides appropriate shipping information to the operating center.
The operating center makes the delivery appointment and arranges with the
appropriate carrier to pick up the freight. Once it receives confirmation that
the freight has been picked up, the operating center monitors the movement of
the freight until it reaches its destination and the delivery has been
confirmed. If the carrier notifies us that after delivering the load it will
need additional freight, we may notify the operating center located nearest the
destination of the carrier’s availability. Although under no
obligation to do so, that operating center then may attempt to secure additional
freight for the carrier.
Marketing
and Customers
We believe that fostering long-term
customer relationships is critical to our success. Through these
long-term relationships, we are able to better understand our customers’ needs
and tailor our transportation services to the specific customer, regardless of
the customer’s size or volume. We currently have full-time marketing
representatives at various operating centers and sales offices with primary
responsibility for servicing local, regional and national
accounts. These sales representatives directly or indirectly report
to our Chief Marketing Officer. This model allows us to provide our
customers with both a local marketing contact and access to our competitive
rates as a result of being a large, national transportation service
provider.
Our marketing efforts have produced a
large, diverse customer base, with no one customer representing more than 5% of
our total revenue in 2009. We service customers in a wide variety of
industries, including consumer products, retail and durable goods.
Management
Information Systems
A primary component of our business
strategy is the continued improvement of our Network Management System and other
technology to ensure that we remain a leader among transportation providers in
information processing for transportation services. Our Network
Management System consists of proprietary software running on a combination of
platforms which includes the IBM iSeries and Microsoft Windows Server
environments located at a secure offsite data center. All of our
operating centers are linked together with the data center using an MPLS
(“Multi-Protocol Label Switching”) network. This configuration
provides a real time environment for transmitting data among our operating
centers and headquarters. We also make extensive use of electronic
commerce (“e-Commerce”), allowing each operating center to communicate
electronically with each railroad, many drayage companies, certain trucking
companies and those customers with e-Commerce capabilities.
Our Network Management System is the
primary mechanism used in our operating centers to handle our intermodal and
truck brokerage business. The Network Management System processes
customer transportation requests, tenders and tracks shipments, prepares
customer billing, establishes account profiles and retains critical information
for analysis. The Network Management System provides connectivity with each of
the major rail carriers. This enables us to electronically tender and track
shipments in a real time environment. In addition, the Network Management
System’s e-Commerce features offer customers with e-Commerce capability a
completely paperless process, including load tendering, shipment tracking,
billing and remittance processing. We aggressively pursue
opportunities to establish e-Commerce interfaces with our customers, railroads,
trucking companies and drayage companies.
To manage our logistics business, we
use specialized software that includes planning and execution
solutions. This sophisticated transportation management software
enables us to offer supply chain planning and logistics managing, modeling,
optimizing and monitoring for our customers. We use this software
when offering logistics management services to customers that ship via multiple
modes, including intermodal, truckload, and less-than-truckload, allowing us to
optimize mode and carrier selection and routing for our
customers. This software is integrated with Hub Group’s Network
Management System and our accounting system.
3
Our website, www.hubgroup.com, is
designed to allow our customers and vendors to easily do business with us
online. Through Vendor Interface, we tender loads to our drayage
partners using the Internet rather than phones or faxes. Vendor
Interface also captures event status information, allows vendors to view
outstanding paperwork requirements and helps facilitate paperless invoicing. We
currently tender substantially all of our drayage loads using Vendor Interface
or e-Commerce. Through Trucker Advantage, we exchange information on
available Hub loads, available carrier capacity and updates to event status
information with our truck brokerage partners. Through Customer
Advantage, customers receive immediate pricing, place orders, track shipments,
and review historical shipping data through a variety of reports over the
Internet. All of our Internet applications are integrated with the
Network Management System.
Relationship
with Railroads
A key element of our business
strategy is to strengthen our close working relationship with the major
intermodal railroads in the United States. We view our relationship with the
railroads as a partnership. Due to our size and relative importance, many
railroads have dedicated support personnel to focus on our day-to-day service
requirements. On a regular basis, our senior executives and each of the
railroads meet to discuss major strategic issues concerning intermodal
transportation.
We have relationships with each of
the following major railroads:
|
Burlington
Northern Santa Fe
|
Florida
East Coast
|
|
Canadian
National
|
Kansas
City Southern
|
|
Canadian
Pacific
|
Norfolk
Southern
|
|
CSX
|
Union
Pacific
|
We also have relationships with each
of the following major service providers: CMA CGM (America) Inc., Express System
Intermodal Inc., Hanjin Shipping, Hyundai Merchant Marine, K-Line America,
Maersk Sea-Land, Mitsui O.S.K. Lines (America) Inc. and Pacer
International.
Transportation rates are market
driven. We sometimes negotiate with the railroads or other major
service providers on a route or customer specific basis. Consistent with
industry practice, some of the rates we negotiate are special commodity
quotations (“SCQs”), which provide discounts from published price lists based on
competitive market factors and are designed by the railroads or major service
providers to attract new business or to retain existing business. SCQ rates are
generally issued for the account of a single IMC. SCQ rates apply to
specific customers in specified shipping lanes for a specific period of time,
usually up to 12 months.
Relationship
with Drayage Companies
We have a “Quality Drayage Program,”
which consists of agreements and rules that govern the framework by which many
drayage companies perform services for us. Participants in the
program commit to provide high quality service along with clean and safe
equipment, maintain a defined on-time performance level and follow specified
procedures designed to minimize freight loss and damage. We negotiate
drayage rates for transportation between specific origin and destination
points.
We also supplement third-party
drayage services with our own drayage operations, which we operate through our
subsidiary Comtrak. Our drayage operations employ their own drivers
and also contract with owner-operators who supply their own trucks.
Relationship
with Trucking Companies
Our truck brokerage operation has a
large and growing number of active trucking companies that we use to transport
freight. The local operating centers deal daily with these carriers
on an operational level. Our corporate headquarters handles the
administrative and regulatory aspects of the trucking company
relationship. Our relationships with these trucking companies are
important since these relationships determine pricing, load coverage and overall
service.
Risk Management and
Insurance
We require all drayage companies participating in the Quality Drayage Program to
carry at least $1.0 million in general liability insurance, $1.0 million in
truckman’s auto liability insurance and a minimum of $100,000 in cargo
insurance. Railroads, which are self-insured, provide limited cargo
protection, generally up to $250,000 per shipment. To cover freight
loss or damage when a carrier's liability cannot be established or a carrier's
insurance is insufficient to cover the claim, we carry our own cargo insurance
with a limit of $1.0 million per container or trailer and a limit of $20.0
million in the aggregate. We also carry general liability insurance
with limits of $1.0 million per occurrence and $2.0 million in the aggregate
with a companion $50.0 million umbrella policy on this general liability
insurance.
4
We maintain separate insurance
policies to cover potential exposure from our company-owned drayage operations.
We carry commercial general liability insurance with a limit of $1.0 million per
occurrence, subject to a $2.0 million policy aggregate limit, and truckers
automobile liability insurance with a limit of $1.0 million per occurrence.
Additionally, we have an umbrella excess liability policy with a limit of $19.0
million. We also maintain motor truck cargo liability insurance with
a limit of $1.0 million per occurrence.
Government
Regulation
Hub Group, Inc. and various
subsidiaries are licensed by the Department of Transportation as brokers in
arranging for the transportation of general commodities by motor vehicle. To the
extent that the operating centers perform truck brokerage services, they do so
under these licenses. The Department of Transportation prescribes qualifications
for acting in this capacity, including a $10,000 surety bond that we have
posted. To date, compliance with these regulations has not had a
material adverse effect on our results of operations or financial condition.
However, the transportation industry is subject to legislative or regulatory
changes that can affect the economics of the industry by requiring changes in
operating practices or influencing the demand for, and cost of providing,
transportation services.
Competition
The transportation services industry
is highly competitive. We compete against other IMCs, as well as logistics
companies, third party brokers, trucking companies and railroads that market
their own intermodal services. Several larger trucking companies have entered
into agreements with railroads to market intermodal services nationwide.
Competition is based primarily on freight rates, quality of service,
reliability, transit time and scope of operations. Several
transportation service companies and trucking companies, and all of the major
railroads, have substantially greater financial and other resources than we
do.
General
Employees: As of
December 31, 2009, we had 1,329 employees or 1,028 employees excluding drivers.
We are not a party to any collective bargaining agreement and consider our
relationship with our employees to be satisfactory.
Other: No material
portion of our operations is subject to renegotiation of profits or termination
of contracts at the election of the federal government. None of our
trademarks are believed to be material to us. Our business is
seasonal to the extent that certain customer groups, such as retail, are
seasonal.
Periodic
Reports
Upon written request, our annual
report to the Securities and Exchange Commission on Form 10-K for the fiscal
year ended December 31, 2009, our quarterly reports on Form 10-Q and current
reports on Form 8-K will be furnished to stockholders free of charge; write to:
Public Relations Department, Hub Group, Inc., 3050 Highland Parkway, Suite 100,
Downers Grove, Illinois 60515. Our filings are also accessible
through our website at www.hubgroup.com as
soon as reasonably practicable after we file or furnish such reports to the
Securities and Exchange Commission.
Item
1A. RISK
FACTORS
Because our
business is concentrated on intermodal marketing, any decrease in demand for
intermodal transportation services compared to other transportation services
could have an adverse effect on our results of operations.
We
derived 70% of our revenue from our intermodal services in 2009 as compared to
71% in 2008 and 73% in 2007. As a result, any decrease in demand for
intermodal transportation services compared to other transportation services
could have an adverse effect on our results of operations.
Because
we depend on railroads for our operations, our operating results and financial
condition are likely to be adversely affected by any reduction or deterioration
in rail service.
We depend
on the major railroads in the United States for virtually all of the intermodal
services we provide. In many markets, rail service is limited to one
or a few railroads. Consequently, a reduction in, or elimination of,
rail service to a particular market is likely to adversely affect our ability to
provide intermodal transportation services to some of our
customers. In addition, the railroads are relatively free to adjust
shipping rates up or down as market conditions permit. Rate increases
would result in higher intermodal transportation costs, reducing the
attractiveness of intermodal transportation compared to truck or other
transportation modes, which could cause a decrease in demand for our
services. Further, our ability to continue to expand our intermodal
transportation business is dependent upon the railroads’ ability to increase
capacity for intermodal freight and provide consistent service. Our
business could also be adversely affected by a work stoppage at one or more
railroads or by adverse weather conditions or other factors that hinder the
railroads’ ability to provide reliable transportation services. In
the past, there have been service issues when railroads have merged. As a
result, we cannot predict what effect, if any, further consolidation among
railroads may have on intermodal transportation services or our results of
operations.
5
Because
our relationships with the major railroads are critical to our ability to
provide intermodal transportation services, our business may be adversely
affected by any change to those relationships.
We have
important relationships with the major U.S. railroads. To date, the
railroads have chosen to rely on us, other IMCs and other intermodal competitors
to market their intermodal services rather than fully developing their own
marketing capabilities. If one or more of the major railroads were to
decide to reduce their dependence on us, the volume of intermodal shipments we
arrange would likely decline, which could adversely affect our results of
operations and financial condition.
Because we rely on drayage companies
in our intermodal operations, our ability to expand our business or maintain our
profitability may be adversely affected by a shortage of drayage
capacity.
In many
of the markets we serve, we use third-party drayage companies for pickup and
delivery of intermodal containers. Most drayage companies operate
relatively small fleets and have limited access to capital for fleet
expansion. In some of our markets, there are a limited number of
drayage companies that can meet our quality
standards. This could limit our ability to expand our intermodal
business or require us to establish our own drayage operations in some markets,
which could increase our operating costs and could adversely affect our
profitability and financial condition. Also, the trucking industry
chronically experiences a shortage of available drivers, which may limit the
ability of third-party drayage companies to expand their fleets. This
shortage also may require them to increase drivers’ compensation, thereby
increasing our cost of providing drayage services to our
customers. Therefore, the driver shortage could also adversely affect
our profitability and limit our ability to expand our intermodal
business.
Because
we depend on trucking companies for our truck brokerage services, our ability to
maintain or expand our truck brokerage business may be adversely affected by a
shortage of trucking capacity.
We
derived 19% of our revenue from our truck brokerage services in 2009 as compared
to 20% in 2008 and 19% in 2007. We depend upon various third-party
trucking companies for the transportation of our customers’ loads. Particularly
during periods of economic expansion, trucking companies may be unable to expand
their fleets due to capital constraints or chronic driver shortages, and these
trucking companies also may raise their rates. If we face
insufficient capacity among our third-party trucking companies, we may be unable
to maintain or expand our truck brokerage business. Also, we may be
unable to pass rate increases on to our customers, which could adversely affect
our profitability.
Because we use a significant number
of independent contractors in our businesses, proposals from legislative,
judicial or regulatory authorities that change the independent contractor
classification could have a significant impact on our gross margin and operating
income.
We use a
significant number of independent contractors in our businesses, consistent with
long-standing industry practices. There can be no assurance that
legislative, judicial, or regulatory (including tax) authorities will not
introduce proposals or assert interpretations of existing rules and regulations
that would change the independent contractor classification of a significant
number of independent contractors doing business with us. The costs
associated with potential reclassifications could have a material adverse effect
on results of operations and our financial position.
We
depend on third parties for equipment essential to operate our business, and if
we fail to secure sufficient equipment, we could lose customers and
revenue.
We depend
on third parties for transportation equipment, such as containers and trailers,
necessary for the operation of our business. Our industry has
experienced equipment shortages in the past, particularly during the peak
shipping season in the fall. A substantial amount of intermodal freight
originates at or near the major West Coast ports, which have historically had
the most severe equipment shortages. If we cannot secure sufficient
transportation equipment at a reasonable price from third parties to meet our
customers’ needs, our customers may seek to have their transportation needs met
by other providers. This could have an adverse effect on our
business, results of operations and financial position.
Our
business could be adversely affected by strikes or work stoppages by draymen,
truckers, longshoremen and railroad workers.
There has
been labor unrest, including work stoppages, among draymen. We could
lose business from any significant work stoppage or slowdown and, if labor
unrest results in increased rates for draymen, we may not be able to pass these
cost increases on to our customers. In the summer of 2008, an
owner-operator work stoppage in Northern California caused us to incur an
additional $1.0 million in transportation costs. In the fall of 2002,
all of the West Coast ports were shut down as a result of a dispute with the
longshoremen. The ports remained closed for nearly two weeks, until
reopened as the result of a court order under the Taft-Hartley Act. Our
operations were adversely affected by the shutdown. A new contract
was agreed to through 2014 by the International Longshoremen and Warehouse Union
and the Pacific Maritime Association. In the past several years,
there have been strikes involving railroad workers. Future strikes by railroad
workers in the United States, Canada or anywhere else that our customers’
freight travels by railroad could adversely affect our business and results of
operations. Any significant work stoppage, slowdown or other
disruption involving ports, railroads, truckers or draymen could adversely
affect our business and results of operations.
6
Our
results of operations are susceptible to changes in general economic conditions
and cyclical fluctuations.
Economic
recession, customers’ business cycles, changes in fuel prices and supply,
interest rate fluctuations, increases in fuel or energy taxes and other general
economic factors affect the demand for transportation services and the operating
costs of railroads, trucking companies and drayage companies. We have
little or no control over any of these factors or their effects on the
transportation industry. Increases in the operating costs of
railroads, trucking companies or drayage companies can be expected to result in
higher freight rates. Our operating margins could be adversely
affected if we were unable to pass through to our customers the full amount of
higher freight rates. Economic recession or a downturn in customers’
business cycles also may have an adverse effect on our results of operations and
growth by reducing demand for our services. Therefore, our results of
operations, like the entire freight transportation industry, are cyclical and
subject to significant period-to-period fluctuations.
Relatively
small increases in our transportation costs that we are unable to pass through
to our customers are likely to have a significant effect on our gross margin and
operating income.
Transportation
costs represented 88% of our consolidated revenue in 2009, 87% in 2008 and 86%
in 2007. Because transportation costs represent such a significant
portion of our costs, even relatively small increases in these transportation
costs, if we are unable to pass them through to our customers, are likely to
have a significant effect on our gross margin and operating income.
Our
business could be adversely affected by heightened security measures, actual or
threatened terrorist attacks, efforts to combat terrorism, military action
against a foreign state or other similar event.
We cannot
predict the effects on our business of heightened security measures, actual or
threatened terrorist attacks, efforts to combat terrorism, military action
against a foreign state or other similar events. It is possible that one or more of these events could be directed at U.S. or
foreign ports, borders, railroads or highways. Heightened security
measures or other events are likely to slow the movement of freight through U.S.
or foreign ports, across borders or on U.S. or foreign railroads or highways and
could adversely affect our business and results of operations. Any of
these events could also negatively affect the economy and consumer confidence,
which could cause a downturn in the transportation industry.
If
we fail to maintain and enhance our information technology systems, we may be at
a competitive disadvantage and lose customers.
Our
information technology systems are critical to our operations and our ability to
compete effectively as an IMC, truck broker and logistics
provider. We expect our customers to continue to demand more
sophisticated information technology applications from their
suppliers. If we do not continue to enhance our Network Management
System and the logistics software we use to meet the increasing demands of our
customers, we may be placed at a competitive disadvantage and could lose
customers.
Our
information technology systems are subject to risks that we cannot control and
the inability to use our information technology systems could materially
adversely affect our business.
Our
information technology systems are dependent upon global communications
providers, web browsers, telephone systems and other aspects of the Internet
infrastructure that have experienced significant system failures and electrical
outages in the past. Our systems are susceptible to outages from
fire, floods, power loss, telecommunications failures, break-ins and similar
events. Our servers are vulnerable to computer viruses, break-ins and similar
disruptions from unauthorized tampering with our computer
systems. The occurrence of any of these events could disrupt or
damage our information technology systems and inhibit our internal operations,
our ability to provide services to our customers and the ability of our
customers and vendors to access our information technology
systems. This could result in a loss of customers or a reduction in
demand for our services.
The
transportation industry is subject to government regulation, and regulatory
changes could have a material adverse effect on our operating results or
financial condition.
Hub
Group, Inc. and various subsidiaries are licensed by the Department of
Transportation as motor carrier freight brokers. The Department of
Transportation prescribes qualifications for acting in this capacity, including
surety bond requirements. Our Comtrak subsidiary is licensed by
the Department of Transportation to act as a motor carrier. To date,
compliance with these regulations has not had a material adverse effect on our
results of operations or financial condition. However, the
transportation industry is subject to legislative or regulatory changes, including potential limits on carbon emissions under climate change
legislation, that can affect the economics of the industry by requiring changes
in operating practices or influencing the demand for, and cost of providing,
transportation services. We may become subject to new or more
restrictive regulations relating to fuel emissions or limits on vehicle weight
and size. Future laws and regulations may be more stringent and
require changes in operating practices, influence the demand for transportation
services or increase the cost of providing transportation services, any of which
could adversely affect our business and results of operations.
7
We are
not able to accurately predict how new governmental laws and regulations, or
changes to existing laws and regulations, will affect the transportation industry generally, or us in particular. Although
government regulation that affects us and our competitors may simply result in
higher costs that can be passed to customers, there can be no assurance that
this will be the case.
Our
operations are subject to various environmental laws and regulations, the
violation of which could result in substantial fines or penalties.
From time
to time, we arrange for the movement of hazardous materials at the request of
our customers. As a result, we are subject to various environmental
laws and regulations relating to the handling of hazardous
materials. If we are involved in a spill or other accident involving
hazardous materials, or if we are found to be in violation of applicable laws or
regulations, we could be subject to substantial fines or penalties and to civil
and criminal liability, any of which could have an adverse effect on our
business and results of operations.
We
derive a significant portion of our revenue from our largest customers and the
loss of several of these customers could have a material adverse effect on our
revenue and business.
Our
largest 20 customers accounted for approximately 40%, 36% and 36% of our revenue
in 2009, 2008 and 2007, respectively. A reduction in or termination
of our services by several of our largest customers could have a material
adverse effect on our revenue and business.
Insurance
and claims expenses could significantly reduce our earnings.
Our
future insurance claims expenses might exceed historical levels, which could
reduce our earnings. If the number or severity of claims increases,
our operating results could be adversely affected. We maintain
insurance with licensed insurance companies. Insurance carriers have
recently raised premiums. As a result, our insurance and claims
expenses could increase when our current coverage expires. If these
expenses increase, and we are unable to offset the increase with higher freight
rates, our earnings could be materially and adversely affected.
Our
success depends upon our ability to recruit and retain key
personnel.
Our
success depends upon attracting and retaining the services of our management
team as well as our ability to attract and retain a sufficient number of other
qualified personnel to run our business. There is substantial
competition for qualified personnel in the transportation services
industry. As all key personnel devote their full time to our
business, the loss of any member of our management team or other key person
could have an adverse effect on us. We do not have written employment
agreements with any of our executive officers and do not maintain key man
insurance on any of our executive officers.
Our
growth could be adversely affected if we are not able to identify, successfully
acquire and integrate future acquisition prospects.
We believe that future acquisitions
and/or the failure to make such acquisitions 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.
An
economic downturn could materially adversely affect our business.
Our
operations and performance depend significantly on economic conditions.
Uncertainty about global economic conditions poses a risk as consumers and
businesses may postpone spending in response to tighter credit, negative
financial news and/or declines in income or asset values, which could have a
material negative effect on demand for transportation services. We
are unable to predict the likely duration and severity of the current
disruptions in the financial markets and the adverse global economic conditions,
and if the current uncertainty continues or economic conditions further
deteriorate, our business and results of operations could be materially and
adversely affected. Other factors that could influence demand include
fluctuations in fuel costs, labor costs, consumer confidence, and other
macroeconomic factors affecting consumer spending behavior. There
could be a number of follow-on effects from a credit crisis on our business,
including the insolvency of key transportation providers and the inability of
our customers to obtain credit to finance development and/or manufacture
products resulting in a decreased demand for transportation
services. Our revenues and gross margins are dependent upon this
demand, and if demand for transportation services declines, our revenues and
gross margins could be adversely affected.
Although
we believe we have adequate liquidity and capital resources to fund our
operations internally our inability to access the capital markets on favorable
terms, or at all, may adversely affect our ability to engage in strategic
transactions. The inability to obtain adequate financing from debt or
capital sources could force us to self-fund strategic initiatives or even forgo
certain opportunities, which in turn could potentially harm our
performance.
Uncertainty
about global economic conditions could also continue to increase the volatility
of our stock price.
8
We
are exposed to credit risk and fluctuations in the market values of our
investment portfolio.
Although
we have not recognized any material losses on our cash and cash equivalents,
future declines in their market values could have a material adverse effect on
our financial condition and operating results. The value or liquidity
of our cash and cash equivalents could decline which could have a material
adverse effect on our financial condition and operating results.
Item
1B. UNRESOLVED
STAFF COMMENTS
None.
Item
2. PROPERTIES
We directly,
or indirectly through our subsidiaries, operate 43 offices
throughout the United States, Canada and Mexico, including our headquarters in
Downers Grove, Illinois and our Company-owned drayage operations headquartered
in Memphis, Tennessee. All of our office space is
leased. Most office leases have initial terms of more than one year,
and many include options to renew. While some of our leases expire in
the near term, we do not believe that we will have difficulty in renewing them
or in finding alternative office space. We believe that our offices are adequate
for the purposes for which they are currently used.
Item
3. LEGAL
PROCEEDINGS
We are a
party to litigation incident to our business, including claims for personal
injury and/or property damage, freight lost or damaged in transit, improperly
shipped or improperly billed. Some of the lawsuits to which we are
party are covered by insurance and are being defended by our insurance
carriers. Some of the lawsuits are not covered by insurance and we
defend those ourselves. We do not believe that the outcome of this
litigation will have a materially adverse effect on our financial position or
results of operations. See Item 1 Business - Risk Management and
Insurance.
Item
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of our security holders during the fourth
quarter of 2009.
9
Executive
Officers of the Registrant
In
reliance on General Instruction G to Form 10-K, information on executive
officers of the Registrant is included in this Part I. The table sets
forth certain information as of February 1, 2010 with respect to each person who
is an executive officer of the Company.
|
Name
|
Age
|
Position
|
|
David
P. Yeager
|
56
|
Chairman
of the Board of Directors and Chief Executive Officer
|
|
Mark
A. Yeager
|
45
|
Vice
Chairman of the Board of Directors, President and Chief Operating
Officer
|
|
Christopher
R. Kravas
|
44
|
Chief
Intermodal Officer
|
|
David
L. Marsh
|
42
|
Chief
Marketing Officer
|
|
Terri
A. Pizzuto
|
51
|
Executive
Vice President, Chief Financial Officer and Treasurer
|
|
James
B. Gaw
|
59
|
Executive
Vice President-Sales
|
|
Dwight
C. Nixon
|
47
|
Executive
Vice President-Highway
|
|
Donald
G. Maltby
|
55
|
Executive
Vice President-Logistics
|
|
Dennis
R. Polsen
|
56
|
Executive
Vice President-Information Services
|
|
David
C. Zeilstra
|
40
|
Vice
President, Secretary and General
Counsel
|
David P.
Yeager has served as our Chairman of the Board since November 2008 and as Chief
Executive Officer since March 1995. From March 1995 through November
2008, Mr. Yeager served as Vice Chairman of the Board. From
October 1985 through December 1991, Mr. Yeager was President of Hub Chicago.
From 1983 to October 1985, he served as Vice President, Marketing of Hub
Chicago. Mr. Yeager founded the St. Louis Hub in 1980 and served as its
President from 1980 to 1983. Mr. Yeager founded the Pittsburgh Hub in 1975 and
served as its President from 1975 to 1977. Mr. Yeager received a Masters in
Business Administration degree from the University of Chicago in 1987 and a
Bachelor of Arts degree from the University of Dayton in 1975. Mr. Yeager is the
brother of Mark A. Yeager.
Mark A.
Yeager has served as Vice Chairman of the Board since November
2008. He became the President of the Company in January 2005 and has
been our Chief Operating Officer and a Director since May 2004. From
July 1999 to December 2004, Mr. Yeager was President-Field
Operations. From November 1997 through June 1999, Mr. Yeager was
Division President, Secretary and General Counsel. From March 1995 to
November 1997, Mr. Yeager was Vice President, Secretary and General
Counsel. From May 1992 to March 1995, Mr. Yeager served as our Vice
President-Quality. Prior to joining us in 1992, Mr. Yeager was an associate at
the law firm of Grippo & Elden from January 1991 through May 1992 and an
associate at the law firm of Sidley & Austin from May 1989 through January
1991. Mr. Yeager received a Juris Doctor degree from Georgetown University in
1989 and a Bachelor of Arts degree from Indiana University in 1986. Mr. Yeager
is the brother of David P. Yeager.
Christopher
R. Kravas has been our Chief Intermodal Officer since October
2007. Prior to this promotion, Mr. Kravas was Executive Vice
President-Strategy and Yield Management from December 2003 through September
2007. From February 2002 through November 2003, Mr. Kravas served as
President of Hub Highway Services. From February 2001 through
December 2001, Mr. Kravas was Vice President-Enron Freight
Markets. Mr. Kravas joined Enron after it acquired Webmodal, an
intermodal business he founded. Mr. Kravas was Chief Executive
Officer of Webmodal from July 1999 through February 2001. From 1989
through June 1999 Mr. Kravas worked for the Burlington Northern Santa Fe Railway
in various positions in the intermodal business unit and finance
department. Mr. Kravas received a Bachelor of Arts degree in 1987
from Indiana University and a Masters in Business Administration in 1994 from
the University of Chicago.
David L.
Marsh has been our Chief Marketing Officer since October 2007. Prior
to this promotion, Mr. Marsh was Executive Vice President-Highway from February
2004 through September 2007. Mr. Marsh previously served as President
of Hub Ohio from January 2000 through January 2004. Mr. Marsh joined
us in March 1991 and became General Manager with Hub Indianapolis in 1993, a
position he held through December 1999. Prior to joining Hub Group,
Mr. Marsh worked for Carolina Freight Corporation, a less than truckload
carrier, starting in January 1990. Mr. Marsh received a Bachelor of
Science degree in Marketing and Physical Distribution from Indiana
University-Indianapolis in December 1989. Mr. Marsh has been a member
of the American Society of Transportation and Logistics, the Indianapolis
Traffic Club, the Council for Logistics Management and served as an advisor to
the Indiana University-Indianapolis internship program for transportation and
logistics. Mr. Marsh was honored as the Indiana Transportation Person
of the Year in 1999.
Terri A.
Pizzuto has been our Executive Vice President, Chief Financial Officer and
Treasurer since March 2007. Prior to this promotion, Ms. Pizzuto was
Vice President of Finance from July 2002 through February 2007. Prior
to joining us, Ms. Pizzuto was a partner in the Assurance and Business Advisory
Group at Arthur Andersen LLP. Ms. Pizzuto worked for Arthur Andersen
LLP for 22 years holding various positions and serving numerous transportation
companies. Ms. Pizzuto received a Bachelor of Science in Accounting
from the University of Illinois in 1981. Ms. Pizzuto is a CPA and a
member of the American Institute of Certified Public Accountants.
10
James B.
Gaw has been our Executive Vice President-Sales since February
2004. From December 1996 through January 2004, Mr. Gaw was President
of Hub North Central, located in Milwaukee. From 1990 through late
1996, he was Vice President and General Manager of Hub Chicago. Mr.
Gaw joined Hub Chicago as Sales Manager in 1988. Mr. Gaw’s entire
career has been spent in the transportation industry, including 13 years of
progressive leadership positions at Itofca, an intermodal marketing company, and
Flex Trans. Mr. Gaw received a Bachelor of Science degree from
Elmhurst College in 1973.
Dwight C.
Nixon has been our Executive Vice President-Highway since October
2007. Mr. Nixon previously served as Regional Vice President of
Highway’s Western Region from April 2004 through September
2007. Prior to joining us, Mr. Nixon was a Senior Corporate Account
Executive for Roadway Express, Inc. and spent 19 years in various operational,
sales and sales management positions. Mr. Nixon was also a California
Gubernatorial appointee and member of the California Workforce Investment Board
from November 2005 through December 2007. Mr. Nixon received a
Bachelor of Science degree in Finance from the University of Arizona in
1984.
Donald G.
Maltby has been our Executive Vice President-Logistics since February
2004. Mr. Maltby previously served as President of Hub Online, our
e-commerce division, from February 2000 through January 2004. Mr.
Maltby also served as President of Hub Cleveland from July 1990 through January
2000 and from April 2002 to January 2004. Prior to joining Hub Group,
Mr. Maltby served as President of Lyons Transportation, a wholly owned
subsidiary of Sherwin Williams Company, from 1988 to 1990. In his
career at Sherwin Williams, which began in 1981 and continued until he joined us
in 1990, Mr. Maltby held a variety of management positions including
Vice-President of Marketing and Sales for their Transportation Division. Mr.
Maltby has been in the transportation and logistics industry since 1976, holding
various executive and management positions. Mr. Maltby received a
Masters in Business Administration from Baldwin Wallace College in 1982 and a
Bachelor of Science degree from the State University of New York in
1976.
Dennis R.
Polsen has been our Executive Vice President-Information Services since February
2004. From September 2001 to January 2004, Mr. Polsen was Vice
President-Chief Information Officer and from March 2000 through August 2001, Mr.
Polsen was our Vice-President of Application Development. Prior to
joining us, Mr. Polsen was Director of Applications for Humana, Inc. from
September 1997 through February 2000 and spent 14 years prior to that
developing, implementing, and directing transportation logistics applications at
Schneider National, Inc. Mr. Polsen received a Masters in Business
Administration in May of 1983 from the University of Wisconsin Graduate School
of Business and a Bachelor of Business Administration in May of 1976 from the
University of Wisconsin-Milwaukee. Mr. Polsen is a past member of the
American Trucking Association.
David C.
Zeilstra has been our Vice President, Secretary and General Counsel since July
1999. From December 1996 through June 1999, Mr. Zeilstra was our
Assistant General Counsel. Prior to joining us, Mr. Zeilstra was an
associate with the law firm of Mayer, Brown & Platt from September 1994
through November 1996. Mr. Zeilstra received a Juris Doctor degree
from Duke University in 1994 and a Bachelor of Arts degree from Wheaton College
in 1990.
Directors
of the Registrant
In addition to David P. Yeager and
Mark A. Yeager, the following three individuals are also on our Board of
Directors: Gary D. Eppen – currently retired and formerly the Ralph and Dorothy
Keller Distinguished Service Professor of Operations Management and Deputy Dean
for part-time Masters in Business Administration Programs at the Graduate School
of Business at the University of Chicago; Charles R. Reaves – Chief Executive
Officer of Reaves Enterprises, Inc., a real estate development company, and
Martin P. Slark – Vice Chairman and Chief Executive Officer of Molex,
Incorporated, a manufacturer of electronic, electrical and fiber optic
interconnection products and systems.
11
PART
II
|
Item
5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our Class A Common Stock (“Class A
Common Stock”) trades on the NASDAQ Global Select Market tier of the NASDAQ
Stock Market under the symbol “HUBG.” Set forth below are the high
and low closing prices for shares of the Class A Common Stock for each full
quarterly period in 2009 and 2008.
|
2009
|
2008
|
||||
|
High
|
Low
|
High
|
Low
|
||
|
First
Quarter
|
$28.27
|
$15.83
|
$35.17
|
$22.77
|
|
|
Second
Quarter
|
$25.52
|
$17.42
|
$36.32
|
$30.90
|
|
|
Third
Quarter
|
$24.76
|
$18.34
|
$41.75
|
$31.31
|
|
|
Fourth
Quarter
|
$27.82
|
$22.48
|
$36.50
|
$21.82
|
|
On
February 12, 2010, there were approximately 309 stockholders of record of
the Class A Common Stock and, in addition, there were an estimated 9,482
beneficial owners of the Class A Common Stock whose shares were held by brokers
and other fiduciary institutions. On February 12, 2010, there were 13
holders of record of our Class B Common Stock (the “Class B Common Stock”
together with the Class A Common Stock, the “Common Stock”).
We were incorporated in 1995 and have
never paid cash dividends on either the Class A Common Stock or the Class B
Common Stock. The declaration and payment of dividends are subject to
the discretion of the Board of Directors. Any determination as to the
payment of dividends will depend upon our results of operations, capital
requirements and financial condition of the Company, and such other factors as
the Board of Directors may deem relevant. Accordingly, there can be
no assurance that the Board of Directors will declare or pay cash dividends on
the shares of Common Stock in the future. Our certificate of
incorporation requires that any cash dividends must be paid equally on each
outstanding share of Class A Common Stock and Class B Common
Stock. Our credit facility prohibits us from paying dividends on the
Common Stock if there has been, or immediately following the payment of a
dividend there would be, a default or an event of default under the credit
facility. We are currently in compliance with the covenants contained
in the credit facility.
On
October 26, 2006, our Board of Directors authorized the purchase of up to $75.0
million of our Class A Common Stock. During the fourth quarter of
2007, we completed the authorized purchase of $75.0 million of our Class A
Common Stock. On November 14, 2007, our Board of Directors authorized
the purchase of up to $75.0 million of our Class A Common Stock. We
purchased 38,800 shares at an average price of $36.12 during 2008. No additional
shares were purchased before the authorization expired June 30,
2009.
12
Performance
Graph
The
following line graph compares the Company’s cumulative total stockholder return
on its Class A Common Stock since December 31, 2004 with the cumulative total
return of the Nasdaq Stock Market Index and the Nasdaq Trucking and
Transportation Index. These comparisons assume the investment of $100 on
December 31, 2004 in each index and in the Company’s Class A Common Stock and
the reinvestment of dividends.
13
Item
6. SELECTED
FINANCIAL DATA
|
Selected
Financial Data
|
||||||||||||||||||||||
|
(in
thousands except per share data)
|
||||||||||||||||||||||
|
Years
Ended December 31,
|
||||||||||||||||||||||
|
2009
|
2008 | 2007 | 2006 (2) |
2005
|
|
|||||||||||||||||
|
Statement
of Income Data:
|
||||||||||||||||||||||
|
Revenue
|
$ | 1,510,970 | $ | 1,860,608 | $ | 1,658,168 | $ | 1,609,529 | $ | 1,481,878 | ||||||||||||
|
Gross
margin
|
185,690 | 234,311 | 232,324 | 218,418 | 174,742 | |||||||||||||||||
|
Operating
income
|
55,531 | 95,462 | 90,740 | 77,236 | 47,904 | |||||||||||||||||
|
Income
from continuing operations before taxes
|
55,885 | 96,326 | 93,228 | 79,508 | 48,871 | |||||||||||||||||
|
Income
from continuing operations after taxes
|
34,265 | 59,245 | 59,799 | 47,705 | 29,176 | |||||||||||||||||
|
Income
from discontinued operations, net of tax (1)
|
- | - | - | 981 | 3,770 | |||||||||||||||||
|
Net
income
|
$ | 34,265 | $ | 59,245 | $ | 59,799 | $ | 48,686 | $ | 32,946 | ||||||||||||
|
Basic
earnings per common share
|
||||||||||||||||||||||
|
Income
from continuing operations
|
$ | 0.92 | $ | 1.59 | $ | 1.55 | $ | 1.19 | $ | 0.73 | ||||||||||||
|
Income
from discontinued operations
|
$ | - | $ | - | $ | - | $ | 0.03 | $ | 0.10 | ||||||||||||
|
Diluted
earnings per common share
|
||||||||||||||||||||||
|
Income
from continuing operations
|
$ | 0.91 | $ | 1.58 | $ | 1.53 | $ | 1.17 | $ | 0.71 | ||||||||||||
|
Income
from discontinued operations
|
$ | - | $ | - | $ | - | $ | 0.02 | $ | 0.09 | ||||||||||||
|
As
of December 31,
|
||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||||
|
Total
assets
|
$ | 573,348 | $ | 528,231 | $ | 491,967 | $ | 484,548 | $ | 444,418 | ||||||||||||
|
Long-term
debt, excluding current portion
|
- | - | - | - | - | |||||||||||||||||
|
Stockholders'
equity
|
353,841 | 315,184 | 250,899 | 258,844 | 242,075 | |||||||||||||||||
|
(1)
|
HGDS
disposed of May 1, 2006
|
|
(2)
|
Comtrak
was acquired February 28, 2006
|
14
Item
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
FORWARD
LOOKING STATEMENTS
The
information contained in this annual report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of
1995. Words such as “expects,” “hopes,” “believes,” “intends,”
“estimates,” “anticipates,” and variations of these words and similar
expressions are intended to identify these forward-looking
statements. Forward-looking statements are inherently uncertain and
subject to risks. Such statements should be viewed with
caution. Actual results or experience could differ materially from
the forward-looking statements as a result of many factors. We assume
no liability to update any such forward-looking statements contained in this
annual report. Factors that could cause our actual results to differ
materially, in addition to those set forth under Items 1A “Risk Factors,”
include:
|
·
|
the
degree and rate of market growth in the domestic intermodal, truck
brokerage and logistics markets served by
us;
|
|
·
|
deterioration
in our relationships with existing railroads or adverse changes to the
railroads’ operating rules;
|
|
·
|
changes
in rail service conditions or adverse weather
conditions;
|
|
·
|
further
consolidation of railroads;
|
|
·
|
the
impact of competitive pressures in the marketplace, including entry of new
competitors, direct marketing efforts by the railroads or marketing
efforts of asset-based carriers;
|
|
·
|
changes
in rail, drayage and trucking company
capacity;
|
|
·
|
railroads
moving away from ownership of intermodal
assets;
|
|
·
|
equipment
shortages or equipment surplus;
|
|
·
|
changes
in the cost of services from rail, drayage, truck or other
vendors;
|
|
·
|
increases
in costs for independent contractors due to regulatory, judicial and legal
changes;
|
|
·
|
labor
unrest in the rail, drayage or trucking company
communities;
|
|
·
|
general
economic and business conditions;
|
|
·
|
significant
deterioration in our customers’ financial condition, particularly in the
retail and durable goods sectors;
|
|
·
|
fuel
shortages or fluctuations in fuel
prices;
|
|
·
|
increases
in interest rates;
|
|
·
|
changes
in homeland security or terrorist
activity;
|
|
·
|
difficulties
in maintaining or enhancing our information technology
systems;
|
|
·
|
changes
to or new governmental regulation;
|
|
·
|
loss
of several of our largest
customers;
|
|
·
|
inability
to recruit and retain key
personnel;
|
|
·
|
inability
to recruit and maintain drivers and owner
operators;
|
|
·
|
changes
in insurance costs and claims
expense;
|
|
·
|
changes
to current laws which will aid union organizing efforts;
and
|
|
·
|
inability
to close and successfully integrate any future business
combinations.
|
CAPITAL
STRUCTURE
We have
authorized common stock comprised of Class A Common Stock and Class B Common
Stock. The rights of holders of Class A Common Stock and Class B
Common Stock are identical, except each share of Class B Common Stock entitles
its holder to approximately 80 votes, while each share of Class A Common Stock
entitles its holder to one vote. We have authorized 2,000,000 shares
of preferred stock.
EXECUTIVE
SUMMARY
Hub
Group, Inc. (“we”, “us” or “our”) is the largest intermodal marketing
company (“IMC”) in the United States and a full service transportation provider
offering intermodal, truck brokerage and logistics services. We
operate through a nationwide network of operating centers.
As an
IMC, we arrange for the movement of our customers’ freight in containers and
trailers over long distances. We contract with railroads to provide
transportation for the long-haul portion of the shipment and with local trucking
companies, known as “drayage companies,” for local pickup and
delivery. As part of the intermodal services, we negotiate rail and
drayage rates, electronically track shipments in transit, consolidate billing
and handle claims for freight loss or damage on behalf of our
customers.
15
Our
drayage services are provided by our subsidiary, Comtrak, which assists us in
providing reliable, cost effective intermodal services to our
customers. Comtrak has terminals in Atlanta, Bensalem (Philadelphia),
Birmingham, Charleston, Charlotte, Chattanooga, Chicago, Cleveland, Columbus,
Dallas, Harrisburg, Huntsville, Jacksonville, Kansas City, Memphis, Nashville,
Ontario (Los Angeles), Perry, Saint Louis, Savannah, Stockton, and
Tampa. As of December 31, 2009, Comtrak owned 283 tractors, leased 20
tractors, leased or owned 553 trailers, employed 301 drivers and contracted with
1,007 owner-operators.
We also arrange for the transportation of freight by truck, providing customers
with another option for their transportation needs. We match
the customers’ needs with carriers’ capacity to provide the most effective
service and price combinations. As part of our truck brokerage
services, we negotiate rates, track shipments in transit and handle claims for
freight loss or damage on behalf of our customers.
Our
logistics service consists of complex transportation management services,
including load consolidation, mode optimization and carrier
management. These service offerings are designed to take advantage of
the increasing trend for shippers to outsource all or a greater portion of their
transportation needs.
We have
full time marketing representatives throughout North America who service local,
regional and national accounts. We believe that fostering long-term
customer relationships is critical to our success and allows us to better
understand our customers’ needs and specifically tailor our transportation
services to them.
Our yield
management group works with pricing and operations to enhance customer
margins. We are working on margin enhancement projects including
matching up inbound and outbound loads, reducing our drayage costs and improving
our recovery of accessorial costs. Our top 50 customers’ revenue
represents approximately 59% of our revenue.
We use
various performance indicators to manage our business. We closely
monitor margin and gains and losses for our top 50 customers and loads that are
not beneficial to our network. We also evaluate on-time performance,
cost per load and daily sales outstanding by customer account. Vendor
cost changes and vendor service issues are also monitored closely.
RESULTS
OF OPERATIONS
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
The
following table summarizes our revenue by service line (in
thousands):
|
Twelve
Months Ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
%
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
Revenue
|
||||||||||||
|
Intermodal
|
$ | 1,054,862 | $ | 1,329,382 | (20.7 | %) | ||||||
|
Brokerage
|
292,639 | 372,051 | (21.3 | %) | ||||||||
|
Logistics
|
163,469 | 159,175 | 2.7 | % | ||||||||
|
Total
revenue
|
$ | 1,510,970 | $ | 1,860,608 | (18.8 | %) | ||||||
16
The
following table includes certain items in the consolidated statements of income
as a percentage of revenue:
|
Twelve
Months Ended
|
|||
|
December
31,
|
|||
|
2009
|
2008
|
||
|
Revenue
|
100.0
%
|
100.0
%
|
|
|
Transportation
costs
|
87.7
|
87.4
|
|
|
Gross
margin
|
12.3
|
12.6
|
|
|
Costs
and expenses:
|
|||
|
Salaries
and benefits
|
5.9
|
5.0
|
|
|
General
and administration
|
2.4
|
2.3
|
|
|
Depreciation
and amortization
|
0.3
|
0.2
|
|
|
Total
costs and expenses
|
8.6
|
7.5
|
|
|
Operating
income
|
3.7
|
5.1
|
|
|
Other
income (expense):
|
|||
|
Interest
and dividend income
|
0.0
|
0.1
|
|
|
Total
other income
|
0.0
|
0.1
|
|
|
Income
before provision for income taxes
|
3.7
|
5.2
|
|
|
Provision
for income taxes
|
1.4
|
2.0
|
|
|
Net
income
|
2.3%
|
3.2%
|
|
Revenue
Revenue decreased 18.8% to $1,511.0
million in 2009 from $1,860.6 million in 2008. Intermodal revenue
decreased 20.7% to $1,054.9 million from $1,329.4 million due to an 11% decline
for fuel, a 5% decrease in volume, a 3% price decrease and a 2% decrease for
mix. Truck brokerage revenue decreased 21.3% to $292.6 million from
$372.1 million due to a 2% decrease in volume, an 11% decline for fuel and an 8%
decline due to price and mix. Logistics revenue increased 2.7% to
$163.5 million from $159.2 million due to increases in business from both new
and existing customers in 2009.
Gross
Margin
Gross margin decreased 20.8% to $185.7
million in 2009 from $234.3 million in 2008. Gross margin as a
percentage of revenue decreased to 12.3% in 2009 from 12.6% in
2008. This decline was primarily due to decreases in intermodal gross
margin, related to lower price and mix. These decreases were
partially offset by cost reductions from better management of our drayage
operations and other margin initiatives.
Salaries
and Benefits
Salaries and benefits decreased to
$88.5 million in 2009 from $93.7 million in 2008 partially due to a decrease in
bonus expense of $2.2 million, salaries and benefits of $2.1 million and
commissions of $0.8 million. The decrease in bonus expense was the
result of not earning any EPS based bonus in 2009. As a percentage of
revenue, salaries and benefits increased to 5.9% in 2009 from 5.0% in
2008. Headcount as of December 31, 2009 and 2008 was 1,028 and 1,099,
respectively, which excludes drivers, as driver costs are included in
transportation costs.
General
and Administrative
General and administrative expenses
decreased to $37.5 million from $41.2 million in 2008. Total expenses
decreased due to reductions in outside services of $1.4 million, travel and
entertainment expenses of $1.2 million, office expense of $0.6 million and
outside sales commissions of $0.4 million. These reductions were
partially offset by a $0.7 million increase in bad debts due to bankruptcies of
certain customers. The reduction in travel and entertainment expenses
resulted primarily from an increased focus on controlling costs. As a
percentage of revenue, general and administrative expenses increased to 2.4% in
2009 from 2.3% in 2008.
17
Depreciation
and Amortization
Depreciation and amortization increased
5.5% to $4.2 million in 2009 from $4.0 million in 2008. This expense
as a percentage of revenue increased to 0.3% in 2009 from 0.2% in
2008. The increase in depreciation and amortization was due primarily
to a decrease in the salvage value of certain assets.
Other
Income (Expense)
Interest expense remained consistent at
$0.1 million in 2009 and 2008. Interest and dividend income decreased
to $0.1 million in 2009 from $1.2 million in 2008. The decrease in
interest and dividend income was the result of lower interest rates in 2009
primarily due to investing our cash in money market funds comprised of U.S.
Treasury Securities and repurchase agreements for these securities rather than
commercial paper.
Provision
for Income Taxes
The
provision for income taxes decreased to $21.6 million in 2009 from $37.1 million
in 2008. We provided for income taxes using an effective rate of
38.7% in 2009 compared to 38.5% in 2008. The 2009 effective rate was
higher due to income tax law changes enacted in February, 2009 by Wisconsin and
California, which resulted in an increase of income tax expense of
approximately $0.4 million.
Net
Income
Net income decreased to $34.3 million
in 2009 from $59.2 million in 2008 due primarily to lower gross
margin.
Earnings
Per Common Share
Basic earnings per share was $0.92 in
2009 and $1.59 in 2008. Basic earnings per share decreased due to the
decrease in net income.
Diluted earnings per share decreased to
$0.91 in 2009 from $1.58 in 2008. Diluted earnings per share
decreased due to the decrease in net income.
Year
Ended December 31, 2008, Compared to Year Ended December 31, 2007
The
following table summarizes our revenue by service line (in
thousands):
|
Twelve
Months Ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
%
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Revenue
|
||||||||||||
|
Intermodal
|
$ | 1,329,382 | $ | 1,206,364 | 10.2 | % | ||||||
|
Brokerage
|
372,051 | 322,465 | 15.4 | % | ||||||||
|
Logistics
|
159,175 | 129,339 | 23.1 | % | ||||||||
|
Total
revenue
|
$ | 1,860,608 | $ | 1,658,168 | 12.2 | % | ||||||
18
The
following table includes certain items in the consolidated statements of income
as a percentage of revenue:
|
Twelve
Months Ended
|
|||
|
December
31,
|
|||
|
2008
|
2007
|
||
|
Revenue
|
100.0
%
|
100.0
%
|
|
|
Transportation
costs
|
87.4
|
86.0
|
|
|
Gross
margin
|
12.6
|
14.0
|
|
|
Costs
and expenses:
|
|||
|
Salaries
and benefits
|
5.0
|
5.8
|
|
|
General
and administration
|
2.3
|
2.5
|
|
|
Depreciation
and amortization
|
0.2
|
0.2
|
|
|
Total
costs and expenses
|
7.5
|
8.5
|
|
|
Operating
income
|
5.1
|
5.5
|
|
|
Other
income (expense):
|
|||
|
Interest
and dividend income
|
0.1
|
0.1
|
|
|
Total
other income
|
0.1
|
0.1
|
|
|
Income
before provision for income taxes
|
5.2
|
5.6
|
|
|
Provision
for income taxes
|
2.0
|
2.0
|
|
|
Net
income
|
3.2%
|
3.6%
|
|
Revenue
Revenue increased 12.2% to $1,860.6
million in 2008 from $1,658.2 million in 2007. Intermodal revenue
increased 10.2% to $1,329.4 million from $1,206.4 million due to a 9% increase
in fuel, a 2% increase in volume and a 1% decrease related to
price/mix. Truck brokerage revenue increased 15.4% to $372.1 million
from $322.5 million due to volume increases, changes in mix and an increase in
fuel surcharges. Logistics revenue increased 23.1% to $159.2 million
from $129.3 million due to increases in business from both new and existing
customers in 2008.
Gross
Margin
Gross margin increased 0.9% to $234.3
million in 2008 from $232.3 million in 2007. Gross margin as a
percentage of revenue decreased to 12.6% in 2008 from 14.0% in
2007. The decrease in gross margin as a percentage of revenue was due
to a one time $2.0 million profitable vendor deal in 2007, the owner operator
work stoppage in northern California that cost us an extra $1.0 million in 2008
and competitive pricing.
Salaries
and Benefits
Salaries and benefits decreased to
$93.7 million in 2008 from $95.7 million in 2007. The decrease in
2008 was due to a decrease in bonuses of $3.7 million due to not earning as much
EPS based bonus as we did in 2007, partially offset by an increase in salaries
of $1.4 million. As a percentage of revenue, salaries and benefits
decreased to 5.0% in 2008 from 5.8% in 2007. Headcount as of December
31, 2008 and 2007 was 1,099 and 1,081, respectively, which excludes drivers, as
driver costs are included in transportation costs.
General
and Administrative
General and administrative expenses
decreased to $41.2 million from $41.4 million in 2007. The decrease
was primarily due to a $0.9 million reduction in general insurance expense
related to conversions in 2008 of QS locations to Comtrak and a $0.6 million
reduction in outside services related to reduced consultant
spending. These reductions were partially offset by a $0.6 million
increase in rent, an increase of $0.5 million related to bad debts due to
bankruptcies, and a $0.3 million increase in repairs and maintenance related to
maintenance for information technology hardware. As a percentage of
revenue, general and administrative expenses decreased to 2.3% in 2008 from 2.5%
in 2007.
19
Depreciation
and Amortization
Depreciation and amortization decreased
11.9% to $4.0 million in 2008 from $4.5 million in 2007. This expense
as a percentage of revenue remained consistent at 0.2% of
revenue. The decrease in depreciation and amortization was due to
lower software depreciation due to certain assets being fully
depreciated.
Other
Income (Expense)
Interest expense remained consistent at
$0.1 million in 2008 and 2007. Interest and dividend income decreased
to $1.2 million in 2008 from $2.5 million in 2007. The decrease in
interest and dividend income was the result of lower interest rates in 2008
partially due to investing our cash in money market funds comprised of U.S.
Treasury Securities and repurchase agreements for these securities rather than
commercial paper.
Provision
for Income Taxes
The
provision for income taxes increased to $37.1 million in 2008 from to $33.4
million in 2007. We provided for income taxes using an effective rate
of 38.5% in 2008 compared to 35.9% in 2007. The 2007 effective rate
was lower primarily due to two events. In the fourth quarter of 2007,
we resolved a dispute with the IRS which reduced our 2007 income tax provision
by $1.3 million. Also, tax legislation enacted by the State of
Illinois in the third quarter of 2007 created a benefit of approximately $1.2
million from the reduction of non-current deferred tax
liabilities. The tax legislation modified how we apportion taxable
income to Illinois.
Net
Income
Net income decreased to $59.2 million
in 2008 from $59.8 million in 2007 due to higher income taxes and lower interest
and dividend income, only partially offset by higher gross margin, lower
salaries and benefits, lower depreciation and amortization expense and lower
general and administrative expense.
Earnings
Per Common Share
Basic earnings per share was $1.59 in
2008 and $1.55 in 2007. Basic earnings per share increased primarily
due to the decrease in the basic weighted average number of shares outstanding
because of our purchase of treasury shares in 2007.
Diluted earnings per share increased to
$1.58 in 2008 from $1.53 in 2007. Diluted earnings per share
increased primarily due to the decrease in the diluted weighted average number
of shares outstanding because of our purchase of treasury shares in
2007.
LIQUIDITY
AND CAPITAL RESOURCES
In 2009, we funded our operations,
capital expenditures and purchase of treasury stock through cash flows from
operations.
Cash provided by operating activities
for the year ended December 31, 2009 was approximately $45.2 million, which
resulted from net income of $34.3 million, adjustments for non cash items of
$18.1 million offset by an increase in net operating assets and liabilities of
$7.2 million.
Net cash used in investing activities
for the year ended December 31, 2009 was $4.2 million and related primarily to
capital expenditures. We expect capital expenditures to be between
$9.0 million and $11.0 million in 2010.
The net cash provided by financing
activities for the year ended December 31, 2009 included $1.1 million of cash
used to purchase treasury stock offset by $0.3 million of proceeds from stock
options exercised and $0.8 million of reported excess tax benefits from
share-based compensation as a financing cash in-flow.
We invest our cash overnight in a
money market fund comprised of U.S. Treasury Securities and repurchase
agreements for these securities. These investments are included in
cash and cash equivalents on our balance sheet due to their short term maturity
and are reported at their carrying value which approximates fair
value.
Our revolving credit agreement
provides for unsecured borrowing up to $50.0 million. The interest
rate ranges from LIBOR plus 0.75% to 1.25% or Prime plus 0.5%. The
revolving line of credit expires on March 23, 2010. The financial
covenants require a minimum net worth of $175.0 million and a cash flow leverage
ratio of not more than 2.0 to 1.0. The commitment fees charged on the
unused line of credit were between 0.15% and 0.25%. Our unused and
available borrowings under our bank revolving line of credit were $47.1 million
as of December 31, 2009 and December 31, 2008. We were in compliance
with our debt covenants as of December 31, 2009.
We have standby letters of credit
that expire from 2010 to 2012. As of December 31, 2009, our letters
of credit were $2.9 million.
20
CONTRACTUAL
OBLIGATIONS
Our contractual cash obligations as
of December 31, 2009 were minimum rental commitments. We have six
years remaining on a ten year lease agreement for a building and property
(Comtrak’s Memphis facility) with a related party, the President of
Comtrak. Rent paid under this agreement totaled $0.7 million for the
year ended December 31, 2009. The annual lease payments escalate by
less than 1% per year. Minimum annual rental commitments, as of
December 31, 2009, under non-cancelable operating leases, principally for real
estate, containers and equipment are payable as follows (in
thousands):
|
2010
|
$ | 16,919 | ||
|
2011
|
15,096 | |||
|
2012
|
11,599 | |||
|
2013
|
4,344 | |||
|
2014
|
1,166 | |||
|
2015
and thereafter
|
718 | |||
| $ | 49,842 |
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):
|
2010
|
$ | 1,841 | ||
|
2011
|
729 | |||
|
2012
|
805 | |||
|
2013
|
761 | |||
|
2014
|
1,945 | |||
|
2015
and thereafter
|
5,738 | |||
| $ | 11,819 |
CRITICAL ACCOUNTING
POLICIES
The preparation of financial
statements in conformity with U.S. 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.
Allowance
for Uncollectible Trade Accounts Receivable
In the
normal course of business, 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 collectibility based on historical trends and an
evaluation based on current economic conditions. To be more specific,
we reserve a portion of every account balance that has aged over one year, a
portion of receivables for customers in bankruptcy and certain account balances
specifically identified as uncollectible. On an annual basis, we
perform a hindsight analysis to determine our experience in collecting account
balances over one year old and account balances in
bankruptcy. We then use this hindsight analysis to establish
our reserves for receivables over one year and in bankruptcy. In establishing a
reserve for certain account balances specifically identified as uncollectible,
we consider the aging of the customer receivables, the customer’s current and
projected financial results, the customer’s ability to meet and sustain their
financial commitments, the positive or negative effects of the current and
projected industry outlook and the general economic conditions. The
Company’s level of reserves for its customer accounts receivable fluctuate
depending upon all the factors mentioned above. However, we do not
expect the reserve for uncollectible accounts to change significantly relative
to our accounts receivable balance. Historically, our reserve for
uncollectible accounts has approximated actual accounts written
off. 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.
21
Revenue
Recognition
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. Revenue and related transportation costs are recognized
based on relative transit time. Further, we report revenue on a gross
basis because we are the primary obligor and are responsible for providing the
service desired by the customer. The customer views 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 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, our earnings vary. In addition, we have the discretion
to select our vendors from multiple suppliers for the services ordered by our
customers. Finally, we have credit risk for our
receivables. These three factors, discretion in setting prices,
discretion in selecting vendors and credit risk, further support reporting
revenue on the gross basis.
Provision
for Income Taxes
Deferred income taxes are recognized
for the future tax effects of temporary differences between financial and income
tax reporting using tax rates in effect for the years in which the differences
are expected to reverse. We believe that it is more likely than not
that our deferred tax assets will be realized based on future taxable income
projections with the exception of $0.4 million related to state tax net
operating losses for which a valuation allowance has been
established. In the event the probability of realizing the remaining
deferred tax assets do not meet the more likely than not threshold in the
future, a valuation allowance would be established for the deferred tax assets
deemed unrecoverable.
Tax
liabilities are recorded when, in management’s judgment, a tax position does not
meet the more likely than not threshold for recognition as prescribed by the
guidance. For tax positions that meet the more likely than not
threshold, a tax liability may be recorded depending on management’s assessment
of how the tax position will ultimately be settled.
Valuation
of Goodwill and Other Indefinite-Lived Intangibles
We review
goodwill and other indefinite-lived intangibles for impairment on an annual
basis or whenever events or changes in circumstances indicate the carrying
amount of goodwill or other indefinite-lived intangibles may not be
recoverable. An indefinite lived intangible asset is impaired if its
fair value is less than its carrying value. Goodwill impairment is
indicated if the fair value of the reporting unit is less that its carrying
value. An impairment loss is measured as the difference between the
implied fair value of the reporting unit's goodwill and the carrying amount of
goodwill. We utilize a third party independent valuation firm to assist in
performing the necessary valuations to be used in the impairment
testing. These valuations are based on a market comparable approach,
a discounted cash flow approach or a combination of both
approaches. The fair value measurement is determined based on
assumptions that a market participant would use including expectations regarding
future operating performance (which are consistent with our internal projections
and operating plans), discount rates, control premiums and other factors which
are subjective in nature. As of December 31, 2009, reasonable variations
in these assumptions do not have a significant impact on the results of the
goodwill impairment test. Actual cash flows from operations could
differ from management’s estimates due to changes in business conditions,
operating performance and economic conditions.
Valuation
of Finite-Lived Intangibles and Fixed Assets
We
evaluate the potential impairment of finite-lived intangible assets and fixed
assets when impairment indicators exist. If the carrying value is no
longer recoverable based upon the undiscounted future cash flows of the asset,
the amount of the impairment is the difference between the carrying amount and
the fair value of the asset.
Equipment
We operate tractors and utilize
containers in connection with our business. This equipment may be
purchased or acquired under capital or operating lease agreements. 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. We had no
equipment under capital lease arrangements as of December 31, 2009 or
2008. Our equipment leases have five to seven year terms and in some
cases contain renewal options.
Stock
Based Compensation
Share-based
compensation includes the restricted stock awards expected to vest based on the
grant date fair value. Compensation expense is amortized
straight-line over the vesting period and is included in salaries and
benefits.
22
Fair
Value Measurement
In
September 2006, the FASB issued guidance in the Fair Value Measurements and
Disclosures Topic of the Codification. This guidance defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. In
February 2008, the FASB deferred the effective date of this guidance for one
year for nonfinancial assets and nonfinancial liabilities, except for those
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). We adopted the guidance
effective January 1, 2008 for all financial assets and
liabilities. As of January 1, 2009, we adopted the guidance for all
nonfinancial assets and nonfinancial liabilities. There is no impact
on our financial statements as of December 31, 2009.
New
Pronouncements
In
December 2007, the FASB issued guidance in the Business Combinations Topic of
the Codification. This guidance requires the acquiring entity in a
business combination to record all assets acquired and liabilities assumed at
their respective acquisition-date fair values including contingent
consideration. In addition, this guidance changes the recognition of
assets acquired and liabilities assumed arising from preacquisition
contingencies and requires the expensing of acquisition-related costs as
incurred. The guidance applies prospectively to business combinations
for which the acquisition date is on or after January 1, 2009. We
adopted this guidance effective January 1, 2009. Any impact would be
on future acquisitions.
In April
2008, the FASB issued guidance in the Intangibles-Goodwill and Other Topic of
the Codification on the determination of the useful life of an intangible
asset. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. We adopted this
guidance effective January 1, 2009 and it had no impact on our financial
statements.
The FASB
issued guidance in the Subsequent Events Topic of the Codification in May
2009. The guidance is intended to establish general standards of
accounting for, and disclosure of, events that occur after the balance sheet
date but before financial statements are issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date. We adopted this guidance effective
for the quarter ending June 30, 2009. The adoption of this guidance
had no impact on our financial statements as of December 31, 2009, other than
the additional disclosure.
In June
2009, the FASB issued amendments to the guidance on variable interest entities
and consolidation, codified primarily in the Consolidation Topic of the FASB
ASC. This guidance modifies the method for determining whether an entity is a
variable interest entity as well as the methods permitted for determining the
primary beneficiary of a variable interest entity. In addition, this guidance
requires ongoing reassessments of whether a company is the primary beneficiary
of a variable interest entity and enhanced disclosures related to a company’s
involvement with a variable interest entity. The Company adopted this guidance
effective January 1, 2010, as required. The effect of adopting this
standard was not significant.
OUTLOOK,
RISKS AND UNCERTAINTIES
Business
Combinations/Divestitures
We believe that any future
acquisitions 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
the railroads 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. 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, the entry of new competitors, customer
retention, inadequate drayage service and inadequate equipment
supply.
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, changes in the transportation business
mix, insurance costs, trailer and container capacity, vendor pricing, fuel
costs, intermodal industry growth, intermodal industry service levels,
accessorials, competitive pricing and accounting estimates.
23
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 affect the percentage from staying 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, how well we
perform against our EPS 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 web-based business interfaces and the
restructuring of our information systems and related platforms, we believe there
could be significant expenses incurred, some of which would not be
capitalized. Other factors that could cause selling, general and
administrative expense to fluctuate include, but are not limited to, changes in
insurance premiums, bad debt expenses and outside services expense.
Depreciation
and Amortization
We estimate that depreciation and
amortization of property and equipment in 2010 will approximate
2009.
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,
management determines that an impairment exists, the carrying amount of the
asset is reduced by the estimated impairment with a corresponding charge to
earnings which management estimates could have a material adverse impact on
earnings.
Other
Income (Expense)
Factors that could cause a change in
interest income include, but are not limited to, change in interest rates,
change in investments, funding working capital needs, funding capital
expenditures, funding an acquisition and buying back stock.
Item
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related
to changes in interest rates on our bank line of credit which may adversely
affect our results of operations and financial condition. We have no
significant exposure to foreign currency exchange rate changes. No
derivative financial instruments were outstanding as of December 31, 2009 and
2008. We do not use financial instruments for trading
purposes.
As of December 31, 2009 and 2008, the
Company had no outstanding obligations under its bank line of credit
arrangement.
24
Item
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
INDEX
TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
|
Report
of Independent Registered Public Accounting Firm
|
26
|
|
Consolidated
Balance Sheets – December 31, 2009 and December 31, 2008
|
27
|
|
Consolidated
Statements of Income – Years ended December 31, 2009, December 31, 2008
and December 31, 2007
|
28
|
|
Consolidated
Statements of Stockholders’ Equity – Years ended December 31,
2009,
December
31, 2008 and December 31, 2007
|
29
|
|
Consolidated
Statements of Cash Flows – Years ended December 31, 2009,
December
31, 2008 and December 31, 2007
|
30
|
|
Notes
to Consolidated Financial Statements
|
31
|
|
Schedule
II – Valuation and Qualifying Accounts
|
S-1
|
25
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders of Hub Group, Inc.:
We have
audited the accompanying consolidated balance sheets of Hub Group, Inc. as of
December 31, 2009 and 2008 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2009. Our audits also included the financial
statement schedule listed in the index at Item 15(b). These financial
statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hub Group, Inc. at
December 31, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2009
in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Hub Group, Inc.’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 18, 2010
expressed an unqualified opinion thereon.
ERNST
& YOUNG LLP
Chicago,
Illinois
February
18, 2010
26
|
HUB
GROUP, INC.
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
(in
thousands, except share amounts)
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 126,863 | $ | 85,799 | ||||
|
Accounts
receivable
|
||||||||
|
Trade,
net
|
145,317 | 145,362 | ||||||
|
Other
|
11,932 | 10,318 | ||||||
|
Prepaid
taxes
|
593 | 123 | ||||||
|
Deferred
taxes
|
2,874 | 1,985 | ||||||
|
Prepaid
expenses and other current assets
|
6,801 | 4,346 | ||||||
|
TOTAL
CURRENT ASSETS
|
294,380 | 247,933 | ||||||
|
Restricted
investments
|
9,583 | 6,118 | ||||||
|
Property
and equipment, net
|
28,510 | 32,713 | ||||||
|
Other
intangibles, net
|
6,164 | 6,610 | ||||||
|
Goodwill,
net
|
232,892 | 233,110 | ||||||
|
Other
assets
|
1,819 | 1,747 | ||||||
|
TOTAL
ASSETS
|
$ | 573,348 | $ | 528,231 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
||||||||
|
Trade
|
$ | 110,626 | $ | 105,064 | ||||
|
Other
|
7,695 | 6,107 | ||||||
|
Accrued
expenses
|
||||||||
|
Payroll
|
8,253 | 9,988 | ||||||
|
Other
|
18,958 | 26,388 | ||||||
|
TOTAL
CURRENT LIABILITIES
|
145,532 | 147,547 | ||||||
|
Non-current
liabilities
|
12,002 | 9,535 | ||||||
|
Deferred
taxes
|
61,973 | 55,965 | ||||||
|
STOCKHOLDERS'
EQUITY:
|
||||||||
|
Preferred
stock, $.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding in 2009 and
2008
|
- | - | ||||||
|
Common
stock
|
||||||||
|
Class
A: $.01 par value; 97,337,700 shares authorized and
41,224,792 shares issued in 2009 and 2008; 37,253,330 outstanding in 2009
and 36,970,347 shares outstanding in 2008
|
412 | 412 | ||||||
|
Class
B: $.01 par value; 662,300 shares authorized; 662,296 shares
issued and outstanding in 2009 and 2008
|
7 | 7 | ||||||
|
Additional
paid-in capital
|
171,470 | 174,355 | ||||||
|
Purchase
price in excess of predecessor basis, net of tax benefit of
$10,306
|
(15,458 | ) | (15,458 | ) | ||||
|
Retained
earnings
|
299,552 | 265,287 | ||||||
|
Other
comprehensive income
|
(9 | ) | - | |||||
|
Treasury
stock; at cost, 3,971,462 shares in 2009 and 4,254,445 shares in
2008
|
(102,133 | ) | (109,419 | ) | ||||
|
TOTAL
STOCKHOLDERS' EQUITY
|
353,841 | 315,184 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 573,348 | $ | 528,231 | ||||
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
27
|
HUB
GROUP, INC.
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||
|
Years
Ended
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
$ | 1,510,970 | $ | 1,860,608 | $ | 1,658,168 | ||||||
|
Transportation
costs
|
1,325,280 | 1,626,297 | 1,425,844 | |||||||||
|
Gross
margin
|
185,690 | 234,311 | 232,324 | |||||||||
|
Costs
and expenses:
|
||||||||||||
|
Salaries
and benefits
|
88,518 | 93,658 | 95,678 | |||||||||
|
General
and administrative
|
37,467 | 41,234 | 41,416 | |||||||||
|
Depreciation
and amortization
|
4,174 | 3,957 | 4,490 | |||||||||
|
Total
costs and expenses
|
130,159 | 138,849 | 141,584 | |||||||||
|
Operating
income
|
55,531 | 95,462 | 90,740 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
expense
|
(91 | ) | (102 | ) | (108 | ) | ||||||
|
Interest
and dividend income
|
146 | 1,153 | 2,480 | |||||||||
|
Other,
net
|
299 | (187 | ) | 116 | ||||||||
|
Total
other income
|
354 | 864 | 2,488 | |||||||||
|
Income
before provision for income taxes
|
55,885 | 96,326 | 93,228 | |||||||||
|
Provision
for income taxes
|
21,620 | 37,081 | 33,429 | |||||||||
|
Net
income
|
$ | 34,265 | $ | 59,245 | $ | 59,799 | ||||||
|
Basic
earnings per common share
|
$ | 0.92 | $ | 1.59 | $ | 1.55 | ||||||
|
Diluted
earnings per common share
|
$ | 0.91 | $ | 1.58 | $ | 1.53 | ||||||
|
Basic
weighted average number of shares outstanding
|
37,367 | 37,174 | 38,660 | |||||||||
|
Diluted
weighted average number of shares outstanding
|
37,525 | 37,484 | 39,128 | |||||||||
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
28
|
HUB
GROUP, INC
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
||||||||||||
|
(in
thousands, except shares)
|
||||||||||||
|
Years
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Class
A & B Common Stock Shares Outstanding
|
||||||||||||
|
Beginning
of year
|
37,632,643 | 37,329,027 | 39,605,418 | |||||||||
|
Purchase
of treasury shares
|
(43,408 | ) | (85,361 | ) | (2,741,700 | ) | ||||||
|
Treasury
shares issued for restricted stock and stock options
exercised
|
326,391 | 388,977 | 465,309 | |||||||||
|
Ending
balance
|
37,915,626 | 37,632,643 | 37,329,027 | |||||||||
|
Class
A & B Common Stock Amount
|
||||||||||||
|
Beginning
of year
|
$ | 419 | $ | 419 | $ | 419 | ||||||
|
Ending
balance
|
419 | 419 | 419 | |||||||||
|
Additional
Paid-in Capital
|
||||||||||||
|
Beginning
of year
|
174,355 | 176,657 | 179,203 | |||||||||
|
Exercise
of non-qualified stock options
|
(2,965 | ) | (4,085 | ) | (6,668 | ) | ||||||
|
Share-based
compensation expense
|
4,394 | 4,360 | 3,853 | |||||||||
|
Tax
benefit of share-based compensation plans
|
852 | 2,903 | 3,952 | |||||||||
|
Issuance
of restricted stock awards, net of forfeitures
|
(5,166 | ) | (5,480 | ) | (3,683 | ) | ||||||
|
Ending
balance
|
171,470 | 174,355 | 176,657 | |||||||||
|
Purchase
Price in Excess of Predecessor Basis, Net of Tax
|
||||||||||||
|
Beginning
of year
|
(15,458 | ) | (15,458 | ) | (15,458 | ) | ||||||
|
Ending
balance
|
(15,458 | ) | (15,458 | ) | (15,458 | ) | ||||||
|
Retained
Earnings
|
||||||||||||
|
Beginning
of year
|
265,287 | 206,042 | 146,243 | |||||||||
|
Net
income
|
34,265 | 59,245 | 59,799 | |||||||||
|
Ending
balance
|
299,552 | 265,287 | 206,042 | |||||||||
|
Accumulated
Other Comprehensive Income
|
||||||||||||
|
Beginning
of year
|
- | - | - | |||||||||
|
Foreign
currency translation adjustments
|
(9 | ) | - | - | ||||||||
|
Ending
balance
|
(9 | ) | - | - | ||||||||
|
Treasury
Stock
|
||||||||||||
|
Beginning
of year
|
(109,419 | ) | (116,761 | ) | (51,563 | ) | ||||||
|
Purchase
of treasury shares
|
(1,101 | ) | (2,630 | ) | (76,309 | ) | ||||||
|
Issuance
of restricted stock and exercise of stock options
|
8,387 | 9,972 | 11,111 | |||||||||
|
Ending
balance
|
(102,133 | ) | (109,419 | ) | (116,761 | ) | ||||||
|
Total
stockholders’ equity
|
$ | 353,841 | $ | 315,184 | $ | 250,899 | ||||||
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
29
|
HUB
GROUP, INC.
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
Income
|
$ | 34,265 | $ | 59,245 | $ | 59,799 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
8,199 | 7,369 | 7,195 | |||||||||
|
Deferred
taxes
|
5,519 | 9,294 | 3,523 | |||||||||
|
Compensation
expense related to share-based compensation plans
|
4,394 | 4,360 | 3,853 | |||||||||
|
Loss
(gain) on sale of assets
|
50 | (22 | ) | (160 | ) | |||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Restricted
investments
|
(3,465 | ) | (912 | ) | (2,189 | ) | ||||||
|
Accounts
receivable, net
|
(1,569 | ) | 15,092 | (4,119 | ) | |||||||
|
Prepaid
taxes
|
(470 | ) | (37 | ) | 2,033 | |||||||
|
Prepaid
expenses and other current assets
|
(2,455 | ) | (28 | ) | 132 | |||||||
|
Other
assets
|
(72 | ) | (374 | ) | 88 | |||||||
|
Accounts
payable
|
7,150 | (18,532 | ) | 4,223 | ||||||||
|
Accrued
expenses
|
(8,603 | ) | (13,040 | ) | 4,094 | |||||||
|
Non-current
liabilities
|
2,285 | (908 | ) | 2,108 | ||||||||
|
Net
cash provided by operating activities
|
45,228 | 61,507 | 80,580 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Proceeds
from sale of equipment
|
84 | 1,342 | 725 | |||||||||
|
Purchases
of property and equipment
|
(4,246 | ) | (10,732 | ) | (10,197 | ) | ||||||
|
Cash
used in acquisition of Comtrak, Inc.
|
- | (5,000 | ) | (5,000 | ) | |||||||
|
Net
cash used in investing activities
|
(4,162 | ) | (14,390 | ) | (14,472 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from stock options exercised
|
256 | 407 | 760 | |||||||||
|
Purchase
of treasury stock
|
(1,101 | ) | (2,630 | ) | (76,309 | ) | ||||||
|
Excess
tax benefits from share-based compensation
|
852 | 2,903 | 3,952 | |||||||||
|
Net
cash provided by (used in) financing activities
|
7 | 680 | (71,597 | ) | ||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(9 | ) | - | - | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
41,064 | 47,797 | (5,489 | ) | ||||||||
|
Cash
and cash equivalents beginning of year
|
85,799 | 38,002 | 43,491 | |||||||||
|
Cash
and cash equivalents end of year
|
$ | 126,863 | $ | 85,799 | $ | 38,002 | ||||||
|
Supplemental
disclosures of cash paid for:
|
||||||||||||
|
Interest
|
$ | 91 | $ | 102 | $ | 106 | ||||||
|
Income
taxes
|
$ | 17,263 | $ | 27,199 | $ | 22,192 | ||||||
|
The
accompanying notes to consolidated financial statements are an integral
part of these statements.
|
||||||||||||
30
HUB
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. Description
of Business and Summary of Significant Accounting Policies
Business: Hub
Group, Inc. (“we”, “us” or “our”) provides intermodal transportation services
utilizing primarily third party arrangements with railroads and drayage
companies. We also arrange for transportation of freight by truck and
perform logistics and drayage services.
Principles of
Consolidation: The consolidated financial statements include
our accounts and all entities in which we have more than a 50% equity ownership
or otherwise exercise unilateral control. All significant
intercompany balances and transactions have been eliminated.
Cash and Cash
Equivalents: We consider as cash equivalents all highly liquid
instruments with an original maturity of three months or less. We
invested our cash overnight in a money market fund comprised of U.S. Treasury
Securities and repurchase agreements for these securities. The
outstanding balances were $123.0 million and $80.9 million as of December 31,
2009 and 2008, respectively.
Accounts Receivable and Allowance
for Uncollectible Accounts: In the normal course of business,
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 collectibility based on historical trends and an evaluation based on current
economic conditions. To be more specific, we reserve a portion of
every account balance that has aged over one year, a portion of receivables for
customers in bankruptcy and certain account balances specifically identified as
uncollectible. On an annual basis we perform a hindsight analysis to
determine our experience in collecting account balances over one year old and
account balances in bankruptcy. We then use this hindsight
analysis to establish our reserves for receivables over one year and in
bankruptcy. In establishing a reserve for certain account balances specifically
identified as uncollectible, we consider the aging of the customer receivables,
the customer’s current and projected financial results, the customer’s ability
to meet and sustain their financial commitments, the positive or negative
effects of the current and projected industry outlook and the general economic
conditions. The allowance for uncollectible accounts is reported on
the balance sheet in net accounts receivable. Our reserve for
uncollectible accounts was approximately $4.6 million and $5.1 million as of
December 31, 2009 and 2008, respectively. Receivables are written off
once collection efforts have been exhausted. Recoveries of
receivables previously charged off are recorded when received.
Property and
Equipment: Property and equipment are stated at
cost. Depreciation of property and equipment is computed using the
straight-line and various accelerated methods at rates adequate to depreciate
the cost of the applicable assets over their expected useful
lives: building and improvements, 1 to 8 years; leasehold
improvements, the shorter of useful life or lease term; computer equipment and
software, 3 to 5 years; furniture and equipment, 3 to 11 years; and
transportation equipment and automobiles, 5 to 10 years. Direct costs
related to internally developed software projects are capitalized and amortized
over their expected useful life on a straight-line basis not to exceed five
years. Interest is capitalized on qualifying assets under development
for internal use. Maintenance and repairs are charged to operations
as incurred and major improvements are capitalized. The cost of
assets retired or otherwise disposed of and the accumulated depreciation thereon
are removed from the accounts with any gain or loss realized upon sale or
disposal charged or credited to operations. We review long-lived
assets for impairment when events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. In the event that
the undiscounted future cash flows resulting from the use of the asset group is
less than the carrying amount, an impairment loss equal to the excess of the
assets carrying amount over its fair value is recorded.
Goodwill and Other
Intangibles: Goodwill represents the excess of purchase price
over the fair market value of net assets acquired in connection with our
business combinations. Goodwill and intangible assets that have
indefinite useful lives are not amortized but are subject to annual impairment
tests.
We review
goodwill and other indefinite-lived intangibles for impairment as of November 1
or whenever events or changes in circumstances indicate the carrying amount of
goodwill or other indefinite-lived intangibles may not be
recoverable. An indefinite lived intangible asset is impaired if its
fair value is less than its carrying value. Goodwill impairment is
indicated if the fair value of the reporting unit is less than its carrying
value. An impairment loss is measured as the difference between the
implied fair value of the reporting unit's goodwill and the carrying amount of
goodwill. We utilize a third party independent valuation firm to assist in
performing the necessary valuations to be used in the impairment
testing. These valuations are based on a market comparable approach,
a discounted cash flow approach or a combination of both
approaches. The fair value measurement is determined based on
assumptions that a market participant would use including expectations regarding
future operating performance (which are consistent with our internal projections
and operating plans), discount rates, control premiums and other factors which
are subjective in nature. As of December 31, 2009, reasonable
variations in these assumptions do not have a significant impact on the results
of the goodwill impairment test. Actual cash flows from operations
could differ from management’s estimates due to changes in business conditions,
operating performance and economic conditions.
31
We
evaluate the potential impairment of finite-lived acquired intangible assets
when impairment indicators exist. If the carrying value is no longer
recoverable based upon the undiscounted future cash flows of the asset, the
amount of the impairment is the difference between the carrying amount and the
fair value of the asset.
Concentration of Credit
Risk: Our financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. We place our cash and temporary investments with
high quality financial institutions and invest our cash overnight in a money
market fund comprised of U.S. Treasury Securities and repurchase agreements for
these securities. We primarily serve customers located throughout the
United States with no significant concentration in any one region. No
one customer accounted for more than 5% of revenue in 2009, 2008 or
2007. We review a customer’s credit history before extending
credit. In addition, we routinely assess the financial strength of
our customers and, as a consequence, believe that our trade accounts receivable
risk is limited.
Revenue
Recognition: 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. Revenue and related transportation costs are recognized
based on relative transit time. Further, 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. 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. 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. Finally, we have credit risk for our
receivables. These three factors, discretion in setting prices,
discretion in selecting vendors and credit risk, further support reporting
revenue on a gross basis.
Provision for Income
Taxes: Deferred income taxes are recognized for the future tax
effects of temporary differences between financial and income tax reporting
using tax rates in effect for the years in which the differences are expected to
reverse. We believe that it is more likely than not that our deferred
tax assets will be realized based on future taxable income projections with the
exception of $0.4 million related to state tax net operating losses for which a
valuation allowance has been established. In the event the
probability of realizing the remaining deferred tax assets do not meet the more
likely than not threshold in the future, a valuation allowance would be
established for the deferred tax assets deemed unrecoverable.
Tax
liabilities are recorded when, in management’s judgment, a tax position does not
meet the more likely than not threshold for recognition as prescribed by the
guidance. For tax positions that meet the more likely than not
threshold, a tax liability may be recorded depending on management’s assessment
of how the tax position will ultimately be settled. We recognize interest
expense and penalities related to income tax liabilities in our provision for
income taxes.
Earnings Per Common
Share: Basic earnings per common share are based on the
average quarterly weighted average number of Class A and Class B shares of
common stock outstanding. Diluted earnings per common share are
adjusted for the assumed exercise of dilutive stock options and for restricted
stock which are both computed using the treasury stock method.
Stock Based Compensation:
Share-based compensation includes the restricted stock awards expected to
vest based on the grant date fair value. Compensation expense is
amortized straight-line over the vesting period and is included in salaries and
benefits. We present excess tax deductions resulting from the
exercise of share-based compensation as financing cash in-flows and as operating
cash out-flows in the Statement of Cash Flows.
New
Pronouncements: In September 2006, the FASB issued new
guidance in the Fair Value Measurements and Disclosures Topic of the
Codification. This guidance defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. In February 2008, the FASB deferred
the effective date of this guidance for one year for nonfinancial assets and
nonfinancial liabilities, except for those items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). We adopted the guidance effective January 1, 2008
for all financial assets and liabilities. As of January 1, 2009, we
adopted the guidance for all nonfinancial assets and all nonfinancial
liabilities. There is no impact on our financial statements as of
December 31, 2009.
In
December 2007, the FASB issued guidance in the Business Combinations Topic of
the Codification. This guidance requires the acquiring entity in a
business combination to record all assets acquired and liabilities assumed at
their respective acquisition-date fair values including contingent
consideration. In addition, this guidance changes the recognition of
assets acquired and liabilities assumed arising from preacquisition
contingencies and requires the expensing of acquisition-related costs as
incurred. The guidance applies prospectively to business combinations
for which the acquisition date is on or after January 1, 2009. We
adopted this guidance effective January 1, 2009. Any impact would be
on future acquisitions.
In April
2008, the FASB issued guidance in the Intangibles-Goodwill and Other Topic of
the Codification on the determination of the useful life of an intangible
asset. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. We adopted this
guidance effective January 1, 2009 and it had no impact on our financial
statements.
32
The FASB issued guidance in the Subsequent Events Topic of the
Codification in May 2009. This guidance sets forth the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements. The guidance also indicates the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, as well as
the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. We adopted this guidance effective
for the quarter ending June 30, 2009. The adoption of this guidance had no
impact on our financial statements as of December 31, 2009, other than the
additional disclosure.
The Company evaluated subsequent events through February 18, 2010,
the date the financial statements were issued and filed with the Securities and
Exchange Commission. There were no subsequent events that required recognition
or disclosure except for the issuance of restricted stock as described in Note
9.
In June
2009, the FASB issued amendments to the guidance on variable interest
entities and consolidation, codified primarily in the Consolidation Topic
of the FASB ASC. This guidance modifies the method for determining whether an
entity is a variable interest entity as well as the methods permitted for
determining the primary beneficiary of a variable interest entity. In addition,
this guidance requires ongoing reassessments of whether a company is the primary
beneficiary of a variable interest entity and enhanced disclosures related to a
company’s involvement with a variable interest entity. The Company adopted this
guidance effective January 1, 2010, as required. We do not expect the
adoption of this guidance to have an impact on our financial statements.
Use of
Estimates: The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires us 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 revenue and expense during
the reporting period. Significant estimates include the allowance for
doubtful accounts and the cost of purchased transportation. Actual
results could differ from those estimates.
Reclassifications: Certain
prior year amounts have been reclassified to conform to the current year
presentation.
NOTE
2. Capital
Structure
We have
authorized common stock comprised of Class A Common Stock and Class B Common
Stock. The rights of holders of Class A Common Stock and Class B
Common Stock are identical, except each share of Class B Common Stock entitles
its holder to approximately 80 votes, while each share of Class A Common Stock
entitles its holder to one vote. We have authorized 2,000,000 shares
of preferred stock.
NOTE
3. Earnings
Per Share
The
following is a reconciliation of our earnings per share (in thousands, except
for per share data):
|
Years
Ended, December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income for basic and diluted earnings per share
|
$ | 34,265 | $ | 59,245 | $ | 59,799 | ||||||
|
Weighted
average shares outstanding - basic
|
37,367 | 37,174 | 38,660 | |||||||||
|
Dilutive
effect of stock options and restricted stock
|
158 | 310 | 468 | |||||||||
|
Weighted
average shares outstanding - diluted
|
37,525 | 37,484 | 39,128 | |||||||||
|
Earnings
per share - basic
|
$ | 0.92 | $ | 1.59 | $ | 1.55 | ||||||
|
Earnings
per share - diluted
|
$ | 0.91 | $ | 1.58 | $ | 1.53 | ||||||
NOTE
4. Fair
Value Measurement
The
carrying value of cash and cash equivalents, accounts receivable and accounts
payable approximated fair value as of December 31, 2009 and 2008 due to their
short-term nature. Cash and cash equivalents included $123.0 million
and $80.9 million as of December 31, 2009 and 2008, respectively, invested in a
money market fund comprised of U.S. treasury securities and repurchase
agreements for these securities. Restricted investments included $9.6
million and $6.1 million as of December 31, 2009 and 2008, respectively, of
mutual funds which are reported at fair value. The fair value
measurement of these securities is based on quoted prices in active markets for
identical assets which are defined as “Level 1” of the fair value hierarchy in
the Fair Value Measurements and Disclosures Topic of the
Codification.
33
NOTE
5. Property
and Equipment
Property
and equipment consist of the following (in thousands):
| December 31, | ||||||||
|
2009
|
2008
|
|||||||
|
Building
and improvements
|
$ | 72 | $ | 54 | ||||
|
Leasehold
improvements
|
2,174 | 1,700 | ||||||
|
Computer
equipment and software
|
52,302 | 50,366 | ||||||
|
Furniture
and equipment
|
8,077 | 7,995 | ||||||
|
Transportation
equipment
|
30,551 | 30,231 | ||||||
| 93,176 | 90,346 | |||||||
|
Less: Accumulated
depreciation and amortization
|
(64,666 | ) | (57,633 | ) | ||||
|
Property
and Equipment, net
|
$ | 28,510 | $ | 32,713 | ||||
Depreciation
expense was $7.8 million, $6.9 million and $6.8 million for 2009, 2008 and 2007,
respectively.
NOTE
6. Income
Taxes
The
following is a reconciliation of our effective tax rate to the federal statutory
tax rate:
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
U.S.
federal statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
taxes, net of federal benefit
|
2.6 | 2.7 | 3.4 | |||||||||
|
Nondeductible
expenses
|
0.5 | 0.6 | 0.5 | |||||||||
|
Provision
for valuation allowance
|
0.4 | - | 0.1 | |||||||||
|
IRS
settlement
|
- | - | (1.4 | ) | ||||||||
|
Illinois
law change
|
- | - | (1.3 | ) | ||||||||
|
Other
|
0.2 | 0.2 | (0.4 | ) | ||||||||
|
Net
effective rate
|
38.7 | % | 38.5 | % | 35.9 | % | ||||||
We and
our subsidiaries file both unitary and separate company state income tax
returns.
The
following is a summary of our provision for income taxes (in
thousands):
| Years Ended December 31, | ||||||||||||
|
Current
|
2009 | 2008 | 2007 | |||||||||
|
Federal
|
$ | 14,700 | $ | 25,197 | $ | 26,234 | ||||||
|
State
and local
|
1,619 | 2,590 | 3,672 | |||||||||
| 16,319 | 27,787 | 29,906 | ||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
4,560 | 8,651 | 4,000 | |||||||||
|
State
and local
|
741 | 643 | (477 | ) | ||||||||
| 5,301 | 9,294 | 3,523 | ||||||||||
|
Total
provision
|
$ | 21,620 | $ | 37,081 | $ | 33,429 | ||||||
34
The following is a summary of our deferred tax assets and
liabilities (in thousands):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Reserve
for uncollectible accounts receivable
|
$ | 1,721 | $ | 1,813 | ||||
|
Accrued
compensation
|
2,792 | 2,577 | ||||||
|
Other
reserves
|
2,393 | 1,748 | ||||||
|
Current
deferred tax assets
|
6,906 | 6,138 | ||||||
|
Accrued
compensation
|
3,739 | 3,035 | ||||||
|
Operating
loss carryforwards
|
390 | 386 | ||||||
|
Other
reserves
|
842 | 692 | ||||||
|
Income
tax basis in excess of financial basis of goodwill
|
870 | 1,588 | ||||||
|
Less
valuation allowance
|
(379 | ) | (163 | ) | ||||
|
Long-term
deferred tax assets
|
5,462 | 5,538 | ||||||
|
Total
deferred tax assets
|
$ | 12,368 | $ | 11,676 | ||||
|
|
||||||||
|
Prepaids
|
$ | (1,374 | ) | $ | (1,200 | ) | ||
|
Other
receivables
|
(2,658 | ) | (2,953 | ) | ||||
|
Current
deferred tax liabilities
|
(4,032 | ) | (4,153 | ) | ||||
|
Property
and equipment
|
(7,322 | ) | (7,393 | ) | ||||
|
Goodwill
|
(60,113 | ) | (54,110 | ) | ||||
|
Long-term
deferred tax liabilities
|
(67,435 | ) | (61,503 | ) | ||||
|
Total
deferred tax liabilities
|
$ | (71,467 | ) | $ | (65,656 | ) | ||
Our state
tax net operating losses of $390,000 expire between December 31, 2012 and
December 31, 2023. Management believes it is more likely than not
that the deferred tax assets will be realized with the exception of $379,000
related to state tax net operating losses for which a valuation allowance has
been established.
During
its examination of our 1997 federal income tax return, the Internal Revenue
Service (“IRS”) proposed to reclassify our allocation of a significant amount of
tax basis in fixed assets to non-amortizable intangibles. The dispute
was ultimately resolved in the fourth quarter of 2007 after the IRS Office of
Appeals reviewed the dispute and permitted the statute of limitations to
lapse. The settlement reduced our 2007 income tax provision by $1.3
million and resulted in a reclassification of our liability for unrecognized tax
benefits to a deferred tax liability.
As of
December 31, 2009 and 2008, the amount of unrecognized tax benefits was $0.5
million and $0.3 million, of which $0.3 million and $0.2 million would decrease
our income tax provision, respectively, if recognized. A
reconciliation of the beginning and ending amount of unrecognized tax benefits
(excluding accrued interest expense) is as follows (in thousands):
|
Balance
at January 1, 2007
|
$ | 3,152 | ||
|
Reductions
as a result of a lapse of the applicable statute of
limitations
|
(2,896 | ) | ||
|
Balance
at December 31, 2007
|
$ | 256 | ||
|
Additions
for tax positions taken in prior years
|
80 | |||
|
Balance
at December 31, 2008
|
$ | 336 | ||
|
Additions
based on tax positions related to the current year
|
118 | |||
|
Additions
for tax positions taken in prior years
|
199 | |||
|
Reductions
for tax positions taken in prior years
|
(80 | ) | ||
|
Reductions
as a result of a lapse of the applicable statute of
limitations
|
(55 | ) | ||
|
Balance
at December 31, 2009
|
$ | 518 |
35
NOTE
7. Long-Term
Debt and Financing Arrangements
We have a
revolving credit agreement that provides for unsecured borrowings of up to $50.0
million. The interest rate ranges from LIBOR plus 0.75% to 1.25% or
Prime plus 0.5%. The revolving line of credit expires on March 23,
2010. The financial covenants require a minimum net worth of $175.0
million and a cash flow leverage ratio of not more than 2.0 to
1.0. The commitment fees charged on the unused line of credit are
between 0.15% and 0.25%.
Our unused and available borrowings
under our bank revolving line of credit were $47.1 million as of December 31,
2009 and December 31, 2008. We were in compliance with our debt
covenants as of December 31, 2009.
We have standby letters of credit
that expire from 2010 to 2012. As of December 31, 2009, our letters
of credit were $2.9 million.
NOTE
8. Rental
Expense, User Charges and Commitments
Minimum
annual rental commitments, as of December 31, 2009, under non-cancelable
operating leases, principally for real estate, containers and equipment, are
payable as follows (in thousands):
|
2010
|
$ | 16,919 | ||
|
2011
|
15,096 | |||
|
2012
|
11,599 | |||
|
2013
|
4,344 | |||
|
2014
|
1,166 | |||
|
2015
and thereafter
|
718 | |||
| $ | 49,842 |
Total
rental expense included in general and administrative expense, which relates
primarily to real estate, was approximately $8.0 million, $8.3 million and $7.7
million for 2009, 2008 and 2007, respectively. Many of the real
estate leases contain renewal options and escalation clauses which require
payments of additional rent to the extent of increases in the related operating
costs. We straight-line rental expense in accordance with the FASB
guidance in the Leases Topic of the Codification.
In March
2006, we entered into a ten year lease agreement for a building and property
(Comtrak’s Memphis facility) with a related party, the President of
Comtrak. Rent paid under this lease agreement included in general and
administrative expense totaled $0.7 million for each of the years ended 2009,
2008 and 2007. The annual lease payments escalate by less than 1% per
year.
We incur
rental expense for our leased containers and tractors that are included in
transportation costs and totaled $11.5 million, $12.1 million, and $9.9 million
for 2009, 2008 and 2007, respectively.
We incur
charges for use of a fleet of rail owned chassis and dedicated rail owned
containers on the Union Pacific, Norfolk Southern and Burlington Northern Santa
Fe which are included in transportation costs. Such charges were
$50.1 million, $45.4 million and $45.5 million for 2009, 2008 and 2007,
respectively. As of December 31, 2009, we have the ability to return
the majority of the containers and pay for the chassis only when we are using
them under these agreements. As a result, no minimum commitments
related to these chassis and containers have been included in the table above.
Chassis charges included in accrued expenses-other as of Decem