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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the quarterly period ended September 30, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission file number: 0-27754
HUB GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-4007085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
377 EAST BUTTERFIELD ROAD, SUITE 700
LOMBARD, ILLINOIS 60148
(Address, including zip code, of principal executive offices)
(630) 271-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
On November 13, 2001, the registrant had 7,046,250 outstanding shares
of Class A common stock, par value $.01 per share, and 662,296 outstanding
shares of Class B common stock, par value $.01 per share.
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HUB GROUP, INC.
INDEX
Page
PART I. Financial Information:
Hub Group, Inc. - Registrant
Unaudited Condensed Consolidated Balance Sheets - September 30, 2001 and
December 31, 2000 3
Unaudited Condensed Consolidated Statements of Operations - Three Months
and Nine Months Ended September 30, 2001 and 2000 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity - Nine
Months Ended September 30, 2001 5
Unaudited Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2001 and 2000 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II. Other Information 17
2
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
SEPTEMBER 30, DECEMBER 31,
----------------- -----------------
2001 2000
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ -
Accounts receivable, net 195,315 195,765
Deferred taxes 11,183 7,933
Prepaid expenses and other current assets 4,551 3,609
----------------- -----------------
TOTAL CURRENT ASSETS 211,049 207,307
PROPERTY AND EQUIPMENT, net 39,900 43,854
GOODWILL, net 209,602 213,907
OTHER ASSETS 1,737 2,177
----------------- -----------------
TOTAL ASSETS $ 462,288 $ 467,245
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 157,377 $ 166,743
Other 6,133 8,529
Accrued expenses
Payroll 11,669 9,559
Other 10,385 9,658
Current portion of long-term debt 8,037 12,341
----------------- -----------------
TOTAL CURRENT LIABILITIES 193,601 206,830
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 115,096 109,089
DEFERRED TAXES 17,950 15,202
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST 1,032 352
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares
issued or outstanding in 2001 and 2000 - -
Common stock,
Class A: $.01 par value; 12,337,700 shares authorized; 7,046,250
shares issued and outstanding in 2001 and 7,046,050 shares issued and
outstanding in 2000 70 70
Class B: $.01 par value; 662,300 shares authorized; 662,296 shares
issued and outstanding in 2001 and 2000 7 7
Additional paid-in capital 110,817 110,817
Purchase price in excess of predecessor basis, net of tax benefit of $10,306 (15,458) (15,458)
Retained earnings 39,613 40,336
Accumulated other comprehensive loss (440) -
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 134,609 135,772
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 462,288 $ 467,245
================= =================
See notes to unaudited condensed consolidated financial statements.
3
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -------------
Revenue $ 323,046 $ 354,797 $ 987,004 $ 1,027,694
Transportation costs 278,475 310,574 851,066 899,423
----------- ----------- ----------- -------------
Gross margin 44,571 44,223 135,938 128,271
Costs and expenses:
Salaries and benefits 23,461 24,648 71,663 71,972
Selling, general and administrative 16,989 11,698 41,541 34,129
Depreciation and amortization of property and equipment 2,147 1,508 8,117 3,908
Amortization of goodwill 1,435 1,435 4,305 4,305
Impairment of property and equipment - - 3,401 -
----------- ----------- ----------- -------------
Total costs and expenses 44,032 39,289 129,027 114,314
Operating income 539 4,934 6,911 13,957
----------- ----------- ----------- -------------
Other income (expense):
Interest expense (2,426) (2,558) (7,793) (8,566)
Interest income 189 228 522 568
Other, net 93 47 (185) 170
----------- ----------- ----------- -------------
Total other expense (2,144) (2,283) (7,456) (7,828)
Income (loss) before minority interest and provision for income taxes (1,605) 2,651 (545) 6,129
----------- ----------- ----------- -------------
Minority interest 280 - 680 120
----------- ----------- ----------- -------------
Income (loss) before provision for income taxes (1,885) 2,651 (1,225) 6,009
Provision for (benefit from) income taxes (773) 1,087 (502) 2,464
----------- ----------- ----------- -------------
Net income (loss) $ (1,112) $ 1,564 $ (723) $ 3,545
=========== =========== =========== =============
Basic earnings (loss) per common share $ (0.14) $ 0.20 $ (0.09) $ 0.46
=========== =========== =========== =============
Diluted earnings (loss) per common share $ (0.14) $ 0.20 $ (0.09) $ 0.46
=========== =========== =========== =============
See notes to unaudited condensed consolidated financial statements.
4
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2001
(in thousands, except shares)
PURCHASE
PRICE IN
CLASS A & B EXCESS OF ACCUMULATED
COMMON STOCK ADDITIONAL PREDECESSOR OTHER TOTAL
--------------------- PAID-IN BASIS, NET RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL OF TAX EARNINGS LOSS EQUITY
----------- --------- ----------- ----------- ---------- ------------- ---------------
Balance at December 31, 2000 7,708,346 $ 77 $ 110,817 $ (15,458) $ 40,336 $ - $ 135,772
Comprehensive income
Net loss - - - - (723) - (723)
Other comprehensive
income (loss):
Cumulative effect of
adopting Statement 133,
net of tax of $55 - - - - - 79 79
Unrealized interest rate swap
loss net of tax benefit of ($361) - - - - - (519) (519)
---------------
Comprehensive loss (1,163)
----------- --------- ----------- ----------- ---------- ------------- ---------------
Balance at September 30, 2001 7,708,346 $ 77 $ 110,817 $ (15,458) $ 39,613 $ (440) $ 134,609
=========== ========= =========== =========== ========== ============= ===============
See notes to unaudited condensed consolidated financial statements.
5
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2001 2000
---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ (723) $ 3,545
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 8,612 4,505
Amortization of goodwill 4,305 4,305
Impairment of property and equipment 3,401 -
Deferred taxes (502) 2,464
Minority interest 680 120
Loss/(Gain) on sale of assets 410 (3)
Changes in working capital:
Accounts receivable, net 450 (3,533)
Prepaid expenses and other current assets (942) (2,526)
Accounts payable (11,762) 22,562
Accrued expenses 2,397 3,757
Other assets 440 18
---------------- ----------------
Net cash provided by operating activities 6,766 35,214
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment, net (8,469) (20,050)
---------------- ----------------
Net cash used in investing activities (8,469) (20,050)
---------------- ----------------
Cash flows from financing activities:
Proceeds from sale of common stock - 31
Distributions to minority interest - (454)
Net borrowings/(payments) on long-term debt 1,703 (16,633)
Proceeds from issuance of long-term debt - 27
---------------- ----------------
Net cash provided by (used in) financing activities 1,703 (17,029)
---------------- ----------------
Net decrease in cash and cash equivalents - (1,865)
Cash and cash equivalents, beginning of period - 1,865
---------------- ----------------
Cash and cash equivalents, end of period $ - $ -
================ ================
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 7,488 $ 9,377
Income taxes 60 1,520
Non-cash activity:
Unrealized loss on derivative instrument $ 440 $ -
See notes to unaudited condensed consolidated financial statements.
6
HUB GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
of Hub Group, Inc. (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements have been
condensed or omitted pursuant to those rules and regulations. However, the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading.
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.
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, 2000. Results of operations in interim periods are not necessarily
indicative of results to be expected for a full year.
NOTE 2. Earnings (Loss) per Share
The following is a reconciliation of the Company's Earnings (Loss) per
Share:
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
-------------------------- ------------------------
(000's) (000's)
---------------- --------------
Per-Share Per-Share
Loss Shares Amount Income Shares Amount
-------- ------ --------- ------ ------ ---------
Basic (Loss) Earnings per Share
Income (loss) available to
common stockholders $(1,112) 7,709 $ (0.14) $1,564 7,708 $ 0.20
-------- ------ --------- ------ ------ ---------
Effect of Dilutive Securities
Stock options - 15 - - - -
-------- ------ --------- ------ ------ ---------
Diluted (Loss) Earnings per Share
Income (loss) available to
common stockholders
plus assumed exercises $(1,112) 7,724 $ (0.14) $1,564 7,708 $ 0.20
-------- ------ --------- ------ ------ ---------
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
-------------------------- ------------------------
(000's) (000's)
---------------- --------------
Per-Share Per-Share
Loss Shares Amount Income Shares Amount
-------- ------ --------- ------ ------ ---------
Basic (Loss) Earnings per Share
Income (loss) available to
common stockholders $ (723) 7,708 $(0.09) $3,545 7,708 $ 0.46
-------- ------ --------- ------ ------ ---------
Effect of Dilutive Securities
Stock options - 9 - - 11 -
-------- ------ --------- ------ ------ ---------
Diluted (Loss) Earnings per Share
Income (loss) available to
common stockholders
plus assumed exercises $ (723) 7,717 $(0.09) $3,545 7,719 $ 0.46
-------- ------ --------- ------ ------ ---------
7
NOTE 3. Property and Equipment
Property and equipment consist of the following:
September 30, December 31,
--------------- -------------
2001 2000
--------------- -------------
(000's)
Building and improvements $ 57 $ 57
Leasehold improvements 2,096 2,111
Computer equipment and software 47,828 46,396
Furniture and equipment 7,722 7,635
Transportation equipment and automobiles 3,540 3,678
--------------- -------------
61,243 59,877
Less: Accumulated depreciation and amortization (21,343) (16,023)
--------------- -------------
PROPERTY AND EQUIPMENT, net $ 39,900 $ 43,854
=============== =============
Depreciation and amortization expense for the nine months ending
September 30, 2001, includes approximately $1.5 million in additional
depreciation due primarily to a change in estimated useful lives for various
assets. Of this amount, $0.9 million relates to various assets, that in December
2000, were determined to be no longer useful once the Company's new operating
system was completed. The remaining $0.6 million of additional depreciation
relates to the Company's decision to accelerate depreciation for a piece of
communications software that was replaced with a more stable and cost effective
software application during the second quarter of 2001.
NOTE 4. Impairment of Property and Equipment
On March 30, 2001, a $3.4 million pretax charge was recorded due to the
impairment of Hub Group Distribution Services' ("Hub Distribution") e-Logistics
software ("e-software"). This e-software was used to process orders relating to
the home delivery of large box items purchased over the internet. Management
made the decision to exit the internet home delivery business and, in
conjunction with this decision, all customer contracts associated with the
internet home delivery business were terminated as of March 30, 2001.
Consequently, the e-software's fair value was reduced to zero based on the lack
of any future cash flows attributable to Hub Distribution's e-Logistics
initiative. The Company does not intend to use the software in the future.
NOTE 5. Restructuring Charge
In the fourth quarter of 2000, management approved a plan to
restructure the Company's accounting functions and centralize them at its
corporate headquarters in Lombard, Illinois. This centralization plan was to
result in the reduction of 56 accounting-related positions from the operating
companies. All affected employees were informed in mid-November 2000. In
connection with this plan, the Company recorded a pre-tax charge of $250,000
included in salaries and benefits in the fourth quarter of 2000. As of September
30, 2001, $206,000 had been paid related to the accounting restructuring and
thirty-one employees had been terminated. The remaining $44,000 of accrual was
reversed during the third quarter, thereby reducing salaries and benefits
expense.
NOTE 6. Derivative Financial Instrument
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("Statement 133"), "Accounting for
Derivative Instruments and Hedging Activities." On January 1, 2001, the Company
adopted Statement 133 and recorded the fair value of its interest rate swap of
$79,000, net of related income taxes of $55,000, as an asset. The transition
adjustment to record the asset was included in other comprehensive income.
8
The Company uses this interest rate swap to manage its exposure to
changes in interest rates for its floating rate debt. This interest rate swap
qualifies as a cash flow hedge. The interest rate differential to be received or
paid on the swap is recognized in the condensed consolidated statements of
operations as a reduction or increase in interest expense, respectively. In
accordance with the new derivative requirements, the effective portion of the
change in the fair value of the derivative instrument is recorded in the
condensed consolidated balance sheets as a component of current assets or
liabilities and other comprehensive income. The ineffective portion of the
change in the fair value of the derivative instrument, along with the gain or
loss on the hedged item, is recorded in earnings and reported in the condensed
consolidated statements of operations, on the same line as the hedged item.
For the nine months ended September 30, 2001, the Company adjusted its
derivative financial instrument to fair value which resulted in an unrealized
loss of $519,000, net of the related income tax benefit of $361,000. This
adjustment is included in other comprehensive loss.
NOTE 7. Bad Debt Write-off
During September 2001, the Company recognized bad debt expense which is
included in selling, general and administrative expense in the accompanying
condensed consolidated statements of operations in the amount of $4.7 million
related to a Korean steamship line customer ("Customer"). The Customer filed for
reorganization under the Corporate Reorganization Act of Korea in May 2001 and
has subsequently been forced into liquidation by the Korean courts. According to
court filings, the Customer does not have adequate funds to pay its secured
creditors. The Company, as an unsecured creditor, was notified by the trustee
appointed by the court during September 2001 that it should not expect to
recover any funds from the Customer.
NOTE 8. Recent Accounting Pronouncements
On June 30, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 141, "Business Combinations"("Statement 141"). Under
Statement 141, all business combinations initiated after June 30, 2001 must be
accounted for using the purchase method of accounting. Use of the
pooling-of-interests method will be prohibited. Additionally, Statement 141
requires that certain intangible assets that can be identified and named be
recognized as assets apart from goodwill. Statement 141 is effective for all
business combinations initiated after June 30, 2001.
On June 30, 2001, the FASB issued Statement No. 142, "Goodwill and
Other Intangible Assets" ("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 will adopt Statement 142 as of January 1, 2002 for goodwill and
other intangible assets acquired prior to June 30, 2001. As of September 30,
2001, goodwill, net of accumulated amortization, is $209.6 million and
amortization expense for the nine months ended September 30, 2001 is $4.3
million. Except as set forth in Outlook, Risks and Uncertainties - Amortization
of Goodwill, the Company has not yet fully determined the impact that Statement
142 will have on the Company's financial condition or results of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement 144") which supercedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Statement 144 created one accounting model
for long-lived assets to be disposed of by sale that applies to all long-lived
assets, including discontinued operations, and replaces the provisions of
Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions", for
the disposal of segments of a business. Statement 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reporting in continuing operations or in discontinued
operations. The provisions of Statement 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
9
generally, are to be applied prospectively. The Company does not expect this
statement to have a material impact on its statements of financial condition or
results of operations.
10
HUB GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUE
Revenue for Hub Group, Inc. (the "Company") decreased 8.9% to $323.0
million in 2001 from $354.8 million in 2000. Overall, management believes that
a soft economy has negatively impacted the current year growth. Intermodal
revenue decreased 14.9% from 2000. The decline in intermodal revenue was
primarily due to a $31.8 million reduction in demand for intermodal service from
the Company's steamship customers. Two large steamship customers ceased doing
business with the Company in the second quarter of 2001. While one steamship
customer has terminated operations worldwide, the other has changed its method
of business. Truckload brokerage revenue increased 4.7% from 2000. Logistics
revenue, which includes revenue from the Company's supply chain solutions
services and revenue from Hub Group Distribution Services ("Hub Distribution"),
increased 9.7% compared to 2000. This increase was primarily due to significant
growth from the Company's supply chain solutions business.
GROSS MARGIN
Gross margin increased 0.8% to $44.6 million in 2001 from $44.2 million
in 2000. As a percent of revenue, gross margin increased to 13.8% from 12.5% in
2000. The increase in gross margin as a percent of revenue is primarily due to
the increase in the intermodal gross margin percentage resulting primarily from
the loss of the high volume, lower margin steamship business.
SALARIES AND BENEFITS
Salaries and benefits decreased 4.8% to $23.5 million in 2001 from
$24.6 million in 2000. As a percentage of revenue, salaries and benefits
increased to 7.3% from 6.9% in 2000. The increase as a percentage of revenue is
due to the decrease in revenue.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 45.2% to $17.0
million in 2001 from $11.7 million in 2000. As a percentage of revenue, these
expenses increased to 5.3% from 3.3% in 2000. The increase as a percentage of
revenue is primarily attributed to a $4.7 million write-off associated with the
bankruptcy and forced liquidation of a Korean steamship line customer and the
decrease in the Company's revenue.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization increased 42.4% to $2.1 million in 2001
from $1.5 million in 2000. This expense as a percentage of revenue increased to
0.7% from 0.4% in 2000. The increase in depreciation and amortization is due to
the depreciation of software applications placed into service throughout 2000
and 2001.
AMORTIZATION OF GOODWILL
Amortization of goodwill remained constant at $1.4 million in both 2001
and 2000.
11
OTHER INCOME (EXPENSE)
Interest expense decreased 5.2% to $2.4 million in 2001 from $2.6
million in 2000. The decrease in interest expense is due primarily to lower
interest rates.
Interest income remained constant at $0.2 million in both periods.
MINORITY INTEREST
Minority interest increased to $0.3 million in 2001 from $0.0 million
in 2000. Minority interest represents the 35% minority interest in Hub
Distribution.
INCOME TAXES
The (benefit from)/provision for income taxes decreased to $(0.8)
million in 2001 from $1.1 million in 2000. The Company recorded an income tax
benefit and provision using an effective rate of 41% in 2001 and 2000,
respectively.
NET INCOME/(LOSS)
The Company incurred a net loss of $(1.1) million in 2001 compared to
net income of $1.6 million in 2000.
EARNINGS/(LOSS) PER SHARE
Basic and diluted loss per common share was $(0.14) in 2001 compared to
earnings per share of $0.20 in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUE
Revenue for the Company decreased 4.0% to $987.0 million in 2001 from
$1,027.7 million in 2000. Overall, management believes that a soft economy has
negatively impacted the current year growth. Intermodal revenue decreased 8.5%
from 2000. In addition to a soft economy, the decline in intermodal revenue was
primarily due to a $33.2 million reduction in demand for intermodal service from
the Company's steamship customers. Two large steamship customers ceased doing
business with the Company in the second quarter. While one steamship customer
has terminated operations worldwide, the other has changed its method of
business. Truckload brokerage revenue remained flat in comparison to 2000.
Logistics revenue, which includes revenue from the Company's supply chain
solutions services and revenue from Hub Distribution, increased 17.8% compared
to 2000. This increase was primarily due to significant growth from the
Company's supply chain solutions business.
GROSS MARGIN
Gross margin increased 6.0% to $135.9 million in 2001 from $128.3
million in 2000. As a percent of revenue, gross margin increased to 13.8% from
12.5% in 2000. The increase in gross margin as a percent of revenue is primarily
due to two significant factors. First, gross margin for intermodal improved due
primarily to the loss of the high volume, lower margin steamship business.
Second, Hub Distribution experienced an unusually strong gross margin percentage
due to some one-time installation projects and an amendment to a contract with
one of its customers. This amendment allowed for a rate increase back to the
beginning of the current contract year.
12
SALARIES AND BENEFITS
Salaries and benefits decreased 0.4% to $71.7 million in 2001 from
$72.0 million in 2000. As a percentage of revenue, salaries and benefits
increased to 7.3% from 7.0% in 2000. The increase as a percentage of revenue is
primarily attributed to the decrease in revenue.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 21.7% to $41.5
million in 2001 from $34.1 million in 2000. As a percentage of revenue, these
expenses increased to 4.2% from 3.3% in 2000. The increase as a percentage of
revenue is primarily attributed to a $4.7 million write-off associated with the
bankruptcy and forced liquidation of a Korean steamship line customer, increased
expenditures related to information systems and to the decrease in revenue.
Information systems costs increased, in part, due to the leasing of computer
hardware required to support newly developed software applications, data
communication costs and costs associated with the outsourced data center.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization increased 107.7% to $8.1 million in 2001
from $3.9 million in 2000. This expense as a percentage of revenue increased to
0.8% from 0.4% in 2000. The increase in depreciation and amortization is due in
part to the depreciation of software applications placed into service throughout
2000 and 2001. Additionally, during the first half of the year, the Company
recognized $1.5 million in additional depreciation due primarily to a change in
estimated useful lives for various assets. Of this amount, $0.9 million relates
to various assets, that in December 2000, were determined to be no longer useful
once the Company's new operating system was completed. The remaining $0.6
million of additional depreciation relates to the Company's decision to
accelerate depreciation for a piece of communications software that was replaced
with a more stable and cost effective software application during the second
quarter of 2001.
AMORTIZATION OF GOODWILL
Amortization of goodwill remained constant at $4.3 million in both 2001
and 2000.
IMPAIRMENT OF PROPERTY AND EQUIPMENT
The $3.4 million impairment charge in 2001 was due to Hub
Distribution's exit from its initiative surrounding the home delivery of large
box items purchased over the internet.
OTHER INCOME (EXPENSE)
Interest expense decreased 9.0% to $7.8 million in 2001 from $8.6
million in 2000. The decrease in interest expense is due primarily to carrying a
lower average debt balance this year as compared to the prior year and lower
interest rates.
Interest income decreased to $0.5 million in 2001 from $0.6 million in
2000.
Other income/(expense) decreased to $(0.2) million in 2001 from $0.2
million in 2000. The change is due primarily to a $0.4 million loss on the
disposal of a piece of software in 2001.
MINORITY INTEREST
Minority interest increased to $0.7 million in 2001 from $0.1 million
in 2000. Minority interest represents the 35% minority interest in Hub
Distribution.
13
INCOME TAXES
The (benefit from)/provision for income taxes decreased to $(0.5)
million in 2001 from $2.5 million in 2000. The Company recorded an income tax
benefit and provision using an effective rate of 41% in 2001 and 2000,
respectively.
NET INCOME/(LOSS)
The Company incurred a net loss of $(0.7) million in 2001 compared to
net income of $3.5 million in 2000.
EARNINGS/(LOSS) PER SHARE
Basic and diluted loss per common share was $(0.09) in 2001 compared to
earnings per share of $0.46 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
In order to minimize net financing costs, the Company intentionally
maintains low cash balances by using available cash to reduce borrowings. The
Company has funded its operations and capital expenditures through cash flows
from operations and bank borrowings.
Cash provided by operating activities for the nine months ended
September 30, 2001, was approximately $6.8 million, which resulted primarily
from net income from operations before non-cash charges of $16.2 million offset
by a net decrease in working capital of $9.4 million. The decrease in working
capital resulted primarily from a temporary increase in accounts receivable days
sales outstanding due to related issues from the implementation of a new billing
system.
Net cash used in investing activities for the nine months ended
September 30, 2001, was $8.5 million related to capital expenditures. The
capital expenditures were principally made to enhance the Company's information
system capabilities. The most significant project relates to a customized
operating system.
The net cash provided by financing activities for the nine months ended
September 30, 2001, was $1.7 million. This was comprised of $12.0 million of
borrowings on the Company's line of credit offset by $10.3 million of scheduled
payments on the Company's term debt, installment notes and capital leases.
The Company maintains a multi-bank credit facility. The facility was
originally comprised of $50.0 million in term debt and a $50.0 million revolving
line of credit. At September 30, 2001, there was $37.0 million of outstanding
term debt and $36.0 million outstanding and $14.0 million unused and available
under the line of credit. Borrowings under the 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 payments ranging from $1,250,000 to $2,000,000 with a
balloon payment of $19.0 million due on March 31, 2004.
On March 30, 2001, the Company executed an amendment of its unsecured
$50.0 million term debt and the $50.0 million five-year revolving line of credit
agreement. The amendment modifies the definition of EBITDAM (earnings before
interest expense, income taxes, depreciation, amortization and minority
interest) slightly, extending the date for adding back certain non-cash charges.
Effective September 30, 2001, the Company executed an additional amendment,
allowing the $4.7 million of customer bad debt write-off from a Korean steamship
line to be added back for the purpose of calculating EBITDAM at September 30,
2001. All other provisions of the existing credit facility remained unchanged.
The Company was in compliance with the amended financial covenants that were
effective as of September 30, 2001.
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
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payments of $10.0 million commencing on June 25, 2005.
On March 30, 2001, the Company executed an amendment to the Notes. This
amendment modifies the definition of EBITDAM slightly, extending the date for
adding back certain non-cash charges. Effective September 30, 2001, the Company
executed an additional amendment, allowing the $4.7 million of customer bad debt
write-off from a Korean steamship line to be added back for the purpose of
calculating EBITDAM at September 30, 2001. All other provisions of the Notes
agreement remained unchanged. The Company was in compliance with the amended
financial covenants that were effective as of September 30, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 141, "Business Combinations"("Statement 141"). Under
Statement 141, all business combinations initiated after June 30, 2001 must be
accounted for using the purchase method of accounting. Use of the
pooling-of-interests method will be prohibited. Additionally, Statement 141
requires that certain intangible assets that can be identified and named be
recognized as assets apart from goodwill. Statement 141 is effective for all
business combinations initiated after June 30, 2001.
On June 30, 2001, the FASB issued Statement No. 142, "Goodwill and
Other Intangible Assets" ("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 will adopt Statement 142 as of January 1, 2002 for goodwill and
other intangible assets acquired prior to June 30, 2001. As of September 30,
2001, goodwill, net of accumulated amortization, was $209.6 million and
amortization expense for the nine months ended September 30, 2001 was $4.3
million. Except as set forth in Outlook, Risks and Uncertainties - Amortization
of Goodwill, the Company has not yet fully determined the impact that Statement
142 will have on the Company's financial condition or results of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement 144") which supercedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Statement 144 created one accounting model
for long-lived assets to be disposed of by sale that applies to all long-lived
assets, including discontinued operations, and replaces the provisions of
Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions", for
the disposal of segments of a business. Statement 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reporting in continuing operations or in discontinued
operations. The provisions of Statement 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Company does not expect this
statement to have a material impact on its statements of financial condition or
results of operations.
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,
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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.
AMORTIZATION OF GOODWILL
The Company will adopt FASB Statement 142 as of January 1, 2002. As a
result of this new standard, goodwill and intangible assets that have indefinite
useful lives will not be amortized but rather will be tested at least annually
for impairment. In conjunction with Statement 142, the Company will cease
amortizing its goodwill, which the Company expects will result in approximately
$5.7 million of reduced amortization expense on an annual basis beginning in
2002. The Company will also, at a minimum, test annually for impairment. Should
the Company determine that its goodwill is impaired in the context of Statement
142, the goodwill will be adjusted to reflect its fair value and a corresponding
charge to earnings would result.
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
8 of the Company's Form 10-K filed for the year ended December 31, 2000. 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 September 30, 2001, the Company had
an interest rate swap with a notional amount of $25.0 million, a weighted
average pay rate of 7.87%, a weighted average receive rate of 4.84% 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.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
A list of exhibits included as part of this Report is
set forth in the Exhibit Index appearing elsewhere
herein by this reference.
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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: November 13, 2001 /S/ JAY E. PARKER
-----------------
Jay E. Parker
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit No.
10.18 Amendment to $100 million Credit Agreement among the Registrant, Hub
City Terminals, Inc. and Harris Trust and Savings Bank effective as of
September 30, 2001.
10.19 Amendment to $50 million Note Purchase Agreement among the Registrant,
Hub City Terminals, Inc. and various purchasers effective as of
September 30, 2001.