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December 12, 2008
VIA
EDGAR
Ms. Linda
Cvrkel
Branch
Chief
Division
of Corporate Finance
Securities
and Exchange Commission
100 F
Street, N.E.
Washington
D.C. 20549
Re: Hub
Group, Inc.
Form 10-K for the year ended December
31, 2007
Filed February 22, 2008
File No. 000-27754
Dear Ms.
Cvrkel:
We are
writing in response to your letter dated December 1, 2008, setting forth the
comment of the staff of the Division of Corporation Finance (the “Staff”) on the
Hub Group, Inc. Form 10-K for the year ended December 31, 2007. We
have carefully considered the Staff’s comments and our responses are set forth
below. To facilitate the Staff’s review, we have keyed our response
to the heading and numbered comment used in the Staff’s comment letter, which we
have reproduced in bold text.
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1.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
page 14
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Results
of Operations, page 15
Year
Ended December 31, 2007, Compared to Year Ended December 31, 2006, page
15
In
future filings, where changes in revenue and expense amounts are related to
several factors, each significant factor should be separately quantified and
discussed. For example, each of the factors contributing to the
change in general and administrative expenses listed on page 17 should be
quantified and discussed, specifically, the changes in each of the rental,
telephone, bad debt and equipment lease expenses.
In future
filings, where changes in revenue and expense amounts are related to several
factors, each significant factor will be separately quantified and
discussed. For example, we intend to expand the explanation for
general and administrative expenses in our Form 10-K for the year ended December
31, 2008.
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2.
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Critical
Accounting Policies, page 21
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We
note that your critical accounting policies disclosure is substantially similar
to your accounting policy footnote 1. In accordance with the guidance
in FR-72 (Release 33-8350), please revise your discussion in future filings to
identify the risks involved with critical accounting policies, analyzing to the
extent possible factors such as:
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How
the Company arrived at the
estimate;
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How
accurate the estimate/assumption has been in the
past;
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Whether
the estimate/assumption is reasonably likely to change in the future;
and
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Evaluate
the sensitivity to change of your critical accounting
policies.
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We will
revise our discussion in future filings to identify risks involved with the
critical accounting policies, analyzing to the extent possible factors such as
how we arrived at the estimate and how accurate the
estimate/assumption has been in the past. Additionally, we will
discuss whether the estimate/assumption is reasonably likely to change in the
future and we will evaluate the sensitivity to change of our critical accounting
policies. We intend to revise our Allowance for Uncollectible Trade
Accounts Receivable and Goodwill disclosure in future filings as
follows:
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,
based on an annual hindsight analysis to determine our experience, we reserve a
portion of every receivable balance that has aged over one year and for
customers in bankruptcy. In addition, we reserve for a portion of
account balances specifically identified by management as uncollectible based on
consideration of the aging of the customer’s 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 trade accounts receivable fluctuates depending
upon the factors mentioned above. However, we do not expect the
allowance for trade uncollectible accounts receivable 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 trade accounts receivable
is reported on the balance sheet in net accounts
receivable. Recoveries of receivables previously charged off are
recorded as reduction of bad debt expense when received.
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 than its carrying
value. 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 assumptions used in the valuations include
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. At December 31,
2007, 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.
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3.
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Notes to Consolidated
Financial Statements
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Note
14. Acquisition, page 41
We
note from the disclosures included in Note 14 that the terms of the Asset
Purchase Agreement for Comtrak, included an earn–out mechanism for 2006 and
2007, which has been achieved for $10 million in total and is based on Comtrak’s
2006 and 2007 EBITDA as defined in the Asset Purchase Agreement. We
also note that the additional consideration of $5.0 million for both 2006 and
2007 has been added to the purchase price and applied to goodwill. We
further note that the $5.0 million for 2006 has been paid and the $5.0 million
for 2007 is due to the seller, the current President of Comtrak, and is included
in the related party payable on the Company’s December 31, 2007 balance
sheet.
Please
tell us and clarify in the notes to your financial statements in future filings
why you believe it is appropriate to account for the payments made or to be made
to the seller and current President of Comtrak pursuant to the earn-out
provisions of the purchase agreement as additional purchase price rather than as
compensation expense. In this regard, please explain how the various
factors outlined in EITF 95-8 were considered in determining that the earn out
payments should be accounted for as additional purchase price. We may
have further comment upon receipt of your response.
First, we
want to clarify that there were two earn out payments for $5.0 million each,
totaling $10 million. The second $5.0 million payment was made in the
first quarter of 2008. This is the payment accrued at December 31,
2007. The purchase agreement does not provide for any additional earn
out payments.
When we
reviewed EITF 95-8, we took into consideration the following factors which led
us to conclude the payments are additional purchase price:
1) In
EITF 95-8, under Factors involving terms of continuing employment, number 1, the
EITF states “A contingent consideration arrangement in which the payments are
automatically forfeited if employment terminates is a strong indicator that the
arrangement is compensation for post combination
services. Arrangements in which the contingent payments are not
affected by employment termination may indicate that the contingent payments are
additional purchase price rather than compensation.” In our
arrangement with Mike Bruns, the President of Comtrak, the contingent payments
for the earn-out are not affected by employment termination which indicates the
payments are additional purchase price;
2) In EIF
95-8, under Factors involving terms of continuing employment, number 3, level of
compensation, the EITF states “Situations in which employee compensation other
than contingent payments is at a reasonable level in comparison to that of other
key employees in the combined enterprise may indicate that the contingent
payments are additional purchase price rather than compensation.” The
employment agreement with the President of Comtrak is for 3 years with an annual
salary of $400,000 per year and the agreement automatically
renews. The salary for the President of Comtrak is at a reasonable
level as compared to our other key employees. In addition to his
salary, the President of Comtrak was awarded restricted stock each year as a
part of our long term incentive plan similar to other key
employees. The President of Comtrak’s total compensation package
relative to other key employees indicates that the contingent payments are
additional purchase price; and
3)
In EITF 95-8, under Factors involving reasons for contingent payment provisions
it states “Understanding the reasons why the acquisition agreement includes a
provision for contingent payments may be helpful in assessing the substance of
the arrangement.” The contingent earn-out was determined at the time
of acquisition based on the valuation of Comtrak. In other words, the
purchase price was based on a multiple of earnings before depreciation, interest
and taxes and we wanted to make sure that the performance of the business was
consistent with forecasts. The multiple including the $10
million payment was approximately 4 (high end of our range) and the multiple
without the $10 million payment was 3 (low end of our range). The
substance of the arrangement would indicate the continent payments are
additional purchase price.
The other
criteria of EITF 95-8 not mentioned above were also reviewed and noted to not be
indicative that the additional payments were compensation. Also,
there were no other relevant criteria noted that would indicate the terms of the
earn-out would be considered compensation expense. We plan to mention
point number 1 and point number 3 above in our notes to the financial statements
in future filings.
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4.
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Notes to Consolidated
Financial Statements
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Note
14. Acquisition, page 41
In
future filings, please revise to state the primary reasons for the acquisition
and include a description of the factors that contributed to a purchase price
that resulted in recognition of goodwill. Refer to the disclosure
requirements outlined in paragraph 51b of SFAS 141.
We intend
to add the following information to our future filings related to the Comtrak
acquisition.
We paid a
premium (i.e. goodwill) over the fair value of the net tangible and identified
intangible assets acquired for a number of strategic fit reasons including the
following:
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Our
Company will benefit from Comtrak’s diverse service
offerings
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We
will be able to perform more of our own drayage which our customers
value
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We
will be less vulnerable to the capacity volatility in the
marketplace
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Comtrak
has best in class operations and we will adopt their best practices at our
existing drayage operations
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*****
The
Company acknowledges that:
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The
Company is responsible for the adequacy and accuracy of the disclosure in
the filing;
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Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the
filings; and
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The
Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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Please
contact the undersigned at (630) 271-3676 if you have any questions or require
additional information.
Sincerely
Terri A.
Pizzuto
Chief
Financial Officer
CC: David
C. Zeilstra
General
Counsel