hubgroup10q2008q2.htm

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008 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
Hub Group Logo
HUB GROUP, INC.
(Exact name of registrant as specified in its charter)


 
Delaware
36-4007085
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 

3050 Highland Parkway, Suite 100
Downers Grove, Illinois 60515
(Address, including zip code, of principal executive offices)
(630) 271-3600
(Registrant’s telephone number, including area code)


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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated Filer  X      Accelerated Filer           Non-Accelerated Filer         Smaller Reporting Company      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act).  Yes__  No X

On July 22, 2008, the registrant had 36,997,712 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


 
 PART I.  Financial Information:  Page
   
 Hub Group, Inc. - Registrant  
   
 Condensed Consolidated Balance Sheets – June 30, 2008 (unaudited) and
December 31, 2007 
 3
   
Unaudited Condensed Consolidated Statements of Income - Three Months
and Six Months Ended June 30, 2008 and 2007
 4
   
Unaudited Condensed Consolidated Statement of Stockholders’ Equity - Six
Months Ended June 30, 2008
 5
   
Unaudited Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2008 and 2007
 6
   
 Notes to Unaudited Condensed Consolidated Financial Statements  7
   
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 9
   
 Quantitative and Qualitative Disclosures About Market Risk 14
   
 Controls and Procedures 15
   
 PART II.  Other Information 15
 
 



















 
2
 

Item 1. Financial Statements
 
HUB GROUP, INC.
 
CONSOLIDATED BALANCE SHEETS
 
(in thousands, except share amounts)
 
       
   
June 30,
2008
   
December 31,
2007
 
ASSETS
 
(unaudited)
       
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 54,038     $ 38,002  
Accounts receivable
               
Trade, net
    191,878       160,944  
Other
    10,720       9,828  
Prepaid taxes
    86       86  
Deferred taxes
    3,876       5,044  
Prepaid expenses and other current assets
    5,925       4,318  
TOTAL CURRENT ASSETS
    266,523       218,222  
                 
Restricted investments
    7,746       5,206  
Property and equipment, net
    28,181       29,662  
Other intangibles, net
    6,833       7,056  
Goodwill, net
    230,448       230,448  
Other assets
    1,251       1,373  
TOTAL ASSETS
  $ 540,982     $ 491,967  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable
               
Trade
  $ 147,282     $ 123,020  
Other
    9,029       6,683  
Accrued expenses
               
Payroll
    12,137       16,446  
Other
    28,434       33,063  
       Related party payable
    -       5,000  
TOTAL CURRENT LIABILITIES
    196,882       184,212  
                 
Non-current liabilities
    9,753       9,708  
Deferred taxes
    51,129       47,148  
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $.01 par value;  2,000,000 shares authorized;  no shares issued or outstanding in 2008 and 2007
    -       -  
Common stock
               
Class A:  $.01 par value;  97,337,700 shares authorized and 41,224,792 shares issued in 2008 and 2007;  37,001,494 outstanding in 2008 and 36,666,731 outstanding in 2007
    412       412  
Class B:  $.01 par value; 662,300 shares authorized; 662,296 shares issued and outstanding in 2008 and 2007
    7       7  
Additional paid-in capital
    172,357       176,657  
Purchase price in excess of predecessor basis, net of tax benefit of $10,306
    (15,458 )     (15,458 )
Retained earnings
    234,147       206,042  
Treasury stock; at cost, 4,223,298 shares in 2008 and 4,558,061 shares in 2007
    (108,247 )     (116,761 )
TOTAL STOCKHOLDERS' EQUITY
    283,218       250,899  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 540,982     $ 491,967  

See notes to unaudited condensed consolidated financial statements.

 
3
 

HUB GROUP, INC.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(in thousands, except per share amounts)
 
               
   
Three Months
   
Six Months
   
   
Ended June 30,
   
Ended June 30,
   
                       
   
2008
   
2007
   
2008
   
2007
 
   
                     
Revenue
  $ 490,929     $ 401,565     $ 915,924     $ 794,862  
Transportation costs
    431,090       343,802       798,583       680,438  
Gross margin
    59,839       57,763       117,341       114,424  
                           
Costs and expenses:
                         
Salaries and benefits
    24,301       24,177       49,664       49,787  
General and administrative
    10,477       10,218       20,627       21,819  
Depreciation and amortization
    991       1,203       1,992       2,375  
Total costs and expenses
    35,769       35,598       72,283       73,981  
                           
Operating income
    24,070       22,165       45,058       40,443  
                           
Other income (expense):
                         
Interest expense
    (26 )     (24 )     (52 )     (45 )
Interest and dividend income
    340       611       678       1,256  
Other, net
    (9 )     55       86       58  
Total other income
    305       642       712       1,269  
                           
Income before provision for income taxes
    24,375       22,807       45,770       41,712  
                           
Provision for income taxes
    9,405       9,032       17,665       16,518  
                           
Net income
  $ 14,970     $ 13,775     $ 28,105     $ 25,194  
                           
Basic earnings per common share
  $ 0.40     $ 0.35     $ 0.76     $ 0.64  
                           
Diluted earnings per common share
  $ 0.40     $ 0.35     $ 0.75     $ 0.64  
                           
Basic weighted average number of shares outstanding
    37,191       39,043       37,146       39,150  
                           
Diluted weighted average number of shares outstanding
    37,489       39,538       37,447       39,652  
                           
                       
See notes to unaudited condensed consolidated financial statements.
 


 
 
 
 
 
 
 

 

 
4
 



HUB GROUP, INC
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 
For the six months ended June 30, 2008
 
(in thousands, except shares)
 
       
   
June 30,
 
   
2008
 
Class A & B Common Stock Shares Outstanding
     
Beginning of year
    37,329,027  
Purchase of treasury shares
    (28,528 )
Treasury shares issued for restricted stock and stock options exercised
    363,291  
Ending balance
    37,663,790  
         
Class A & B Common Stock Amount
       
Beginning of year
  $ 419  
Ending balance
    419  
         
Additional Paid-in Capital
       
Beginning of year
    176,657  
Exercise of non-qualified stock options
    (3,470 )
Share-based compensation expense
    2,257  
Tax benefit of share-based compensation plans
    2,398  
Issuance of restricted stock awards, net of forfeitures
    (5,485 )
Ending balance
    172,357  
         
Purchase Price in Excess of Predecessor Basis, Net of Tax
       
Beginning of year
    (15,458 )
Ending balance
    (15,458 )
         
Retained Earnings
       
Beginning of year
    206,042  
Net income
    28,105  
Ending balance
    234,147  
         
Treasury Stock
       
Beginning of year
    (116,761 )
Purchase of treasury shares
    (796 )
Issuance of restricted stock and exercise of stock options
    9,310  
Ending balance
    (108,247 )
         
Total stockholders’ equity
  $ 283,218  
 
See notes to unaudited condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 

 
5
 
 
HUB GROUP, INC.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(in thousands)
 
   
Six Months Ended June 30,
 
   
2008
   
2007
 
Cash flows from operating activities:
           
    Net income
  $ 28,105     $ 25,194  
    Adjustments to reconcile net income to net cash provided by operating activities:
               
       Depreciation and amortization
    3,395       3,706  
       Deferred taxes
    5,149       3,034  
       Compensation expense related to share-based compensation plans
    2,257       1,923  
       Gain loss on sale of assets
    (197 )     (117 )
    Changes in operating assets and liabilities:
               
          Restricted investments
    (2,540 )     (1,786 )
          Accounts receivable, net
    (31,826 )     1,667  
          Prepaid taxes
    -       2,033  
          Prepaid expenses and other current assets
    (1,607 )     (345 )
          Other assets
    122       4  
          Accounts payable
    26,608       (4,388 )
          Accrued expenses
    (8,938 )     (174 )
          Deferred compensation
    45       180  
            Net cash provided by operating activities
    20,573       30,931  
Cash flows from investing activities:
               
   Proceeds from sale of equipment
    364       550  
   Purchases of property and equipment
    (1,858 )     (7,453 )
   Cash used in acquisition of Comtrak, Inc.
    (5,000 )     (5,000 )
            Net cash used in investing activities
    (6,494 )     (11,903 )
Cash flows from financing activities:
               
   Proceeds from stock options exercised
    355       329  
   Purchase of treasury stock
    (796 )     (12,898 )
   Excess tax benefits from share-based compensation
    2,398       2,430  
            Net cash provided by (used in) financing activities
    1,957       (10,139 )
                 
Net increase in cash and cash equivalents
    16,036       8,889  
Cash and cash equivalents beginning of period
    38,002       43,491  
Cash and cash equivalents end of period
  $ 54,038     $ 52,380  
                 
Supplemental disclosures of cash paid for:
               
     Interest
  $ 52     $ 45  
     Income taxes
  $ 11,165     $ 7,427  
 
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 at June 30, 2008 and results of operations for the three months and six months ended June 30, 2008 and 2007.

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, 2007.  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.                      Earnings Per Share

The following is a reconciliation of our earnings per share:

   
Three Months Ended
   
Three Months Ended
 
   
June 30, 2008
   
June 30, 2007
 
          (000's)                 
 (000's)
       
   
Income
   
Shares
   
Per Share Amount
   
Income
   
Shares
   
Per Share Amount
 
Basic EPS
                                       
    Net income
  $ 14,970       37,191     $ 0.40     $ 13,775       39,043     $ 0.35  
                                                 
Effect of Dilutive Securities
                                               
    Stock options and restricted stock
            298                       495          
                                                 
Diluted EPS
  $ 14,970       37,489     $ 0.40     $ 13,775       39,538     $ 0.35  


   
Six Months Ended
   
Six Months Ended
 
   
June 30, 2008
   
June 30, 2007
 
           (000's)                
 (000's)
       
   
Income
   
Shares
   
Per Share Amount
   
Income
   
Shares
   
Per Share Amount
 
Basic EPS
                                       
    Net income
  $ 28,105       37,146     $ 0.76     $ 25,194       39,150     $ 0.64  
                                                 
Effect of Dilutive Securities
                                               
    Stock options and restricted stock
            301                       502          
                                                 
Diluted EPS
  $ 28,105       37,447     $ 0.75     $ 25,194       39,652     $ 0.64  

 
NOTE 3.                      Debt

We had $47.2 million of unused and available borrowings under our bank revolving line of credit at June 30, 2008.  We were in compliance with our debt covenants at June 30, 2008.

We have standby letters of credit that expire at various dates from 2008 to 2012.  As of June 30, 2008, the outstanding letters of credit totaled $2.8 million.

7
NOTE 4.                      Commitments and Contingencies

In February 2008, we entered into an equipment purchase contract with Singamas Management Services, Ltd. and Singamas North America, Inc.  We agreed to purchase 1,000 fifty-three foot dry freight steel domestic containers for approximately $10.0 million.  We have received 349 units as of June 30, 2008 and expect delivery on the remainder before September 30, 2008.  We plan to enter into operating leases to finance these containers with terms of approximately six years.

In the second quarter of 2008, we entered into agreements to purchase approximately $7.2 million in tractors, which we expect to take possession of during the third and fourth quarters.  These purchases will be funded with cash.

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 5.                      Fair Value Measurements

      We adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157) effective January 1, 2008 as required.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  There was no cumulative effect recorded upon adoption.  At June 30, 2008, cash and cash equivalents and restricted investments include $51.8 million of money market funds and $7.7 million of mutual funds, respectively, which are reported at fair value.  The fair value measurement of these securities is based on quoted prices in active markets for identical assets which are defined as “Level 1” of the fair value hierarchy based on the criteria in SFAS No. 157.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
8
 

HUB GROUP, INC.

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


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 domestic intermodal, truck brokerage and logistics markets served by us;
·  
deterioration in our relationships with existing railroads or adverse changes to the railroads’ operating rules;
·  
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;
·  
railroads moving away from ownership of intermodal assets;
·  
equipment shortages or equipment surplus;
·  
changes in the cost of services from rail, drayage, truck or other vendors;
·  
increases in costs for independent contractors due to regulatory, judicial and legal changes;
·  
labor unrest in the rail, drayage or trucking company communities;
·  
general economic and business conditions;
·  
significant deterioration in our customer’s financial condition, particularly in the retail sector;
·  
fuel shortages or fluctuations in fuel prices;
·  
increases in interest rates;
·  
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;
·  
inability to recruit and retain key personnel;
·  
inability to recruit and retain drivers and owner operators;
·  
changes in insurance costs and claims expense; and
·  
inability to close and successfully integrate any future business combinations.


EXECUTIVE SUMMARY

Hub Group, Inc.  (“we”, “us” or “our”) is the largest intermodal marketing company (“IMC”) in the United States and a full service transportation provider offering intermodal, truck brokerage and logistics services.  We operate through a nationwide network of operating centers.

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.

Our drayage services are provided by our subsidiaries, Comtrak Logistics, Inc. (“Comtrak”) and Quality Services, LLC (“QS”) that assist us in providing reliable, cost effective intermodal services to our customers.  Our subsidiaries have terminals in Atlanta, Birmingham, Charleston, Charlotte, Chattanooga, Chicago, Cleveland, Columbus, Dallas, Huntsville, Jacksonville, Kansas City, Los Angeles, Memphis, Nashville, Perry, Savannah, St. Louis, Stockton, and Tampa.  At June 30, 2008, Comtrak and QS owned 291 tractors, leased 22 tractors, leased or owned 605 trailers, and employed 326 drivers and contracted with 881 owner-operators.
 

 
9
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 truck brokerage services, we negotiate rates, track shipments in transit and handle claims for freight loss or damage on behalf of our customers.

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.

One of our primary goals is to grow our net income.  We achieved this growth through an increase in revenue and margin from our existing transportation customers and winning new customers.  Our yield management group works with sales and operations to enhance customer margins.  Our top 50 customers’ revenue represents approximately 50.0% of our revenue.  During 2007 and 2008, we severed relationships with certain customers, due to profitability issues and credit issues which impeded our intermodal revenue growth.

We use various performance indicators to manage our business.  We closely monitor margin and gains and losses for our top 50 customers.  We also evaluate on-time performance, costs per load and daily sales outstanding by customer account.  Vendor cost changes and vendor service issues are also monitored closely.


RESULTS OF OPERATIONS

The following table summarizes our revenue by business line (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
               
%
               
%
 
   
2008
   
2007
   
Change
   
2008
   
2007
   
Change
 
Revenue
                                   
Intermodal
  $ 351,640     $ 300,877       16.9 %   $ 654,411     $ 588,710       11.2 %
Truck brokerage
    98,667       73,631       34.0       188,575       148,648       26.9  
Logistics
    40,622       27,057       50.1       72,938       57,504       26.8  
Total Revenue
  $ 490,929     $ 401,565       22.3 %   $ 915,924     $ 794,862       15.2 %



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
10
 
 

 
The following table includes certain items in the consolidated statements of income as a percentage of revenue:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Revenue
    100.0 %     100.0 %     100.0 %     100.0 %
                                 
Transportation costs
    87.8       85.6       87.2       85.6  
                                 
Gross margin
    12.2       14.4       12.8       14.4  
                                 
Costs and expenses:
                               
     Salaries and benefits
    5.0       6.0       5.4       6.3  
     General and administrative
    2.1       2.6       2.3       2.7  
     Depreciation and amortization
    0.2       0.3       0.2       0.3  
Total costs and expenses
    7.3       8.9       7.9       9.3  
                                 
Operating income
    4.9       5.5       4.9       5.1  
                                 
Other income:
                               
     Interest and dividend income
    0.1       0.2       0.1       0.1  
     Total other income
    0.1       0.2       0.1       0.1  
                                 
Income before provision for income taxes
    5.0       5.7       5.0       5.2  
                                 
Provision for income taxes
    2.0       2.3       1.9       2.0  
                                 
Net income
    3.0 %     3.4 %     3.1 %     3.2 %


Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007

Revenue

Revenue increased 22.3% to $490.9 million in 2008 from $401.6 million in 2007.  Intermodal revenue increased 16.9% to $351.6 million due to an increase in pricing, including fuel, of 11.6% and an increase in volume of 5.3%.  The largest volume growth came from our consumer products and transportation customers.  Truck brokerage revenue increased 34.0% to $98.7 million due to higher volume, mix and pricing, including fuel.  Logistics revenue increased 50.1% to $40.6 million due primarily to business from new customers.

Gross Margin

Gross margin increased 3.6% to $59.8 million in 2008 from $57.8 million in 2007.  This margin expansion of $2.0 million comes primarily from increases in logistics and truck brokerage.  These increases were offset by an extra $1.0 million in costs related to an owner-operator work stoppage in Northern California.  As a percent of revenue, gross margin decreased to 12.2% in 2008 from 14.4% in 2007.  The decrease in gross margin as a percentage of revenue is due primarily to lower truck brokerage yield, the dramatic increase in fuel costs during the quarter, the owner operator work stoppage in northern California that cost us an extra $1.0 million and pressure on intermodal pricing due to the soft freight economy.

Salaries and Benefits

Salaries and benefits increased slightly to $24.3 million in 2008 from $24.2 million in 2007.  As a percentage of revenue, these expenses decreased to 5.0% in 2008 from 6.0% in 2007.  The increase in salaries and benefits is due primarily to an increase in restricted stock expense.  Headcount as of June 30, 2008 was 1,086.  Headcount numbers exclude drivers, as driver costs are included in transportation costs.
 

 
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General and Administrative

General and administrative expenses increased to $10.5 million in 2008 from $10.2 million in 2007. As a percentage of revenue, these expenses decreased to 2.1% in 2008 from 2.6% in 2007.  The increase in general and administrative expenses is due primarily to increases in rent expense, bad debt expense, and professional services, partially offset by a decrease in computer costs and insurance expenses.

Depreciation and Amortization

Depreciation and amortization decreased to $1.0 million in 2008 from $1.2 million in 2007.  These expenses as a percentage of revenue decreased to 0.2% in 2008 from 0.3% in 2007.  The decrease in depreciation and amortization is due primarily to lower computer software depreciation as some of our software was fully depreciated.

Other Income (Expense)

Interest and dividend income decreased to $0.3 million in 2008 from $0.6 million in 2007.  This income as a percentage of revenue decreased to 0.1% in 2008 from 0.2% in 2007.  The decrease in interest and dividend income is a result of lower interest rates.

Provision for Income Taxes

The provision for income taxes increased to $9.4 million in 2008 compared to $9.0 million in 2007.  We provided for income taxes using an effective rate of 38.6% in 2008 and an effective rate of 39.6% in 2007.  The decrease in the effective tax rate is primarily due to tax legislation enacted by the State of Illinois in the third quarter of 2007, which modifies how we apportion taxable income to Illinois.

 Net Income

Net income increased to $15.0 million in 2008 from $13.8 million in 2007 due primarily to generating additional gross margin, lower depreciation and amortization expense, and maintaining our cost discipline.

Earnings Per Common Share

Basic earnings per share was $0.40 in 2008 and $0.35 in 2007.  Diluted earnings per share was $0.40 in 2008 from $0.35 in 2007.


Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007

Revenue

Revenue increased 15.2% to $915.9 million in 2008 from $794.9 million in 2007.  Intermodal revenue increased 11.2% to $654.4 million due primarily to a 10.5% combined increase related to price, mix and fuel surcharges and a 0.7% increase in volume.  Truck brokerage revenue increased 26.9% to $188.6 million due primarily to a change in mix, an increase in volume and an increase in revenue per load from price increases including fuel.  Logistics revenue increased 26.8% to $72.9 million as a result of increased business from new and existing customers.

Gross Margin

Gross margin increased 2.5% to $117.3 million in 2008 from $114.4 million in 2007.  This margin expansion is primarily due to strong growth in truck brokerage and new logistics customers.  As a percent of revenue, gross margin decreased to 12.8% in 2008 from 14.4% in 2007.  The decrease in gross margin as a percentage of revenue is due to a one-time $2.0 million profitable vendor deal in the first quarter of 2007, lower truck brokerage yield, the dramatic increase in fuel costs during the first six months of the year, the owner operator work stoppage in northern California that cost us an extra $1.0 million and pressure on intermodal pricing due to the soft freight economy.

Salaries and Benefits

Salaries and benefits decreased slightly to $49.7 million in 2008 from $49.8 million in 2007.  As a percentage of revenue, these expenses decreased to 5.4% in 2008 from 6.3% in 2007.  The decrease is primarily the result of reducing headcount from 1,097 at June 30, 2007 to 1,086 at June 30, 2008.  Headcount numbers exclude drivers, as driver costs are included in transportation costs.
 

 
 
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General and Administrative

General and administrative expenses decreased to $20.6 million in 2008 from $21.8 million in 2007.  As a percentage of revenue, these expenses decreased to 2.3% in 2008 from 2.7% in 2007.  The decrease in general and administrative expenses relates primarily to lower insurance expenses, computer expenses, telephone costs and professional services, slightly offset by an increase in rent expenses.

Depreciation and Amortization

Depreciation and amortization decreased to $2.0 million in 2008 from $2.4 million in 2007.  These expenses as a percentage of revenue decreased slightly to 0.2% in 2008 from 0.3% in 2007.  The decrease in depreciation and amortization is due primarily to lower computer software depreciation as some of our software was fully depreciated.

Other Income (Expense)

Interest and dividend income decreased to $0.7 million in 2008 from $1.3 million in 2007.  The decrease in interest and dividend income is a result of lower interest rates and investment balances in 2008.

Provision for Income Taxes

The provision for income taxes increased to $17.7 million in 2008 from $16.5 million in 2007.  We provided for income taxes using an effective rate of 38.6% in 2008 and an effective rate of 39.6% in 2007.  The decrease in the effective tax rate is primarily due to tax legislation enacted by the State of Illinois in the third quarter of 2007, which modifies how we apportion taxable income to Illinois.

Net Income

Net income increased to $28.1 million in 2008 from $25.2 million in 2007 due primarily to generating additional gross margin, lower general and administrative expense and lower depreciation and amortization expense.

Earnings Per Common Share

Basic earnings per share was $0.76 in 2008 and $0.64 in 2007.  Diluted earnings per share increased to $0.75 in 2008 from $0.64 in 2007.

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 our accounting policies.  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, 2007, includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements.


LIQUIDITY AND CAPITAL RESOURCES

During 2008, we have funded operations, capital expenditures, and the earn-out payment related to the Comtrak acquisition through cash flows from operations.

Cash provided by operating activities for the six months ended June 30, 2008 was approximately $20.6 million, which resulted primarily from income from operations of $28.1 million and non-cash charges of $10.6 million, partially offset by an increase in operating assets and liabilities of $18.1 million.

Net cash used in investing activities for the six months ended June 30, 2008 was $6.5 million and related primarily to the $5.0 million earn-out payment made to the former owner of Comtrak and purchases of property and equipment of $1.9 million, partially offset by $0.4 million of cash generated from the sale of equipment.  We expect capital expenditures to be approximately $11.0 million for all of 2008, which includes $7.2 million in tractors to be purchased in the third and fourth quarters.

The net cash provided by financing activities for the six months ended June 30, 2008 was $1.9 million.  We generated $0.3 million of cash from stock options being exercised and used $0.8 million of cash to purchase treasury stock.  We also reported $2.4 million of excess tax benefits from share-based compensation as a financing cash in-flow.
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We had $47.2 million of unused and available borrowings under our bank revolving line of credit at June 30, 2008.  We were in compliance with our debt covenants at June 30, 2008.

We have standby letters of credit that expire at various dates from 2008 to 2012.  As of June 30, 2008, the outstanding letters of credit totaled $2.8 million.

The $5.0 million related party payable was paid out during the first quarter of 2008.  This amount relates to the 2007 earn-out payment due to the former owner of Comtrak.  This payment completed the potential earn-outs related to the purchase of Comtrak.

We have authorization to spend up to $75.0 million to purchase common stock through June of 2009. Through the first six months of 2008, no shares have been repurchased.  Through July 25, 2008, we have purchased 4,900 shares.  We may make additional purchases from time to time as market conditions warrant.

Contractual Obligations

Our contractual cash obligations as of June 30, 2008 are minimum rental commitments.  Minimum annual rental commitments, at June 30, 2008, under non-cancelable operating leases, principally for real estate, containers and equipment are payable as follows (in thousands):

       
2008
  $ 9,847  
2009
    17,877  
2010
    15,453  
2011
    13,930  
2012
    12,297  
2013 and thereafter
    5,451  
    $ 74,855  

In February 2008, we entered into an equipment purchase contract with Singamas Management Services, Ltd. and Singamas North America, Inc.  We agreed to purchase 1,000 fifty-three foot dry freight steel domestic containers for approximately $10.0 million.  We have received 349 units as of June 30, 2008 and expect delivery on the remainder before September 30, 2008.  We plan to finance these containers with operating leases with terms of approximately six years.  These commitments are not included in the table above since the arrangements have not yet been finalized.

In the second quarter of 2008, we entered into agreements to purchase approximately $7.2 million in tractors, which we expect to take possession of during the third and fourth quarters.  These purchases will be funded with cash.

Deferred Compensation

Under our Nonqualified Deferred Compensation Plan (the “Plan”), participants can elect to defer certain compensation.  Payments under the Plan are due as follows as of June 30, 2008 (in thousands):

2008
  $ 101  
2009
    759  
2010
    1,636  
2011
    526  
2012
    615  
2013 and thereafter
    6,721  
    $ 10,358  


Item 3.  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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Item 4.  CONTROLS AND PROCEDURES

As of June 30, 2008, 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 June 30, 2008.  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.



PART II.                      Other  Information

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

On November 14, 2007, our Board of Directors authorized the purchase of up to $75.0 million of our Class A Common Stock.  This authorization expires June 30, 2009.  Through June 30, 2008, no shares were purchased pursuant to this plan.  Through July 25, 2008 we have purchased 4,900 shares.   We may make additional purchases from time to time as market conditions warrant, and any repurchased shares are expected to be held in treasury for future use.

The following table displays the number of shares purchased and the maximum value of shares that may yet be purchased under the plan:

   
Total Number of Shares Purchased
   
Average Price Paid Per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plan
   
Maximum Value of Shares that May Yet Be Purchased Under the Plan (in 000’s)
 
April 1 to
April 30
    --       --       --       75,000  
May 1 to
May 31
    --       --       --       75,000  
June 1 to
June 30
    --       --       --       75,000  
           Total
    --     $ --       --     $ 75,000  

This table excludes 28,528 shares ($0.8 million) purchased by the Company during the first half of 2008 related to employee withholding upon vesting of restricted stock.


Item 4.  Submission of Matters to a Vote of Security Holders

The 2008 Annual Meeting of Stockholders of Hub Group, Inc. was held on May 14, 2008.  All six of the directors were re-elected with the following votes:  Phillip C. Yeager:  62,320,030 for and 24,966,431 votes withheld;  David P. Yeager:  71,401,079 for and 15,885,382 votes withheld;  Mark A. Yeager: 70,772,847 for and 16,513,614 votes withheld;  Gary D. Eppen: 84,068,358 for and 3,218,103 votes withheld;  Charles R. Reaves: 84,320,777 for and 2,965,684 votes withheld;  Martin P. Slark: 84,321,478 for and 2,964,983 votes withheld.


Item 6.  Exhibits

The exhibits included as part of the Form 10-Q are set forth in the Exhibit Index immediately preceding such Exhibits and are incorporated herein by reference.
 
 
 
 
 
 

 
 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
     
    HUB GROUP   
       
DATE: July 25, 2008
 
/s/ Terri A. Pizzuto  
    Terri A. Pizzuto  
    Executive 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 Terri A. Pizzuto, Executive 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 Terri A. Pizzuto, Chief Executive Officer and Chief Financial Officer, respectively, Pursuant to 18 U.S.C. Section 1350.