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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the quarterly period ended June 30, 2002 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission file number: 0-27754
HUB GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-4007085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
377 EAST BUTTERFIELD ROAD, SUITE 700
LOMBARD, ILLINOIS 60148
(Address, including zip code, of principal executive offices)
(630) 271-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
On August 14, 2002, the registrant had 7,046,250 outstanding shares of
Class A common stock, par value $.01 per share, and 662,296 outstanding shares
of Class B common stock, par value $.01 per share.
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HUB GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
HUB GROUP, INC. - REGISTRANT
Unaudited Condensed Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001 3
Unaudited Condensed Consolidated Statements of Operations - Three Months
and Six Months Ended June 30, 2002 and 2001 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity - Six
Months Ended June 30, 2002 5
Unaudited Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2002 and 2001 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II. OTHER INFORMATION 17
2
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
JUNE 30, DECEMBER 31,
---------------- ----------------
2002 2001
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ -
Accounts receivable, net 151,560 149,765
Deferred taxes 11,075 11,147
Prepaid expenses and other current assets 3,571 3,840
---------------- ----------------
TOTAL CURRENT ASSETS 166,206 164,752
PROPERTY AND EQUIPMENT, net 37,160 39,098
GOODWILL, net 208,166 208,166
OTHER ASSETS 1,563 1,507
MINORITY INTEREST 3,025 2,501
---------------- ----------------
TOTAL ASSETS $ 416,120 $ 416,024
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 139,437 $ 135,588
Other 1,648 1,275
Accrued expenses
Payroll 8,864 11,195
Other 8,735 14,020
Current portion of long-term debt 8,040 8,054
---------------- ----------------
TOTAL CURRENT LIABILITIES 166,724 170,132
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 101,045 96,059
DEFERRED TAXES 16,924 17,380
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares
issued or outstanding in 2002 and 2001 - -
Common stock,
Class A: $.01 par value; 12,337,700 shares authorized; 7,046,250
shares issued and outstanding in 2002 and 2001 70 70
Class B: $.01 par value; 662,300 shares authorized; 662,296 shares
issued and outstanding in 2002 and 2001 7 7
Additional paid-in capital 110,819 110,819
Purchase price in excess of predecessor basis, net of tax benefit
of $10,306 (15,458) (15,458)
Retained earnings 36,117 37,404
Accumulated other comprehensive loss (128) (389)
----------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 131,427 132,453
----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 416,120 $ 416,024
================= ===============
See notes to unaudited consolidated financial statements.
3
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
-------------- ------------- -------------- -------------
(Not Reviewed) (Not Reviewed)
Revenue $ 327,595 $ 318,023 $ 632,894 $ 663,958
Transportation costs 290,999 272,692 555,289 572,591
-------------- ------------- -------------- -------------
Gross margin 36,596 45,331 77,605 91,367
Costs and expenses:
Salaries and benefits 23,348 23,497 46,945 48,202
Selling, general and administrative 11,610 12,340 23,123 24,552
Depreciation and amortization of property and equipment 2,535 2,835 5,207 5,970
Amortization of goodwill - 1,435 - 2,870
Impairment of property and equipment - - - 3,401
-------------- ------------- -------------- -------------
Total costs and expenses 37,493 40,107 75,275 84,995
Operating (loss) income (897) 5,224 2,330 6,372
-------------- ------------- -------------- -------------
Other income (expense):
Interest expense (2,482) (2,423) (4,768) (5,367)
Interest income 54 80 121 333
Other, net 60 36 122 (278)
-------------- ------------- -------------- -------------
Total other expense (2,368) (2,307) (4,525) (5,312)
(Loss) income before minority interest and provision for income taxes (3,265) 2,917 (2,195) 1,060
-------------- ------------- -------------- -------------
Minority interest - 1,111 (524) 400
-------------- ------------- -------------- -------------
(Loss) income before provision for (benefit from) income taxes (3,265) 1,806 (1,671) 660
Provision for (benefit from) income taxes (1,038) 741 (384) 271
-------------- ------------- -------------- -------------
Net (loss) income $ (2,227) $ 1,065 $ (1,287) $ 389
============== ============= ============== =============
Basic (loss) earnings per common share $ (0.29) $ 0.14 $ (0.17) $ 0.05
============== ============= ============== =============
Diluted (loss) earnings per common share $ (0.29) $ 0.14 $ (0.17) $ 0.05
============== ============= ============== =============
See notes to unaudited condensed consolidated financial statements.
4
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 2002
(in thousands, except shares)
JUNE 30,
2002
----------------
Class A & B Common Stock Shares
Beginning of year 7,708,546
----------------
Ending balance 7,708,546
----------------
Class A & B Common Stock Amount
Beginning of year $ 77
----------------
Ending balance 77
----------------
Additional Paid-in Capital
Beginning of year 110,819
----------------
Ending balance 110,819
----------------
Purchase Price in Excess of Predecessor Basis, Net of Tax
Beginning of year (15,458)
----------------
Ending balance (15,458)
----------------
Retained Earnings
Beginning of year 37,404
Net loss (1,287)
----------------
Ending balance 36,117
----------------
Accumulated Other Comprehensive Income (Loss)
Beginning of year (389)
Other comprehensive income 261
----------------
Ending balance (128)
----------------
TOTAL STOCKHOLDERS' EQUITY $ 131,427
================
Comprehensive Income (Loss)
Net loss $ (1,287)
Unrealized interest rate swap income net of tax expense of $153 261
----------------
Other comprehensive loss $ (1,026)
================
See notes to unaudited condensed consolidated financial statements.
5
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED JUNE 30,
--------------------------------
2002 2001
--------------- ---------------
(Not Reviewed)
Cash flows from operating activities:
Net (loss) income $ (1,287) $ 389
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and equipment 5,284 6,317
Amortization of goodwill - 2,870
Impairment of property and equipment - 3,401
Deferred taxes (384) 271
Minority interest (524) 400
Loss on sale of assets 48 423
Other assets (56) 442
Changes in working capital:
Accounts receivable, net (1,795) 25,154
Prepaid expenses and other current assets 269 (434)
Accounts payable 4,222 (5,382)
Accrued expenses (7,355) (979)
--------------- ---------------
Net cash (used in) provided by operating activities (1,578) 32,872
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment, net (3,394) (5,552)
--------------- ---------------
Net cash used in investing activities (3,394) (5,552)
--------------- ---------------
Cash flows from financing activities:
Net borrowings (payments) on long-term debt 4,972 (27,320)
--------------- ---------------
Net cash provided by (used in) financing activities 4,972 (27,320)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
--------------- ---------------
Cash and cash equivalents, end of period $ - $ -
=============== ===============
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 4,152 $ 5,574
Income taxes - 36
Non-cash activity:
Unrealized (loss) income on derivative instrument $ 261 $ (251)
See notes to undaudited condensed consolidated financial statements.
6
HUB GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Statements
The accompanying unaudited condensed consolidated financial
statements of Hub Group, Inc. (the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements have been condensed or omitted pursuant to those rules
and regulations. However, the Company believes that the disclosures
contained herein are adequate to make the information presented not
misleading.
As previously reported in the Company's Form 10-K for the year
ended December 31, 2001, the Company's independent auditors were unable to
review the quarterly financial data from 2001 in accordance with standards
established by the American Institute of Certified Public Accountants
because the Company did not restate its results on a quarterly basis.
The financial statements reflect, in the opinion of management,
all material adjustments (which include only normal recurring adjustments)
necessary to present fairly the Company's financial position and results of
operations for the three months and six months ended June 30, 2002. In the
fourth quarter of 2001, the Company recorded adjustments which resulted in
a decline of $0.7 million in net income to properly report the annual
results for the year as a result of accounting irregularities at the
Company's 65% owned subsidiary, Hub Group Distribution Services (HGDS). The
Company was unable to determine in which quarters in 2001 the adjustments
should have been made and the amount to be recorded in each quarter.
Consequently, the results for the six and three months ended June 30, 2002
are not comparable to the results for the six months and three months ended
June 30, 2001.
These condensed consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001. Results of operations in
interim periods are not necessarily indicative of results to be expected
for a full year.
NOTE 2. Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Significant estimates include allowance for doubtful accounts, costs of
purchased transportation and services and reserves for pricing and billing
adjustments. Actual results could differ from those estimates. During the
three months ended March 31, 2002, the Company revised its estimate of
accrued transportation costs resulting in an increase in pretax income of
approximately $2.8 million.
7
NOTE 3. Minority Interest
HGDS is a 65% owned partnership. Pursuant to the HGDS Partnership
Agreement, each of the partners has a legal obligation to the partnership
for any deficit balance in their respective capital accounts. Accordingly,
there is a debit balance reflected in minority interest in the accompanying
condensed consolidated balance sheets related to the minority partner's
deficit capital account balance of approximately $3 million and $2.5
million at June 30, 2002 and December 31, 2001, respectively. Management
believes that the balance in the minority interest account was collectable
at December 31, 2001 and June 30, 2002. Hub has a legal right to pursue the
minority partner for this deficit balance in the capital account. In August
of 2002, the Company entered into a settlement agreement and release with
the minority partner that resulted in the relinquishment of the minority
partner's 35% interest in HGDS and release of the minority partner's claims
against the Company in exchange for $4.0 million in cash and release of
Hub's claims against the minority partner including the $3.0 million
balance in minority interest.
NOTE 4. Earnings (Loss) per Share
The following is a reconciliation of the Company's Earnings (Loss)
per Share (in thousands except per share amounts):
<table>
<caption>
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------------ -----------------------------
<s> <c> <c> <c> <c> <c> <c>
Per-Share Per-Share
Loss Shares Amount Income Shares Amount
Basic Earnings (Loss) per Share
Income (loss) available to
common stockholders $(2,227) 7,709 $(0.29) $1,065 7,708 $0.14
-------- ----- ------- ------ ----- -----
Effect of Dilutive Securities
Stock options - - - - 7 -
-------- ------ ------- ------ ----- -----
Diiluted Earnings (Loss) per Share
Income (loss) available to
common stockholders
plus assumed exercises $(2,227) 7,709 $(0.29) $1,065 7,715 $0.14
-------- ----- ------- ------ ----- -----
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------------------------- ----------------------------
Per-Share Per-Share
Loss Shares Amount Income Shares Amount
Basic Earnings (Loss) per Share
Income (loss) available to
common stockholders $(1,287) 7,709 $(0.17) $389 7,708 $0.05
-------- ----- ------- ---- ----- ------
Effect of Dilutive Securities
Stock options - - - - 5 -
-------- ----- ------- ---- ----- ------
Diluted Earnings (Loss) per Share
Income (loss) available to
common stockholders
plus assumed exercises $(1,287) 7,709 $(0.17) $389 7,713 $0.05
-------- ----- ------- ---- ----- -----
8
NOTE 5. Property and Equipment
Property and equipment consist of the following (in thousands):
June 30, December 31,
--------------------- ------------------
2002 2001
-------------------- ------------------
Building and improvements $ 57 $ 57
Leasehold improvements 2,054 2,126
Computer equipment and software 51,892 49,373
Furniture and equipment 7,749 7,542
Transportation equipment and automobiles 3,764 3,690
-------------------- ------------------
65,516 62,788
Less: Accumulated depreciation and amortization (28,356) (23,690)
-------------------- ------------------
PROPERTY AND EQUIPMENT, net $ 37,160 39,098
==================== ==================
NOTE 6. Debt
The Company's outstanding debt is as follows (in thousands):
June 30, December 31,
------------------ ----------------
2002 2001
------------------ ----------------
Bank line of credit $ 28,000 $ 19,000
Unsecured term notes, with quarterly payments ranging from $1,250,000 to
$2,000,000 with a balloon payment of $19,000,000 due March 31, 2004;
Interest is due quarterly at a floating rate based upon LIBOR (London
Interbank Offered Rate) or Prime rate. At June 30, 2002 and December 31,
2001, the weighted average interest rate was 4.61%
and 4.66%, respectively 35,000
31,000
Unsecured notes, mature on June 25, 2009 with annual payments of
$10,000,000 commencing on June 25, 2005; interest is paid quarterly
at a fixed rate of 9.14% during 2002 and 2001 50,000
50,000
Capital lease obligations, collateralized by certain equipment
85 113
--------------- ------------
Total long-term debt 109,085 104,113
Less current portion (8,054) (8,040)
---------------- ------------
$ 101,045 $ 96,059
----------------- ------------
</table>
9
Fair value approximates book value at the balance sheet dates.
The Company was in default of certain debt covenants including the fixed
charge coverage ratio, minimum earnings before interest, taxes,
depreciation and minority interest and cash flow leverage ratio as of June
30, 2002. By August 14, 2002, amendments to the Company's credit agreements
were executed to modify certain financial covenants for the quarters ending
September 30, 2002 and December 31, 2002 and waive Hub Group's
non-compliance with certain financial covenants for the fiscal quarter
ending June 30, 2002. The amendments provide the loans will be secured by
assets of the Company no later than October 15, 2002. In addition, the
amendments outline a process for the modification of financial covenants
for the periods beginning March 31, 2003 and beyond. The Company believes
that it will satisfactorily complete the modification of the financial
covenants for these periods as outlined in the amendments.
NOTE 7. Rent Expense and User Charges
Rent expense included in selling, general and administrative
expense is $3.8, $3.8, $7.7 and $7.4 million for the three months ended
June 30, 2002 and 2001 and the six months ended June 30, 2002 and 2001,
respectively. Hub also incurs user charges for its use of a fleet of
dedicated containers which are included in transportation costs. Such
charges included in transportation costs are $7.0, $7.5, $13.9 and $15.8
million for the three months ended June 30, 2002 and 2001 and the six
months ended June 30, 2002 and 2001, respectively.
NOTE 8. Recent Accounting Pronouncement
On June 30, 2001, the Financial Accounting Standards Board issued
Statement 142. Under Statement 142, goodwill and intangible assets that
have indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. Intangible assets that have finite
useful lives will continue to be amortized over their useful lives. The
Company adopted Statement 142 as of January 1, 2002.
In connection with SFAS 142, the Company completed the first step
of transitional goodwill impairment testing. This transitional testing used
discounted cash flow and market capitalization methodologies to determine a
fair market value for the reporting unit. The results of the transitional
testing indicated no impairment.
The transitional impairment testing is based upon the Company's
estimates of the value of the reporting unit, future operating performance
and discount rates. Should the estimates differ materially from actual
results, the Company may be required to record impairment charges in future
periods. The Company will continue to test the value of its goodwill for
any impairment at least annually and impairment, if any, will be recorded
as expense in the period of impairment.
10
The following table presents net income (loss) for 2002 in
comparison to 2001 exclusive of amortization expense recognized in the
previous year related to goodwill which will no longer be amortized.
Amounts are in thousands except per share amounts:
Three Months Ended June 30,
-----------------------------------
2002 2001
--------------- --------------
Net income (loss) as reported $ (2,227) 1,065
Add back amortization of goodwill, net of tax - -
Adjusted net income (loss) (2,227) 1,912
----------- -----------
Adjusted basic and diluted earnings per share (0.29) $ 0.25
----------- -----------
Six Months Ended June 30,
----------------------------------
2002 2001
-------------- -------------
Net income (loss) as reported $ (1,287 $ 89
Add back amortization of goodwill, net of tax - 1,694
Adjusted net income (loss) -------------- ------------
(1,287) 2,083
-------------- ------------
Adjusted basic and diluted earnings per share (0.17) $ 0.27
-------------- ------------
NOTE 9. Contingencies
On February 19, 2002, a purported class action lawsuit was filed
by Riggs Partners, LLC in the United States District Court for the Northern
District of Illinois, Eastern Division. The complaint names as defendants
the Company, the Company's officers and former officers that signed the
Company's periodic reports filed with the Securities and Exchange
Commission and the Company's former auditors. The complaint alleges that
the defendants violated Section 10 (b) and Rule 10b-5 there under and
section 20 (a) of the Securities Exchange Act of 1934 by filing or causing
to be filed with the Securities and Exchange Commission periodic reports
that contained inaccurate financial statements. The complaint seeks
unspecified compensatory damages, reimbursement of reasonable costs and
expenses, including counsel fees and expert fees, and such other relief as
the court deems proper. On June 7, 2002, the plaintiffs filed a
consolidated amended complaint. On July 18, 2002, the Company and is
officers and former officers filed a motion to dismiss the amended
complaint in its entirety. The Company's former auditors also filed a
motion to dismiss the amended complaint on July 18, 2002. The plaintiffs
have until August 15, 2002 to respond to the motions to dismiss, and the
Company and its former auditors have until August 29, 2002 to file replies
in support of their motions to dismiss. The Company believes that this suit
is without merit and intends to vigorously defend itself and its officers.
An adverse judgment in this lawsuit could have a material adverse effect on
the Company's financial position and results of operations.
11
HUB GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING ADJUSTMENT
In the fourth quarter of 2001, the Company recorded adjustments
which resulted in a decline of $0.7 million in net income to properly
report the annual results for the year as a result of accounting
irregularities at the Company's 65% owned subsidiary, Hub Group
Distribution Services (HGDS). The Company was unable to determine in which
quarters in 2001 the adjustments should have been made and the amount to be
recorded in each quarter. Consequently, the results for the six months
ended and three months ended June 30, 2002 are not comparable to the
results for the six months and three months ended June 30, 2001.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to the Three Months Ended
June 30, 2001
Revenue
Revenue for Hub Group, Inc. increased 3.0% to $327.6 million in
2002 from $318.0 million in 2001. Intermodal revenue increased 3.1% from
2001. Truckload brokerage revenue increased 15.5% over 2001 due to
increased volume. Logistics revenue, which includes revenue from the
Company's supply chain solutions services and revenue from Hub Group
Distribution Services, decreased 9.3% to $46.8 million in 2002 from $51.6
million in 2001. Supply chain solutions logistics services revenue
increased 36.9% to $27.8 million in 2002 from $20.3 million in 2001 as a
result of adding new customers and increased business from existing
customers. Hub Group Distribution Services' revenue decreased 39.3% to
$19.0 million in 2002 from $31.3 million in 2001. HGDS experienced a
significant revenue decline primarily in its installation business due to
lower demand from its largest customer.
Gross Margin
Gross margin decreased 19.3% to $36.6 million in 2002 from $45.3
million in 2001. As a percent of revenue, gross margin decreased to 11.2%
from 14.3% in 2001. The decrease in gross margin as a percent of revenue is
due primarily to HGDS performing less installation work than during the
second quarter of 2001, Hub Group Distribution Services' customer mix and
their pricing structure. In addition, intermodal gross margin decreased
slightly due to customer mix, price competition and higher transportation
costs than in 2001.
Salaries and Benefits
Salaries and benefits decreased 0.6% to $23.3 million in 2002 from
$23.5 million in 2001. As a percentage of revenue, salaries and benefits
decreased to 7.1% from 7.4% in 2001. The decrease is attributed primarily
to a decrease in both headcount and incentive compensation, partially
offset by increased costs for health benefits.
Selling, General and Administrative
Selling, general and administrative expenses decreased 5.9% to
$11.6 million in 2002 from $12.3 million in 2001. As a percentage of
revenue, these expenses decreased to 3.5% in 2002 from 3.9% in 2001. This
decrease is primarily attributed to a reduction in information technology
contractor costs, outsourced data center costs, travel costs and telephone
costs. In the second quarter of 2002, the Company incurred a $0.3 million
expense for professional fees related to the investigation and restatement
of Hub Group Distribution Services' historical financial statements.
11
Depreciation and Amortization of Property and Equipment
Depreciation and amortization of property and equipment decreased
10.6% to $2.5 million in 2002 from $2.8 million in 2001. This expense as a
percentage of revenue decreased from 0.9% to 0.8% in 2002.
Amortization of Goodwill
Amortization of goodwill decreased to $0.0 million in 2002 from
$1.4 million in 2001. As of January 1, 2002, the Company adopted Financial
Accounting Standards Board Statement No. 142, "Goodwill and Other
Intangible Assets ("Statement 142"). Under Statement 142, goodwill and
intangible assets that have indefinite useful lives are no longer
amortized.
Other Income (Expense)
Interest expense increased 2.4% to $2.5 million in 2002 from $2.4
million in 2001. The increase in interest expense is due to carrying a
higher average debt balance this year as compared to the prior year.
Minority Interest
The minority interest decreased to $0.0 million in 2002 from $1.1
million in 2001. HGDS is a 65% owned partnership. Pursuant the HGDS
Partnership Agreement, each of the partners has a legal obligation to the
partnership for any deficit balance in their respective capital accounts.
Accordingly, there is a debit balance reflected in minority interest in the
accompanying condensed consolidated balance sheets related to the minority
partner's deficit capital account balance of approximately $3 million and
$2.5 million at June 30, 2002 and December 31, 2001, respectively.
Management believes that the balance in the minority interest account was
collectable at December 31, 2001 and June 30, 2002. Hub has a legal right
to pursue the minority partner for this deficit balance in the capital
account. In August of 2002, the Company entered into a settlement agreement
and release with the minority partner that resulted in the relinquishment
of the minority partner's 35% interest in HGDS and release of the minority
partner's claims against the Company in exchange for $4.0 million in cash
and release of Hub's claims against the minority partner including the $3.0
million balance in minority interest.
Income Tax Provision
The income tax provision decreased to a benefit of $1.0 million in
2002 compared to a provision of $0.7 million in 2001. The Company recorded
income taxes using an effective rate of 41.0% in 2001 and 37% in 2002. The
rate changed because of changes in permanent differences between book and
taxable income (loss) and the impact of state net operating losses.
Net Income (Loss)
Net (loss) income decreased to a loss of $2.2 million in 2002 from
net income of $1.1 million in 2001.
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per common share decreased to a
loss of $0.29 in 2002 from income of $0.14 in 2001.
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
Revenue
Revenue for Hub Group, Inc. decreased 4.7% to $632.9 million in
2002 from $664.0 million in 2001. Intermodal revenue decreased 6.8% from
2001which is primarily attributed to a $32.3 million reduction in demand
from the Company's steamship customers when comparing the first quarter of
2002 with the first quarter of 2001. As previously disclosed, these
12
customers ceased doing business with the Company early in the second
quarter of 2001. Without the decrease in revenue related to the loss of the
steamship customers intermodal revenue would have remained flat. Truckload
brokerage revenue increased 12.0% from 2001 due to increased volume.
Logistics revenue, which includes revenue from the Company's supply chain
solutions services and revenue from Hub Group Distribution Services,
decreased 11.8% to $90.8 million in 2002 from $102.9 million in 2001.
Revenue from supply chain solutions logistics services increased 24.7% to
$52.5 million in 2002 from $42.1 million in 2001 as a result of adding new
customers and increased business from existing customers. Hub Group
Distribution Services' revenue decreased 37.0% to $38.3 million in 2002
from $60.8 million in 2001.
Gross Margin
Gross margin decreased 15.1% to $77.6 million in 2002 from $91.4
million in 2001. As a percent of revenue, gross margin decreased to 12.3%
from 13.8% in 2001. The decrease in gross margin as a percent of revenue is
primarily attributed to HGDS experiencing lower volumes and lower margins
in the installation business. Intermodal gross margin as a percentage of
revenue decreased slightly due to changes in customer mix, competitive
pricing, and increased transportation costs as compared to 2001. During the
three months ended March 31, 2002, the Company revised its estimate of
accrued transportation costs resulting in an increase in pretax income of
approximately $2.8 million.
Salaries and Benefits
Salaries and benefits decreased 2.6% to $46.9 million in 2002 from
$48.2 million in 2001. As a percentage of revenue, salaries and benefits
increased to 7.4% from 7.3% in 2001. The decrease in expense is due to the
consolidation of the accounting functions, which took place primarily
during the first and second quarters of 2001.
Selling, General and Administrative
Selling, general and administrative expenses decreased 5.8% to
$23.1 million in 2002 from $24.6 million in 2001. As a percentage of
revenue, these expenses remained constant at 3.7% in 2002 and 2001. The
decrease in expense is primarily attributed to a reduction in contractor
costs, outsourced data center costs, travel costs and telephone costs. In
the first six months of 2002, the Company incurred a $1.3 million expense
for professional fees related to the investigation and restatement of Hub
Group Distribution Services' historical financial statements. Without the
$1.3 million in professional services, selling, general and administrative
expense decreased $2.8 million or 11.4%.
Depreciation and Amortization of Property and Equipment
Depreciation and amortization decreased 12.8% to $5.2 million in
2002 from $6.0 million in 2001. This expense as a percentage of revenue
decreased to 0.8% from 0.9% in 2001. Depreciation expense in the prior year
included $0.9 million of excess depreciation related to various assets that
were determined to be no longer useful once the Company's new operating
system was completed.
Amortization of Goodwill
Amortization of goodwill decreased to $0.0 million in 2002 from
$2.9 million in 2001. As of January 1, 2002, the Company adopted Financial
Accounting Standards Board Statement No. 142, "Goodwill and Other
Intangible Assets ("Statement 142"). Under Statement 142, goodwill and
intangible assets that have indefinite useful lives are no longer
amortized.
Impairment of Property and Equipment
The $3.4 million impairment charge in 2001 was due to HGDS' exit
from its initiative surrounding the home delivery of large box items
purchased over the internet.
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Other Income (Expense)
Interest expense decreased 11.2% to $4.8 million in 2002 from $5.4
million in 2001. The decrease in interest expense is due primarily to
carrying a lower average debt balance this year as compared to the prior
year.
Minority Interest
The minority interest was a $0.5 million benefit in 2002 compared
with a $0.4 million charge in 2001. HGDS is 65% owned partnership. Pursuant
to the HGDS Partnership Agreement, each of the partners has a legal
obligation to the partnership for any deficit balance in their respective
capital accounts. Accordingly, there is a debit balance reflected in
minority interest in the accompanying condensed consolidated balance sheets
related to the minority partner's deficit capital account balance of
approximately $3 million and $2.5 million at June 30, 2002 and December 31,
2001, respectively. Management believes that the balance in the minority
interest account was collectable at December 31, 2001 and June 30, 2002.
Hub has a legal right to pursue the minority partner for this deficit
balance in the capital account. In August of 2002, the Company entered into
a settlement agreement and release with the minority partner that resulted
in the relinquishment of the minority partner's 35% interest in HGDS and
release of the minority partner's claims against the Company in exchange
for $4.0 million in cash and release of Hub's claims against the minority
partner including the $3.0 million balance in minority interest.
Income Tax Provision
The income tax provision decreased to a benefit of $0.4 million in
2002 compared to a provision of $0.3 million in 2001. The Company recorded
income taxes using an effective rate of 41.0% in 2001 and 37% in 2002. The
rate changed because of changes in permanent differences between book and
taxable income (loss) and the impact of state net operating losses.
Net Income (Loss)
Net (loss) income decreased to a loss of $1.3 million in 2002 from
net income of $0.4 million in 2001.
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per common share decreased to a
loss of $0.17 in 2002 from income of $0.05 in 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board issued
Statement 142. Under Statement 142, goodwill and intangible assets that
have indefinite useful lives are no longer amortized but rather will be
tested at least annually for impairment. Intangible assets that have finite
useful lives will continue to be amortized over their useful lives. The
Company adopted Statement 142 as of January 1, 2002.
In connection with SFAS 142, the Company completed the first step
of transitional goodwill impairment testing. The transitional testing used
discounted cash flow and market capitalization methodologies to determine a
fair market value for the reporting unit. The results of the transitional
testing indicated no impairment.
The transitional testing is based upon the Company's estimates of
the value of the reporting unit, future operating performance and discount
rates. Should the estimates differ materially from actual results, the
Company may be required to record impairment charges in future periods. The
Company will continue to test the value of its goodwill for any impairment
at least annually and impairment, if any, will be recorded as expense in
the period of impairment.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and capital expenditures
through cash flows from operations and bank borrowings.
Cash used in operating activities for the six months ended June
30, 2002 was approximately $1.6 million, which resulted primarily from net
income from operations before non-cash charges of $3.1 million and a net
decrease in working capital of $4.7 million.
Net cash used in investing activities for the six months ended
June 30, 2002 was $3.4 million which related to capital expenditures. The
capital expenditures were primarily related to enhancing the Company's
operating system and various software applications.
The net cash provided by financing activities for the six months
ended June 30, 2002, was $5.0 million. This is comprised of $9.0 million of
borrowings on the Company's line of credit and $4.0 million of scheduled
payments on the Company's term debt and capital leases.
The Company maintains a multi-bank credit facility. The facility
is comprised of term debt and a revolving line of credit. At June 30, 2002,
there was $31.0 million of outstanding term debt and $28.0 million
outstanding and $22.0 million unused and available under the line of
credit. Borrowings under the revolving line of credit are unsecured and
have a five-year term that began on April 30, 1999, with a floating
interest rate based upon the LIBOR (London Interbank Offered Rate) or Prime
Rate. The term debt has quarterly principal payments ranging from
$1,250,000 to $2,000,000 with a balloon payment of $19.0 million due on
March 31, 2004.
The Company maintains $50.0 million of private placement debt (the
"Notes"). These Notes are unsecured and have an eight-year average life.
Interest is paid quarterly. These Notes mature on June 25, 2009, with
annual principal payments of $10.0 million commencing on June 25, 2005
The Company was in default of certain debt covenants including the
fixed charge coverage ratio, minimum earnings before interest, taxes,
depreciation and minority interest and cash flow leverage ratio as of June
30, 2002. By August 14, 2002, amendments to the Company's credit agreements
were executed to modify certain financial covenants for the quarters ending
September 30, 2002 and December 31, 2002 and waive Hub Group's
non-compliance with certain financial covenants for the fiscal quarter
ending June 30, 2002. The amendments provide the loans will be secured by
assets of the Company no later than October 15, 2002. In addition, the
amendments outline a process for the modification of financial covenants
for the periods beginning March 31, 2003 and beyond. The Company believes
that it will satisfactorily complete the modification of the financial
covenants for these periods as outlined in the amendments
OUTLOOK, RISKS AND UNCERTAINTIES
Except for historical data, the information contained in this
Quarterly Report constitutes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are inherently uncertain and subject to risks. Such statements
should be viewed with caution. Actual results or experience could differ
materially from the forward-looking statements as a result of many factors.
Forward-looking statements in this report include, but are not limited to,
those contained in this "Outlook, Risks and Uncertainties" section
regarding expectations, hopes, beliefs, estimates, intentions or strategies
regarding the future. The Company assumes no liability to update any such
forward-looking statements. In addition to those mentioned elsewhere in
this section, such risks and uncertainties include the impact of
competitive pressures in the marketplace, including the entry of new,
web-based competitors and direct marketing efforts by the railroads, the
degree and rate of market growth in the intermodal, brokerage and logistics
markets served by the Company, changes in rail and truck capacity, further
consolidation of rail carriers, deterioration in relationships with
existing rail carriers, rail service conditions, changes in governmental
regulation, adverse weather conditions, fuel shortages, changes in the cost
of services from rail, drayage and other vendors and fluctuations in
interest rates.
15
Liquidity and Capital Resources
The Company believes that cash to be provided by operations, cash
available under its line of credit and the Company's ability to obtain
additional credit will be sufficient to meet the Company's short-term
working capital and capital expenditure needs. The Company believes that
the aforementioned items are sufficient to meet its anticipated long-term
working capital, capital expenditure and debt repayment needs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in
interest rates which may adversely affect its results of operations and
financial condition. The Company seeks to minimize the risk from interest
rate volatility through its regular operating and financing activities and,
when deemed appropriate, through the use of derivative financial
instruments. The Company does not use financial instruments for trading
purposes.
The Company has both fixed and variable rate debt as described in
Note 9 of the Company's Form 10-K filed for the year ended December 31,
2001. The Company has entered into an interest rate swap agreement
designated as a hedge on a portion of the Company's variable rate debt. The
purpose of the swap is to fix the interest rate on a portion of the
variable rate debt and reduce certain exposures to interest rate
fluctuations. At June 30, 2002, the Company had an interest rate swap with
a notional amount of $25.0 million, a weighted average pay rate of 8.37%, a
weighted average receive rate of 4.36% and a maturity date of September 30,
2002. This swap agreement involves the exchange of amounts based on the
variable interest rate for amounts based on the fixed interest rate over
the life of the agreement, without an exchange of the notional amount upon
which the payments are based. The differential to be paid or received as
interest rates change is accrued and recognized as an adjustment of
interest expense related to the debt.
The main objective of interest rate risk management is to reduce
the total funding cost to the Company and to alter the interest rate
exposure to the desired risk profile.
16
PART II. Other Information
Item 1. Legal Proceedings.
On February 19, 2002, a purported class action lawsuit was
filed by Riggs Partners, LLC in the United States District Court
for the Northern District of Illinois, Eastern Division. The
complaint names as defendants the Company, the Company's officers
and former officers that signed the Company's periodic reports
filed with the Securities and Exchange Commission and the
Company's former auditors. The complaint alleges that the
defendants violated Section 10 (b) and Rule 10b-5 thereunder and
section 20 (a) of the Securities Exchange Act of 1934 by filing or
causing to be filed with the Securities and Exchange Commission
periodic reports that contained inaccurate financial statements.
The complaint seeks unspecified compensatory damages,
reimbursement of reasonable costs and expenses, including counsel
fees and expert fees, and such other relief as the court deems
proper. On June 7, 2002, the plaintiffs filed a consolidated
amended complaint. On July 18, 2002, the Company and is officers
and former officers filed a motion to dismiss the amended
complaint in its entirety. The Company's former auditors also
filed a motion to dismiss the amended complaint on July 18, 2002.
The plaintiffs have until August 15, 2002 to respond to the
motions to dismiss, and the Company and its former auditors have
until August 29, 2002 to file replies in support of their motions
to dismiss. The Company believes that this suit is without merit
and intends to vigorously defend itself and its officers. An
adverse judgment in this lawsuit could have a material adverse
effect on the Company's financial position and results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of Stockholders of Hub Group, Inc. was
held on May 21, 2002. At this meeting, the following six directors
were reelected with the following votes: Phillip C. Yeager:
19,115,326 votes for and 634,470 votes withheld; David P. Yeager:
19,115,307 votes for and 634,489 votes withheld; Thomas L. Hardin:
19,114,326 votes for and 634,470 votes withheld; Gary D. Eppen:
19,239,358 votes for and 510,438 votes withheld; Charles R.
Reaves: 19,242,590 votes for and 507,206 votes withheld; Martin P.
Slark: 19,242,590 votes for and 507,206 votes withheld.
Also at this meeting, the Stockholders voted on a proposal to
approve the Company's 2002 Long-Term Incentive Plan. This
proposal was approved by the following votes: 17,383,327 votes
for, 593,522 votes against, 89,237 votes withheld and 1,683,710
broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) A list of exhibits included as part of this Report is
set forth in the Exhibit Index appearing elsewhere
herein by this reference.
(b) Reports on Form 8-K. The Company filed a Report on
Form 8-K on May 10, 2002, reporting in Item 4 that
the Company had decided to dismiss its independent
auditors, Arthur Andersen LLP and engage Ernst &
Young LLP to serve as its new independent auditors.
The Company filed an amendment to this Form 8-K on
June 11, 2002, reporting additional information
regarding its restatement of earnings due to the
accounting irregularities discovered at Hub Group
Distribution Services.
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Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly authorized this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HUB GROUP, INC.
DATE: August 15, 2002 /s/ Thomas M. White
---------------------------------
Thomas M. White
Senior Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit No.
10.22 Amendment to $100 million Credit Agreement among the
Registrant, Hub City Terminals, Inc. and Harris Trust
and Savings Bank dated August 13, 2002.
10.23 Amendment to $50 million Note Purchase Agreement among
the Registrant, Hub City Terminals, Inc. and various
purchasers dated August 14, 2002.
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