HUBG

Hub Group, Inc. 2002 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2002, for Hub Group, Inc., the largest intermodal marketing company (IMC) in the United States. The Company operates a network of 22 Hubs providing intermodal, truck brokerage, logistics, and distribution services. In August 2002, Hub Group acquired the remaining 35% minority interest in its subsidiary, Hub Group Distribution Services (HGDS), for $4 million, making it a wholly-owned subsidiary.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 1.2% to $1.34 billion, driven by an 8.3% increase in truckload brokerage and a 21.1% increase in logistics services. This was partially offset by a 27.1% decline in Distribution Services revenue due to the loss of a large logistics customer.
• Margin Compression: Gross margin decreased to $162.8 million (12.2% of revenue) from $179.0 million (13.6%) in 2001. The decline was attributed to competitive pricing, changes in customer mix, and increased transportation costs.
• Profitability: Net income more than tripled to $1.5 million from $0.4 million. This improvement was significantly aided by the adoption of SFAS No. 142, which eliminated the $5.7 million goodwill amortization expense recorded in 2001.
• Cost Management: Selling, general, and administrative (SG&A) expenses dropped 12.7% to $46.8 million, largely due to the absence of a $4.7 million bad debt write-off recorded in 2001 related to a Korean steamship line bankruptcy.
• Accounting Changes: The Company adopted SFAS No. 142 effective January 1, 2002, ceasing the amortization of goodwill. Goodwill is now tested annually for impairment.

Guidance, Outlook, and Risks

• Outlook: Management expects capital expenditures in 2003 not to exceed $9.0 million. They anticipate fluctuations in gross margins due to business mix, fuel costs, and vendor pricing.
• Liquidity: The Company maintains a multi-bank credit facility with $24.3 million available under the revolving line of credit as of year-end. The Company was in compliance with all debt covenants as of December 31, 2002, following three amendments to the credit facility during the year to waive historical violations and modify financial ratios.
• Risks: Key risks include competitive pressures, potential service disruptions from railroad consolidation or labor actions (such as the West Coast port lockout which impacted Q4 2002 revenue by $7-9 million), and dependence on relationships with railroads and drayage carriers.
• Legal: A class-action lawsuit filed in 2002 was dismissed in October 2002, and plaintiffs agreed not to appeal. Routine litigation regarding freight loss or damage is ongoing but not expected to have a material adverse effect.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the Company's continued compliance with the amended fixed charge coverage and cash flow leverage ratios, given the history of covenant waivers in 2002.
• Customer Concentration: Confirm the stability of the logistics and brokerage customer base following the significant revenue loss in Distribution Services and the departure of steamship customers in prior years.
• Goodwill Valuation: Review the annual goodwill impairment testing methodology and assumptions, as the elimination of amortization makes future earnings sensitive to potential impairment charges.
• Working Capital Trends: Monitor the negative working capital position (deficiency of $7.1 million) and the Company's ability to manage cash flow from operations to meet debt service obligations.
• Restatement History: Note the history of financial restatements for 1999 and 2000 and the associated professional fees incurred in 2002 ($1.4 million) to assess internal control effectiveness.