HUBG

Business Context and Reporting Period

Company: Hub Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2002
Business Overview: Hub Group operates in intermodal transportation, truckload brokerage, and logistics. The reporting period is significantly impacted by accounting irregularities discovered at its 65% owned subsidiary, Hub Group Distribution Services (HGDS), and the adoption of SFAS 142 regarding goodwill amortization.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Increased 3.0% for the quarter ($327.6M vs. $318.0M) but decreased 4.7% for the six-month period ($632.9M vs. $664.0M). The six-month decline was driven by a 6.8% drop in intermodal revenue due to the loss of steamship customers in early 2001.
• Profitability: The company reported a net loss of $2.2M for the quarter and $1.3M for the six months, compared to net income of $1.1M and $0.4M, respectively, in the prior year periods.
• Gross Margin: Gross margin percentage declined to 11.2% (quarter) and 12.3% (six months) from 14.3% and 13.8% in 2001. This was primarily due to lower volumes and margins at HGDS and competitive pricing in intermodal services.
• Goodwill Amortization: Amortization of goodwill dropped to $0 in 2002 following the adoption of SFAS 142 on January 1, 2002, compared to $1.4M (quarter) and $2.9M (six months) in 2001.
• Working Capital: Net cash used in operating activities was $1.6M for the six months ended June 30, 2002, a significant reversal from the $32.9M provided in the prior year period.

Guidance, Outlook, Risks, and Unusual Items

• Debt Covenant Default: As of June 30, 2002, the company was in default of certain debt covenants (fixed charge coverage, minimum EBITDA, and leverage ratios). Amendments were executed on August 14, 2002, to waive non-compliance for the quarter and modify covenants for subsequent periods. Loans must be secured by assets by October 15, 2002.
• Accounting Irregularities: The company recorded a $0.7M net income adjustment in Q4 2001 due to irregularities at HGDS. Consequently, 2002 results are not comparable to 2001 results. Professional fees of $1.3M were incurred in the first six months of 2002 related to the investigation and restatement.
• Minority Interest Settlement: In August 2002, the company settled with the minority partner of HGDS. The partner relinquished their 35% interest in exchange for $4.0M cash, releasing Hub's claims on a $3.0M deficit balance.
• Legal Proceedings: A class-action lawsuit filed by Riggs Partners, LLC alleges violations of securities laws regarding inaccurate financial statements. The company intends to vigorously defend the suit, which could have a material adverse effect if an adverse judgment occurs.
• Liquidity: Cash and cash equivalents were $0 at period end. The company relies on a $50M line of credit ($28M outstanding, $22M available) and term debt to fund operations.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the status of the August 2002 amendments and whether the company successfully secured the loans by the October 15, 2002 deadline.
• Restatement Impact: Assess the full financial impact of the HGDS accounting irregularities and the $1.3M in professional fees on future quarters.
• Legal Exposure: Monitor the progress of the Riggs Partners class-action lawsuit and the company's motion to dismiss.
• Liquidity Position: Confirm the company's ability to meet working capital needs given the $0 cash balance and reliance on the revolving credit facility.
• HGDS Performance: Evaluate the sustainability of revenue growth in truckload brokerage and supply chain solutions to offset the decline in HGDS installation business.