[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005 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
Delaware
36-4007085
(State or other jurisdiction of
(I.R.S.
Employer
incorporation of organization)
Identification No.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No
On April 19, 2005, the registrant had 9,736,703 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.
HUB GROUP, INC.
INDEX
Page | |||||
---|---|---|---|---|---|
PART I. Financial Information: | |||||
Hub Group, Inc. - Registrant | |||||
Condensed Consolidated Balance Sheets - March 31, 2005 (unaudited) and | |||||
December 31, 2004 | 3 | ||||
Unaudited Condensed Consolidated Statements of Income - Three Months | |||||
Ended March 31, 2005 and 2004 | 4 | ||||
Unaudited Condensed Consolidated Statement of Stockholders' Equity - Three | |||||
Months Ended March 31, 2005 | 5 | ||||
Unaudited Condensed Consolidated Statements of Cash Flows - Three | |||||
Months Ended March 31, 2005 and 2004 | 6 | ||||
Notes to Unaudited Condensed Consolidated Financial Statements | 7 | ||||
Management's Discussion and Analysis of Financial Condition and | |||||
Results of Operations | 11 | ||||
Quantitative and Qualitative Disclosures related to Market Risk | 16 | ||||
Controls and Procedures | 17 | ||||
PART II. Other Information | 18 |
2
March 31, 2005 |
December 31, 2004 | ||||
---|---|---|---|---|---|
ASSETS | (Unaudited) | ||||
CURRENT ASSETS: | |||||
Cash and cash equivalents | $ 15,570 | $ 16,806 | |||
Restricted investments | 661 | | |||
Accounts receivable | |||||
Trade, net | 139,113 | 141,079 | |||
Other | 7,527 | 7,996 | |||
Deferred taxes | 4,412 | 4,667 | |||
Prepaid expenses and other current assets | 3,715 | 4,746 | |||
TOTAL CURRENT ASSETS | 170,998 |
175,294 |
|||
PROPERTY AND EQUIPMENT, net | 17,854 | 19,487 | |||
GOODWILL, net | 215,175 | 215,175 | |||
OTHER ASSETS | 371 | 889 | |||
TOTAL ASSETS | $ 404,398 | $ 410,845 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
CURRENT LIABILITIES: | |||||
Accounts payable | |||||
Trade | $ 115,250 | $ 115,819 | |||
Other | 2,925 | 1,660 | |||
Accrued expenses | |||||
Payroll | 10,262 | 19,542 | |||
Other | 12,031 | 15,100 | |||
TOTAL CURRENT LIABILITIES | 140,468 |
152,121 |
|||
DEFERRED TAXES | 31,545 | 31,788 | |||
STOCKHOLDERS' EQUITY: | |||||
Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares | |||||
issued or outstanding in 2005 and 2004 | | | |||
Common stock | |||||
Class A: $.01 par value; 12,337,700 shares authorized; 9,809,476 shares | |||||
issued (including treasury stock in 2005) and 9,727,917 outstanding | |||||
in 2005; 9,635,657 issued and outstanding in 2004 | 98 | 96 | |||
Class B: $.01 par value; 662,300 shares authorized; 662,296 shares | |||||
issued and outstanding in 2005 and 2004 | 7 | 7 | |||
Additional paid-in capital | 187,068 | 182,365 | |||
Purchase price in excess of predecessor basis, net of tax benefit of $10,306 | (15,458 | ) | (15,458 | ) | |
Retained earnings | 69,959 | 64,611 | |||
Unearned compensation | (4,137 | ) | (4,685 | ) | |
Treasury stock, at cost (81,559 shares in 2005) | (5,152 | ) | | ||
TOTAL STOCKHOLDERS' EQUITY | 232,385 | 226,936 | |||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 404,398 | $ 410,845 | |||
See notes to unaudited condensed consolidated financial statements
Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|
2005 |
2004 | ||||||
Revenue | $339,858 | $328,302 | |||||
Transportation costs | 296,613 | 286,498 | |||||
Gross margin | 43,245 | 41,804 | |||||
Costs and expenses: | |||||||
Salaries and benefits | 21,875 | 22,342 | |||||
General and administrative | 9,752 | 10,281 | |||||
Depreciation and amortization of property and equipment | 2,483 | 2,884 | |||||
Total costs and expenses | 34,110 | 35,507 | |||||
Operating income | 9,135 | 6,297 | |||||
Other income (expense): | |||||||
Interest expense | (207 | ) | (1,713 | ) | |||
Interest income | 200 | 53 | |||||
Other, net | 14 | 41 | |||||
Total other income (expense) | 7 | (1,619 | ) | ||||
Income before provision for income taxes | 9,142 | 4,678 | |||||
Provision for income taxes | 3,794 | 1,965 | |||||
Net income | $ 5,348 | $ 2,713 | |||||
Basic earnings per common share | $ 0.53 | $ 0.35 | |||||
Diluted earnings per common share | $ 0.51 | $ 0.33 | |||||
Basic weighted average number of shares outstanding | 10,141 | 7,746 | |||||
Diluted weighted average number of shares outstanding | 10,579 | 8,294 | |||||
See notes to unaudited condendsed consolidated financial statements
4
March 31,
2005 | |||||
---|---|---|---|---|---|
Class A & B Common Stock Shares Outstanding | |||||
Beginning of year | 10,297,953 | ||||
Exercise of non-qualified stock options | 173,129 | ||||
Issuance of restricted stock | 690 | ||||
Purchase of treasury shares | (97,850 | ) | |||
Treasury shares issued under restricted stock and stock option plans | 16,291 | ||||
Ending balance | 10,390,213 | ||||
Class A & B Common Stock Amount | |||||
Beginning of year | $ | 103 | |||
Issuance of restricted stock and exercise of stock options | 2 | ||||
Ending balance | 105 | ||||
Additional Paid-in Capital | |||||
Beginning of year | 182,365 | ||||
Exercise of non-qualified stock options | 1,707 | ||||
Tax benefit of employee stock plans | 2,996 | ||||
Ending balance | 187,068 | ||||
Purchase Price in Excess of Predecessor Basis, Net of Tax | |||||
Beginning of year | (15,458 | ) | |||
Ending balance | (15,458 | ) | |||
Retained Earnings | |||||
Beginning of year | 64,611 | ||||
Net income | 5,348 | ||||
Ending balance | 69,959 | ||||
Unearned Compensation | |||||
Beginning of year | (4,685 | ) | |||
Issuance of restricted stock awards, net of forfeitures | 28 | ||||
Compensation expense related to restricted stock awards | 520 | ||||
Ending balance | (4,137 | ) | |||
Treasury Stock | |||||
Beginning of year | | ||||
Purchase of treasury shares | (5,599 | ) | |||
Issuance for restricted stock and exercise of stock options | 447 | ||||
Ending balance | (5,152 | ) | |||
Total stockholder's equity | $ | 232,385 | |||
See notes to unaudited condendsed consolidated financial statements
5
Three Months Ended March 31, | |||||
---|---|---|---|---|---|
2005 |
2004 | ||||
Cash flows from operating activities: | |||||
Net income | $ 5,348 | $ 2,713 | |||
Adjustments to reconcile net income to net cash provided | |||||
by operating activities: | |||||
Depreciation and amortization of property and equipment | 2,593 | 2,911 | |||
Deferred taxes | 3,008 | 1,961 | |||
Compensation expense related to restricted stock | 520 | 404 | |||
Gain on sale of assets | (12 | ) | (18 | ) | |
Other assets | 518 | 188 | |||
Changes in working capital: | |||||
Restricted investments | (661 | ) | | ||
Accounts receivable, net | 2,435 | 3,466 | |||
Prepaid expenses and other current assets | 1,031 | 462 | |||
Accounts payable | 696 | (1,867 | ) | ||
Accrued expenses | (12,349 | ) | (4,072 | ) | |
Net cash provided by operating activities | 3,127 | 6,148 | |||
Cash flows from investing activities: | |||||
Purchases of property and equipment, net | (948 | ) | (460 | ) | |
Net cash used in investing activities | (948 | ) | (460 | ) | |
Cash flows from financing activity: | |||||
Proceeds from stock options exercised | 2,184 | 2,090 | |||
Purchase of treasury stock | (5,599 | ) | (2,767 | ) | |
Net payments on revolver | | (3,000 | ) | ||
Payments on long-term debt | | (2,011 | ) | ||
Net cash used in financing activities | (3,415 | ) | (5,688 | ) | |
Net decrease in cash and cash equivalents | (1,236 | ) | | ||
Cash and cash equivalents beginning of period | 16,806 | | |||
Cash and cash equivalents end of period | $ 15,570 | $ | |||
Supplemental disclosures of cash flow information | |||||
Cash paid for: | |||||
Interest | $ | $ 1,357 | |||
Income taxes | $ 333 | $ |
See notes to unaudited condensed consolidated financial statements
6
HUB GROUP, INC.
NOTES TO UNAUDITED
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Statements
Our accompanying unaudited condensed consolidated financial statements of Hub Group, Inc. (we, us or our) 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, we believe that the disclosures contained herein are adequate to make the information presented not misleading.
The financial statements reflect, in our opinion, all material adjustments (which include only normal recurring adjustments) necessary to fairly present our financial position and results of operations for the three months ended March 31, 2005 and 2004.
These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year due partially to seasonality.
NOTE 2. Restructuring Charges
During the three months ended March 31, 2005, we recorded a severance charge for 24 employees of $176,000. All severance charges are included in salaries and benefits in the statements of income. Additionally, we recorded charges of $37,000 related to the 2002 restructuring plan as a result of changes in assumptions related to the closing of a facility.
The following table displays the activity and balances for the restructuring reserves for the three months ended March 31, 2005 (in thousands):
Headcount | Consolidation | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Reduction | of Facilities | Total | |||||||||
Balance at December 31, 2004 | $ | | $ | 146 | $ | 146 | |||||
Additional Restructuring Expenses | 176 | | 176 | ||||||||
Cash Payments | (78 | ) | (79 | ) | (157 | ) | |||||
Adjustment for previous estimate | | 37 | 37 | ||||||||
Balance at March 31, 2005 | $ | 98 | $ | 104 | $ | 202 | |||||
NOTE 3. Stock Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. We have chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the quoted market price of our stock at the date of the grant over the amount an employee must pay to acquire the stock. We grant options at fair market value and therefore recognize no compensation expense.
7
The following table illustrates the effect on the net income and net income per share if we had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation (in thousands, except per share data):
Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|
2005 | 2004 | ||||||
Net income, as reported | $5,348 | $ 2,713 | |||||
Add: Total stock-based compensation included in | |||||||
net income, net of related tax effects | 304 | 234 | |||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all | |||||||
awards, net of related tax effects | (391 | ) | (401 | ) | |||
Net income, pro forma | $5,261 | $ 2,546 | |||||
Earnings per share: | |||||||
Basic-- as reported | $0.53 | $0.35 | |||||
Basic-- pro forma | $0.52 | $0.33 | |||||
Diluted-- as reported | $0.51 | $0.33 | |||||
Diluted-- pro forma | $0.50 | $0.31 | |||||
The pro forma disclosure is not likely to be indicative of pro forma results which may be expected in future periods because of the fact that options vest over several years, pro forma compensation expense is recognized as the options vest and additional awards may also be granted.
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123 (R) is similar to the approach described in Statement 123. However, Statement 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. This statement must be adopted effective January 1, 2006.
Statement 123 (R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under the current literature. This requirement will reduce net operating cash flow and increase net financing cash flows in periods after adoption. We cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options).
8
NOTE 4. Earnings Per Share
The following is a reconciliation of our earnings per share:
Three Months Ended March 31, 2005 |
Three Months Ended March 31, 2004 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(000's) |
(000's) |
||||||||||||
Income |
Shares |
Per Share Amount |
Income |
Shares |
Per Share Amount | ||||||||
Basic EPS | |||||||||||||
Net Income | $5,348 | 10,141 | $0.53 | $2,713 | 7,746 | $0.35 | |||||||
Effect of Dilutive Securities | |||||||||||||
Stock options and restricted stock | | 438 | | | 548 | | |||||||
Diluted EPS | |||||||||||||
Net Income | $5,348 | 10,579 | $0.51 | $2,713 | 8,294 | $0.33 | |||||||
Stock options not included in diluted weighted-average shares because they would have been anti-dilutive were 0 and 23,000 for the three months ending March 31, 2005 and 2004, respectively.
NOTE 5. Deferred Compensation Plan
In January 2005, we established the Hub Group, Inc. Nonqualified Deferred Compensation Plan (the Plan) to provide added incentive for the retention of certain key employees. Under the Plan, participants can elect to defer up to 50% of their base salary and up to 100% of their bonus. Accounts will grow on a tax-deferred basis to the participant. Restricted investments included in the consolidated balance sheet represent the fair value of the mutual fund and other security investments related to the Plan at March 31, 2005. Both realized and unrealized gains and losses, which have not been material, are included in income and expense and offset the change in the deferred compensation liability. The Company provides a 50% match on the first 6% of employee compensation deferred under the Plan, with a maximum match equivalent of 3% of base salary.
NOTE 6. Property and Equipment
Property and equipment consist of the following (in thousands):
March 31, | December 31, | ||||
---|---|---|---|---|---|
2005 | 2004 | ||||
Building and improvements | $ 237 | $ 237 | |||
Leasehold improvements | 942 | 942 | |||
Computer equipment and software | 53,528 | 52,442 | |||
Furniture and equipment | 6,970 | 7,188 | |||
Transportation equipment and automobiles | 1,388 | 1,461 | |||
63,065 | 62,270 | ||||
Less: Accumulated depreciation and amortization | (45,211 | ) | (42,783 | ) | |
Property and Equipment, net | $ 17,854 | $ 19,487 | |||
9
NOTE 7. Debt
On March 23, 2005, we entered into a revolving credit agreement that provides for unsecured borrowings of up to $40 million. The interest rate ranges from LIBOR plus 0.75% to 1.25% or Prime plus 0.5%. The revolving line of credit expires on March 23, 2010. The financial covenants require a minimum net worth of $175 million and a cash flow leverage ratio of not more than 2.0 to 1.0. The commitment fees charged on the unused line of credit are between 0.15% and 0.25%.
We had $39,125,000 of unused and available borrowings under our bank revolving line of credit at March 31, 2005. We were in compliance with our debt covenants at March 31, 2005.
We have standby letters of credit that expire from 2005 to 2012. As of March 31, 2005, the outstanding letters of credit were $875,000.
NOTE 8. Commitments and Contingencies
In March 2005, we entered into an equipment purchase contract with Shanghai Jindo Container Co., Ltd. We agreed to purchase 3,400 fifty-three foot dry freight steel domestic containers for approximately $33.0 million. We expect delivery of 900 units in each of May, June and July of 2005 and the final 700 units in August 2005. However, these timeframes are subject to the manufacturer meeting production and delivery schedules. We plan to finance these containers with operating leases.
We are a party to litigation incident to our business, including claims for freight lost or damaged in transit, freight improperly shipped or improperly billed, property damage and personal injury. Some of the lawsuits to which we are party are covered by insurance and are being defended by our insurance carriers. Some of the lawsuits are not covered by insurance and we are defending them. Management does not believe that the outcome of this litigation will have a material adverse effect on our financial position.
NOTE 9. Stock Buy Back Plan
During the first quarter of 2005, the Board of Directors authorized the purchase of up to $30.0 million of our Class A Common Stock. We intend to make repurchases from time to time as market and business conditions warrant. Repurchases may be made in the open market or in privately negotiated transactions. We intend to hold the repurchased shares in treasury for future use. This program replaces the previous repurchase plan. During the first quarter of 2005, we spent approximately $5.1 million to purchase 87,400 shares as follows:
Total Number of Shares | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total Number | Purchased as | |||||||||||||
of Shares | Average Price | Part of Publicly | ||||||||||||
Purchased | Paid Per Share | Announced Plan | ||||||||||||
January 1 to January 31 | | | | |||||||||||
February 1 to February 28 | 32,400 | $ 54.38 | 32,400 | |||||||||||
March 1 to March 31 | 55,000 | 60.08 | 55,000 | |||||||||||
Total | 87,400 | $ 57.97 | 87,400 | |||||||||||
NOTE 10. Stock Split
The Board of Directors approved a 2 for 1 stock split in February 2005. The Board has set May 4, 2005 as the record date for this stock split and May 11, 2005 as the payment date, contingent on receiving shareholder approval at our annual meeting on May 4, 2005, to increase the number of authorized shares of Class A common stock. If approved by the Companys shareholders, the stock split will be in the form of a stock dividend, which will be tax-free to shareholders.
10
HUB GROUP, INC.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
OUTLOOK, RISKS AND UNCERTAINTIES
The information contained in this quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, hopes, believes, intends, estimates, anticipates, and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Actual results or experience could differ materially from the forward-looking statements as a result of many factors. We assume no liability to update any such forward-looking statements contained in this quarterly report. Factors that could cause our actual results to differ materially include:
the degree and rate of market
growth in the intermodal, truck brokerage and logistics markets served by us;
deterioration in our relationships with existing railroads;
changes in rail service
conditions or adverse weather conditions;
further consolidation of railroads;
the
impact of competitive pressures in the marketplace, including entry of new competitors,
direct marketing efforts
by the
railroads or marketing efforts of asset-based carriers;
changes in rail, drayage and trucking company capacity;
equipment shortages;
changes in the cost of services
from rail, drayage, truck or other vendors;
labor unrest in the rail, drayage or
trucking company communities;
general economic and business conditions;
fuel
shortages
or prices;
increases in interest rates;
decrease in demand for our distribution
services;
changes in homeland security or terrorist activity;
difficulties in
maintaining or enhancing our information technology systems;
changes to or new
governmental regulation;
loss of several of our largest customers; and
inability to
recruit and retain key personnel.
EXECUTIVE SUMMARY
Hub Group, Inc. (we, us or our) is the largest intermodal marketing company (IMC) in North America and a full service transportation provider offering intermodal, truck brokerage or highway services and comprehensive logistics services. These service offerings are referred to as the Core Transportation business. The Core Transportation business operates through a nationwide network of operating centers. We also operate Hub Group Distribution Services (HGDS or Hub Distribution). Hub Distribution performs certain specialized services, predominately installation of point of purchase displays, and is responsible for its own operations, customer service, marketing and management information systems support.
As an IMC, we arrange for the movement of our customers freight in containers and trailers over long distances. We contract with railroads to provide transportation for the long-haul portion of the shipment and with local trucking companies, known as drayage companies, for local pickup and delivery. As part of the intermodal services, we negotiate rail and drayage rates, electronically track shipments in transit, consolidate billing and handle claims for freight loss or damage on behalf of our customers.
We also arrange for the transportation of freight by truck, providing customers with another option for their transportation needs. We match the customers needs with carriers capacity to provide the most effective service and price combinations. As part of our highway services, we negotiate rates, track shipments in transit and handle claims for freight loss or damage on behalf of our customers.
11
Our logistics service consists of complex transportation management services, including load consolidation, mode optimization and carrier management. These service offerings are designed to take advantage of the increasing trend for shippers to outsource all or a greater portion of their transportation needs.
We have full time marketing representatives throughout North America who service local, regional and national accounts. We believe that fostering long-term customer relationships is critical to our success and allows us to better understand our customers needs and specifically tailor our transportation services to them.
Revenue growth resulted primarily from price increases, mix and fuel surcharges during the first quarter of 2005 versus the first quarter of 2004. The price increase resulted from rate increases from our carriers.
We use various performance indicators to manage our business. We closely monitor gains and losses for our Top 50 customers and evaluate on-time performance, costs per load by location and daily sales outstanding by location. Vendor cost changes and vendor service issues are also tracked closely.
Our installation services business, HGDS, is a project-based business with significant customer concentration and higher margins than our other service lines. Any decrease in the demand from these customers or our failure to secure new project business could have a material effect on our revenue.
RESULTS OF OPERATIONS
The following table summarizes our revenue by business line:
Three Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
March 31, | |||||||||||
% | |||||||||||
2005 | 2004 | Change | |||||||||
Revenue (in thousands) | |||||||||||
Core Transporation | |||||||||||
Intermodal | $ | 233,662 | $ | 236,321 | -1 | .1% | |||||
Brokerage | 60,154 | 50,960 | 18 | .0 | |||||||
Logistics | 35,589 | 33,913 | 4 | .9 | |||||||
Total Core | 329,405 | 321,194 | 2 | .6 | |||||||
Hub Distribution | 10,453 | 7,108 | 47 | .1 | |||||||
Total Revenue | $ | 339,858 | $ | 328,302 | 3 | .5% | |||||
12
The following table includes certain items in the consolidated statement of income as a percentage of revenue:
Three Months
Ended March 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|
2005 |
2004 |
||||||||
Revenue | 100.0 | % | 100.0 | % | |||||
Transportation costs | 87.3 | 87.3 | |||||||
Gross margin | 12.7 | 12.7 | |||||||
Costs and expenses: | |||||||||
Salaries and benefits | 6.4 | 6.8 | |||||||
General and administrative | 2.9 | 3.1 | |||||||
Depreciation and amortization | 0.7 | 0.9 | |||||||
Total costs and expenses | 10.0 | 10.8 | |||||||
Operating income | 2.7 | 1.9 | |||||||
Other expense | |||||||||
Interest expense: | (0.1 | ) | (0.5 | ) | |||||
Interest income | 0.1 | 0.0 | |||||||
Total other expense | 0.0 | (0.5 | ) | ||||||
Income before provision for income taxes | 2.7 | 1.4 | |||||||
Provision for income taxes | 1.1 | 0.6 | |||||||
Net income | 1.6 | % | 0.8 | % | |||||
Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31, 2004
Revenue
Revenue increased 3.5% to $339.9 million in 2005 from $328.3 million in 2004. Intermodal revenue decreased 1.1% due primarily to an 11.4% decrease in volume subtantially offset by price increases, mix and fuel surcharges. Approximately one-third of the volume decline relates to culled customers. Truckload brokerage revenue increased 18.0% due primarily to an increase in revenue per load from price increases, mix, and fuel surcharges. Logistics revenue increased 4.9% due to the transfer of the time sensitive delivery of pharmaceutical samples from Hub Distribution to this service line during the third quarter of 2004 and as a result of adding new customers. Hub Distribution revenue increased 47.1% due primarily to an increase in the installation business.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Gross Margin
Gross margin increased 3.4% to $43.2 million in 2005 from $41.8 million in 2004. As a percent of revenue, gross margin has remained consistent at 12.7% in 2005 and 2004.
13
Salaries and Benefits
As a percentage of revenue, salaries and benefits decreased to 6.4% from 6.8% in 2004. Salaries and benefits decreased to $21.9 million in 2005 from $22.3 million in 2004. This was due primarily to a decrease in headcount. Headcount as of March 31, 2005 was 1,154 while headcount for March 31, 2004 was 1,183. Severance costs during the three months ended March 31, 2005 were $0.2 million compared with $0.1 million for the three months ended March 31, 2004.
General and Administrative
General and administrative expenses decreased to $9.8 million in 2005 from $10.3 million in 2004. As a percentage of revenue, these expenses decreased to 2.9% in 2005 from 3.1% in 2004. The decrease in general and administrative expenses is primarily attributed to a decrease in equipment leases, professional fees, travel and entertainment expense and rent expense.
Depreciation and Amortization of Property and Equipment
Depreciation and amortization decreased to $2.5 million in 2005 from $2.9 million in 2004. This expense as a percentage of revenue decreased to 0.7% in 2005 from 0.9% in 2004. The decrease in depreciation and amortization is due primarily to lower computer equipment depreciation.
Other Income (Expense)
Interest expense decreased to $0.2 million in 2005 from $1.7 million in 2004. The decrease in interest expense is due primarily to the extinguishment of the private placement debt during the third quarter of 2004. Interest income increased to $0.2 million in 2005 from $0.1 million in 2004. The increase in interest income is due to investing cash.
Provision for Income Taxes
The provision for income taxes increased to $3.8 million in 2005 compared to $2.0 million in 2004. We provided for income taxes using an effective rate of 41.5% in 2005 and an effective rate of 42.0% in the first quarter of 2004. The decrease in the effective tax rate is primarily the result of a lower state tax rate due to business restructuring.
Net Income
Net income increased to $5.3 million in 2005 from $2.7 million in 2004 due primarily to higher gross margin, lower general and administrative expenses, and lower interest expense.
Earnings Per Common Share
Basic earnings per share were $0.53 in 2005 and were $0.35 in 2004 and diluted earnings per share increased to $0.51 in 2005 from $0.33 in 2004. The weighted average diluted shares outstanding increased 28% from 8,294,000 at March 31, 2004 to 10,579,000 at March 31, 2005 due primarily to our followon offering of Class A Common Stock in July 2004.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. In certain circumstances, those estimates and assumptions can affect amounts reported in the accompanying consolidated financial statements. We have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2004, includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of the more significant accounting policies and estimates.
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Allowance for Uncollectible Trade Accounts Receivable
In the normal course of business, we extend credit to customers after a review of each customers 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 of the current economic conditions. To be more specific, we reserve every account balance that has aged over one year, certain customers in bankruptcy and account balances specifically identified as uncollectible. In addition, we provide a reserve for accounts not specifically identified as uncollectible based upon historical trends. The allowance is reported on the balance sheet in net accounts receivable. Actual collections of accounts receivable could differ from managements estimates due to changes in future economic, industry or customer financial conditions. Recoveries of receivables previously charged off are recorded when received.
Revenue Recognition
Revenue is recognized at the time 1) persuasive evidence of an arrangement exists, 2) services have been rendered, 3) the sales price is fixed and determinable and 4) collectibility is reasonably assured. In accordance with EITF 91-9, revenue and related transportation costs are recognized based on relative transit time. Further, we report revenue on a gross basis in accordance with the criteria in EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. We are the primary obligor and are responsible for providing the service desired by the customer. The customer views us as responsible for fulfillment including the acceptability of the service. Service requirements may include, for example, on-time delivery, handling freight loss and damage claims, setting up appointments for pick up and delivery and tracing shipments in transit. We have discretion in setting sales prices and as a result, our earnings vary. In addition, we have the discretion to select our vendors from multiple suppliers for the services ordered by our customers. Finally, we have credit risk for our receivables. These three factors, discretion in setting prices, discretion in selecting vendors and credit risk, further support reporting revenue on the gross basis.
Deferred Income Taxes
Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. We believe that it is more likely than not that our deferred tax assets will be realized with the exception of $321,000 related to state tax net operating losses for which a valuation allowance has been established. In the event the probability of realizing the remaining deferred tax assets do not meet the more likely than not threshold in the future, a valuation allowance would be established for the deferred tax assets deemed unrecoverable.
Valuation of Goodwill
We review goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. 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 market capitalization, discounted cash flow analysis or a combination of both methodologies. The assumptions used in the valuations include expectations regarding future operating performance, discount rates, control premiums and other factors which are subjective in nature. Actual cash flows from operations could differ from managements estimates due to changes in business conditions, operating performance and economic conditions. Should estimates differ materially from actual results, we may be required to record impairment charges in the future.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter, we have funded operations and capital expenditures through cash flows from operations.
Cash provided by operating activities for the three months ended March 31, 2005, was approximately $3.1 million, which resulted primarily from net income from operations of $5.3 million, non-cash charges of $6.1 million offset by decreases in working capital of $8.8 million.
Net cash used in investing activities for the three months ended March 31, 2005, was $0.9 million and related primarily to expenditures made to enhance our information system capabilities. We expect capital expenditures to be approximately $5 million for the year ended December 31, 2005.
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The net cash used in financing activities for the three months ended March 31, 2005, was $3.4 million. Uses of cash related to the purchase of treasury stock. We generated cash from stock options being exercised.
On March 23, 2005 we entered into a revolving credit agreement that provides for unsecured borrowings of up to $40 million. The interest rate ranges from LIBOR plus 0.75% to 1.25% or Prime plus 0.5%. The revolving line of credit expires on March 23, 2010. The financial covenants require a minimum net worth of $175 million and a cash flow leverage ratio of not more than 2.0 to 1.0. The commitment fees charged on the unused line of credit are between 0.15% and 0.25%.
Our unused and available borrowings under our bank revolving line of credit at March 31, 2005 are $39.1 million. We were in compliance with our debt covenants at March 31, 2005.
We have standby letters of credit that expire from 2005 to 2012. As of March 31, 2005, our outstanding letters of credit were $0.9 million.
Contractual Obligations
Our contractual cash obligations as of March 31, 2005 are minimum rental commitments. Minimum annual rental commitments, at March 31, 2005, under noncancellable operating leases, principally for real estate and equipment, are payable as follows (in thousands):
Remainder 2005 | $ 5,209 | ||
2006 | 5,789 | ||
2007 | 5,102 | ||
2008 | 4,517 | ||
2009 | 2,853 | ||
2010 and thereafter | 5,259 | ||
Total | $28,729 |
In March 2005, we entered into an equipment purchase contract with Shanghai Jindo Container Co., Ltd. We agreed to purchase 3,400 fifty-three foot dry freight steel domestic containers for approximately $33.0 million. We expect delivery of 900 units in May, June and July of 2005 and the final 700 units in August 2005. However, these timeframes are subject to the manufacturer meeting production and delivery schedules. We plan to finance these containers with operating leases.
Revenue
During 2004, in connection with our realignment, we revised our revenue classifications by transportation mode. Accordingly, the 2004 revenue amounts have been reclassified to conform to the current year presentation (in millions):
2004 | Intermodal | Brokerage | Logistics | HGDS | Total | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Quarter Ended March 31 | $ | 236.3 | $ | 51.0 | $ | 33.9 | $ | 7.1 | $ | 328.3 | |||||||
Quarter Ended June 30 | 247.9 | 56.8 | 33.8 | 10.5 | 349.0 | ||||||||||||
Quarter Ended September 30 | 260.0 | 56.1 | 34.0 | 12.0 | 362.1 | ||||||||||||
Quarter Ended December 31 | 270.3 | 61.6 | 39.0 | 16.5 | 387.4 | ||||||||||||
Total | $ | 1,014.5 | $ | 225.5 | $ | 140.7 | $ | 46.1 | $ | 1,426.8 | |||||||
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates on our bank line of credit which may adversely affect our results of operations and financial condition.
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CONTROLS AND PROCEDURES
As of March 31, 2005, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of March 31, 2005. There have been no changes in our internal control over financial reporting identified in connection with such evaluation that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) | Note 9 of the Company's Notes to Unaudited Condensed Consolidated Financial Statements is incorporated herein by 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: April 25, 2005 | /s/ Thomas M. White |
Thomas M. White | |
Senior Vice President-Chief Financial | |
Officer and Treasurer | |
(Principal Financial Officer) |
EXHIBIT INDEX
Exhibit No. Description
31.1 | Certification of David P. Yeager, Vice Chairman and Chief Executive Officer, Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
31.2 | Certification of Thomas M. White, Senior Vice President-Chief Financial Officer and Treasurer, Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
32.1 | Certification of David P. Yeager and Thomas M. White, Chief Executive Officer and Chief Financial Officer, respectively, Pursuant to 18 U.S.C. Section 1350. |
I, David P. Yeager, certify that:
1) | I have reviewed this report on Form 10-Q of Hub Group, Inc.; |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a(f) and 15d-15(f))for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the generally accepted accounting principals; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; |
5) | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: April 25, 2005 | |
/s/ David P.Yeager | |
Name: David P. Yeager | |
Title: Vice Chairman and | |
Chief Executive Officer |
I, Thomas M. White, certify that:
1) | I have reviewed this report on Form 10-Q of Hub Group, Inc.; |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a(f) and 15d-15(f))for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the generally accepted accounting principals; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; |
5) | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: April 25, 2005 | |
/s/ Thomas M. White | |
Name: Thomas M. White | |
Title: Senior Vice President- | |
Chief Financial Officer and Treasurer |
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following statement is provided by the undersigned to accompany the Form 10-Q for the quarter ended March 31, 2005 of Hub Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and shall not be deemed filed pursuant to any provision of the Exchange Act of 1934 or any other securities law.
Each of the undersigned certifies that the foregoing Report on Form 10-Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Hub Group, Inc.
/s/David P. Yeager | /s/Thomas M. White |
David P. Yeager | Thomas M. White |
Vice Chairman and Chief Executive Officer | Senior Vice President- Chief Financial Officer |
Hub Group, Inc. | and Treasurer |
Hub Group, Inc. |