[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004 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
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 No X On July 22, 2004, the registrant had 9,328,382 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.
See notes to unaudited condensed consolidated 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 for the three months and six months ended June 30, 2004 and 2003.
These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year due partially to seasonality.
Certain prior year amounts have been reclassified to conform to the current year presentation.
In the fourth quarter of 2002, the Company recorded a $458,000 liability for the remaining lease obligation related to a closed facility. Lease payments made during 2004 were $80,000. The payments made in the quarters ended March 31, 2004 and June 30, 2004 were $53,000 and $27,000 respectively. The lease obligation is $201,000 at June 30, 2004.
During the quarter ended June 30, 2003 the Company recorded a liability of $180,000 for the estimated remaining lease obligation and closing costs related to a facility in Detroit. Approximately $43,000 of the lease obligation remains as of June 30, 2004. Lease and closing cost payments made during 2004 were $37,000. The payments made in the quarters ended March 31, 2004 and June 30, 2004 were $19,000 and $18,000, respectively.
During the year ended December 31, 2003 the Company recorded a severance charge for 165 employees of $876,000. Severance payments of $75,000 were made during the period ended March 31, 2004. All of the severance payments for these employees were made as of March 31, 2004.
During the three months ended March 31, 2004, the Company recorded severance charges for 20 employees of $115,000 and for the three months ended June 30, 2004, the Company recorded severance charges for 20 employees of $191,000. Total severance charges for the six months ended June 30, 2004 was $306,000 for 40 employees. All of these severance payments were made as of June 30, 2004.
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. The Company has 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 the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company grants options at fair market value and therefore recognizes no compensation expense.
The following table illustrates the effect on the net income and net income per share if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation (in thousands, except per share data):
No options were granted in 2004. The above table is based upon the valuation of option grants using the Black-Scholes pricing model for traded options with an assumed risk-free interest rate of 3.6% in 2003, a stock price volatility factor of 40.0% in 2003 and an expected life of the options of six years. Using the foregoing assumptions, the calculated weighted-average fair value of the options granted during the three months ended June 30, 2003 was $2.95 and for the six months ended June 30, 2003 was $2.35. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, in management’s opinion, the model does not necessarily provide a reliable single measure of the fair value of its employee stock options.
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.
The following is a reconciliation of the Company’s earnings per share:
Stock options not included in diluted weighted-average shares because they would have been antidilutive were 0 and 878,550 for the three months ending June 30, 2004 and 2003, respectively. Stock options not included in diluted weighted average shares because they would have been anti-dilutive were 11,500 and 956,050 for the six months ended June 30, 2004 and 2003, respectively.
Property and equipment consist of the following (in thousands):
The Company’s outstanding debt is as follows (in thousands):
On March 25, 2004, at the Company’s request, the Credit Agreement was amended to reduce the interest rate, commitment fees and the aggregate Revolving Credit Commitment. The interest rate for the Revolving Line of Credit was changed from LIBOR plus 2.0% to LIBOR plus 1.75%. The interest rate for the Term Loan was changed from LIBOR plus 2.25% to LIBOR plus 1.75%. The interest rate for both the Revolving Line of Credit and the Term Loan can be reduced to LIBOR plus 1.625% if the Company’s cash flow leverage ratio is below 1.75 to 1. The commitment fees charged on the unused Line of Credit were reduced from .35% to .3%. The commitment fees can be reduced to .275% if the Company’s cash flow leverage ratio is below 1.75 to 1. The Company’s current cash flow leverage ratio is 1.5 to 1. The Revolving Credit Commitment was reduced from $50,000,000 to $35,000,000.
The Company had $34,000,000 and $43,000,000 of unused and available borrowings under its bank revolving line of credit at June 30, 2004 and December 31, 2003, respectively. The Company was in compliance with its debt covenants at June 30, 2004.
The Company has standby letters of credit that expire from 2004 to 2012. As of June 30, 2004, the letters of credit were $1,000,000.
See Note 9 for subsequent event related to paydown of debt.
The Company is a party to litigation incident to its business, including claims for freight lost or damaged in transit, improperly shipped or improperly billed. Some of the lawsuits to which the Company is party are covered by insurance and are being defended by the Company’s insurance carriers. Some of the lawsuits are not covered by insurance and are being defended by the Company. Management does not believe that the outcome of this litigation will have a materially adverse effect on the Company’s financial position.
During the fourth quarter of 2003, the Board of Directors authorized the purchase of up to 500,000 shares of the Company’s Class A Common Stock from time to time. The timing of the program will be determined by financial and market conditions. Since the program was initiated, the Company purchased 116,700 shares for $3,059,000. A summary of purchases in 2004 follows:
ISSUER PURCHASES OF EQUITY SECURITIES
(1) The Company announced on November 3, 2003 that the Board of Directors had authorized the purchase of up to 500,000 shares of the Company’s Class A Common Stock from time to time. There is no expiration date for the Plan.
Hub’s public offering of Class A common stock priced at $33.00 per share, before underwriting discounts and commissions, and was closed on July 2, 2004. The Company sold 1,800,000 shares and selling stockholders sold 385,000 shares. Net proceeds to the Company of $56,100,000 were used to prepay the $50,000,000 of 9.14% debt on July 6, 2004 as well as the majority of the make-whole payment of $6,800,000. As a result of the pre-payment, the Company will record a change of $7,300,000 (after-tax of approximately $4,200,000), consisting of $6,800,000 in pre-payment penalties and $500,000 related to the write off of deferred financing costs during the third quarter of 2004.
Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30, 2003
Transportation-related revenue, generated by Hub Group, Inc.’s (the “Company’s”) intermodal, truckload brokerage and logistics business units, increased 7.2% or $22.8 million. Intermodal revenue increased 5.7% to $242.3 million from $229.2 million in 2003 due primarily to an increase in volume. Truckload brokerage revenue increased 7.3% to $56.8 million from $52.9 million in 2003 due primarily to an increase in revenue per load. Logistics revenue increased 17.1% to $39.4 million from $33.7 million due primarily to increased volume. Hub Group Distribution Services (“HGDS”) revenue decreased 34.0% to $10.5 million in 2004 from $15.9 million in 2003 due primarily to a decrease in the installation business. Total revenue for the Company increased 5.2% to $349.0 million in 2004 from $331.7 million in 2003.
Gross margin increased 0.5% to $43.7 million in 2004 from $43.5 million in 2003. Transportation-related gross margin dollar increases were offset by decreases in gross margin dollars at HGDS. As a percent of revenue, gross margin decreased to 12.5% in 2004 from 13.1% in 2003. The change in gross margin as a percentage of revenue is primarily attributable to a decrease in the higher margin business of HGDS.
As a percentage of revenue, salaries and benefits decreased to 6.4% from 6.9% in 2003. Salaries and benefits decreased to $22.2 million in 2004 from $22.9 million in 2003. This was due primarily to a decrease in headcount. Headcount as of June 30, 2004 was 1,176. In late 2003, the Company stopped issuing new stock options and began issuing restricted stock which vests over three years. As a result, salaries and benefits include a $0.6 million charge related to restricted stock in the three months ended June 30, 2004.
Selling general and administrative expenses decreased to $10.3 million in 2004 from $12.1 million in 2003. As a percentage of revenue, these expenses decreased to 3.0% in 2004 from 3.6% in 2003. Equipment lease expense decreased by $0.6 million due primarily to the lease buy-outs in the latter half of 2003. Outside services expense decreased by $0.4 million due primarily to lower legal fees incurred during 2004. Outside sales commissions decreased by $0.2 million and rent and office expense decreased by $0.2 million due primarily to a reduction in offices and cost savings initiatives.
Depreciation and amortization increased to $2.9 million in 2004 from $2.6 million in 2003. This expense as a percentage of revenue remained constant at 0.8%. The increase in depreciation and amortization is due primarily to more computer equipment being depreciated in 2004 as a result of lease buy-outs in the latter half of 2003.
Interest expense decreased to $1.7 million in 2004 from $2.0 million in 2003. The decrease in interest expense is due primarily to carrying a lower average debt balance this year as compared to the prior year.
The provision for income taxes increased to $2.9 million in 2004 compared to $2.4 million in 2003. The Company provided for income taxes using an effective rate of 42.0% in 2004 and an effective rate of 61.1% in the second quarter of 2003. The decrease in the effective rate from 2003 to 2004 is related to the write off of $0.8 million of deferred tax assets related to the Illinois Research and Development credit in 2003. On June 20, 2003, the governor of Illinois signed legislation that eliminated the Illinois Research and Development credit and the use of any credit carryforwards for any year ending on or after December 31, 2003.
Net income increased to $4.1 million in 2004 from $1.5 million from 2003.
Basic earnings per share increased to $0.52 in 2004 from $0.20 in 2003 and diluted earnings per shared increased to $0.48 in 2004 from $0.20 in 2003.
Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003
Transportation-related revenue, generated by the Company’s intermodal, truckload brokerage and logistics business units, increased 4.8% or $30.1 million. Intermodal revenue increased 3.4% to $472.9 million from $457.2 million in 2003 due primarily to an increase in volume. Truckload brokerage revenue increased 4.1% to $107.7 million from $103.5 million in 2003 due primarily to an increase in revenue per load. Logistics revenue increased 14.8% to $79.1 million from $68.9 million due primarily to increased volume. HGDS revenue decreased 43.9% to $17.6 million in 2004 from $31.3 million in 2003 due primarily to a decrease in the installation business. Total revenue for the Company increased 2.5% to $677.3 million in 2004 from $660.9 million in 2003.
Gross margin remained constant at $85.5 million. Transportation-related gross margin dollar increases were offset by decreases in gross margin dollars at HGDS. As a percent of revenue, gross margin decreased slightly to 12.6% in 2004 from 12.9% in 2003. The change in gross margin as a percentage of revenue is primarily attributable to a decrease in the higher margin business of HGDS.
Salaries and benefits decreased to $44.6 million in 2004 from $46.2 million in 2003. As a percentage of revenue, salaries and benefits decreased to 6.6% from 7.0% in 2003. This was due primarily to a decrease in headcount. In late 2003, the Company stopped issuing new stock options and began issuing restricted stock which vests over three years. As a result, salaries and benefits include a $1.0 million charge related to restricted stock in the six months ended June 30, 2004.
Selling general and administrative expenses decreased to $20.6 million in 2004 from $23.9 million in 2003. As a percentage of revenue, these expenses decreased to 3.0% in 2004 from 3.6% in 2003. Equipment lease expense decreased by $1.4 million due primarily to the lease buy-outs in the latter half of 2003. Telephone expense decreased by $0.4 million due primarily to a reduction in headcount. Outside services expense decreased by $0.5 million due primarily to lower legal fees incurred during 2004. Rent and office expense decreased by $0.4 million due primarily to a reduction in offices and cost savings initiatives. Outside sales commissions decreased by $0.3 million.
Depreciation and amortization increased to $5.7 million in 2004 from $5.1 million in 2003. This expense as a percentage of revenue remained constant at 0.8%. The increase in depreciation and amortization is due primarily to more computer equipment being depreciated in 2004 as a result of lease buy-outs in the latter half of 2003.
Interest expense decreased to $3.4 million in 2004 from $4.1 million in 2003. The decrease in interest expense is due primarily to carrying a lower average debt balance this year as compared to the prior year.
The provision for income taxes increased to $4.9 million in 2004 compared to $3.4 million in 2003. The Company provided for income taxes using an effective rate of 42.0% for the six months ended June 30, 2004 and an effective rate of 53.7% for the six months ended June 30, 2003. The decrease in the effective rate from 2003 to 2004 is related to the write off of $0.8 million of deferred tax assets related to the Illinois Research and Development credit in 2003. On June 20, 2003, the governor of Illinois signed legislation that eliminated the Illinois Research and Development credit and the use of any credit carryforwards for any year ending on or after December 31, 2003.
Net income increased to $6.8 million in 2004 from $2.9 million from 2003.
Basic earnings per share increased to $0.87 in 2004 from $0.38 in 2003 and diluted earnings per shared increased to $0.81 in 2004 from $0.37 in 2003.
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, 2004, was approximately $14.1 million, which resulted primarily from net income from operations and non-cash charges of $11.6 million.
Net cash used in investing activities for the six months ended June 30, 2004, was $1.7 million and related to expenditures principally made to enhance the Company’s information system capabilities.
The net cash used in financing activities for the six months ended June 30, 2004, was $12.4 million and related primarily to payments on the Company’s debt and purchase of treasury stock offset by an increase in cash resulting from stock options being exercised.
The Company does not believe its net working capital deficit impairs its ability to meet obligations as they become due.
Hub’s public offering of Class A common stock priced at $33.00 per share, before underwriting discounts and commissions, and closed on July 2, 2004. The Company sold 1,800,000 shares and selling stockholders sold 385,000 shares. Net proceeds to the Company of $56,100,000 were used to prepay the $50,000,000 of 9.14% debt on July 6, 2004 as well as the majority of the make-whole payment of $6,800,000. As a result of the pre-payment, the Company will record a charge of $7,300,000 (after-tax of approximately $4,200,000) consisting of $6,800,000 in pre-payment penalities and $500,000 related to the write off of deferred financing costs during the third quarter of 2004.
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 obligation to update any such forward-looking statements. In addition to those mentioned elsewhere in this section and the risk factors outlined in the Company's Prospectus dated June 28, 2004, 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 and highway transportation 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, the situation in the Middle East and fluctuations in interest rates.
During 2004, in connection with the field realignment, the Company revised its revenue classifications by transportation mode. Accordingly, the 2003 revenue amounts have been reclassified to conform to the current year presentation (in millions):
Transit times have increased for certain rail vendors due to rail congestion caused primarily by increased volume. A decline in rail service could adversely affect the Company’s revenue for the remainder of 2004 and could increase the Company’s operating costs per load, which could negatively impact net income.
As a result of eliminating the $50,000,000 of debt, the Company will no longer be required to pay the related interest which historically has been approximately $1,100,000 per quarter.
The Company is exposed to market risk related to changes in interest rates on its bank line of credit and term notes 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. No derivative financial instruments were in use during the six months ended June 30, 2004.
As of June 30, 2004, an evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Office and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of June 30, 2004. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of this evaluation.
(e) Note 8 of the Company’s Notes to Unaudited Condensed Consolidated Financial Statements is incorporated herein by reference.
(a) A list of exhibits included as part of this report is set forth in the Exhibit Index incorporated herein by reference.
(b) Reports on Form 8-K.
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.
Exhibit No. Description