[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-27754
(Exact name of registrant as specified in its charter)
| Delaware | 36-4007085 |
|---|---|
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent fliers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in PartIII of the Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No X
The aggregate market value of the Registrant's voting stock held by non-affiliates on June 30, 2003, based upon the last reported sale price on that date on the NASDAQ National Market of $8.75 per share, was $54,074,522.
On March 12, 2004, the registrant had 7,436,277 outstanding shares of Class A common stock, par value $.01 per share, and 662,296 outstanding shares of of Class B common stock, par value $.01 per share.
The Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 13, 2004, (the "Proxy Statement") is incorporated by reference in Part III of the Form 10-K to the extent stated herein. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.
Hub Group, Inc. (“Hub Group” or the “Company”) is a Delaware corporation that was incorporated on March 8, 1995. Since its founding as an intermodal marketing company (“IMC”) in 1971, Hub Group has grown to become the largest IMC in the United States and a full service transportation provider, offering intermodal, truck brokerage and comprehensive logistics services.
The Company has traditionally operated through a nationwide network of operation centers or “Hubs,” with each Hub functioning as a stand-alone business managed by a local executive. Effective February 1, 2004, the Company realigned its network. Each Hub field office will be managed as a part of Hub’s national network, with individuals at the local Hubs reporting directly or indirectly to either the Company’s Executive Vice President for intermodal, highway, logistics or sales. The Company believes these changes will enable it to compete more effectively as a network.
The Company also operates through Hub Group Distribution Services, LLC (“HGDS” or “Hub Distribution”). Hub Distribution, which performs certain specialized logistics services, is responsible for its own operations, customer service, marketing and management information systems support. Unless the context otherwise requires, references to Hub Group or the Company include the Hubs, Hub Distribution and their respective subsidiaries.
The Company’s transportation services can be broadly placed into the following categories:
Intermodal As an IMC, the Company arranges for the movement of its customers’ freight in containers and trailers over long distances. Hub Group contracts with railroads to provide transportation over the long-haul portion of the shipment and with local trucking companies, known as “drayage companies,” for pickup and delivery. In markets where adequate service is not available, the Company supplements third party drayage services with Company-owned drayage operations. As part of its intermodal services, the Company negotiates rail and drayage rates, electronically tracks shipments in transit, consolidates billing and handles claims for freight loss or damage on behalf of its customers.
The Company uses its Hub network, connected through its proprietary Network Management System, to access containers and trailers owned by leasing companies, railroads and steamship lines. Each Hub is able to track trailers and containers entering its service area and reuse that equipment to fulfill its customers’ outbound shipping requirements. This effectively allows the Company to “capture” containers and trailers and keep them within the Hub network without having to make a capital investment in transportation equipment. The Company also has exclusive use of the containers in its Premier Service Network.
Highway Services The Company arranges for the transportation of freight by truck, providing customers another option for their transportation needs. This is accomplished by matching customers’ needs with carriers’ capacity to provide the appropriate service and price combination. The Company has contracts with a substantial base of carriers allowing it to meet the varied needs of its customers. The Company negotiates rates, tracks shipments in transit and handles claims for freight loss and damage on behalf of its customers.
The Company’s brokerage operation also provides customers with specialized programs. Through the Dedicated Trucking program, certain carriers have informally agreed to move freight for Hub’s customers on a continuous basis. This arrangement allows the Company to effectively meet its customer’s needs without owning the equipment. Through the Core Carrier-Plus One program, the Company assumes the responsibility for over-the-road truckload shipments that the customer’s core carriers cannot handle. This service supplements the customer’s core carrier program and helps ensure the timely delivery of the customer’s freight.
Logistics The Company has expanded its service capabilities as customers increasingly outsource their transportation needs. The Company has established Logistics Centers of Excellence at certain Hub locations. These locations, which service customers throughout the country, have experienced logistics personnel exclusively dedicated to selling and servicing Hub Group’s logistics service offering.
The Company currently offers various logistics services, including comprehensive transportation management, arranging for delivery to multiple locations at the shipment’s destination, airfreight services, boxcar, mode optimization, carrier management, less-than-truckload consolidation and other customized logistics services. When providing complete transportation services, the Company essentially replaces the customer’s transportation department. Once the Company is hired as a single source logistics provider, it negotiates with intermodal, railcar, truckload and less-than-truckload carriers to move the customer’s product through the supply chain and then dispatches the move for the customer.
Distribution Services Hub Distribution offers non-traditional logistics services such as installation of point of sale merchandise displays and delivery of sample pharmaceuticals to sales representatives.
Hub Group currently has operating centers in the following metropolitan areas:
| Atlanta | Indianapolis | Pittsburgh | Seattle | ||||
| Baltimore | Kansas City | Portland | Toledo | ||||
| Boston | Los Angeles | Rochester | Toronto | ||||
| Chicago | Memphis | St. Louis | |||||
| Cleveland | Milwaukee | Salt Lake City | |||||
| Houston | New York City | San Francisco | |||||
The entire Hub network is interactively connected through the Company’s proprietary Network Management System. This enables Hub Group to move freight into and out of every major city in the United States and most locations in Canada and Mexico.
Each Hub manages the freight originating in its service area. In a typical intermodal transaction, the customer contacts the local Hub, known as the selling Hub, to to place an order. The local Hub obtains the necessary intermodal equipment, arranges for it to be delivered to the customer by a drayage company and, after the freight is loaded, arranges for the transportation of the container or trailer to the rail ramp. Information is entered into the Network Management System by the local Hub. The Company’s predictive track and trace technology then monitors the shipment to ensure that it will arrive as scheduled, alerting the customer service personnel if there are service delays. The selling Hub then arranges for and confirms delivery by a drayage company at destination. After unloading, the empty equipment is made available for reloading by the local operating center in the delivery market.
The Company provides brokerage services to its customers in a similar manner. In a sample brokerage transaction, the customer contacts the local Hub to obtain transit information and a price quote for a particular freight movement. The customer then provides appropriate shipping information to the local Hub. The local Hub makes the delivery appointment and arranges with the appropriate carrier to pick up the freight. Once it receives confirmation that the freight has been picked up, the local Hub monitors the movement of the freight until it reaches its destination and the delivery has been confirmed. If the carrier notifies Hub Group that after delivering the load it will need additional freight, the Hub located nearest the destination is notified of the carrier’s availability. Although it is under no obligation to do so, the local Hub then may attempt, if requested by the carrier, to secure freight for the carrier.
The Company believes that fostering long-term customer relationships is critical to the Company’s success. Through these long-term relationships, the Company is able to better understand its customer’s needs and to tailor transportation services for a specific customer, regardless of the customer’s size or volume. The Company currently has full time marketing representatives at each Hub and Hub Distribution with primary responsibility for servicing local, regional and national accounts. These sales representatives work from the local Hubs, Hub Distribution and the Company’s satellite sales offices. This network provides a local marketing contact for small, medium and large shippers in most major metropolitan areas within the United States.
As part of the Company’s network realignment, all salespeople, including the Company’s former National Accounts group, now report, either directly or indirectly, to the Company’s Executive Vice President of Sales. The Company’s marketing has produced a large, diverse customer base. The Company services customers in a wide variety of industries, including automotive components, consumer and electronic products, paper, printing, manufactured products and retail.
The Company has a joint marketing relationship with TMM Logistics, a wholly owned subsidiary of Grupo TMM. TMM Logistics provides sales support and operational execution within Mexico and Hub Group furnishes the same capabilities in Canada and the United States.
A primary component of the Company’s business strategy is the continued improvement of its Network Management System and other technology to ensure that the Company will remain a leader among transportation providers in information processing for transportation services. Hub Group’s Network Management System consists of proprietary software running on IBM AS/400 computers located at a secure offsite data center. All of the Hubs are linked with these AS/400 computers and each other using a frame relay network. This configuration provides a real time environment for transmitting data among the Hubs and the Company’s headquarters. The Company also makes extensive use of electronic data interchange (“EDI”), allowing each Hub to communicate electronically with each railroad, certain drayage companies and those customers with EDI capabilities.
The Company’s Network Management System is the primary mechanism used by the Hubs to handle the Company’s intermodal and highway services business. The Network Management System processes customer transportation requests, schedules and tracks shipments, prepares customer billing, establishes account profiles and retains critical information for analysis. The Network Management System provides connectivity with each of the major rail carriers, enabling the Company to electronically schedule and track shipments in a real time environment. In addition, the Network Management System’s EDI features offer customers with EDI capability a completely paperless process, including load tendering, shipment tracking, customer billing and remittance processing. The Company aggressively pursues opportunities to establish EDI interfaces with its customers and carriers.
To help manage its logistics business, the Company uses specialized software that includes planning and execution solutions. This sophisticated transportation management software enables Hub Group to offer supply chain planning tools and logistics managing, modeling, optimizing and monitoring tools for its customers. This software may be used by the Company when offering logistics management services to customers that ship via multiple modes, including intermodal, truckload, and less-than-truckload, allowing the Company to optimize mode and carrier selection and routing for its customers. This software is integrated with Hub Group’s Network Management System and Hub Group’s accounting system.
The Company’s website, www.hubgroup.com, is designed to allow Hub Group’s customers and vendors to easily do business with Hub Group online. Through Vendor Interface, the Company tenders loads to its drayage partners using the Internet rather than phones or faxes. Vendor Interface also captures event status information, allows vendors to view outstanding paperwork requirements and helps facilitate paperless invoicing for payment. Hub Group currently tenders 98% of its drayage loads using Vendor Interface or EDI. Customer Advantage allows customers to receive immediate pricing, place orders, track shipments and review historical shipping data through a variety of reports over the Internet. Current Internet applications are integrated with the Network Management System.
A key element of the Company’s business strategy is to strengthen its close working relationship with each of the major intermodal railroads in the United States. The Company views its relationship with the railroads as a partnership. Due to the Company’s size and relative importance, many railroads have dedicated support personnel to focus on the Company’s day-to-day service requirements. On a regular basis, senior executives of the Company and each of the railroads meet to discuss major strategic issues concerning intermodal transportation. Several of the Company’s executive officers, including both the Company’s Chairman and President, are former railroad employees, which makes them well-suited to understand the railroads’ service capabilities.
The Company has contracts with each of the following major railroads:
| Burlington Northern Santa Fe Railway | Kansas City Southern | ||
| Canadian National | Norfolk Southern | ||
| Canadian Pacific | Union Pacific | ||
| CSX | |||
The Company also has contracts with each of the following major fourth-party service providers: Mitsui O.S.K. Lines (America) Inc., Pacer International, Inc., K-Line America, Inc. and Maersk Sea-Land.
These contracts govern the transportation services and payment terms pursuant to which the Company’s intermodal shipments are handled by the railroads. The contracts have staggered renewal terms with the earliest expiration occurring during 2004. While there can be no assurances that these contracts will be renewed, the Company has in the past successfully negotiated extensions of these contracts. Transportation rates are market driven and are typically negotiated between the Company and the railroads or fourth-party service providers on a customer specific basis. Consistent with industry practice, many of the rates negotiated by the Company are special commodity quotations (“SCQs”), which provide discounts from published price lists based on competitive market factors and are designed by the railroads or fourth-party service providers to attract new business or to retain existing business. SCQ rates are generally issued for the account of a single IMC. SCQ rates apply to specific customers in specified shipping lanes for a specific period of time, usually six to 12 months.
The Company also manages a fleet of containers under its Premier Service Network with the Burlington Northern and Santa Fe Railway Company (“BNSF”) and the Norfolk Southern Corporation (“NS”). Under agreements with both the BNSF and NS, the Company manages, as of February 24, 2004, approximately 5,477 containers owned by the BNSF and 1,275 containers owned by the NS. These containers are for Hub Group’s dedicated use on the BNSF and NS rail systems. The BNSF containers and the NS containers are fully interchangeable across both the BNSF and NS rail networks. These arrangements are discussed in Note 10 to the consolidated financial statements.
The Company has a “Quality Drayage Program,” which consists of agreements and rules that govern the framework pursuant to which certain drayage companies perform services for the Company. Participants in the program commit to provide high quality service along with clean and safe equipment, maintain a defined on-time performance level and follow specified procedures designed to minimize freight loss and damage. The Company negotiates drayage rates for transportation between specific origin and destination points.
The Company’s brokerage operation has a large and growing number of active carriers in its database which it uses to transport freight. The local Hubs deal daily with these carriers on an operational level. The Company’s corporate headquarters handles the administrative and regulatory aspects of the carrier relationship. Hub Group’s relationships with its carriers are important since these relationships determine pricing, load coverage and overall service.
The Company requires all drayage companies participating in the Quality Drayage Program to carry at least $1.0 million in general liability insurance, $1.0 million in truckman’s auto liability insurance and a minimum of $100,000 in cargo insurance. Railroads, which are self-insured, provide limited cargo protection, generally up to $250,000 per shipment. To cover freight loss or damage when a carrier’s liability cannot be established or a carrier’s insurance is insufficient to cover the claim, the Company carries its own cargo insurance with a limit of $1.0 million per container or trailer and a limit of $20.0 million in the aggregate. The Company also carries general liability insurance with limits of $1.0 million per occurrence and $2.0 million in the aggregate with a companion $25.0 million umbrella policy on this general liability insurance.
Hub Highway Services is licensed by the Department of Transportation (“DOT”) as a broker in arranging for the transportation of general commodities by motor vehicle. To the extent that the Hubs perform truck brokerage services, they do so under the license granted to Hub Highway Services. The DOT prescribes qualifications for acting in this capacity, including a $10,000 surety bond which the Company has posted. To date, compliance with these regulations has not had a material adverse effect on the Company’s results of operations or financial condition. However, the transportation industry is subject to legislative or regulatory changes that can affect the economics of the industry by requiring changes in operating practices or influencing the demand for, and cost of providing, transportation services.
The transportation services industry is highly competitive. The Company competes against other IMCs, as well as logistics companies, third party brokers, over-the-road truckload carriers and railroads that market their own intermodal services. Certain larger truckload carriers have entered into agreements with railroads to market intermodal services nationwide. Competition is based primarily on freight rates, quality of service, reliability, transit time and scope of operations. Several transportation service companies and truckload carriers, and all of the major railroads, have substantially greater financial and other resources than the Company.
Employees: As of February 29, 2004, the Company had approximately 1,197 employees. The Company is not a party to any collective bargaining agreement and considers its relationship with its employees to be satisfactory.
Other: No material portion of the Company’s operations is subject to renegotiation of profits or termination of contracts at the election of the federal government. None of the Company’s trademarks are believed to be material to the Company. The Company’s business is seasonal to the extent that certain customer groups, such as retail, are seasonal.
The Company directly, or indirectly through its subsidiaries, operates 31 offices throughout the United States and in Canada, including the Company’s headquarters in Downers Grove, Illinois and its Company-owned drayage operations. The office building used by the Hub located in Toledo is owned, and the remainder are leased. Most office leases have initial terms of more than one year, and many include options to renew. While some of the Company’s leases expire in the near term, the Company does not believe that it will have difficulty in renewing them or in finding alternative office space. The Company believes that its offices are adequate for the purposes for which they are currently used.
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 or results of operations. See Item 1 Business — Risk Management and Insurance.
There were no matters submitted to a vote of the Company’s security holders during the fourth quarter of 2003.
In reliance on General Instruction G to Form 10-K, information on executive officers of the Registrant is included in this Part I. The table sets forth certain information as of March 1, 2004 with respect to each person who is an executive officer of the Company.
| Name | Age | Position | |||
|---|---|---|---|---|---|
| Phillip C. Yeager | 76 | Chairman of the Board of Directors | |||
| David P. Yeager | 50 | Vice Chairman of the Board of Directors and Chief Executive Officer | |||
| Thomas L. Hardin | 58 | President, Chief Operating Officer and Director | |||
| Mark A. Yeager | 39 | President- Field Operations | |||
| Thomas M. White | 46 | Senior Vice President, Chief Financial Officer and Treasurer | |||
| James B. Gaw | 53 | Executive Vice President-Sales | |||
| Daniel F. Hardman | 55 | Executive Vice President-Intermodal | |||
| Christopher R. Kravas | 38 | Executive Vice President-Strategy and Yield Management | |||
| Donald G. Maltby | 49 | Executive Vice President-Logistics | |||
| David L. Marsh | 36 | Executive Vice President-Highway | |||
| Dennis R. Polsen | 50 | Executive Vice President of Information Services | |||
| Terri A. Pizzuto | 45 | Vice President-Finance | |||
| David C. Zeilstra | 34 | Vice President, Secretary and General Counsel | |||
Phillip C. Yeager, the Company’s founder, has been Chairman of the Board since October 1985. From April 1971 to October 1985, Mr. Yeager served as President of Hub City Terminals, Inc. (“Hub Chicago”). Mr. Yeager became involved in intermodal transportation in 1959, five years after the introduction of intermodal transportation in the United States, as an employee of the Pennsylvania and Pennsylvania Central Railroads. He spent 19 years with the Pennsylvania and Pennsylvania Central Railroads, 12 of which involved intermodal transportation. In 1991, Mr. Yeager was named Man of the Year by the Intermodal Transportation Association. In 1995, he received the Salzburg Practitioners Award from Syracuse University in recognition of his lifetime achievements in the transportation industry. In October 1996, Mr. Yeager was inducted into the Chicago Area Entrepreneurship Hall of Fame sponsored by the University of Illinois at Chicago. In March 1997, he received the Presidential Medal from Dowling College for his achievements in transportation services. In September 1998 he received the Silver Kingpin award from the Intermodal Association of North America and in February 1999 he was named Transportation Person of the Year by the New York Traffic Club. Mr. Yeager graduated from the University of Cincinnati in 1951 with a Bachelor of Arts degree in Economics. Mr. Yeager is the father of David P. Yeager and Mark A. Yeager.
David P. Yeager has served as the Company’s Vice Chairman of the Board since January 1992 and as Chief Executive Officer of the Company since March 1995. From October 1985 through December 1991, Mr. Yeager was President of Hub Chicago. From 1983 to October 1985, he served as Vice President, Marketing of Hub Chicago. Mr. Yeager founded the St. Louis Hub in 1980 and served as its President from 1980 to 1983. Mr. Yeager founded the Pittsburgh Hub in 1975 and served as its President from 1975 to 1977. Mr. Yeager received a Masters in Business Administration degree from the University of Chicago in 1987 and a Bachelor of Arts degree from the University of Dayton in 1975. Mr. Yeager is the son of Phillip C. Yeager and the brother of Mark A. Yeager.
Thomas L. Hardin has served as the Company’s President since October 1985 and has served as Chief Operating Officer and a director of the Company since March 1995. From January 1980 to September 1985, Mr. Hardin was Vice President-Operations and from June 1972 to December 1979, he was General Manager of the Company. Prior to joining the Company, Mr. Hardin worked for the Missouri Pacific Railroad where he held various marketing and pricing positions. Mr. Hardin is the former Chairman of the Intermodal Association of North America.
Mark A. Yeager has been the Company’s President-Field Operations since July 1999. From November 1997 through June 1999 Mr. Yeager was Division President, Secretary and General Counsel. From March 1995 to November 1997, Mr. Yeager was Vice President, Secretary and General Counsel. From May 1992 to March 1995, Mr. Yeager served as the Company’s Vice President-Quality. Prior to joining the Company in 1992, Mr. Yeager was an associate at the law firm of Grippo & Elden from January 1991 through May 1992 and an associate at the law firm of Sidley & Austin from May 1989 through January 1991. Mr. Yeager received a Juris Doctor degree from Georgetown University in 1989 and a Bachelor of Arts degree from Indiana University in 1986. Mr. Yeager is the son of Phillip C. Yeager and the brother of David P. Yeager.
Thomas M. White has been the Company’s Senior Vice President, Chief Financial Officer and Treasurer since June 2002. Prior to joining the Company, Mr. White was a Managing Partner-Business Process Outsourcing at Arthur Andersen, LLP. Mr. White worked for Arthur Andersen, LLP for 23 years, holding various positions including Managing Partner of the Kansas City, Missouri office and Omaha, Nebraska office. Mr. White received a Masters in Science and Industrial Administration from Purdue University in 1985 and a Bachelor of Business Administration from Western Michigan University in 1979. Mr. White is a CPA and a member of the American Institute of Certified Public Accountants.
James B. Gaw has been the Company’s Executive Vice President-Sales since February 2004. From December 1996 through January 2004, Mr. Gaw was President of Hub North Central, located in Milwaukee. From 1990 through late 1996, he was Vice President and General Manager of Hub Chicago. Mr. Gaw joined Hub Chicago as Sales Manager in 1988. Mr. Gaw’s entire career has been spent in the transportation industry, including 13 years of progressive leadership positions at Itofca, an intermodal marketing company, and Flex Trans. Mr. Gaw received a Bachelor of Science degree from Elmhurst College in 1973.
Daniel F. Hardman has been the Company’s Executive Vice President-Intermodal since February 2004. Mr. Hardman has been employed by Hub Group since 1982, serving as President of Hub Chicago, the largest Hub office, from December 1992 to January 2004. From 1982 to late 1992, Mr. Hardman held various positions with Hub Group, including General Manager of Sales and Vice President for Hub Chicago and President of Hub Charlotte. Mr. Hardman is a former director of the Intermodal Transportation Association and is presently a member of the Chicago Traffic Club and the Chicago Intermodal Transportation Association. Mr. Hardman is a 1991 graduate of the Certificate Program in Business Administration from the University of Illinois.
Christopher R. Kravas has been the Company’s Executive Vice President-Strategy and Yield Management since December 2003. From February 2002 through November 2003, Mr. Kravas served as President of Hub Highway Services. From February 2001 through December 2001, Mr. Kravas was Vice President-Enron Freight Markets. Mr. Kravas joined Enron after it acquired Webmodal, an intermodal business he founded. Mr. Kravas was Chief Executive Officer of Webmodal from July 1999 through February 2001. From 1989 through June 1999 Mr. Kravas worked for the Burlington Northern Santa Fe Railway in various positions in the intermodal business unit and finance department. Mr. Kravas received a Bachelor of Arts degree in 1987 from Indiana University and a Masters in Business Administration in 1994 from the University of Chicago.
Donald G. Maltby has been the Company’s Executive Vice President – Logistics since February 2004. Mr. Maltby previously served as President of Hub Online, the Company’s e-commerce division from February 2000 through January 2004. Mr. Maltby also served as President of the Company’s Hub in Cleveland from July 1990 through January 2000 and from April 2002 to January 2004. Prior to joining Hub Group, Mr. Maltby served as President of Lyons Transportation, a wholly owned subsidiary of Sherwin Williams Company, from 1988 to 1990. In his career at Sherwin Williams, which began in 1981 and continued until he joined the Company in 1990, Mr. Maltby held a variety of management positions including Vice-President of Marketing and Sales for their Transportation Division. Mr. Maltby has been in the transportation and logistics industry since 1976, holding various executive and management positions. Mr. Maltby received a Masters in Business Administration from Baldwin Wallace College in 1982 and a Bachelor of Science degree from the State University of New York in 1976.
David L. Marsh has been the Company’s Executive Vice President – Highway since February 2004. Mr. Marsh previously served as President of Hub Ohio from January 2000 through January 2004. Mr. Marsh joined the Company in March 1991 and became General Manager with Hub Indianapolis in 1993, a position he held through December 1999. Prior to joining Hub Group, Mr. Marsh worked for Carolina Freight Corporation, an LTL carrier, starting in January 1990. Mr. Marsh received a Bachelor of Science degree in Marketing and Physical Distribution from Indiana University-Indianapolis in December 1989. Mr. Marsh has been a member of the American Society of Transportation and Logistics, the Indianapolis Traffic Club, the Council for Logistics Management and served as an advisor to the Indiana University-Indianapolis internship program for transportation and logistics. Mr. Marsh was honored as the Indiana Transportation Person of the Year for 1999.
Dennis R. Polsen has been the Company’s Executive Vice President of Information Services since February 2004. From September 2001 to January 2004, Mr. Polsen was Vice President — Chief Information Officer and from March 2000 through August 2001, Mr. Polsen was the Company’s Vice—President of Application Development. Prior to joining the Company, Mr. Polsen was Director of Applications for Humana, Inc. from September 1997 through February 2000 and spent 14 years prior to that developing, implementing, and directing transportation logistics applications at Schneider National, Inc. Mr. Polsen received a Bachelor of Business Administration in May of 1976 from the University of Wisconsin, Milwaukee and a Masters in Business Administration in May of 1983 from the University of Wisconsin Graduate School of Business. Mr. Polsen is a past member of the American Trucking Association.
Terri A. Pizzuto has been the Company’s Vice President of Finance since July 2002. Prior to joining the Company, Ms. Pizzuto was a Partner in the Assurance and Business Advisory Group at Arthur Andersen LLP. Ms. Pizzuto worked for Arthur Andersen LLP for 22 years holding various positions and serving numerous transportation companies. Ms. Pizzuto received a Bachelor of Science in Accounting from the University of Illinois in 1981. Ms. Pizzuto is a CPA and a member of the American Institute of Certified Public Accountants.
David C. Zeilstra has been the Company’s Vice President, Secretary and General Counsel since July 1999. From December 1996 through June 1999, Mr. Zeilstra was the Company’s Assistant General Counsel. Prior to joining the Company, Mr. Zeilstra was an associate with the law firm of Mayer, Brown & Platt from September 1994 through November 1996. Mr. Zeilstra received a Juris Doctor degree from Duke University in 1994 and a Bachelor of Arts degree from Wheaton College in 1990.
In addition to Phillip C. Yeager, David P. Yeager and Thomas L. Hardin, the following three individuals are also on the Company’s Board of Directors: Gary D. Eppen – currently retired and formerly the Ralph and Dorothy Keller Distinguished Service Professor of Operations Management and Deputy Dean for part-time Masters in Business Administration Programs at the Graduate School of Business at the University of Chicago; Charles R. Reaves- Chief Executive Officer of Reaves Enterprises, Inc., a real estate development company and Martin P. Slark – President, Chief Operating Officer and Director of Molex, Incorporated, a manufacturer of electronic, electrical and fiber optic interconnection products and systems.
The Class A common stock of the Company (“Class A Common Stock”) trades on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol “HUBG.” Set forth below are the high and low closing prices for shares of the Class A Common Stock of the Company for each full quarterly period in 2002 and 2003.
| 2002 | 2003 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| High | Low | High | Low | |||||||||||
| First Quarter | $ | 11 | .28 | $ | 7 | .55 | $ | 6 | .67 | $ | 4 | .13 | ||
| Second Quarter | $ | 11 | .20 | $ | 9 | .01 | $ | 9 | .37 | $ | 6 | .27 | ||
| Third Quarter | $ | 9 | .70 | $ | 4 | .18 | $ | 11 | .95 | $ | 8 | .68 | ||
| Fourth Quarter | $ | 8 | .19 | $ | 4 | .75 | $ | 22 | .00 | $ | 10 | .86 | ||
On March 9, 2004, there were approximately 202 stockholders of record of the Class A Common Stock and, in addition, there were an estimated 1,204 beneficial owners of the Class A Common Stock whose shares were held by brokers and other fiduciary institutions. On March 9, 2004, there were 11 holders of record of the Company’s Class B common stock (the “Class B Common Stock” together with the Class A Common Stock, the “Common Stock”).
The Company was incorporated in 1995 and has never paid cash dividends on either the Class A Common Stock or the Class B Common Stock. The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors. Any determination as to the payment of dividends will depend upon the results of operations, capital requirements and financial condition of the Company, and such other factors as the Board of Directors may deem relevant. Accordingly, there can be no assurance that the Board of Directors will declare or pay dividends on the shares of Common Stock in the future. The certificate of incorporation of the Company requires that any cash dividends must be paid equally on each outstanding share of Class A Common Stock and Class B Common Stock. The Company’s credit facility and private placement debt prohibit the Company from paying dividends on the Common Stock if there has been, or immediately following the payment of a dividend would be, a default or an event of default under the credit facility or private placement debt. The Company is currently in compliance with the covenants contained in the credit facility and private placement debt.
Selected Financial Data
(in thousands except per share data)
| Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002(1) | 2001 | 2000 | 1999 | |||||||||
| Statement of Operations Data: | |||||||||||||
| Revenue | $1,359,614 | $1,335,660 | $1,319,331 | $1,382,880 | $1,295,502 | ||||||||
| Gross margin | 170,682 | 162,812 | 178,963 | 167,767 | 159,863 | ||||||||
| Operating income | 24,295 | 11,141 | 10,548 | 13,495 | 26,453 | ||||||||
| Income before minority interest and taxes | 16,895 | 2,015 | 902 | 2,878 | 19,928 | ||||||||
| Income before income taxes | 16,895 | 2,539 | 751 | 4,547 | 15,941 | ||||||||
| Net income | 8,430 | 1,498 | 443 | 2,683 | 9,405 | ||||||||
| Basic earnings per common share | $ 1.09 | $ 0.19 | $ 0.06 | $ 0.35 | $ 1.22 | ||||||||
| Diluted earnings per common share | $ 1.07 | $ 0.19 | $ 0.06 | $ 0.35 | $ 1.21 | ||||||||
| As of December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||
| Balance Sheet Data: | |||||||||||||
| Working capital (deficiency) | $ (9,631) | $ (7,109) | $ (5,380) | $ (5,902) | $ 20,202 | ||||||||
| Total assets | 389,567 | 399,262 | 416,024 | 469,373 | 441,421 | ||||||||
| Long-term debt, excluding current portion | 67,017 | 94,027 | 96,059 | 109,089 | 131,414 | ||||||||
| Stockholders' equity | 143,035 | 134,340 | 132,453 | 132,397 | 129,683 | ||||||||
(1) As of January 1, 2002, the Company adopted Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets” (“Statement 142”). Under Statement 142, goodwill is no longer amortized. Amortization expense for the years ended December 31, 2001, 2000 and 1999 was $5,741,000, $5,741,000 and $5,069,000, respectively. The per share effect of amortization expense related to goodwill, net of tax was $0.44, $0.44 and $0.39 for the years ended December 31, 2001, 2000 and 1999, respectively.
Hub Group, Inc. (the “Company”) has authorized common stock comprised of Class A common stock and Class B common stock. The rights of holders of Class A common stock and Class B common stock are identical, except each share of Class B common stock entitles its holder to 20 votes, while each share of Class A common stock entitles its holder to one vote.
Year Ended December 31, 2003, Compared to Year Ended December 31, 2002
Revenue for the Company increased 1.8% to $1,359.6 million in 2003 from $1,335.7 million in 2002. Intermodal revenue decreased slightly to $972.5 million from $973.2 million. Truckload brokerage revenue decreased 6.7% to $194.9 million from $209.0 million in 2002 due primarily to a strategic decision to support logistics customer growth with traditional brokerage resources as well as a decrease in volume. Supply chain solutions logistics revenue increased 90.7% to $138.4 million from $72.5 million due primarily to increased volume from both new and existing customers. In addition, the revenue of Hub Group Distribution Services “HGDS” decreased 33.6% to $53.8 million in 2003 from $81.0 million in 2002 due primarily to the decrease in the installation business for a significant customer, transferring logistics business to other Hub locations in 2002 and the loss of a logistics customer.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Gross margin increased to $170.7 million in 2003 from $162.8 million in 2002. As a percent of revenue, gross margin increased to 12.6% from 12.2% in 2002. The increase in margin as a percentage of revenue is primarily due to changes in business mix and as a result of the Company’s margin enhancement initiatives.
Salaries and benefits decreased 3.7% to $90.0 million in 2003 from $93.5 million in 2002. As a percentage of revenue, salaries and benefits decreased to 6.6% from 7.0% in 2002 due primarily to a decrease in headcount and an increase in revenue.
Selling, general and administrative expenses decreased 2.5% to $45.7 million in 2003 from $46.8 million in 2002. As a percentage of revenue, these expenses decreased to 3.4% in 2003 from 3.5% in 2002. The selling, general and administrative expense decreased primarily due to decreases in equipment lease expense, automotive expenses, telephone expenses, temporary labor services and meals and entertainment expenses, offset by increases in insurance and outside service expenses. Equipment lease expense decreased by approximately $1.0 million due primarily to equipment lease buy-outs. Automotive and meals and entertainment expenses decreased by approximately $0.9 million due to changes in policies and cost reduction efforts. Temporary labor services decreased by approximately $0.4 million due to staffing efficiencies. Telephone expenses decreased by approximately $0.4 million due to decreases in headcount. Insurance expense increased by approximately $1.1 million due to increased premiums. Outside services expense increased by approximately $0.8 million related to litigation involving various matters, including disputes with three former Hub Presidents, a former customer and the National Labor Relations Board.
Depreciation and amortization decreased 5.4% to $10.8 million in 2003 from $11.4 million in 2002. This expense as a percentage of revenue decreased to 0.8% from 0.9% in 2002. The decrease in depreciation expense in 2003 is due primarily to 2002 accelerated depreciation and amortization of leasehold improvements and furniture related to office relocations.
Interest expense decreased 18.6% to $7.7 million in 2003 from $9.5 million in 2002. The decrease in interest expense is due primarily to carrying a lower average debt balance this year as compared to the prior year and lower interest rates.
Interest income remained consistent at $0.2 million in 2003 and 2002.
There was no minority interest in 2003 compared to a $0.5 million benefit in 2002 as a result of the Company’s purchase of the remaining 35% interest in HGDS in August of 2002. See Note 4 to the Consolidated Financial Statements.
The provision for income taxes increased to $8.5 million in 2003 compared to $1.0 million in 2002. The Company provided for income taxes using an effect rate of 50.1% in 2003 compared to 41.0% in 2002. The increase in the effective rate was primarily the result of Illinois legislation enacted on June 20, 2003 which eliminated the Illinois Research and Development and Training Expense credits, and the use of any credit carry forwards for any year ending on or after December 31, 2003.
Net income increased to $8.4 million in 2003 from $1.5 million in 2002.
Basic and diluted earnings per common share increased to $1.09 and $1.07, respectively, in 2003 compared to $0.19 in 2002.
Year Ended December 31, 2002, Compared to Year Ended December 31, 2001
Revenue for the Company increased 1.2% to $1,335.7 million in 2002 from $1,319.3 million in 2001. The Company estimates that the West Coast port lockout negatively impacted revenue by between $7.0 and $9.0 million during the fourth quarter of 2002. Intermodal revenue increased 3.6% over 2001 primarily due to increased volume. The increase in intermodal revenue is partially offset by a $32.8 million reduction in demand from the Company’s steamship customers when comparing the first quarter of 2002 with the first quarter of 2001. These customers ceased doing business with the Company early in the second quarter of 2001. Truckload brokerage revenue decreased 1.6% due primarily to a strategic decision to support logistics customer growth with traditional brokerage resources. Supply chain solutions logistics services revenue increased 27.8% as a result of adding new customers and increased business from existing customers. HGDS revenue decreased 27.0% to $81.0 million in 2002 from $110.9 million in 2001. HGDS experienced a significant revenue decline due to the loss of a large logistics customer as well as a temporary decrease in their installation business from a large customer during the first and second quarter of 2002.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Gross margin decreased to $162.8 million in 2002 from $179.0 million in 2001. As a percent of revenue, gross margin decreased to 12.2% from 13.6% in 2001. Intermodal gross margin, as a percentage of revenue, decreased due to changes in customer mix, competitive pricing, and increased transportation costs as compared to 2001. In addition, the Company revised its estimates of accrued transportation costs resulting in an increase in gross margin for the year ended December 31, 2002 of $1.6 million.
Salaries and benefits decreased 1.6% to $93.5 million in 2002 from $95.0 million in 2001. As a percentage of revenue, salaries and benefits decreased to 7.0% from 7.2% in 2001. Salaries and benefits include a severance charge of $0.5 million in 2002 related to the termination of employees during the fourth quarter. The decrease as a percentage of revenue is due to a decrease in headcount and the increase in revenue.
Selling, general and administrative expenses decreased 12.7% to $46.8 million in 2002 from $53.6 million in 2001. As a percentage of revenue, these expenses decreased to 3.5% in 2002 from 4.1% in 2001. The decrease as a percentage of revenue is primarily attributed to a $4.7 million write-off in 2001 associated with the bankruptcy and forced liquidation of a Korean steamship line customer and a decrease in costs associated with the outsourcing of our data center. During 2002, the Company incurred $1.4 million of expenses for professional fees related to the investigation and restatement of HGDS’s results of operations for the years ended December 31, 2000 and 1999. During the fourth quarter of 2002, the Company recorded a charge of $0.5 million related to a liability for the remaining lease obligation associated with a closed facility.
Depreciation and amortization increased 6.5% to $11.4 million in 2002 from $10.7 million in 2001. This expense as a percentage of revenue increased to 0.9% from 0.8% in 2001. The increase in depreciation expense in 2002 is due primarily to new software applications placed in service throughout 2002 and accelerated depreciation and amortization of leasehold improvements related to office relocations.
There was no impairment charge in 2002. The $3.4 million impairment charge in 2001 was due to HGDS’s exit from its initiative surrounding the home delivery of large box items purchased over the internet.
Interest expense decreased 8.6% to $9.5 million in 2002 from $10.3 million in 2001. The decrease in interest expense is due primarily to carrying a lower average debt balance this year as compared to the prior year and lower interest rates.
Interest income decreased to $0.2 million in 2002 from $0.7 million in 2001 primarily as a result of lower customer finance charges.
Minority interest was a $0.5 million benefit in 2002 compared with a $0.2 million charge in 2001. Minority interest represented the 35% interest in HGDS prior to the Company’s purchase of this interest in August 2002. See Note 4 to the Consolidated Financial Statements.
The provision for income taxes increased to $1.0 million in 2002 compared to $0.3 million in 2001. The Company provided for income taxes using an effective rate of 41.0% in 2002 and 2001.
Net income increased to $1.5 million in 2002 from $0.4 million in 2001.
Basic and diluted earnings per common share increased to $0.19 in 2002 from $0.06 in 2001.
The Company has funded its operations and capital expenditures through cash flows from operations and bank borrowings.
Cash provided by operating activities for the year ended December 31, 2003, was approximately $31.5 million, which resulted primarily from net income from operations and non-cash charges of $19.0 million.
Net cash used in investing activities for the year ended December 31, 2003, was $4.4 million and related to capital expenditures. The capital expenditures were principally made to enhance the Company’s information system capabilities.
The net cash used in financing activities for the year ended December 31, 2003, was $27.1 million. This was primarily comprised of $19.0 million of payments on the Company’s line of credit and $8.1 million of scheduled payments on the Company’s term debt and capital leases.
The Company does not believe its working capital deficit impairs its ability to meet obligations as they become due. The Company had $43.0 million of available borrowings under the revolving line of credit as of December 31, 2003.
The Company maintains a multi-bank credit facility (the “Credit Facility”). The Credit Facility is comprised of term debt and a revolving line of credit. The revolving line of credit has a term that expires on June 24, 2005 and bears interest at a maximum of LIBOR plus 3.0% or Prime plus 1.5%. Borrowings and weighted average interest rates on the revolving line of credit were $6.0 million and 3.13% and $25.0 million and 4.18% at December 31, 2003 and 2002, respectively. There was $43.0 million and $24.0 million unused and available under the revolving line of credit at December 31, 2003 and 2002, respectively. The term debt has quarterly payments of $2.0 million with a balloon payment of $9.0 million due on June 24, 2005. Interest on the term debt is a maximum of LIBOR plus 3.25% or Prime plus 1.75%. Borrowings and weighted average interest rates on the term debt were $19.0 million and 3.41% and $27.0 million and 4.40% at December 31, 2003 and 2002.
During 2002, the Credit Facility was amended three times to waive covenant violations, to revise financial covenants levels and to provide that loans under the Credit Agreement be secured by substantially all assets of the Company. The Credit Facility, as amended, provides for certain financial covenants including a fixed charge coverage ratio, minimum earnings before interest, taxes, depreciation, amortization, minority interest and certain other charges (EBITDAM) and a cash flow leverage ratio. The Company was in compliance with its debt covenants as of December 31, 2003 and 2002.
The Company maintains $50.0 million of private placement debt (the “Notes”). These Notes bear interest at 9.14% which is paid quarterly. These Notes mature on June 25, 2009, with annual payments of $10.0 million commencing on June 25, 2005. The Notes were amended three times during 2002. The amendments were similar to the amendments made to the Credit Facility. The Notes, as amended, provide for certain financial covenants including a fixed charge coverage ratio and a cash flow leverage ratio. The loans are secured by substantially all assets of the Company. The Company was in compliance with the covenants as of December 31, 2003 and 2002.
As of December 31, 2003, the Company has standby letters of credit totaling $975,000 that expire from 2004 to 2012. At December 31, 2002, the Company had standby letters of credit totaling $975,000.
The Company has ongoing commitments under various contractual and commercial obligations at December 31, 2003, as follows (in millions):
| Payments Due by Year | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | |||||||||
| Long-term debt including interest | $ 92 | .0 | $ 13 | ||||||||||||