HUBG

Hub Group, Inc. - 10-Q Summary (Period Ended September 30, 2002)

Business Context and Reporting Period

This is an unaudited quarterly report (Form 10-Q) for Hub Group, Inc., a transportation and logistics company, for the period ended September 30, 2002. The filing covers the three and nine months ended on this date. Management notes that results for 2002 are not directly comparable to 2001 due to accounting irregularities discovered in the fourth quarter of 2001 at a subsidiary (Hub Group Distribution Services) and the adoption of new accounting standards (SFAS 142) regarding goodwill.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 10.4% year-over-year for the quarter, driven by growth in intermodal (13.3%) and truckload brokerage (6.3%) segments. However, the nine-month revenue increase was only 0.3% due to a significant loss of steamship customers in early 2001.
• Margin Compression: Gross margin percentage declined from 13.8% in 2001 to 11.9% in 2002 (quarterly) due to lower intermodal margins, price competition, and higher transportation costs.
• Profitability Turnaround: The company reported a net income of $1.4 million for the quarter, compared to a net loss of $1.1 million in the same period in 2001. This improvement is partly attributed to the cessation of goodwill amortization under SFAS 142.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses dropped 30.4% for the quarter, largely due to a $4.7 million write-off of a receivable in 2001 that did not recur.
• Acquisition Activity: In August 2002, the company purchased the remaining 35% minority interest in its subsidiary HGDS for $4.0 million, resulting in $7.0 million of new goodwill.

Guidance, Outlook, Risks, and Unusual Items

• Outlook and Risks: Management highlighted risks related to the West Coast dock worker lockout in October 2002, which could negatively impact volume and results in the fourth quarter. Competitive pressures from web-based competitors and railroads are also noted.
• Cost Reduction Program: An expense reduction program involving a reduction in force was announced in October 2002, with costs expected to be recorded in the fourth quarter.
• Debt Covenants: On October 15, 2002, the company amended its credit agreements to modify financial covenants (fixed charge coverage, EBITDA, leverage ratios) and reduced the capital expenditure limit for 2003 to $9.0 million. Loans are now secured by substantially all assets.
• Legal Contingency: A class-action lawsuit filed in February 2002 regarding alleged inaccurate financial statements was dismissed by the federal district court in October 2002. Plaintiffs have until November 22, 2002, to file an amended complaint.
• Accounting Changes: The adoption of SFAS 142 eliminated goodwill amortization, significantly impacting reported earnings compared to the prior year. Additionally, a $2.8 million adjustment to accrued transportation costs in Q1 2002 increased pretax income.

Investor Verification Checklist

• Comparability of Results: Verify the impact of the 2001 accounting irregularities and the SFAS 142 adoption on year-over-year comparisons, as management explicitly states results are not comparable.
• Liquidity Position: Confirm the company's ability to meet obligations given the reported $0 cash balance and reliance on a revolving credit facility ($19 million available).
• Debt Covenant Compliance: Review the amended debt covenants effective October 15, 2002, and the reduced capital expenditure limits for 2003.
• Legal Proceedings: Monitor the status of the class-action lawsuit to see if an amended complaint is filed by the November 22, 2002 deadline.
• Operational Risks: Assess the potential financial impact of the West Coast dock worker lockout on Q4 2002 intermodal volumes.