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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, 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 August 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 - June 30, 2001 and
December 31, 2000 3
Unaudited Condensed Consolidated Statements of Operations - Three Months
and Six Months Ended June 30, 2001 and 2000 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity - Six
Months Ended June 30, 2001 5
Unaudited Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 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 10
PART II. OTHER INFORMATION 16
2
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
-------------- --------------
2001 2000
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ -
Accounts receivable, net 170,611 195,765
Deferred taxes 9,444 7,933
Prepaid expenses and other current assets 4,043 3,609
-------------- --------------
TOTAL CURRENT ASSETS 184,098 207,307
PROPERTY AND EQUIPMENT, net 39,266 43,854
GOODWILL, net 211,037 213,907
OTHER ASSETS 1,735 2,177
-------------- --------------
TOTAL ASSETS $ 436,136 $ 467,245
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 161,618 $ 166,743
Other 8,272 8,529
Accrued expenses
Payroll 9,212 9,559
Other 9,277 9,658
Current portion of long-term debt 8,035 12,341
-------------- --------------
TOTAL CURRENT LIABILITIES 196,414 206,830
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 86,075 109,089
DEFERRED TAXES 16,984 15,202
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST 753 352
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; 7,046,050 shares
issued and outstanding in 2001 and 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 40,725 40,336
Accumulated other comprehensive loss (251) -
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 135,910 135,772
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 436,136 $ 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 Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenue $ 318,023 $ 344,329 $ 663,958 $ 672,897
Transportation costs 272,692 299,746 572,591 588,849
----------- ----------- ----------- -----------
Gross margin 45,331 44,583 91,367 84,048
Costs and expenses:
Salaries and benefits 23,497 24,148 48,202 47,324
Selling, general and administrative 12,340 11,064 24,552 22,431
Depreciation and amortization of property and equipment 2,835 1,247 5,970 2,400
Amortization of goodwill 1,435 1,435 2,870 2,870
Impairment of property and equipment - - 3,401 -
----------- ----------- ----------- -----------
Total costs and expenses 40,107 37,894 84,995 75,025
Operating income 5,224 6,689 6,372 9,023
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (2,423) (2,824) (5,367) (6,008)
Interest income 80 168 333 340
Other, net 36 20 (278) 123
----------- ----------- ----------- -----------
Total other expense (2,307) (2,636) (5,312) (5,545)
Income before minority interest and provision for income taxes 2,917 4,053 1,060 3,478
----------- ----------- ----------- -----------
Minority interest 1,111 158 400 120
----------- ----------- ----------- -----------
Income before provision for income taxes 1,806 3,895 660 3,358
Provision for income taxes 741 1,597 271 1,377
----------- ----------- ----------- -----------
Net income $ 1,065 $ 2,298 $ 389 $ 1,981
=========== =========== =========== ===========
Basic earnings per common share $ 0.14 $ 0.30 $ 0.05 $ 0.26
=========== =========== =========== ===========
Diluted earnings per common share $ 0.14 $ 0.30 $ 0.05 $ 0.26
=========== =========== =========== ===========
See notes to unaudited condensed consolidated financial statements.
4
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 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 income - - - - 389 - 389
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 ($230) - - - - - (330) (330)
---------------
Comprehensive income 138
----------- -------- ---------- -------------- ---------- -------------- ---------------
Balance at June 30, 2001 7,708,346 $ 77 $ 110,817 $ (15,458) $ 40,725 $ (251) $ 135,910
=========== ======== ========== ============== ========== ============== ===============
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,
-------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 389 $ 1,981
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 6,317 2,811
Amortization of goodwill 2,870 2,870
Impairment of property and equipment 3,401 -
Deferred taxes 271 1,754
Minority interest 400 120
Loss/(Gain) on sale of assets 423 (13)
Changes in working capital:
Accounts receivable, net 25,154 4,457
Prepaid expenses and other current assets (434) (3,069)
Accounts payable (5,382) 16,620
Accrued expenses (979) (528)
Other assets 442 141
------------ ------------
Net cash provided by operating activities 32,872 27,144
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment, net (5,552) (13,698)
------------ ------------
Net cash used in investing activities (5,552) (13,698)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock - 31
Distributions to minority interest - (454)
Payments on long-term debt (27,320) (14,915)
Proceeds from issuance of long-term debt - 27
------------ ------------
Net cash used in financing activities (27,320) (15,311)
------------ ------------
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 $ 5,574 $ 6,286
Income taxes 36 1,520
Non-cash activity:
Unrealized loss on derivative instrument $ 251 $ -
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.
NOTE 2. Earnings per Share
The following is a reconciliation of the Company's Earnings per Share:
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
------------------------ ------------------------
(000's) (000's)
------------- -------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
Basic Earnings per Share
Income available to
common stockholders $1,065 7,708 $ 0.14 $2,298 7,708 $ 0.30
------ ------ --------- ------ ------ ---------
Effect of Dilutive Securities
Stock options - 7 - - - -
------ ------ --------- ------ ------ ---------
Diluted Earnings per Share
Income available to
common stockholders
plus assumed exercises $1,065 7,715 $ 0.14 $2,298 7,708 $ 0.30
------ ------ --------- ------ ------ ---------
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
------------------------ ------------------------
(000's) (000's)
------------- -------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
Basic Earnings per Share
Income available to
common stockholders $ 389 7,708 $ 0.05 $1,981 7,707 $ 0.26
------ ------ --------- ------ ------ ---------
Effect of Dilutive Securities
Stock options - 5 - - 17 -
------ ------ --------- ------ ------ ---------
Diluted Earnings per Share
Income available to
common stockholders
plus assumed exercises $ 389 7,713 $ 0.05 $1,981 7,724 $ 0.26
------ ------ --------- ------ ------ ---------
7
NOTE 3. Property and Equipment
Property and equipment consist of the following:
June 30, December 31,
------------- -------------
2001 2000
------------- -------------
(000's)
Building and improvements $ 57 $ 57
Leasehold improvements 2,139 2,111
Computer equipment and software 44,846 46,396
Furniture and equipment 7,525 7,635
Transportation equipment and automobiles 3,525 3,678
------------- -------------
58,092 59,877
Less: Accumulated depreciation and amortization (18,826) (16,023)
------------- -------------
PROPERTY AND EQUIPMENT, net $ 39,266 $ 43,854
============= =============
Depreciation and amortization expense for the six months ending June
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 will
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 June 30,
2001, $184,000 had been paid related to the accounting restructuring and
twenty-three employees had been terminated. The remaining $66,000 of accrual is
expected to be paid during the third quarter of 2001.
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 three months ended June 30, 2001, the Company adjusted its
derivative financial instrument to fair value which resulted in an unrealized
loss of $330,000, net of the related income tax benefit or $230,000. This
adjustment is included in other comprehensive loss.
NOTE 7. 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 June 30, 2001,
goodwill, net of accumulated amortization, is $211.0 million and amortization
expense for the six months ended June 30, 2001 is $2.9 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.
NOTE 8. Contingency
On May 31, 2001, a large customer ("Customer") filed for reorganization
under the Corporate Reorganization Act of Korea. The Customer is currently
completing a revitalization plan and has yet to receive court approval of the
plan. This procedure is expected to take approximately three to six months. The
Customer currently owes the Company $4.6 million in outstanding accounts
receivable and $0.2 million in interest charges. These amounts are included in
Accounts Receivable, net in the accompanying condensed consolidated balance
sheets. As of June 30, 2001, the Company has not recorded any bad debt reserve
related specifically to the Customer due to the uncertainty of the outcome of
this matter. Should the Customer negotiate a payment plan with court approval,
these receivables could be collected over a period of years. Should the Customer
liquidate, the Company expects to recognize a charge ranging from $0.0 to
$4.8 million related to uncollectible receivables.
9
HUB GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
REVENUE
Revenue for Hub Group, Inc. (the "Company") decreased 7.6% to $318.0
million in 2001 from $344.3 million in 2000. Overall, management believes that a
soft economy and the impact of having higher fuel surcharges in the prior year
has negatively impacted the current year growth. Intermodal revenue decreased
12.4% from 2000. The decline in intermodal was significantly impacted by a $15.9
million reduction in demand for intermodal service from the Company's steamship
customers. Two large steamship customers no longer use the Company's services.
While one steamship customer has discontinued service to North America, the
other has changed its method of business. Truckload brokerage revenue decreased
7.5% 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 19.4% compared to 2000. This increase was
primarily due to significant growth from the Company's supply chain solutions
business.
GROSS MARGIN
Gross margin increased 1.7% to $45.3 million in 2001 from $44.6 million
in 2000. As a percent of revenue, gross margin increased to 14.3% from 12.9% in
2000. The increase in gross margin as a percent of revenue is primarily due to
two significant factors. First, 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. Hub
Distribution had a net increase in gross margin of $0.6 million that related to
months prior to the second quarter. Second, the intermodal gross margin
percentage increased due to a change in business mix and the loss of the high
volume, lower margin steamship business.
SALARIES AND BENEFITS
Salaries and benefits decreased 2.7% to $23.5 million in 2001 from
$24.1 million in 2000. As a percentage of revenue, salaries and benefits
increased to 7.4% from 7.0% in 2000. The increase as a percentage of revenue is
due primarily to the decrease in revenue.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 11.5% to $12.3
million in 2001 from $11.1 million in 2000. As a percentage of revenue, these
expenses increased to 3.9% from 3.2% in 2000. The increase as a percentage of
revenue is primarily attributed to the decrease in revenue and increased
expenditures related to information systems. 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 127.3% to $2.8 million in 2001
from $1.2 million in 2000. This expense as a percentage of revenue increased to
0.9% from 0.4% in 2000. During the quarter, the Company recognized $0.6 million
in additional depreciation due to a change in estimated useful life for a piece
of communications software. This software was replaced with a more stable and
cost effective software application during the second quarter of 2001.
10
Additionally, the increase in depreciation and amortization is due to the
depreciation of newly implemented 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.
OTHER INCOME (EXPENSE)
Interest expense decreased 14.2% to $2.4 million in 2001 from $2.8
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.
Interest income decreased to $0.1 million in 2001 from $0.2 million in
2000.
MINORITY INTEREST
Minority interest increased to $1.1 million in 2001 from $0.2 million
in 2000. Minority interest represents the 35% minority interest in Hub
Distribution.
INCOME TAXES
The provision for income taxes decreased to $0.7 million in 2001
compared to $1.6 million in 2000. The Company is providing for income taxes
using an effective rate of 41.0% in both years.
NET INCOME
Net income decreased to $1.1 million in 2001 from $2.3 million in 2000.
EARNINGS PER SHARE
Basic and diluted earnings per common share decreased to $0.14 in 2001
from $0.30 in 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000
REVENUE
Revenue for Hub Group, Inc. (the "Company") decreased 1.3% to $664.0
million in 2001 from $672.9 million in 2000. Overall, management believes that a
soft economy has negatively impacted the current year growth. Intermodal revenue
decreased 5.1% from 2000. Truckload brokerage revenue decreased 2.5% 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 22.0% compared to 2000. This increase was primarily
due to significant growth from the Company's supply chain solutions business.
GROSS MARGIN
Gross margin increased 8.7% to $91.4 million in 2001 from $84.0 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 was negatively
impacted in the first quarter of 2000 due to the lag between when the Company
received fuel surcharges from its vendors and when the Company reached agreement
to pass these charges on to its customers. During the first quarter of 2001,
this same lag worked to Hub's benefit as fuel surcharges began to decrease. In
effect, the Company has recouped the margin it lost in the prior year related to
11
fuel surcharges. 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.
SALARIES AND BENEFITS
Salaries and benefits increased 1.9% to $48.2 million in 2001 from
$47.3 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 normal year-over-year merit and cost of living increases
granted to the Company's employees as well as the decrease in revenue.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 9.5% to $24.6
million in 2001 from $22.4 million in 2000. As a percentage of revenue, these
expenses increased to 3.7% from 3.3% in 2000. The increase as a percentage of
revenue is primarily attributed to 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 148.8% to $6.0 million in 2001
from $2.4 million in 2000. This expense as a percentage of revenue increased to
0.9% from 0.4% in 2000. 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. Additionally, the increase in depreciation and amortization is
due to the depreciation of newly implemented software applications placed into
service throughout 2000 and 2001.
AMORTIZATION OF GOODWILL
Amortization of goodwill remained constant at $2.9 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 10.7% to $5.4 million in 2001 from $6.0
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.
Interest income remained constant at $0.3 million in both 2001 and
2000.
Other income/(expense) decreased to $(0.3) million in 2001 from $0.1
million in 2000. The change is due primarily to a $0.4 million loss on the
disposal of a piece of software in 2001.
12
MINORITY INTEREST
Minority interest increased to $0.4 million in 2001 from $0.1 million
in 2000. Minority interest represents the 35% minority interest in Hub
Distribution.
INCOME TAXES
The provision for income taxes decreased to $0.3 million in 2001
compared to $1.4 million in 2000. The Company is providing for income taxes
using an effective rate of 41.0% in both years.
NET INCOME
Net income decreased to $0.4 million in 2001 from $2.0 million in 2000.
EARNINGS PER SHARE
Basic and diluted earnings per common share decreased to $0.05 in 2001
from $0.26 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and capital expenditures through
cash flows from operations and bank borrowings.
Cash provided by operating activities for the six months ended June 30,
2001, was approximately $32.9 million, which resulted primarily from a decrease
in accounts receivable of $25.2 million.
Net cash used in investing activities for the six months ended June 30,
2001, was $5.6 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 used in financing activities for the six months ended June
30, 2001, was $27.3 million. This was comprised of $19.0 million of voluntary
payments on the Company's line of credit and $8.3 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 June 30, 2001, there was $39.0 million of outstanding term
debt and $5.0 million outstanding and $45.0 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 slightly, extending
the date for adding back certain non-cash charges. All other provisions of the
existing credit facility remained unchanged. The Company was in compliance with
the financial covenants that were effective as of June 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
payments of $10.0 million commencing on June 25, 2005.
13
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. All other provisions of the Notes
agreement remained unchanged. The Company was in compliance with the financial
covenants that were effective as of June 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 June 30, 2001,
goodwill, net of accumulated amortization, is $211.0 million and amortization
expense for the six months ended June 30, 2001 is $2.9 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.
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.
GROSS MARGIN
Management estimates it may not sustain the high margin percentage in
its niche logistic services business performed by Hub Distribution, as many of
these high margin projects are one-time in nature and comparable projects may
very well not occur during the remainder of the year. Therefore, the Company
estimates gross margin as a percentage of revenue will possibly decline in
future periods from the 14.3% level which existed in the second quarter of 2001.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Management estimates that as a percentage of revenue depreciation and
amortization of property and equipment will increase significantly in the
future. The most significant factor that will cause an increase in the
percentage is increased software depreciation related to the Company's
information systems. During the second quarter of 2001, the Company placed its
new proprietary operating system in service. Additional factors that could cause
an increase in the percentage are increased depreciation expense if the Company
decided to purchase rather than lease a greater proportion of assets or
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accelerating depreciation due to changes in useful lives of other existing
assets. The reduction in depreciation and amortization expense from the
impairment charge recorded by Hub Distribution is expected to offset only a
portion of the expected increase in depreciation and amortization as a
percentage of revenue.
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 restated to reflect is fair value and a corresponding
charge to earnings would result.
INTEREST EXPENSE
As described above, interest expense decreased significantly during the
first half of the year due primarily to carrying a lower average debt balance
than the prior year. Due to several issues surrounding the centralization of
accounting and the implementation of new accounting and operations systems, the
Company benefited from a temporary slowdown in its accounts payable processing
during the second quarter. The Company does not expect this slowdown to continue
and therefore may not sustain such a low level of interest expense in future
periods.
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. As mentioned in interest
expense above, the Company does not expect the slowdown of accounts payable
processing to continue. Should this slowdown cease, the Company does expect that
its current debt level may increase significantly.
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 June 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 5.96% 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 4. Submission of Matters to a Vote of Security Holders
The 2001 Annual Meeting of Stockholders of Hub Group, Inc. was
held on May 15, 2001. At this meeting, the following six
directors were reelected with the following votes: Phillip C.
Yeager: 19,344,669 votes for and 505,678 votes withheld;
David P. Yeager: 19,343,894 votes for and 506,453 votes
withheld; Thomas L. Hardin: 19,352,294 votes for and 498,053
votes withheld; Gary D. Eppen: 19,846,937 votes for and 3,410
votes withheld; Charles R. Reaves: 19,846,937 votes for and
3,410 votes withheld; Martin P. Slark: 19,846,937 votes for
and 3,410 votes withheld.
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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 13, 2001 /s/ Jay E. Parker
Jay E. Parker
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)