Hub Group, Inc. - Interim / Quarterly Report 2007

10-Q 1 thirdqtr10q2007.htm HUB GROUP, INC. 3RD QTR. 10-Q thirdqtr10q2007.htm Licensed to: ba8213 Document Created using EDGARizer 4.0.0.0 Copyright 2007 EDGARfilings, Ltd., an IEC company. All rights reserved EDGARfilings.com

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 September 30, 2007 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, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

36-4007085

(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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12-b of the Exchange Act. (Check one):

Large Accelerated Filer X Accelerated Filer__ Non-Accelerated Filer __

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 October 19, 2007, the registrant had 38,122,060 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

Page

PART I. Financial Information:

Hub Group, Inc. - Registrant

Condensed Consolidated Balance Sheets – September 30, 2007 (unaudited) and

December 31, 2006 3

Unaudited Condensed Consolidated Statements of Income - Three Months

and Nine Months Ended September 30, 2007 and 2006 4

Unaudited Condensed Consolidated Statement of Stockholders’ Equity - Nine

Months Ended September 30, 2007 5

Unaudited Condensed Consolidated Statements of Cash Flows - Nine

Months Ended September 30, 2007 and 2006 6

Notes to Unaudited Condensed Consolidated Financial Statements 7

Management’s Discussion and Analysis of Financial Condition and

Results of Operations 10

Quantitative and Qualitative Disclosures About Market Risk 17

Controls and Procedures 17

PART II. Other Information 18

| HUB
GROUP, INC. | | | | |
| --- | --- | --- | --- | --- |
| CONDENSED
CONSOLIDATED BALANCE SHEETS | | | | |
| (in
thousands, except share amounts) | | | | |
| | September
30, 2007 | December
31, 2006 | | |
| ASSETS | (unaudited) | | | |
| CURRENT
ASSETS: | | | | |
| Cash
and cash equivalents | $ 39,824 | $ | 43,491 | |
| Accounts
receivable | | | | |
| Trade,
net | 181,601 | | 158,284 | |
| Other | 11,296 | | 8,369 | |
| Prepaid
taxes | 86 | | 2,119 | |
| Deferred
taxes | 4,207 | | 3,433 | |
| Prepaid
expenses and other current assets | 5,244 | | 4,450 | |
| TOTAL
CURRENT ASSETS | 242,258 | | 220,146 | |
| Restricted
investments | 5,116 | | 3,017 | |
| Property
and equipment, net | 29,477 | | 26,974 | |
| Other
intangibles, net | 7,168 | | 7,502 | |
| Goodwill,
net | 225,448 | | 225,448 | |
| Other
assets | 1,440 | | 1,461 | |
| TOTAL
ASSETS | $ 510,907 | $ | 484,548 | |
| LIABILITIES
AND STOCKHOLDERS' EQUITY | | | | |
| CURRENT
LIABILITIES: | | | | |
| Accounts
payable | | | | |
| Trade | $ 129,986 | $ | 117,676 | |
| Other | 6,091 | | 6,839 | |
| Accrued
expenses | | | | |
| Payroll | 12,484 | | 18,294 | |
| Other | 35,742 | | 26,617 | |
| Related
party payable | - | | 5,000 | |
| TOTAL
CURRENT LIABILITIES | 184,303 | | 174,426 | |
| Non-current
liabilities | 13,400 | | 7,691 | |
| Deferred
taxes | 42,248 | | 43,587 | |
| STOCKHOLDERS'
EQUITY: | | | | |
| Preferred
stock, $.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding in 2007 and
2006 | - | | - | |
| Common
stock | | | | |
| Class
A: $.01 par value; 97,337,700 shares authorized in
2007; 41,224,792 shares issued and 38,217,278 outstanding in 2007;
47,337,700 shares authorized in 2006; 41,224,792 shares issued
and 38,943,122 outstanding in 2006 | 412 | | 412 | |
| Class
B: $.01 par value; 662,300 shares authorized; 662,296 shares
issued and outstanding in 2007 and 2006 | 7 | | 7 | |
| Additional
paid-in capital | 176,317 | | 179,203 | |
| Purchase
price in excess of predecessor basis, net of tax benefit of
$10,306 | (15,458 | ) | (15,458 | ) |
| Retained
earnings | 188,045 | | 146,243 | |
| Treasury
stock; at cost, 3,007,514 shares in 2007 and 2,281,670 shares
in 2006 | (78,367 | ) | (51,563 | ) |
| TOTAL
STOCKHOLDERS' EQUITY | 270,956 | | 258,844 | |
| TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY | $ 510,907 | $ | 484,548 | |
| See
notes to unaudited condensed consolidated financial
statements. | | | | |

| HUB
GROUP, INC. | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | | | | | | | | |
| (in
thousands, except per share amounts) | | | | | | | | |
| | Three
Months | | | Nine
Months | | | | |
| | Ended
September 30, | | | Ended
September 30, | | | | |
| | 2007 | 2006 | | | 2007 | | 2006 | |
| Revenue | $ 417,842 | $ | 432,009 | $ | 1,212,704 | $ | 1,184,069 | |
| Transportation
costs | 360,332 | | 374,673 | | 1,040,770 | | 1,023,869 | |
| Gross
margin | 57,510 | | 57,336 | | 171,934 | | 160,200 | |
| Costs
and expenses: | | | | | | | | |
| Salaries
and benefits | 22,100 | | 23,965 | | 71,887 | | 71,271 | |
| General
and administrative | 9,596 | | 9,890 | | 31,415 | | 28,585 | |
| Depreciation
and amortization | 1,080 | | 1,642 | | 3,455 | | 5,029 | |
| Total
costs and expenses | 32,776 | | 35,497 | | 106,757 | | 104,885 | |
| Operating
income | 24,734 | | 21,839 | | 65,177 | | 55,315 | |
| Other
income (expense): | | | | | | | | |
| Interest
expense | (33 | ) | (22 | ) | (78 | ) | (65 | ) |
| Interest
income | 711 | | 670 | | 1,967 | | 1,668 | |
| Other,
net | 24 | | 7 | | 82 | | 63 | |
| Total
other income | 702 | | 655 | | 1,971 | | 1,666 | |
| Income
from continuing operations before provision for income
taxes | 25,436 | | 22,494 | | 67,148 | | 56,981 | |
| Provision
for income taxes | 8,828 | | 9,000 | | 25,346 | | 22,795 | |
| Income
from continuing operations | 16,608 | | 13,494 | | 41,802 | | 34,186 | |
| Discontinued
operations: | | | | | | | | |
| Income
from discontinued operations of HGDS | - | | - | | - | | 1,634 | |
| Provision
for income taxes | - | | - | | - | | 653 | |
| Income
from discontinued operations | - | | - | | - | | 981 | |
| Net
income | $ 16,608 | $ | 13,494 | $ | 41,802 | $ | 35,167 | |
| Basic
earnings per common share | | | | | | | | |
| Income
from continuing operations | $ 0.43 | $ | 0.34 | $ | 1.07 | $ | 0.85 | |
| Income
from discontinued operations | $ - | $ | - | $ | - | $ | 0.02 | |
| Net
income | $ 0.43 | $ | 0.34 | $ | 1.07 | $ | 0.87 | |
| Diluted
earnings per common share | | | | | | | | |
| Income
from continuing operations | $ 0.42 | $ | 0.33 | $ | 1.06 | $ | 0.83 | |
| Income
from discontinued operations | $ - | $ | - | $ | - | $ | 0.02 | |
| Net
income | $ 0.42 | $ | 0.33 | $ | 1.06 | $ | 0.85 | |
| Basic
weighted average number of shares outstanding | 38,777 | | 39,773 | | 39,026 | | 40,246 | |
| Diluted
weighted average number of shares outstanding | 39,230 | | 40,572 | | 39,511 | | 41,161 | |
| See
notes to unaudited condensed consolidated financial
statements. | | | | | | | | |

| HUB
GROUP, INC | | |
| --- | --- | --- |
| UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY | | |
| For
the nine months ended September 30, 2007 | | |
| (in
thousands, except shares) | | |
| | September
30, | |
| | 2007 | |
| Class
A & B Common Stock Shares Outstanding | | |
| Beginning
of year | 39,605,418 | |
| Purchase
of treasury shares | (1,161,762 | ) |
| Treasury
shares issued for restricted stock and stock options
exercised | 435,918 | |
| Ending
balance | 38,879,574 | |
| Class
A & B Common Stock Amount | | |
| Beginning
of year | $ 419 | |
| Ending
balance | 419 | |
| Additional
Paid-in Capital | | |
| Beginning
of year | 179,203 | |
| Exercise
of non-qualified stock options | (5,940 | ) |
| Share-based
compensation expense | 2,893 | |
| Tax
benefit of share-based compensation plans | 3,856 | |
| Issuance
of restricted stock awards, net of forfeitures | (3,695 | ) |
| Ending
balance | 176,317 | |
| Purchase
Price in Excess of Predecessor Basis, Net of Tax | | |
| Beginning
of year | (15,458 | ) |
| Ending
balance | (15,458 | ) |
| Retained
Earnings | | |
| Beginning
of year | 146,243 | |
| Net
income | 41,802 | |
| Ending
balance | 188,045 | |
| Treasury
Stock | | |
| Beginning
of year | (51,563 | ) |
| Purchase
of treasury shares | (37,142 | ) |
| Issuance
of restricted stock and exercise of stock options | 10,338 | |
| Ending
balance | (78,367 | ) |
| Total
stockholders’ equity | $ 270,956 | |
| See
notes to unaudited condensed consolidated financial
statements. | | |

| HUB
GROUP, INC. | | | | |
| --- | --- | --- | --- | --- |
| UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | |
| (in
thousands) | | | | |
| | Nine
Months Ended September 30, | | | |
| | 2007 | 2006 | | |
| Cash
flows from operating activities: | | | | |
| Income
from continuing operations | $ 41,802 | $ | 34,186 | |
| Adjustments
to reconcile income from continuing operations to net cash | | | | |
| provided
by operating activities: | | | | |
| Depreciation
and amortization | 5,475 | | 6,410 | |
| Deferred
taxes | 3,178 | | 12 | |
| Compensation
expense related to share-based compensation plans | 2,893 | | 2,649 | |
| Gain
on sale of assets | (156 | ) | (31 | ) |
| Changes
in operating assets and liabilities excluding effects of purchase
transaction: | | | | |
| Restricted
investments | (2,099 | ) | (1,163 | ) |
| Accounts
receivable, net | (26,244 | ) | (6,325 | ) |
| Prepaid
taxes | 2,033 | | 5,295 | |
| Prepaid
expenses and other current assets | (794 | ) | (1,202 | ) |
| Other
assets | 21 | | 234 | |
| Accounts
payable | 11,562 | | 13,904 | |
| Accrued
expenses | 3,315 | | 9,152 | |
| Non-current
liabilities | 418 | | - | |
| Net
cash provided by operating activities | 41,404 | | 63,121 | |
| Cash
flows from investing activities: | | | | |
| Proceeds
from sale of equipment | 715 | | 228 | |
| Purchases
of property and equipment | (8,203 | ) | (5,247 | ) |
| Cash
used in acquisition of Comtrak, Inc. | (5,000 | ) | (39,942 | ) |
| Proceeds
from the disposal of discontinued operations | - | | 12,203 | |
| Net
cash used in investing activities | (12,488 | ) | (32,758 | ) |
| Cash
flows from financing activities: | | | | |
| Proceeds
from stock options exercised | 703 | | 1,924 | |
| Purchase
of treasury stock | (37,142 | ) | (45,191 | ) |
| Excess
tax benefits from share-based compensation | 3,856 | | 7,897 | |
| Net
cash used in by financing activities | (32,583 | ) | (35,370 | ) |
| Cash
flows from operating activities of discontinued operations | - | | 1,848 | |
| Cash
flows used in investing activities of discontinued
operations | - | | (38 | ) |
| Net
cash provided by discontinued operations | - | | 1,810 | |
| Net
decrease in cash and cash equivalents | (3,667 | ) | (3,197 | ) |
| Cash
and cash equivalents beginning of period | 43,491 | | 36,133 | |
| Cash
and cash equivalents end of period | $ 39,824 | $ | 32,936 | |
| Supplemental
disclosures of cash paid for: | | | | |
| Interest | $ 78 | $ | 64 | |
| Income
taxes | $ 14,518 | $ | 6,573 | |
| See
notes to unaudited condensed consolidated financial
statements. | | | | |

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 September 30, 2007 and results of operations for the three months and nine months ended September 30, 2007 and 2006.

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, 2006. 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 (in thousands, except for per share data):

| | Three
Months Ended | | | Three
Months Ended | | |
| --- | --- | --- | --- | --- | --- | --- |
| | September
30, 2007 | | | September
30, 2006 | | |
| | Income | Shares | Per
Share Amount | Income | Shares | Per
Share Amount |
| Basic
EPS | | | | | | |
| Income
from continuing operations | $ 16,608 | 38,777 | $ 0.43 | $ 13,494 | 39,773 | $ 0.34 |
| Income
from discontinued operations | - | 38,777 | - | - | 39,773 | - |
| Net
Income | $ 16,608 | 38,777 | $ 0.43 | $ 13,494 | 39,773 | $ 0.34 |
| Effect
of Dilutive Securities | | | | | | |
| Stock
options and restricted stock | | 453 | | | 799 | |
| Diluted
EPS | | | | | | |
| Income
from continuing operations | $ 16,608 | 39,230 | $ 0.42 | $ 13,494 | 40,572 | $ 0.33 |
| Income
from discontinued operations | - | 39,230 | - | - | 40,572 | - |
| Net
Income | $ 16,608 | 39,230 | $ 0.42 | $ 13,494 | 40,572 | $ 0.33 |

| | Nine
Months Ended | | | Nine
Months Ended | | |
| --- | --- | --- | --- | --- | --- | --- |
| | September
30, 2007 | | | September
30, 2006 | | |
| | Income | Shares | Per
Share Amount | Income | Shares | Per
Share Amount |
| Basic
EPS | | | | | | |
| Income
from continuing operations | $ 41,802 | 39,026 | $ 1.07 | $ 34,186 | 40,246 | $ 0.85 |
| Income
from discontinued operations | - | 39,026 | - | 981 | 40,246 | 0.02 |
| Net
Income | $ 41,802 | 39,026 | $ 1.07 | $ 35,167 | 40,246 | $ 0.87 |
| Effect
of Dilutive Securities | | | | | | |
| Stock
options and restricted stock | | 485 | | | 915 | |
| Diluted
EPS | | | | | | |
| Income
from continuing operations | $ 41,802 | 39,511 | $ 1.06 | $ 34,186 | 41,161 | $ 0.83 |
| Income
from discontinued operations | - | 39,511 | - | 981 | 41,161 | 0.02 |
| Net
Income | $ 41,802 | 39,511 | $ 1.06 | $ 35,167 | 41,161 | $ 0.85 |

NOTE 3. Debt

We had $47.1 million of unused and available borrowings under our bank revolving line of credit at September 30, 2007. We were in compliance with our debt covenants at September 30, 2007.

We have standby letters of credit that expire from 2007 to 2012. As of September 30, 2007, the outstanding letters of credit were $2.9 million.

NOTE 4. Commitments and Contingencies

In March 2007, we entered into an equipment purchase contract with Singamas Management Services, Ltd. and Singamas North America, Inc. We agreed to purchase 2,000 fifty-three foot dry freight steel domestic containers for approximately $19.4 million. We have received 1,882 units as of September 30, 2007 and we expect delivery of the remainder by the end of October. We entered into operating leases to finance these containers with terms of approximately 6 years.

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. Income Taxes

Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. Although the implementation of FIN 48 did not impact the amount of our liability for unrecognized tax benefits, we reclassified our liability for unrecognized tax benefits from deferred tax liabilities to non-current liabilities to conform with the balance sheet presentation requirements of FIN 48. As of January 1, 2007, the amount of unrecognized tax benefits was $5.3 million of which $1.6 million would, if recognized, decrease our effective tax rate. As of September 30, 2007, the amount of unrecognized tax benefits was $5.1 million of which $1.7 million would, if recognized, decrease our effective tax rate.

Hub Group, Inc. or its subsidiaries are subject to income tax in the U.S. federal jurisdiction and numerous state jurisdictions. The Internal Revenue Service (“IRS”) has completed its examinations of our federal income tax returns for the tax years 2000 through 2004. However, tax years 1997 and 2004 through 2006 remain open to examination by the major tax jurisdictions to which we are subject.

During its examination of our 1997 federal income tax return, the IRS proposed to reclassify our allocation of a significant amount of tax basis in fixed assets to non-amortizable intangibles. This dispute is being reviewed by the IRS Office of Appeals, and it is reasonably possible that it will be resolved by December 31, 2007 resulting in a decrease in our liability for uncertain tax positions of up to $4.9 million. Should the decrease occur, it would have a positive impact on our effective tax rate of up to $1.5 million and the remaining $3.4 million decrease in our liability for uncertain tax positions would be reclassified as additional deferred tax liability.

We recognize accrued interest expense and penalties related to unrecognized tax benefits in our provision for income taxes. At January 1, 2007, accrued interest was $2.1 million or $1.3 million, net of income tax. During the nine months ended September 30, 2007, $0.2 million of interest expense, net of tax, was recognized in our provision for income taxes.

During the third quarter of 2007, the State of Illinois enacted new tax legislation which impacts us by modifying how we apportion taxable income to Illinois. The enactment of the new legislation results in a reduction of our net deferred liabilities and a credit to our provision for state income taxes of approximately $1.2 million. Without this adjustment, our effective tax rate would have been 39.4% for the third quarter of 2007 and 39.5% for the nine months ended September 30, 2007.

NOTE 6. New Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). 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. We expect to adopt SFAS No. 157 effective January 1, 2008, as required. We do not believe the adoption of the Standard will have a significant impact on our financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to voluntarily choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective beginning January 1, 2008, but we have decided not to adopt this optional standard.

HUB GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

OUTLOOK, RISKS AND UNCERTAINTIES

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 we serve;

· 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;

· labor unrest in the rail, drayage or trucking company communities;

· general economic and business conditions;

· 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 maintain 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.

Through our subsidiary Comtrak Logistics, Inc. (“Comtrak”), we acquired substantially all the assets of Comtrak Inc. at the close of business on February 28, 2006. Comtrak is a transportation company whose services include primarily rail and international drayage for the intermodal sector. The results of Comtrak are included in our results of operations from March 1, 2006.

Our drayage services are provided by our subsidiaries, Comtrak and Quality Services, LLC (“QS”), who 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 September 30, 2007, QS and Comtrak owned 308 tractors, leased 44 tractors, leased or owned 706 trailers, employed 337 drivers and contracted with 827 owner-operators.

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, winning new customers and the acquisition of Comtrak. Our yield management group works with sales and operations to enhance customer margins. Our top 50 customers’ revenue represents approximately 50.8% of our revenue.

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

Substantially all of the assets of Hub Group Distribution Services, LLC (“HGDS” or “Hub Distribution”) were sold to the President of the former subsidiary on May 1, 2006. Accordingly, the results of operations of HGDS for the current and prior periods have been reported as discontinued operations, including their revenue through April 30, 2006 of $4.8 million.

RESULTS OF OPERATIONS

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

| | Three
Months Ended | | | | Nine
Months Ended | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| | September
30, | | | | September
30, | | |
| | | | % | | | | % |
| | 2007 | 2006 | Change | | 2007 | 2006 | Change |
| Revenue | | | | | | | |
| Intermodal | $ 303,289 | $ 318,927 | (4.9 | )% | $ 891,999 | $ 865,499 | 3.1 % |
| Truck
brokerage | 77,115 | 77,129 | 0.0 | | 224,933 | 224,805 | 0.1 |
| Logistics | 37,438 | 35,953 | 4.1 | | 95,772 | 93,765 | 2.1 |
| Total
revenue from continuing operations | $ 417,842 | $ 432,009 | (3.3 | )% | $ 1,212,704 | $ 1,184,069 | 2.4 % |

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

| September
30, | | September
30, | | |
| --- | --- | --- | --- | --- |
| 2007 | 2006 | 2007 | 2006 | |
| Revenue | 100.0 % | 100.0 % | 100.0 % | 100.0 % |
| Transportation
costs | 86.2 | 86.7 | 85.8 | 86.5 |
| Gross
margin | 13.8 | 13.3 | 14.2 | 13.5 |
| Costs
and expenses: | | | | |
| Salaries
and benefits | 5.3 | 5.5 | 5.9 | 6.0 |
| General
and administrative | 2.3 | 2.3 | 2.6 | 2.4 |
| Depreciation
and amortization | 0.3 | 0.4 | 0.3 | 0.4 |
| Total
costs and expenses | 7.9 | 8.2 | 8.8 | 8.8 |
| Operating
income | 5.9 | 5.1 | 5.4 | 4.7 |
| Other
income: | | | | |
| Interest
income | 0.2 | 0.1 | 0.1 | 0.1 |
| Total
other income | 0.2 | 0.1 | 0.1 | 0.1 |
| Income
from continuing operations before provision for income
taxes | 6.1 | 5.2 | 5.5 | 4.8 |
| Provision
for income taxes | 2.1 | 2.1 | 2.1 | 1.9 |
| Income
from continuing operations | 4.0 % | 3.1 % | 3.4 % | 2.9 % |

Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006

Revenue

Revenue decreased 3.3% to $417.8 million in 2007 from $432.0 million in 2006. Intermodal revenue decreased 4.9% to $303.3 million due to a 2.1% decrease in volume, a 2.1% decrease in price and a 0.7% negative change in mix. Truck brokerage revenue remained constant at $77.1 million on slightly lower volume. Logistics revenue increased 4.1% to $37.4 million related to several new customers and increased business from existing customers.

Gross Margin

Gross margin increased slightly by 0.3% to $57.5 million in 2007 from $57.3 million in 2006. This margin expansion comes primarily from our logistics business. As a percent of revenue, gross margin has increased to 13.8% in 2007 from 13.3% in 2006.

S alaries and Benefits

As a percentage of revenue, salaries and benefits decreased slightly to 5.3% in 2007 from 5.5% in 2006. Salaries and benefits decreased to $22.1 million in 2007 from $24.0 million in 2006. This is due primarily to a decrease in incentive compensation including a $0.9 million change in estimate related to the first half of 2007, recorded in the third quarter of 2007. Headcount as of September 30, 2007 was 1,064 which excludes drivers as driver costs are included in transportation costs.

General and Administrative

General and administrative expenses decreased to $9.6 million in 2007 from $9.9 million in 2006. As a percentage of revenue, these expenses remained constant at 2.3%. The decrease in general and administrative expenses is due to a decrease in general insurance expense for the quarter partially offset by an increase in professional services.

Depreciation and Amortization

Depreciation and amortization decreased to $1.1 million in 2007 from $1.6 million in 2006. This expense as a percentage of revenue decreased to 0.3% in 2007 from 0.4% in 2006. The decrease in depreciation and amortization is due primarily to lower computer software depreciation as some of our software was fully depreciated in earlier periods.

Other Income (Expense)

Interest income remained constant at $0.7 million for 2007 and 2006.

Provision for Income Taxes

The provision for income taxes decreased to $8.8 million in 2007 compared to $9.0 million in 2006. The decrease is primarily attributable to a revaluation of deferred income taxes of approximately $1.2 million related to an Illinois tax law change enacted during the quarter, which affects how service providers apportion income to Illinois.

Income from Continuing Operations

Income from continuing operations increased to $16.6 million in 2007 from $13.5 million in 2006 due primarily to lower salaries and benefit costs, lower depreciation and amortization expense, lower general and administrative expenses and higher gross margin.

Earnings Per Common Share

Basic earnings per share were $0.43 in 2007 and $0.34 in 2006. Diluted earnings per share increased to $0.42 in 2007 from $0.33 in 2006.

Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006

Revenue

Revenue remained constant at $1.2 billion in both 2007 and 2006. Intermodal revenue increased 3.1% to $892.0 million due primarily to a 2.4% increase in volume and Comtrak being owned an additional two months in 2007. Truck brokerage revenue increased slightly to $224.9 million from $224.8 million due primarily to an increase in price and mix partially offset by a slight decrease in volume. Logistics revenue increased 2.1% to $95.8 million as a result of increased business from new and existing customers. Hub Distribution’s revenue has been reclassified to discontinued operations due to its sale on May 1, 2006.

Gross Margin

Gross margin increased 7.3% to $171.9 million in 2007 from $160.2 million in 2006. This margin expansion comes from Comtrak and an increase in volume from intermodal business. As a percent of revenue, gross margin has increased to 14.2% in 2007 from 13.5% in 2006. The increase in gross margin as a percentage of revenue is due to performing more of our own drayage more efficiently and better brokerage margins.

Salaries and Benefits

As a percentage of revenue, salaries and benefits were slightly lower at 5.9% for 2007 from 6.0% for 2006. Salaries and benefits increased to $71.9 million in 2007 from $71.3 million in 2006. The majority of the increase relates to Comtrak since we owned them for two additional months in 2007.

General and Administrative

General and administrative expenses increased to $31.4 million for 2007 from $28.6 million in 2006. As a percentage of revenue, these expenses increased to 2.6% in 2007 from 2.4% in 2006. The increase relates primarily to increased expenses in our Comtrak business including the two additional months that we owned them in 2007 compared to 2006 and increased spending on consultants of approximately $1.2 million related to a marketing project partially offset by a favorable lease termination agreement.

Depreciation and Amortization

Depreciation and amortization decreased to $3.5 million in 2007 from $5.0 million in 2006. This expense as a percentage of revenue decreased to 0.3% in 2007 from 0.4% in 2006. The decrease in depreciation and amortization is due primarily to lower computer software depreciation as some of our software was fully depreciated in earlier periods.

Other Income (Expense)

Interest income increased to $2.0 million in 2007 from $1.7 million in 2006. The increase in interest income is due to a higher average investment balance and higher interest rates in 2007.

Provision for Income Taxes

The provision for income taxes increased to $25.3 million in 2007 compared to $22.8 million in 2006. The increase is a result of the increase in pre-tax income partially offset by the revaluation of deferred income taxes of approximately $1.2 million related to an Illinois tax law change enacted during the third quarter of 2007, which decreased our effective tax rate.

Income from Continuing Operations

Income from continuing operations increased to $41.8 million in 2007 from $34.2 million in 2006 due primarily to higher gross margin, lower depreciation and amortization expense and higher interest income.

Income from Discontinued Operations

Income from discontinued operations includes income from the operations of HGDS. This income was $1.0 million for the nine months ended September 30, 2006.

Earnings Per Common Share

Basic earnings per share from continuing operations was $1.07 in 2007 and $0.85 in 2006. Basic earnings per share from discontinued operations was $0.02 in 2006. Basic earnings per share was $1.07 for 2007 and $0.87 for 2006. Diluted earnings per share from continuing operations increased to $1.06 in 2007 from $0.83 in 2006. Diluted earnings per share from discontinued operations was $0.02 in 2006. Diluted earnings per share was $1.06 for 2007 and $0.85 for 2006.

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 the accounting policies described below. 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, 2006, includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of the changes that occurred during 2007 to the significant accounting policies and estimates disclosed in Note 1 of the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2006.

New Pronouncements

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109, Accounting for Income Taxes. Although the implementation of FIN 48 did not impact the amount of our liability for unrecognized tax benefits, we did reclassify our liability for unrecognized tax benefits from deferred tax liabilities to non-current liabilities to conform with the balance sheet presentation requirements of FIN 48. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from Financial Accounting Standards Board Statement No. 5, Accounting for Contingencies.

LIQUIDITY AND CAPITAL RESOURCES

During 2007, we have funded operations, capital expenditures, the earn out payment related to the Comtrak acquisition and our stock buy back through cash flows from operations.

Cash provided by operating activities for the nine months ended September 30, 2007 was approximately $41.4 million, which resulted primarily from income from continuing operations of $41.8 million and non-cash charges of $11.4 million, partially offset by the change in operating assets and liabilities of $11.8 million. The decrease in cash provided by operating activities for the nine months ended September 30, 2007 versus the nine months ended September 30, 2006 is primarily a result of the deterioration of our day’s sales outstanding due primarily to our retail customers.

Net cash used in investing activities for the nine months ended September 30, 2007 was $12.5 million and related primarily to capital expenditures of $8.2 million mostly comprised of tractors for the Comtrak operations and the $5.0 million earn out payment made to the former owner of Comtrak, partially offset by $0.7 million of cash generated from the sale of equipment. We expect capital expenditures to be approximately $9.0 to $10.0 million for all of 2007.

The net cash used in financing activities for the nine months ended September 30, 2007 was $32.6 million. We generated $0.7 million of cash from stock options exercised and used $37.1 million of cash to purchase treasury stock. We also reported $3.8 million of excess tax benefits from share-based compensation as a financing cash in-flow.

We had $47.1 million of unused and available borrowings under our bank revolving line of credit at September 30, 2007. We were in compliance with our debt covenants at September 30, 2007.

We have standby letters of credit that expire from 2007 to 2012. As of September 30, 2007, the outstanding letters of credit were $2.9 million.

The $5.0 million related party payable was paid out during the first quarter of 2007. This amount relates to the 2006 earn out payment due to the former owner of Comtrak. A similar amount will be paid in 2008 if the 2007 earn out is achieved.

We spent approximately $37.1 million on stock repurchases through September 30, 2007. At September 30, 2007, we had authorization to spend an additional $38.3 million to purchase common stock through June of 2008. In October of 2007, we spent approximately $3.0 million on stock repurchases and we may make additional purchases from time to time as market conditions warrant.

Contractual Obligations

Our contractual cash obligations as of September 30, 2007 are minimum rental commitments. We have a ten year lease agreement for a building and property (Comtrak’s Memphis facility) with a related party, the President of Comtrak. Minimum annual rental commitments, at September 30, 2007, under non-cancelable operating leases, principally for real estate, containers and equipment are payable as follows (in thousands):

2007	4,997
2008	18,324
2009	15,271
2010	13,313
2011	12,516
2012
and thereafter	15,924
$	80,345

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 September 30, 2007 (in thousands):

2007	-
2008	1,932
2009	1,021
2010	1,610
2011	639
2012
and thereafter	4,987
$	10,189

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.

CONTROLS AND PROCEDURES

As of September 30, 2007, 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 September 30, 2007. 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 October 26, 2006, our Board of Directors authorized the purchase of up to $75.0 million of our Class A Common Stock. This authorization expires June 30, 2008. We intend to hold the repurchased shares in treasury for future use. During the first nine months we made purchases of 1,148,220 shares at a value of approximately $36.7 million. We may make additional purchases from time to time as market conditions warrant.

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

| January
1 to January
31 | -- | Average
Price Paid Per Share — -- | -- | Maximum
Value of Shares that May Yet Be Purchased Under the Plan (in
000’s) — $ 75,000 |
| --- | --- | --- | --- | --- |
| February
1 to February
28 | -- | -- | -- | 75,000 |
| March
1 to March
31 | 408,205 | $ 30.62 | 408,205 | 62,500 |
| April
1 to April
30 | -- | -- | -- | 62,500 |
| May
1 to May
31 | -- | -- | -- | 62,500 |
| June
1 to June
30 | -- | -- | -- | 62,500 |
| July
1 to July
31 | 411,715 | $ 34.49 | 411,715 | 48,300 |
| August
1 to August
31 | 100,000 | $ 31.73 | 100,000 | 45,126 |
| September
1 to September
30 | 228,300 | $ 29.97 | 228,300 | 38,285 |
| Total | 1,148,220 | $ 31.98 | 1,148,220 | $ 38,285 |

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.

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, INC.

DATE: October 25, 2007 /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.

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Hub Group, Inc. Interim / Quarterly Report 2007

31640_10-q_2007-10-25_c296dfe6-3005-4276-b834-b0047516c0e8.zip

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Hub Group, Inc. — Interim / Quarterly Report 2007

31640_10-q_2007-10-25_c296dfe6-3005-4276-b834-b0047516c0e8.zip

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Hub Group, Inc. Interim / Quarterly Report 2007