Hub Group
Annual Report 2006

Plain-text annual report

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2006OR[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934Commission File No. 0-27754 __________________HUB GROUP, INC.(Exact name of registrant as specified in its charter)Delaware36-4007085(State or other jurisdiction of(I.R.S. Employerincorporation of organization)Identification No.)3050 Highland Parkway, Suite 100Downers Grove, Illinois 60515(Address and zip code of principal executive offices)(630) 271-3600(Registrant's telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act:Class A Common Stock, $.01 par value(Title of Class)Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes X No ___ Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes ___ No X 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 if disclosure of delinquent filers 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 Part III of this Form 10-K or any amendment to this Form 10-K. Yes ___ No X 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 Rule12b-2 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 12b-2 of the Exchange Act).Yes ___ No X The aggregate market value of the Registrant’s voting stock held by non-affiliates on June 30, 2006, based upon the last reported sale price on that date on the NASDAQ NationalMarket of $24.53 per share, was $938,679,256.On February 20, 2007, the Registrant had 39,172,178 outstanding shares of Class A Common Stock, par value $.01 per share, and 662,296 outstanding shares of Class B CommonStock, par value $.01 per share.Documents Incorporated by ReferenceThe Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 7, 2007 (the “Proxy Statement”) is incorporated by reference in Part III of thisForm 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 parthereof. PART IItem 1. BUSINESSGeneralHub Group, Inc. (“Company”, “we”, “us” or “our”) is a Delaware corporation that was incorporated on March 8, 1995. We are one of NorthAmerica’s leading asset-light freight transportation management companies. We offer comprehensive intermodal, truck brokerage and logistics services. Sinceour founding in 1971, we have grown to become the largest intermodal marketing company (“IMC”) in the United States and one of the largest truck brokers.We operate through a network of 22 operating centers throughout the United States and Canada. Each operating center is strategically located in amarket with a significant concentration of shipping customers and one or more railheads. Through our network, we have the ability to move freight in and outof every major city in the United States, Canada and Mexico. We service a large and diversified customer base in a broad range of industries, includingconsumer products, retail and durable goods. We utilize an asset-light strategy in order to minimize our investment in equipment and facilities and reduce ourcapital requirements. We arrange freight movement for our customers through transportation carriers and equipment providers.We sold substantially all of the assets of Hub Group Distribution Services, LLC (“HGDS” or “Hub Distribution”) to the President of the formersubsidiary on May 1, 2006. Accordingly, the results of operations of HGDS for the current and prior periods have been reported as discontinued operations.In addition, HGDS’s assets and liabilities have been reclassified as discontinued operations in the consolidated balance sheet as of December 31, 2005.Services ProvidedOur transportation services can be broadly placed into the following categories:Intermodal. As an IMC, we arrange for the movement of our customers’ freight in containers and trailers, typically over long distances of 750 miles ormore. We contract with railroads to provide transportation for the long-haul portion of the shipment and with local trucking companies, known as “drayagecompanies,” for pickup and delivery. In certain markets, we supplement third party drayage services with Company-owned drayage operations. As part of ourintermodal services, we negotiate rail and drayage rates, electronically track shipments in transit, consolidate billing and handle claims for freight loss ordamage on behalf of our customers.We use our network to access containers and trailers owned by leasing companies, railroads and steamship lines. We are able to track trailers andcontainers entering a service area and reuse that equipment to fulfill the customers’ outbound shipping requirements. This effectively allows us to “capture”containers and trailers and keep them within our network. As of December 31, 2006, we also have exclusive access to approximately 5,400 rail-ownedcontainers for our dedicated use on the Burlington Northern Santa Fe (“BNSF”) and the Norfolk Southern (“NS”) rail networks and approximately 2,100 rail-owned containers for our dedicated use on the Union Pacific (“UP”) rail network. In addition to these containers, during 2005 and 2006, we added 5,400 new53’ containers for use on the BNSF and NS. We financed these containers with operating leases. These arrangements are included in Note 7 to theconsolidated financial statements.Through our newly formed subsidiary Comtrak Logistics, Inc. (“Comtrak”), we acquired substantially all the assets of Comtrak, Inc. at the close ofbusiness on February 28, 2006. Comtrak is a transportation company whose services include primarily rail and international drayage for the intermodalsector. The results of Comtrak are included in our results of operations from March 1, 2006, its date of acquisition. 2Our drayage services are provided by our subsidiaries, Comtrak and Quality Services, LLC (“QS”) who assist us in providing reliable, cost effectiveintermodal services to our customers. Our subsidiaries have terminals in Atlanta, Birmingham, Charleston, Charlotte, Chattanooga, Chicago, Cleveland,Columbus, Dallas, Houston, Huntsville, Jacksonville, Kansas City, Los Angeles, Memphis, Nashville, Perry, Savannah, St. Louis, Stockton, and Tampa.At December 31, 2006, QS and Comtrak owned 305 tractors, leased 69 tractors, leased or owned 625 trailers and employed 424 drivers and contracted with865 owner-operators. Truck Brokerage (Highway Services). We are one of the largest truck brokers in the United States, providing customers with another option for theirtransportation needs. We match the customers’ needs with carriers’ capacity to provide the most effective service and price combinations. We have contractswith a substantial base of carriers allowing us to meet the varied needs of our customers. As part of the truck brokerage services, we negotiate rates, trackshipments in transit and handle claims for freight loss and damage on behalf of our customers. Our truck brokerage operation also provides customers with specialized programs. Through the Dedicated Trucking program, certain carriers haveinformally agreed to move freight for our customers on a continuous basis. This arrangement allows us to effectively meet our customer’s needs withoutowning the equipment.Logistics. Our logistics business operates under the name of Unyson Logistics. Unyson Logistics is comprised of a network of logistics professionalsdedicated to developing, implementing and operating customized logistics solutions. Unyson offers a wide range of transportation management services andtechnology solutions including shipment optimization, load consolidation, mode selection, carrier management, load planning and execution and web-basedshipment visibility. Our multi-modal transportation capabilities include small parcel, heavyweight expedited, less-than-truckload, truckload, intermodal andrailcar. Unyson Logistics operates throughout North America with offices strategically located in key market areas. Hub NetworkHub Group currently has operating centers in the following metropolitan areas:AtlantaIndianapolisMinneapolisSan FranciscoBaltimoreKansas CityNew York CitySeattleBostonLaredoOntarioSt. LouisChicagoLos AngelesPittsburghToledoClevelandMemphisSalt Lake City HoustonMilwaukeeSan Diego Our entire network is interactively connected through our proprietary Network Management System. This enables us to move freight into and out of everymajor city in the United States, Canada and Mexico.Each operating center manages the freight originating in its service area. In a typical intermodal transaction, the customer contacts the local operatingcenter to place an order. The operating center consults with the centralized pricing group, obtains the necessary intermodal equipment, arranges for it to bedelivered 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.Relevant information is entered into our Network Management System by the assigned operating center. Our predictive track and trace technology thenmonitors the shipment to ensure that it arrives as scheduled and alerts the customer service personnel if there are service delays. The assigned operating centerthen arranges for and confirms delivery by a drayage company at destination. After unloading, the empty equipment is made available for reloading by thelocal operating center in the delivery market.We provide truck brokerage services to our customers in a similar manner. In a typical truck brokerage transaction, the customer contacts the localoperating center to obtain a price quote for a particular freight movement. The customer then provides appropriate shipping information to the local operatingcenter. The local operating center makes the delivery appointment and arranges with the appropriate carrier to pick up the freight. Once it receives confirmationthat the freight has been picked up, the local operating center monitors the 3movement of the freight until it reaches its destination and the delivery has been confirmed. If the carrier notifies us that after delivering the load it will needadditional freight, we may notify the operating center located nearest the destination of the carrier’s availability. Although under no obligation to do so, the localoperating center then may attempt to secure freight for the carrier. Marketing and CustomersWe believe that fostering long-term customer relationships is critical to our success. Through these long-term relationships, we are able to betterunderstand our customers’ needs and tailor our transportation services to the specific customer, regardless of the customer’s size or volume. We currently havefull-time marketing representatives at various operating centers and sales offices with primary responsibility for servicing local, regional and nationalaccounts. These sales representatives directly or indirectly report to our Executive Vice President - Sales. This model allows us to provide our customers withboth a local marketing contact and access to our competitive rates as a result of being a large, national transportation services provider. Our marketing efforts have produced a large, diverse customer base, with no customer representing more than 5.0% of our total revenue in 2006. Weservice customers in a wide variety of industries, including consumer products, retail and durable goods.We have a joint marketing relationship with TMM Logistics, a wholly owned subsidiary of Grupo TMM, a Mexican logistics and transportationcompany. TMM Logistics provides sales support and operating execution within Mexico, and we furnish the same capabilities in Canada and the UnitedStates for TMM Logistics.Management Information SystemsA primary component of our business strategy is the continued improvement of our Network Management System and other technology to ensure thatwe remain a leader among transportation providers in information processing for transportation services. Our Network Management System consists ofproprietary software running on a combination of platforms which includes the IBM iSeries and Microsoft Windows Server environments located at a secureoffsite data center. All of Hub Group’s operating centers are linked together with the data center using an MPLS (“Multi-Protocol Label Switching”) network.This configuration provides a real time environment for transmitting data among our operating centers and headquarters. We also make extensive use ofelectronic commerce (“e-Commerce”), allowing each operating center to communicate electronically with each railroad, many drayage companies, certaintrucking companies and those customers with e-Commerce capabilities.Our Network Management System is the primary mechanism used in our operating centers to handle our intermodal and truck brokerage business.The Network Management System processes customer transportation requests, tenders and tracks shipments, prepares customer billing, establishes accountprofiles and retains critical information for analysis. The Network Management System provides connectivity with each of the major rail carriers. Thisenables us to electronically tender and track shipments in a real time environment. In addition, the Network Management System’s e-Commerce features offercustomers with e-Commerce capability a completely paperless process, including load tendering, shipment tracking, billing and remittance processing. Weaggressively pursue opportunities to establish e-Commerce interfaces with our customers, railroads, trucking companies and drayage companies.To manage our logistics business, we use specialized software that includes planning and execution solutions. This sophisticated transportationmanagement software enables us to offer supply chain planning and logistics managing, modeling, optimizing and monitoring for our customers. We use thissoftware when offering logistics management services to customers that ship via multiple modes, including intermodal, truckload, and less-than-truckload,allowing us to optimize mode and carrier selection and routing for our customers. This software is integrated with Hub Group’s Network Management Systemand our accounting system.Our website, www.hubgroup.com, is designed to allow our customers and vendors to easily do business with us online. Through Vendor Interface, wetender loads to our drayage partners using the Internet rather than phones or faxes. Vendor Interface also captures event status information, allows vendors toview outstanding paperwork requirements and helps facilitate paperless invoicing. We currently tender substantially all of our drayage loads using VendorInterface or e-Commerce. Through Trucker Advantage, we exchange 4information on available Hub loads, available carrier capacity and updates to event status information with our truck brokerage partners. Through CustomerAdvantage, customers receive immediate pricing, place orders, track shipments, and review historical shipping data through a variety of reports over theInternet. All of our Internet applications are integrated with the Network Management System. Relationship with RailroadsA key element of our business strategy is to strengthen our close working relationship with each of the major intermodal railroads in the United States.We view our relationship with the railroads as a partnership. Due to our size and relative importance, many railroads have dedicated support personnel tofocus on our day-to-day service requirements. On a regular basis, our senior executives and each of the railroads meet to discuss major strategic issuesconcerning intermodal transportation. Several of our top executive officers are former railroad employees, which makes them well suited to understand therailroads’ service capabilities. We have relationships with each of the following major railroads:Burlington Northern Santa FeFlorida East CoastCanadian NationalKansas City SouthernCanadian PacificNorfolk SouthernCSXUnion Pacific We also have relationships with each of the following major service providers: CMA CGM (America) Inc., Express System Intermodal Inc., HanjinShipping, Hyundai Merchant Marine, K-Line America, Maersk Sea-Land, Mitsui O.S.K. Lines (America) Inc. and Pacer International.These relationships govern the transportation services and payment terms pursuant to which our intermodal shipments are handled by the railroads.Transportation rates are market driven and we typically negotiate with the railroads or other major service providers on a route or customer specific basis.Consistent with industry practice, many of the rates we negotiate are special commodity quotations (“SCQs”), which provide discounts from published pricelists based on competitive market factors and are designed by the railroads or major 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 oftime, usually up to 12 months. Under agreements with the BNSF, NS and UP, we managed, as of December 31, 2006, approximately 7,500 rail-owned containers. Thesecontainers are for Hub Group’s dedicated use on the respective rail networks. BNSF and NS containers are generally interchangeable across both railnetworks. In addition to these containers, during 2005 and 2006, we added 5,400 new 53’ containers to our fleet. We financed these containers with operatingleases.Relationship with Drayage CompaniesWe have a “Quality Drayage Program,” which consists of agreements and rules that govern the framework by which many drayage companies performservices for us. Participants in the program commit to provide high quality service along with clean and safe equipment, maintain a defined on-timeperformance level and follow specified procedures designed to minimize freight loss and damage. We negotiate drayage rates for transportation between specificorigin and destination points.We also supplement third-party drayage services with our own drayage operations, which we operate through our QS and Comtrak subsidiaries. Ourdrayage operations employ their own drivers and also contract with owner-operators who supply their own trucks. 5Relationship with Trucking CompaniesOur truck brokerage operation has a large and growing number of active trucking companies that we use to transport freight. The local operating centersdeal daily with these carriers on an operational level. Our corporate headquarters handles the administrative and regulatory aspects of the trucking companyrelationship. Our relationships with these trucking companies are important since these relationships determine pricing, load coverage and overall service.Risk Management and InsuranceWe require all drayage companies participating in the Quality Drayage Program to carry at least $1.0 million in general liability insurance, $1.0 millionin 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 tocover the claim, we carry our own cargo insurance with a limit of $1.0 million per container or trailer and a limit of $20.0 million in the aggregate. We alsocarry 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 policyon this general liability insurance.We maintain separate insurance policies to cover potential exposure from our company-owned drayage operations. We have general liability insurancewith limits of $1.0 million per occurrence and $1.0 million in the aggregate, truckman’s auto liability with limits of $1.0 million and a companion $20.0million umbrella liability policy. Government RegulationHub Group, Inc. and various subsidiaries are licensed by the Department of Transportation as brokers in arranging for the transportation of generalcommodities by motor vehicle. To the extent that the operating centers perform truck brokerage services, they do so under these licenses. The Department ofTransportation prescribes qualifications for acting in this capacity, including a $10,000 surety bond that we have posted. To date, compliance with theseregulations has not had a material adverse effect on our results of operations or financial condition. However, the transportation industry is subject tolegislative or regulatory changes that can affect the economics of the industry by requiring changes in operating practices or influencing the demand for, andcost of providing, transportation services. CompetitionThe transportation services industry is highly competitive. We compete against other IMCs, as well as logistics companies, third party brokers,trucking companies and railroads that market their own intermodal services. Several larger trucking companies have entered into agreements with railroads tomarket 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 trucking companies, and all of the major railroads, have substantially greater financial and other resources thanwe do.GeneralEmployees: As of December 31, 2006, we had 1,513 employees or 1,089 excluding drivers. We are not a party to any collective bargaining agreementand consider our relationship with our employees to be satisfactory.Other: No material portion of our operations is subject to renegotiation of profits or termination of contracts at the election of the federal government.None of our trademarks are believed to be material to us. Our business is seasonal to the extent that certain customer groups, such as retail, are seasonal. 6Periodic ReportsUpon written request, our annual report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 2006, andour quarterly reports on Form 10-Q will be furnished to stockholders free of charge; write to: Public Relations Department, Hub Group, Inc., 3050 HighlandParkway, Suite 100, Downers Grove, Illinois 60515. Our filings are also accessible through our website at www.hubgroup.com.Item 1A. RISK FACTORSSince our business is concentrated on intermodal marketing, any decrease in demand for intermodal transportation services compared to othertransportation services could have an adverse effect on our results of operations. In 2006, 2005 and 2004, we derived 73% of our revenue from our intermodal services. As a result, any decrease in demand for intermodal transportationservices compared to other transportation services could have an adverse effect on our results of operations. Because we depend on railroads for our operations, our operating results and financial condition are likely to be adversely affected by anyreduction or deterioration in rail service. We depend on the major railroads in the United States for virtually all of the intermodal services we provide. In many markets, rail service is limited to one ora few railroads. Consequently, a reduction in, or elimination of, rail service to a particular market is likely to adversely affect our ability to provide intermodaltransportation services to some of our customers. In addition, the railroads are relatively free to adjust shipping rates up or down as market conditions permit.Rate increases would result in higher intermodal transportation costs, reducing the attractiveness of intermodal transportation compared to truck or othertransportation modes, which could cause a decrease in demand for our services. Further, our ability to continue to expand our intermodal transportationbusiness is dependent upon the railroads’ ability to increase capacity for intermodal freight and provide consistent service. Our business could also beadversely affected by a work stoppage at one or more railroads or by adverse weather conditions or other factors that hinder the railroads’ ability to providereliable transportation services. In the past, there have been service issues when railroads have merged. As a result, we cannot predict what effect, if any,further consolidation among railroads may have on intermodal transportation services or our results of operations. Because our relationships with the major railroads are critical to our ability to provide intermodal transportation services, our business may beadversely affected by any change to those relationships. We have important relationships with each of the major U.S. railroads. To date, the railroads have chosen to rely on us, other IMCs and other intermodalcompetitors to market their intermodal services rather than fully developing their own marketing capabilities. If one or more of the major railroads were todecide to reduce their dependence on us, the volume of intermodal shipments we arrange would likely decline, which could adversely affect our results ofoperations and financial condition. Because we rely on drayage companies in our intermodal operations, our ability to expand our business or maintain our profitability may beadversely affected by a shortage of drayage capacity. In many of the markets we serve, we use third-party drayage companies for pickup and delivery of intermodal containers. Most drayage companies operaterelatively small fleets and have limited access to capital for fleet expansion. In some of our markets, there are a limited number of drayage companies that canmeet our quality standards. This could limit our ability to expand our intermodal business or require us to establish our own drayage operations in somemarkets, which could increase our operating costs and could adversely affect our profitability and financial condition. Also, the trucking industry chronicallyexperiences a shortage of available drivers, which may limit the ability of third-party drayage companies to expand their fleets. This shortage also may requirethem to increase drivers’ compensation, thereby increasing our cost of providing drayage services to our customers. Therefore, the driver shortage could alsoadversely affect our profitability and limit our ability to expand our intermodal business. 7Because we depend on trucking companies for our truck brokerage services, our ability to maintain or expand our truck brokerage businessmay be adversely affected by a shortage of trucking capacity. In 2006, 2005 and 2004, we derived 19%, 18% and 16%, respectively, of our revenue from our truck brokerage services. We depend upon various third-party trucking companies for the transportation of our customers’ loads. Particularly during periods of economic expansion, trucking companies may beunable to expand their fleets due to capital constraints or chronicdriver shortages, and these trucking companies also may raise their rates. If we face insufficient capacity among our third-party trucking companies, we maybe unable to maintain or expand our truck brokerage business. Also, we may be unable to pass rate increases on to our customers, which could adverselyaffect our profitability. We depend on third parties for equipment essential to operate our business, and if we fail to secure sufficient equipment, we could lose customersand revenue. We depend on third parties for transportation equipment, such as containers and trailers, necessary for the operation of our business. Our industry hasexperienced equipment shortages in recent years, particularly during the peak-shipping season in the fall. A substantial amount of intermodal freight originatesat or near the major West Coast ports, which have historically had the most severe equipment shortages. If we cannot secure sufficient transportationequipment at a reasonable price from third parties to meet our customers’ needs, our customers may seek to have their transportation needs met by otherproviders. This could have an adverse effect on our business, results of operations and financial position. Our business could be adversely affected by strikes or work stoppages by draymen, truckers, longshoremen and railroad workers. There has been labor unrest, including work stoppages, among draymen. We could lose business from any significant work stoppage or slowdown and, iflabor unrest results in increased rates for draymen, we may not be able to pass these cost increases on to our customers. In the Fall of 2002, all of the WestCoast ports were shut down as a result of a dispute with the longshoremen. The ports remained closed for nearly two weeks, until reopened as the result of acourt order under the Taft-Hartley Act. Our operations were adversely affected by the shutdown. In January 2003, a new six-year contract was agreed to by theInternational Longshoremen and Warehouse Union and the Pacific Maritime Association. In the past several years, there have been strikes involving railroadworkers. Future strikes by railroad workers in the United States, Canada or anywhere else that our customers’ freight travels by railroad could adverselyaffect our business and results of operations. Any significant work stoppage, slowdown or other disruption involving ports, railroads, truckers or draymencould adversely affect our business and results of operations. Our results of operations are susceptible to changes in general economic conditions and cyclical fluctuations. Economic recession, customers’ business cycles, changes in fuel prices and supply, interest rate fluctuations, increases in fuel or energy taxes and othergeneral economic factors affect the demand for transportation services and the operating costs of railroads, trucking companies and drayage companies. Wehave little or no control over any of these factors or their effects on the transportation industry. Increases in the operating costs of railroads, trucking companiesor drayage companies can be expected to result in higher freight rates. Our operating margins could be adversely affected if we were unable to pass through toour customers the full amount of higher freight rates. Economic recession or a downturn in customers’ business cycles also may have an adverse effect on ourresults of operations and growth by reducing demand for our services. Therefore, our results of operations, like the entire freight transportation industry, arecyclical and subject to significant period-to-period fluctuations. Relatively small increases in our transportation costs that we are unable to pass through to our customers are likely to have a significant effecton our gross margin and operating income. Transportation costs represented 86%, 88% and 88% of our consolidated revenue in 2006, 2005 and 2004, respectively. Because transportation costsrepresent such a significant portion of our costs, even relatively small increases in these transportation costs, if we are unable to pass them through to ourcustomers, are likely to have a significant effect on our gross margin and operating income. 8Our business could be adversely affected by heightened security measures, actual or threatened terrorist attacks, efforts to combat terrorism,military action against a foreign state or other similar event. We cannot predict the effects on our business of heightened security measures, actual or threatened terrorist attacks, efforts to combat terrorism, militaryaction against a foreign state or other similar events. It is possible that one or more of these events could be directed at U.S. or foreign ports, borders, railroadsor highways. Heightened security measures or otherevents are likely to slow the movement of freight through U.S. or foreign ports, across borders or on U.S. or foreign railroads or highways and couldadversely affect our business and results of operations. Any of these events could also negatively affect the economy and consumer confidence, which couldcause a downturn in the transportation industry. If we fail to maintain and enhance our information technology systems, we may be at a competitive disadvantage and lose customers. Our information technology systems are critical to our operations and our ability to compete effectively as an IMC, truck broker and logistics provider. Weexpect our customers to continue to demand more sophisticated information technology applications from their suppliers. If we do not continue to enhance ourNetwork Management System to meet the increasing demands of our customers, we may be placed at a competitive disadvantage and could lose customers. Our information technology systems are subject to risks that we cannot control and the inability to use our information technology systems couldmaterially adversely affect our business. Our information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internetinfrastructure that have experienced significant system failures and electrical outages in the past. Our systems are susceptible to outages from fire, floods,power loss, telecommunications failures, break-ins and similar events. Our servers are vulnerable to computer viruses, break-ins and similar disruptionsfrom unauthorized tampering with our computer systems. The occurrence of any of these events could disrupt or damage our information technology systemsand inhibit our internal operations, our ability to provide services to our customers and the ability of our customers and vendors to access our informationtechnology systems. This could result in a loss of customers or a reduction in demand for our services. The transportation industry is subject to government regulation, and regulatory changes could have a material adverse effect on our operatingresults or financial condition. Hub Group, Inc. and various subsidiaries are licensed by the Department of Transportation as motor carrier freight brokers. The Department ofTransportation prescribes qualifications for acting in this capacity, including surety-bonding requirements. To date, compliance with these regulations has nothad a material adverse effect on our results of operations or financial condition. However, the transportation industry is subject to legislative or regulatorychanges 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. Future laws and regulations may be more stringent and require changes in operating practices, influence the demand for transportationservices or increase the cost of providing transportation services, any of which could adversely affect our business. Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties. From time to time, we arrange for the movement of hazardous materials at the request of our customers. As a result, we are subject to various environmentallaws and regulations relating to the handling of hazardous materials. If we are involved in a spill or other accident involving hazardous materials, or if we arefound to be in violation of applicable laws or regulations, we could be subject to substantial fines or penalties and to civil and criminal liability, any of whichcould have an adverse effect on our business and results of operations. We derive a significant portion of our revenue from our largest customers and the loss of several of these customers could have a materialadverse effect on our revenue and business. 9For 2006, our largest 20 customers accounted for approximately 36.8% of our revenue. A reduction in or termination of our services by several of our largestcustomers could have a material adverse effect on our revenue and business. Insurance and claims expenses could significantly reduce our earnings. Our future insurance claims expenses might exceed historical levels, which could reduce our earnings. If the number or severity of claims increases, ouroperating results could be adversely affected. We maintain insurance with licensed insurance companies. Insurance carriers have recently raised premiums. Asa result, our insurance and claims expenses couldincrease when our current coverage expires. If these expenses increase, and we are unable to offset the increase with higher freight rates, our earnings could bematerially and adversely affected.Our success depends upon our ability to recruit and retain key personnel. Our success depends upon attracting and retaining the services of our management team as well as our ability to attract and retain a sufficient number of otherqualified personnel to run our business. There is substantial competition for qualified personnel in the transportation services industry. As all key personneldevote their full time to our business, the loss of any member of our management team or other key person could have an adverse effect on us. We do not havewritten employment agreements with any of our executive officers and do not maintain key man insurance on any of our executive officers. Our growth could be adversely affected if we are not able to identify, successfully acquire and integrate future acquisition prospects.We believe that future acquisitions that we make could significantly impact financial results. Financial results most likely to be impacted include, but are notlimited to, revenue, gross margin, salaries and benefits, selling general and administrative expenses, depreciation and amortization, interest expense, netincome and our debt level. Item 1B. UNRESOLVED STAFF COMMENTSNone. Item 2. PROPERTIESWe directly, or indirectly through our subsidiaries, operate 46 offices throughout the United States and in Canada, including our headquarters inDowners Grove, Illinois and our Company-owned drayage operations. All of our office space is leased. Most office leases have initial terms of more than oneyear, and many include options to renew. While some of our leases expire in the near term, we do not believe that we will have difficulty in renewing them or infinding alternative office space. We believe that our offices are adequate for the purposes for which they are currently used. Item 3. LEGAL PROCEEDINGSWe are a party to litigation incident to our business, including claims for personal injury and/or property damage, freight lost or damaged in transit,improperly shipped or improperly billed. Some of the lawsuits to which we are party are covered by insurance and are being defended by our insurancecarriers. Some of the lawsuits are not covered by insurance and we defend those ourselves. We do not believe that the outcome of this litigation will have amaterially adverse effect on our financial position or results of operations. See Item 1 Business - Risk Management and Insurance.Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSThere were no matters submitted to a vote of our security holders during the fourth quarter of 2006. 10Executive Officers of the RegistrantIn 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 forthcertain information as of February 1, 2007 with respect to each person who is an executive officer of the Company. Name Age Position Phillip C. Yeager 79 Chairman of the Board of Directors David P. Yeager 53 Vice Chairman of the Board of Directors and Chief Executive Officer Mark A. Yeager 42 President, Chief Operating Officer and Director Thomas M. White49Senior Vice President, Chief Financial Officer and Treasurer Stephen P. Cosgrove47Executive Vice President-Intermodal and Administration James B. Gaw56Executive Vice President-Sales Christopher R. Kravas41Executive Vice President-Strategy and Yield Management Donald G. Maltby52Executive Vice President-Logistics David L. Marsh39Executive Vice President-Highway Dennis R. Polsen53Executive Vice President of Information Services Terri A. Pizzuto48Vice President-Finance David C. Zeilstra37Vice President, Secretary and General CounselPhillip C. Yeager, our founder, has been Chairman of the Board since October 1985. From April 1971 to October 1985, Mr. Yeager served asPresident of Hub City Terminals, Inc. (“Hub Chicago”). Mr. Yeager became involved in intermodal transportation in 1959, five years after the introduction ofintermodal transportation in the United States, as an employee of the Pennsylvania and Pennsylvania Central Railroads. He spent 19 years with thePennsylvania and Pennsylvania Central Railroads, 12 of which involved intermodal transportation. In 1991, Mr. Yeager was named Man of the Year by theIntermodal Transportation Association. In 1995, he received the Salzburg Practitioners Award from Syracuse University in recognition of his lifetimeachievements in the transportation industry. In October 1996, Mr. Yeager was inducted into the Chicago Area Entrepreneurship Hall of Fame sponsored by theUniversity of Illinois at Chicago. In March 1997, he received the Presidential Medal from Dowling College for his achievements in transportation services. InSeptember 1998, he received the Silver Kingpin award from the Intermodal Association of North America and in February 1999, he was namedTransportation Person of the Year by the New York Traffic Club. In June 2006, Mr. Yeager was awarded an honorary Doctor of Public Service degree fromthe University of Denver in recognition of his achievements in the intermodal transportation industry. In December 2006, the Containerization and IntermodalInstitute presented Mr. Yeager with their 2006 Connie Award in recognition of his contributions to their industry. Mr. Yeager graduated from the University ofCincinnati in 1951 with a Bachelor of Arts degree in Economics. Mr. Yeager is the father of David P. Yeager and Mark A. Yeager.11David P. Yeager has served as our Vice Chairman of the Board since January 1992 and as Chief Executive Officer since March 1995. From October1985 through December 1991, Mr. Yeager was President of Hub Chicago. From 1983 to October 1985, he served as Vice President, Marketing of HubChicago. 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 andserved as its President from 1975 to 1977. Mr. Yeager received a Masters in Business Administration degree from the University of Chicago in 1987 and aBachelor 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.Mark A. Yeager became the President of the Company in January 2005 and has been our Chief Operating Officer and a director since May 2004. FromJuly 1999 to December 2004, Mr. Yeager was President-Field Operations. 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 toMarch 1995, Mr. Yeager served as our Vice President-Quality. Prior to joining us in 1992, Mr. Yeager was an associate at the law firm of Grippo & Eldenfrom January 1991 through May 1992 and an associate at the law firm of Sidley & Austin from May 1989 through January 1991. Mr. Yeager received aJuris 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 our Senior Vice President, Chief Financial Officer and Treasurer since June 2002. Prior to joining us, Mr. White was apartner at Arthur Andersen. Mr. White received a Masters of Science of Business Administration from Purdue University in 1985 and a Bachelor ofBusiness Administration from Western Michigan University in 1979. Mr. White is a CPA and a member of the board of directors of FTD Group, Inc. andLandauer, Inc.Stephen P. Cosgrove became our Executive Vice President-Intermodal and Administration in January 2005. Prior to this promotion, Mr. Cosgrove wasVice President- Intermodal and Administration for the Central Region from February 2004 through December 2004. Mr. Cosgrove served as Vice President ofHub Chicago from December 1996 through January 2004 and from September 1995 to November 1996 was General Manager of sales and marketing forHub Chicago. Mr. Cosgrove worked for APL Stacktrain Services from 1986 through 1995 prior to coming to Hub Chicago.James B. Gaw has been our Executive Vice President-Sales since February 2004. From December 1996 through January 2004, Mr. Gaw was Presidentof Hub North Central, located in Milwaukee. From 1990 through late 1996, he was Vice President and General Manager of Hub Chicago. Mr. Gaw joinedHub Chicago as Sales Manager in 1988. Mr. Gaw’s entire career has been spent in the transportation industry, including 13 years of progressive leadershippositions at Itofca, an intermodal marketing company, and Flex Trans. Mr. Gaw received a Bachelor of Science degree from Elmhurst College in 1973.Christopher R. Kravas has been our Executive Vice President -Strategy and Yield Management since December 2003. From February 2002 throughNovember 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 ofWebmodal from July 1999 through February 2001. From 1989 through June 1999 Mr. Kravas worked for the Burlington Northern Santa Fe Railway invarious positions in the intermodal business unit and finance department. Mr. Kravas received a Bachelor of Arts degree in 1987 from Indiana University anda Masters in Business Administration in 1994 from the University of Chicago.Donald G. Maltby has been our Executive Vice President - Logistics since February 2004. Mr. Maltby previously served as President of Hub Online,our e-commerce division, from February 2000 through January 2004. Mr. Maltby also served as President of Hub Cleveland from July 1990 through January2000 and from April 2002 to January 2004. Prior to joining Hub Group, Mr. Maltby served as President of Lyons Transportation, a wholly owned subsidiaryof Sherwin Williams Company, from 1988 to 1990. In his career at Sherwin Williams, which began in 1981 and continued until he joined us 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 thetransportation and logistics industry since 1976, holding various executive and management positions. Mr. Maltby received a Masters in BusinessAdministration from Baldwin Wallace College in 1982 and a Bachelor of Science degree from the State University of New York in 1976. 12David L. Marsh has been our Executive Vice President - Highway since February 2004. Mr. Marsh previously served as President of Hub Ohio fromJanuary 2000 through January 2004. Mr. Marsh joined us in March 1991 and became General Manager with Hub Indianapolis in 1993, a position he heldthrough 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 hasbeen a member of the American Society of Transportation and Logistics, the Indianapolis Traffic Club, the Council for Logistics Management and served asan advisor to the Indiana University-Indianapolis internship program for transportation and logistics. Mr. Marsh was honored as the Indiana TransportationPerson of the Year in 1999.Dennis R. Polsen has been our 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 our Vice-President of ApplicationDevelopment. Prior to joining us, Mr. Polsen was Director of Applications for Humana, Inc. from September 1997 through February 2000 and spent 14 yearsprior to that developing, implementing, and directing transportation logistics applications at Schneider National, Inc. Mr. Polsen received a Masters inBusiness Administration in May of 1983 from the University of Wisconsin Graduate School of Business and a Bachelor of Business Administration in Mayof 1976 from the University of Wisconsin-Milwaukee. Mr. Polsen is a past member of the American Trucking Association.Terri A. Pizzuto has been our Vice President of Finance since July 2002. Prior to joining us, Ms. Pizzuto was a partner in the Assurance and BusinessAdvisory Group at Arthur Andersen LLP. Ms. Pizzuto worked for Arthur Andersen LLP for 22 years holding various positions and serving numeroustransportation companies. Ms. Pizzuto received a Bachelor of Science in Accounting from the University of Illinois in 1981. Ms. Pizzuto is a CPA and amember of the American Institute of Certified Public Accountants.David C. Zeilstra has been our Vice President, Secretary and General Counsel since July 1999. From December 1996 through June 1999, Mr.Zeilstra was our Assistant General Counsel. Prior to joining us, Mr. Zeilstra was an associate with the law firm of Mayer, Brown & Platt from September1994 through November 1996. Mr. Zeilstra received a Juris Doctor degree from Duke University in 1994 and a Bachelor of Arts degree from WheatonCollege in 1990.Directors of the RegistrantIn addition to Phillip C. Yeager, David P. Yeager and Mark A. Yeager, the following three individuals are also on our 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 ExecutiveOfficer of Reaves Enterprises, Inc., a real estate development company and Martin P. Slark - Vice Chairman and Chief Executive Officer of Molex,Incorporated, a manufacturer of electronic, electrical and fiber optic interconnection products and systems. 13PART IIItem 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIESOur Class A Common Stock (“Class A Common Stock”) trades on the NASDAQ National Market tier of the NASDAQ Stock Market under thesymbol “HUBG.” Set forth below are the high and low closing prices for shares of the Class A Common Stock for each full quarterly period in 2006 and2005. 2006 2005 High Low High Low First Quarter $22.92 $17.42 $16.46 $12.30 Second Quarter $25.80 $20.75 $16.03 $12.11 Third Quarter $24.68 $20.98 $18.47 $12.54 Fourth Quarter $29.63 $22.99 $20.46 $16.41 On February 20, 2007, there were approximately 238 stockholders of record of the Class A Common Stock and, in addition, there were anestimated 10,186 beneficial owners of the Class A Common Stock whose shares were held by brokers and other fiduciary institutions. On February 20,2007, there were 11 holders of record of our Class B Common Stock (the “Class B Common Stock” together with the Class A Common Stock, the “CommonStock”).We were incorporated in 1995 and have never paid cash dividends on either the Class A Common Stock or the Class B Common Stock. Thedeclaration and payment of dividends are subject to the discretion of the Board of Directors. Any determination as to the payment of dividends will dependupon our results of operations, capital requirements and financial condition of the Company, and such other factors as the Board of Directors may deemrelevant. Accordingly, there can be no assurance that the Board of Directors will declare or pay cash dividends on the shares of Common Stock in the future.Our certificate of incorporation requires that any cash dividends must be paid equally on each outstanding share of Class A Common Stock and Class BCommon Stock. Our credit facility prohibits us from paying dividends on the Common Stock if there has been, or immediately following the payment of adividend there would be, a default or an event of default under the credit facility. We are currently in compliance with the covenants contained in the creditfacility.The Board of Directors approved a two-for-one stock split in the form of a stock dividend which was paid on May 6, 2006. All shares have beenretroactively restated to give effect to the two-for-one stock split, which was affected in the form of a 100% stock dividend. Each of our Class A stockholdersand Class B stockholders received one Class A share on each share of Class A Common Stock and each share of Class B Common Stock held by them onthe record date in connection with the stock split. In accordance with the terms of our Certificate of Incorporation, the number of votes held by each share ofClass B Common Stock was adjusted in connection with this stock dividend such that each share of Class B Common Stock now entitles its holder toapproximately 80 votes. Each share of Class A Common Stock entitles its holder to one vote.Note 13 of the Company’s Notes to Consolidated Financial Statements is incorporated herein by reference.14Performance Graph The following line graph compares the Company’s cumulative total stockholder return on its Class A Common Stock since December 31, 2001 with thecumulative total return of the Nasdaq Stock Market Index and the Nasdaq Trucking and Transportation Index. These comparisons assume the investment of$100 on December 31, 2001 in each index and in the Company’s Class A Common Stock and the reinvestment of dividends. 15Item 6. SELECTED FINANCIAL DATASelected Financial Data (in thousands except per share data) Years Ended December 31, 2006 (2) 2005 2004 2003 2002 Statement of Income Data: Revenue $1,609,529 $1,481,878 $1,380,722 $1,305,817 $1,254,744 Gross margin 218,418 174,742 167,062 155,569 143,759 Operating income 77,236 47,904 38,104 20,611 7,948 Income (loss) from continuing operations before taxes 79,508 48,871 27,551 13,842 (637)Income (loss) from continuing operations after taxes 47,705 29,176 15,870 6,906 (376)Income from discontinued operations, net of tax (1) 981 3,770 1,409 1,524 1,874 Net income $ 48,686 $32,946 $ 17,279 $ 8,430 $ 1,498 Basic earnings per common share Income (loss) from continuing operations $1.19 $0.73 $0.45 $0.22 $(0.01) Income from discontinued operations $ 0.03 $0.10 $0.04 $ 0.05 $0.06 Diluted earnings per common share Income (loss) from continuing operations $1.17 $0.71 $0.42 $0.22 $(0.01) Income from discontinued operations $0.02 $0.09 $0.04 $0.05 $0.06 As of December 31, 2006 2005 2004 2003 2002 Balance Sheet Data: Total assets $484,548 $444,418 $410,845 $388,527 $399,262 Long-term debt, excluding current portion - - - 67,017 94,027 Stockholders' equity 258,844 242,075 226,936 143,035 134,340 (1) HGDS disposed of May 1, 2006(2) Comtrak was acquired February 28, 2006 16Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONSFORWARD LOOKING STATEMENTSThe information contained in this annual report contains forward-looking statements within the meaning of the Private Securities Litigation ReformAct of 1995. Words such as “expects,” “hopes,” “believes,” “intends,” “estimates,” “anticipates,” and variations of these words and similar expressions areintended to identify these forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should beviewed with caution. Actual results or experience could differ materially from the forward-looking statements as a result of many factors. We assume noliability to update any such forward-looking statements contained in this annual report. Factors that could cause our actual results to differ materially, inaddition to those set forth under Items 1A “Risk Factors,” include:· the degree and rate of market growth in the domestic intermodal, truck brokerage and logistics markets served by us;· deterioration in our relationships with existing railroads or adverse changes to the railroads’ operating rules;· changes in rail service conditions or adverse weather conditions;· further consolidation of railroads;· the impact of competitive pressures in the marketplace, including entry of new competitors, direct marketing efforts by the railroads or marketingefforts 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;· changes in insurance costs and claims expense; and· inability to close and successfully integrate any future business combinationsCAPITAL STRUCTUREWe have authorized common stock comprised of Class A Common Stock and Class B Common Stock. The rights of holders of Class A CommonStock and Class B Common Stock are identical, except each share of Class B Common Stock entitles its holder to approximately 80 votes, while each shareof Class A Common Stock entitles its holder to one vote. We have authorized 2,000,000 shares of preferred stock.EXECUTIVE SUMMARYHub Group, Inc. (“we,” “us” or “our”) is the largest intermodal marketing company (“IMC”) in the United States and a full service transportationprovider offering intermodal, truck brokerage and logistics services. We operate through a nationwide network of operating centers. 17As an IMC, we arrange for the movement of our customers’ freight in containers and trailers over long distances. We contract with railroads toprovide transportation for the long-haul portion of the shipment and with local trucking companies, known as “drayage companies,” for local pickup anddelivery. As part of the intermodal services, we negotiate rail and drayage rates, electronically track shipments in transit, consolidate billing and handle claimsfor freight loss or damage on behalf of our customers. Through our newly formed subsidiary Comtrak Logistics, Inc. (“Comtrak”), we acquired substantially all the assets of Comtrak Inc. at the close ofbusiness on February 28, 2006. Comtrak is a transportation company whose services include primarily rail and international drayage for the intermodalsector. The results of Comtrak are included in our results of operations from March 1, 2006, its date of acquisition.Our drayage services are provided by our subsidiaries, Comtrak and Quality Services, LLC (“QS”) who assist us in providing reliable, costeffective intermodal services to our customers. Our subsidiaries have terminals in Atlanta, Birmingham, Charleston, Charlotte, Chattanooga, Chicago,Cleveland, Columbus, Dallas, Houston, Huntsville, Jacksonville, Kansas City, Los Angeles, Memphis, Nashville, Perry, Savannah, St. Louis, Stockton,and Tampa. At December 31, 2006, QS and Comtrak owned 305 tractors, leased 69 tractors, leased or owned 625 trailers and employed 424 drivers andcontracted with 865 owner-operators.We also arrange for the transportation of freight by truck, providing customers with another option for their transportation needs. We match thecustomers’ needs with carriers’ capacity to provide the most effective service and price combinations. As part of our truck brokerage services, we negotiaterates, 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 carriermanagement. These service offerings are designed to take advantage of the increasing trend for shippers to outsource all or a greater portion of theirtransportation needs.We have full time marketing representatives throughout North America who service local, regional and national accounts. We believe that fosteringlong-term customer relationships is critical to our success and allows us to better understand our customers’ needs and specifically tailor our transportationservices 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 existingtransportation customers, winning new customers and the acquisition of Comtrak. Our yield management group works with sales and operations to enhancecustomer margins. Our top 50 customers’ revenue represents approximately 52% of our revenue. During 2006 and 2005, we severed relationships with certaincustomers, due to profitability issues and credit issues which impeded our intermodal revenue growth. We have mitigated our risks in the automotive sector bysignificantly reducing or eliminating our relationship with two automotive parts suppliers in 2006. While we continue to do some limited business for thissector, we are carefully managing our credit exposure.We use various performance indicators to manage our business. We closely monitor margin and gains and losses for our top 50 customers and loadswith negative margins. We also evaluate on-time performance, costs per load by location and daily sales outstanding by location. Vendor cost changes andvendor 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 formersubsidiary on May 1, 2006. Accordingly, the results of operations of HGDS for the current and prior periods have been reported as discontinued operations.In addition, HGDS’s assets and liabilities have been reclassified as discontinued operations in the consolidated balance sheet as of December 31, 2005. 18RESULTS OF OPERATIONSYear Ended December 31, 2006, Compared to Year Ended December 31, 2005The following table summarizes our revenue by service line (in thousands): Twelve Months Ended December 31, % 2006 2005 Change Revenue Intermodal $1,172,566 $1,079,798 8.6%Brokerage 306,332 266,545 14.9%Logistics 130,631 135,535 (3.6)%Total revenue from continuing operations $1,609,529 $1,481,878 8.6%The following table includes certain items in the consolidated statements of income as a percentage of revenue: Twelve Months Ended December 31, 2006 2005 Revenue 100.0% 100.0 % Transportation costs 86.4 88.2 Gross margin 13.6 11.8 Costs and expenses: Salaries and benefits 5.9 5.6 General and administration 2.5 2.3 Depreciation and amortization 0.4 0.7 Total costs and expenses 8.8 8.6 Operating income 4.8 3.2 Other income (expense): Interest income 0.1 0.1 Total other income (expense) 0.1 0.1 Income from continuing operations beforeprovision for income taxes 4.9 3.3 Provision for income taxes 1.9 1.3 Income from continuing operations 3.0% 2.0% 19RevenueRevenue increased 8.6% to $1,609.5 million in 2006 from $1,481.9 million in 2005. Intermodal revenue increased 8.6% to $1,172.6 million from$1,079.8 million due primarily to a 6.2% increase related to Comtrak, a 5.2% combined increase related to pricing, mix and fuel surcharges, offset by a2.8% decline in volume. Truck brokerage revenue increased 14.9% to $306.3 million from $266.5 million due primarily to a 9.7% increase in volume inaddition to price increases, mix and fuel surcharges. Logistics revenue decreased 3.6% to $130.6 million from $135.5 million due primarily to lost customersoffset by increases in business from both new and existing customers in 2006. Hub Distribution’s revenue has been reclassified to discontinued operations dueto its sale.Gross MarginGross margin increased 25.0% to $218.4 million in 2006 from $174.7 million in 2005. Gross margin percentage increased from 11.8% in 2005 to 13.6%in 2006 due to various margin enhancement efforts, growth in truck brokerage and our drayage operations, including the addition of Comtrak.Salaries and BenefitsSalaries and benefits increased to $95.2 million in 2006 from $83.4 million in 2005. The increase is related to Comtrak and an increase in salaries,employee benefits and incentive based compensation. As a percentage of revenue, salaries and benefits increased to 5.9% in 2006 from 5.6% in 2005.Headcount as of December 31, 2006 and 2005 was 1,089 and 944, respectively, which excludes drivers, as driver costs are included in transportation costs.The increase in headcount can be attributed to the addition of the 167 employees resulting from the acquisition of Comtrak. General and Administrative General and administrative expenses increased to $39.9 million in 2006 from $34.5 million in 2005 partially due to the acquisition of Comtrak. Theincrease related to Comtrak was partially offset by a decrease in telephone expense, bad debt expense, office expense and equipment lease expense. As apercentage of revenue, general and administrative expenses increased to 2.5% in 2006 from 2.3% in 2005.Depreciation and AmortizationDepreciation and amortization decreased 31.5% to $6.1 million from $8.9 million in 2005. This expense as a percentage of revenue decreased to 0.4%from 0.7%. The decrease in depreciation and amortization is due primarily to lower software depreciation due to certain assets being fully depreciated.Other Income (Expense)Interest expense remained consistent at approximately $0.1 million in 2006 and 2005. Interest income increased to $2.3 million in 2006 from $1.0 millionin 2005. The increase in interest income is due to a higher average investment balance and a higher average interest rate in 2006. Provision for Income TaxesThe provision for income taxes increased to $31.8 million in 2006 compared to $19.7 million in 2005. We provided for income taxes using an effectiverate of 40.0% in 2006 compared to 40.3% in 2005. The decrease in the effective rate in 2006 resulted primarily from adjustments to the valuation allowance.20Income from Continuing Operations Income from continuing operations increased to $47.7 million in 2006 compared to $29.2 million in 2005 due primarily to higher gross margin, lowerdepreciation and amortization expense and higher interest income partially offset by an increase in salaries and general and administrative expenses.Income from Discontinued OperationsIncome from discontinued operations includes income from the operations of HGDS. This income was $1.0 million in 2006 and $3.8 million in 2005.Certain assets of HGDS were disposed of on May 1, 2006 at a pre-tax loss of $0.1 million.Earnings Per Common ShareBasic earnings per share from continuing operations was $1.19 in 2006 and $0.73 in 2005. Basic earnings per share from discontinued operations was$0.03 in 2006 and $0.10 in 2005. Basic earnings per share was $1.22 in 2006 and $0.83 in 2005.Diluted earnings per share from continuing operations increased to $1.17 in 2006 from $0.71 in 2005. Diluted earnings per share from discontinuedoperations was $0.02 in 2006 and $0.09 in 2005. Diluted earnings per share increased to $1.19 in 2006 from $0.80 in 2005.All shares, per-share amounts and options have been retroactively restated to give effect to the two-for-one stock split in June 2006.Year Ended December 31, 2005, Compared to Year Ended December 31, 2004The following table summarizes our revenue by service line (in thousands): Twelve Months Ended December 31, % 2005 2004 Change Revenue Intermodal $1,079,798 $1,014,533 6.4%Brokerage 266,545 225,466 18.2%Logistics 135,535 140,723 (3.7)%Total revenue from continuing operations $1,481,878 $1,380,722 7.3% 21The following table includes certain items in the consolidated statements of income as a percentage of revenue: Twelve Months Ended December 31, 2005 2004 Revenue 100.0 % 100.0 % Transportation costs 88.2 87.9 Gross margin 11.8 12.1 Costs and expenses: Salaries and benefits 5.6 6.1 General and administration 2.3 2.5 Depreciation and amortization 0.7 0.7 Total costs and expenses 8.6 9.3 Operating income 3.2 2.8 Other income (expense): Interest expense - (0.3) Interest income 0.1 - Debt extinguishment expense - (0.5) Total other income (expense) 0.1 (0.8) Income from continuing operations beforeprovision for income taxes 3.3 2.0 Provision for income taxes 1.3 0.8 Income from continuing operations 2.0% 1.2 % RevenueRevenue increased 7.3% to $1,481.9 million in 2005 from $1,380.7 million in 2004. Intermodal revenue increased 6.4% to $1,079.8 million from$1,014.5 million due primarily to price increases, mix and fuel surcharges, offset by a 5.1% decrease in volume. Truck brokerage revenue increased 18.2%to $266.5 million from $225.5 million due primarily to price increases, mix and fuel surcharges and a 5.4% increase in volume. Logistics revenue decreased3.7% to $135.5 million from $140.7 million due primarily to the loss of two customers in 2005. Hub Distribution’s revenue has been reclassified todiscontinued operations due to the sale in May 2006. 22Gross MarginGross margin increased 4.6% to $174.7 million in 2005 from $167.1 million in 2004. Gross margin percentage decreased from 12.1% in 2004 to11.8% in 2005 due partially to additional costs for repositioning equipment in 2005, accessorial cost increases, ramp up costs for certain new customers andstart up costs associated with our new containers. We made a decision to reposition equipment to certain cities to expand the number of rail-controlledcontainers within our network in order to meet customer demand during the 2005 peak season. In addition, in 2005 some of our rail carriers changedaccessorial pricing and there is often a lag time before we can pass along the increase to our customers. Further, in 2005 we incurred initial ramp up costs forseveral large customers and we had extra drayage costs associated with moving our new containers from the pier. Salaries and BenefitsSalaries and benefits decreased slightly to $83.4 million in 2005 from $83.8 million in 2004. As a percentage of revenue, salaries and benefits decreasedto 5.6% in 2005 from 6.1% in 2004 due primarily to an increase in revenue. Headcount as of December 31, 2005 and 2004 was 944 and 951, respectively,which excludes drivers, as driver costs are included in transportation costs. General and Administrative General and administrative expenses decreased 1.3% to $34.5 million in 2005 from $35.0 million in 2004. As a percentage of revenue, these expensesdecreased to 2.3% in 2005 from 2.5% in 2004. General and administrative expense decreased primarily due to reductions in outside services and equipmentlease expense. Equipment lease expense decreased by approximately $1.3 million due primarily to equipment lease buy-outs. Outside services decreased by$0.6 million due primarily to lower professional service costs. Depreciation and AmortizationDepreciation and amortization decreased 12.4% to $8.9 million from $10.2 million in 2004. This expense as a percentage of revenue remainedconsistent at 0.7%. The decrease in depreciation and amortization is due primarily to lower computer equipment and software depreciation.Other Income (Expense)Interest expense decreased 96.6% to $0.1 million from $3.6 million in 2004. The decrease in interest expense is due primarily to carrying a loweraverage debt balance this year as compared to the prior year and the extinguishment of the private placement debt during the third quarter of 2004. The debtextinguishment expenses of $7.3 million in 2004 includes a $6.8 million pre-payment penalty associated with paying off the $50 million of 9.14% debt andthe $0.5 million write off of the related deferred financing costs. Provision for Income TaxesThe provision for income taxes increased to $19.7 million in 2005 compared to $11.7 million in 2004. We provided for income taxes using an effectiverate of 40.3% in 2005 compared to 42.4% in 2004. The decrease in the effective rate in 2005 resulted primarily from a lower increase in reserves for 2005 and alower state tax rate due to business restructuring.Income from Continuing Operations Net income from continuing operations increased to $29.2 million in 2005 from $15.9 million in 2004 due primarily to an increase in our grossmargin, lower general and administrative expenses and lower interest expense.23Income from Discontinued OperationsIncome from discontinued operations represents income from the operations of HGDS. This income was $3.8 million in 2005 and $1.4 million in 2004. Earnings Per Common ShareBasic earnings per share from continuing operations were $0.73 in 2005 and $0.45 in 2004. Basic earnings per share from discontinued operations were$0.10 in 2005 and $0.04 in 2004. Basic earnings per share were $0.83 in 2005 and $0.49 in 2004.Diluted earnings per share from continuing operations increased to $0.71 in 2005 from $0.42 in 2004. Diluted earnings per share from discontinuedoperations were $0.09 in 2005 and $0.04 in 2004. Diluted earnings per share increased to $0.80 in 2005 from $0.46 in 2004. The weighted average dilutedshares outstanding increased 10.2% from 37,556,000 at December 31, 2004 to 41,392,000 at December 31, 2005 due primarily to the 7,200,000 shares fromour stock offering being outstanding the whole year in 2005 and the issuance of restricted stock.All shares, per-share amounts and options have been retroactively restated to give effect to the two-for-one stock split in June 2006. LIQUIDITY AND CAPITAL RESOURCESIn 2006, we have funded our operations, capital expenditures, acquisitions and stock buy backs through cash flows from operations.Cash provided by operating activities for the year ended December 31, 2006 was approximately $76.6 million, which resulted primarily from netincome from continuing operations of $47.7 million, non-cash charges of $12.1 million and an increase in the change in operating assets of $16.8 million.Net cash used in investing activities for the year ended December 31, 2006 was $35.7 million and related primarily to our acquisition of Comtrak for$39.9 million partially offset by the $12.2 million of proceeds from the disposition of our discontinued operations. We expect capital expenditures to bebetween $10.0 and $11.0 million in 2007. The net cash used in financing activities for the year ended December 31, 2006 was $35.3 million. We generated $2.0 million of cash from stockoptions exercised and used $49.6 million of cash to purchase treasury stock. We also reported $12.3 million of excess tax benefits from share-basedcompensation as a financing cash in-flow. These tax benefits were previously reported as operating cash flows prior to the adoption of SFAS 123 (R).Cash provided by discontinued operations was $1.8 million for the year ended December 31, 2006.We invest our cash overnight in commercial paper. These investments are included in cash and cash equivalents on our balance sheet due to their shortterm maturity and are carried at market value.On March 23, 2005 we entered into a revolving credit agreement that provides for unsecured borrowings of up to $40.0 million. The interest rate rangesfrom LIBOR plus 0.75% to 1.25% or Prime plus 0.5%. The revolving line of credit expires on March 23, 2010. The financial covenants require a minimumnet worth of $175.0 million and a cash flow leverage ratio of not more than 2.0 to 1.0. The commitment fees charged on the unused line of credit are between0.15% and 0.25%. On February 21, 2006, we amended the revolving credit agreement to provide for unsecured borrowing up to $50.0 million. No otherterms of the agreement were amended. Our unused and available borrowings under our bank revolving line of credit at December 31, 2006 and December 31,2005 were $48.2 million and $39.0 million, respectively. We were in compliance with our debt covenants at December 31, 2006. 24We have standby letters of credit that expire from 2007 to 2012. As of December 31, 2006, our letters of credit were $1.8 million.In 2006, we added 2,000 new 53’ containers to our fleet. We financed these 2,000 containers with operating leases. These and other leasingarrangements are included in Note 7 to the consolidated financial statements. We have a related party payable of $5.0 million as of December 31, 2006 that will be paid during the first quarter of 2007. This amount relates to the2006 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 have spent approximately $49.2 million on stock repurchases in 2006. We have authorization to spend an additional $75.0 million to purchasecommon stock through June of 2008. CONTRACTUAL OBLIGATIONSOur contractual cash obligations as of December 31, 2006 are minimum rental commitments and the earn out payment to the former owner of Comtrak.We have a ten year lease agreement for a building and property (Comtrak’s Memphis facility) with a related party, the President of Comtrak. Rent paid underthis agreement totaled $0.6 million for the year ended December 31, 2006. The annual lease payments escalate by less than 1% per year. Minimum annualrental commitments, at December 31, 2006, under non-cancelable operating leases, principally for real estate, containers and equipment and the earn out reltedto Comtrak are payable as follows (in thousands):2007 $28,066 2008 16,173 2009 12,797 2010 10,699 2011 10,020 2012 and thereafter 12,728 Deferred CompensationUnder our Nonqualified Deferred Compensation Plan (the “Plan”), participants can elect to defer certain compensation. Payments under the Plan aredue as follows (in thousands):2007 $571 2008 2,160 2009 955 2010 1,386 2011 519 2012 and thereafter 2,671 CRITICAL ACCOUNTING POLICIESThe preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates andassumptions. 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 notbelieve there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application ofthese accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ fromthese estimates. The following is a brief discussion of the more significant accounting policies and estimates.25Allowance for Uncollectible Trade Accounts ReceivableIn the normal course of business, we extend credit to customers after a review of each customer’s credit history. An allowance for uncollectible tradeaccounts has been established through an analysis of the accounts receivable aging, an assessment of collectibility based on historical trends and an evaluationof the current economic conditions. To be more specific, we reserve a portion of every account balance that has aged over one year, a portion of certaincustomers in bankruptcy and account balances specifically identified as uncollectible. The allowance is reported on the balance sheet in net accountsreceivable. Actual collections of accounts receivable could differ from management’s estimates due to changes in future economic, industry or customerfinancial conditions. Recoveries of receivables previously charged off are recorded when received.Revenue RecognitionRevenue is recognized at the time 1) persuasive evidence of an arrangement exists, 2) services have been rendered, 3) the sales price is fixed anddeterminable and 4) collectibility is reasonably assured. In accordance with EITF 91-9, revenue and related transportation costs are recognized based onrelative transit time. Further, we report revenue on a gross basis in accordance with the criteria in EITF 99-19, “Reporting Revenue Gross as a Principalversus Net as an Agent.” We are the primary obligor and are responsible for providing the service desired by the customer. The customer views us asresponsible for fulfillment including the acceptability of the service. Service requirements may include, for example, on-time delivery, handling freight lossand damage claims, setting up appointments for pick up and delivery and tracing shipments in transit. We have discretion in setting sales prices and as aresult, our earnings vary. In addition, we have the discretion to select our vendors from multiple suppliers for the services ordered by our customers. Finally,we have credit risk for our receivables. These three factors, discretion in setting prices, discretion in selecting vendors and credit risk, further supportreporting revenue on the gross basis.Deferred Income TaxesDeferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates ineffect for the years in which the differences are expected to reverse. We believe that it is more likely than not that our deferred tax assets will be realized with theexception of $248,000 related to state tax net operating losses and other state credits for which valuation allowances have been established. In the event theprobability of realizing the remaining deferred tax assets do not meet the more likely than not threshold in the future, a valuation allowance would beestablished for the deferred tax assets deemed unrecoverable.Valuation of Goodwill and Other Indefinite-Lived IntangiblesWe review goodwill and other indefinite-lived intangibles for impairment on an annual basis or whenever events or changes in circumstances indicatethe carrying amount of goodwill or other indefinite-lived intangibles may not be recoverable. We utilize a third-party independent valuation firm to assist inperforming the necessary valuations to be used in the impairment testing. These valuations are based on market capitalization, discounted cash flow analysisor a combination of both methodologies. The assumptions used in the valuations include expectations regarding future operating performance, discount rates,control premiums and other factors which are subjective in nature. Actual cash flows from operations could differ from management’s estimates due tochanges in business conditions, operating performance and economic conditions. Should estimates differ materially from actual results, we may be required torecord impairment charges in the future.EquipmentWe operate tractors and utilize containers in connection with our business. This equipment may be purchased or acquired under capital or operatinglease agreements. In addition, we rent equipment from third parties and various railroads under short term rental arrangements. Equipment which is purchasedis depreciated on the straight line method over the estimated useful life. We had no equipment under capital lease arrangements at December 31, 2006. Ourequipment leases have five to seven year terms and in some cases contain renewal options. 26Stock based Compensation Effective January 1, 2006 we adopted the fair value recognition provisions of FASB Statement No. 123 (R) “Share Based Payment” (SFAS No. 123(R)), using the modified prospective transition method. Prior to January 1, 2006, we accounted for our share-based compensation plans under the recognitionand measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations as permitted by Statement ofFinancial Accounting Standard (SFAS) No. 123 “Accounting for Stock BasedCompensation.” We have not granted any stock options since 2003. Instead, we have issued restricted stock that vests over three to five years. In addition,during 2006, the Board of Directors granted performance units which entitle the recipients to receive restricted stock contingent upon the achievement of anoperating income earnings target. As of December 31, 2006, there was $4.9 million of unrecognized compensation cost related to non-vested shared basedcompensation that is expected be recognized over a weighted average period of 1.52 years. In addition, we have performance units that were issued in May of2006. The unrecognized compensation cost mentioned above does not include any potential unrecognized compensation expense associated with theperformance units.New PronouncementIn July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (“FIN48”), Accounting for Uncertainty in IncomeTaxes, which is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for income taxes by prescribing theminimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopesout income taxes from Financial Accounting Standards Board Statement No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginningafter December 15, 2006. We will implement this interpretation effective January 1, 2007. The Company has completed its initial evaluation of the impact ofthe January 1, 2007 adoption of FIN 48 and determined that such adoption is not expected to have a material impact on the Company’s financial position.OUTLOOK, RISKS AND UNCERTAINTIESBusiness Combinations/DivestituresWe believe that future acquisitions that we make could significantly impact financial results. Financial results most likely to be impacted include, butare not limited to, revenue, gross margin, salaries and benefits, selling general and administrative expenses, depreciation and amortization, interest expense, netincome and our debt level.RevenueWe believe that the performance of the railroads and a severe or prolonged slow-down of the economy are the most significant factors that couldnegatively influence our revenue growth rate. Should there be further consolidation in the rail industry causing a service disruption, we believe our intermodalbusiness would likely be negatively impacted. Should there be a significant service disruption, we expect that there may be some customers who would switchfrom using our intermodal service to other transportation services. We expect that these customers may choose to continue to utilize other services even whenintermodal service levels are restored. Other factors that could negatively influence our growth rate include, but are not limited to, the elimination of fuelsurcharges, the entry of new web-based competitors, customer retention, inadequate drayage service and inadequate equipment supply.Gross MarginWe expect fluctuations in gross margin as a percentage of revenue from quarter-to-quarter caused by various factors including, but not limited to,changes in the core transportation business mix, trailer and container capacity, vendor pricing, fuel costs, intermodal industry growth, intermodal industryservice levels, accessorials, competition and accounting estimates.27Salaries and BenefitsWe estimate that salaries and benefits as a percentage of revenue could fluctuate from quarter-to-quarter as there are timing differences between volumeincreases and changes in levels of staffing. Factors that could affect the percentage from staying in the recent historical range include, but are not limited to,revenue growth rates significantly higher or lower than forecasted, a management decision to invest in additional personnel to stimulate new or existingbusinesses, changes in customer requirements, changes in our operating structure and changes in railroad intermodal service levels which could result in alower or higher cost of labor per move. General and AdministrativeWe believe there are several factors that could cause general and administrative expenses to fluctuate as a percentage of revenue. As customerexpectations and the competitive environment require the development of web-based business interfaces and the restructuring of our information systems andrelated platforms, we believe there could be significant expenses incurred, some of which would not be capitalized. Other factors that could cause selling,general and administrative expense to fluctuate include, but are not limited to, changes in insurance premiums and outside services expense.Depreciation and AmortizationWe estimate that depreciation and amortization of property and equipment will decrease slightly in 2007.Impairment of Property and Equipment, Goodwill and Indefinite-Lived IntangiblesOn an ongoing basis, we assess the realizability of our assets. If, at any point during the year, management determines that an impairment exists, thecarrying amount of the asset is reduced by the estimated impairment with a corresponding charge to earnings. If it is determined that an impairment exists,management estimates that the write down of specific assets could have a material adverse impact on earnings.Other Income (Expense)Factors that could cause a change in interest income include, but are not limited to, funding working capital needs, funding capital expenditures,funding an acquisition and buying back stock.Item 7A. 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 andfinancial condition. We seek to minimize the risk from interest rate volatility through our regular operating and financing activities and when deemedappropriate, through the use of derivative financial instruments. No derivative financial instruments are outstanding at December 31, 2006. We do not usefinancial instruments for trading purposes.At December 31, 2006, the Company had no outstanding obligations under its bank line of credit arrangement. 28Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO FINANCIAL STATEMENTSAND FINANCIAL STATEMENT SCHEDULEReport of Independent Registered Public Accounting Firm30 Consolidated Balance Sheets - December 31, 2006 and December 31, 200531 Consolidated Statements of Income - Years ended December 31, 2006, December 31, 2005 and December 31,200432 Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2006,December 31, 2005 and December 31, 200433 Consolidated Statements of Cash Flows - Years ended December 31, 2006,December 31, 2005 and December 31, 200434 Notes to Consolidated Financial Statements35 Schedule II - Valuation and Qualifying AccountsS-1 29REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders of Hub Group, Inc.:We have audited the accompanying consolidated balance sheets of Hub Group, Inc. as of December 31, 2006 and 2005, and the related consolidatedstatements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included thefinancial statement schedule listed in the index at Item 15(a) for the years ended December 31, 2006, 2005 and 2004. These financial statements and scheduleare the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on ouraudits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hub Group,Inc. at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2006 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule referred toabove for the years ended December 31, 2006, 2005, and 2004 when considered in relation to the basic consolidated financial statements taken as a whole,presents fairly in all material respects the information set forth therein.As described in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company changed the method of accounting forshare-based payments to conform with FASB Statement No. 123 (R), Share-Based Payment.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of theCompany’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issuedby the Committee of Sponsoring Organizations of Treadway Commission and our report dated February 22, 2007 expressed an unqualified opinion thereon.ERNST & YOUNG LLPChicago, IllinoisFebruary 22, 2007 30 HUB GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) December 31, 2006 2005 ASSETS CURRENT ASSETS: Cash and cash equivalents $43,491 $36,133 Accounts receivable Trade, net 158,284 147,004 Other 8,369 10,603 Prepaid taxes 3,202 6,040 Deferred taxes 3,433 - Prepaid expenses and other current assets 4,450 3,860 Assets of discontinued operations - 17,855 TOTAL CURRENT ASSETS 221,229 221,495 Restricted investments 3,017 1,387 Property and equipment, net 26,974 12,767 Other intangibles, net 7,502 - Goodwill, net 225,448 208,150 Other assets 378 619 TOTAL ASSETS $484,548 $444,418 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable Trade $117,676 $114,094 Other 6,839 3,668 Accrued expenses Payroll 15,901 14,826 Other 29,010 18,917 Related party payable 5,000 - Deferred taxes - 960 Liabilities of discontinued operations - 5,341 TOTAL CURRENT LIABILITIES 174,426 157,806 Deferred compensation 7,691 6,083 Deferred taxes 43,587 38,454 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares issued or outstanding in 2006 and 2005 - - Common stock Class A: $.01 par value; 47,337,700 shares authorized; 41,224,792 shares issued and 38,943,122 outstanding in2006; 41,224,792 shares issued and 39,962,484 outstanding in 2005 412 412 Class B: $.01 par value; 662,300 shares authorized; 662,296 shares issued and outstanding in 2006 and 2005 7 7 Additional paid-in capital 179,203 183,524 Purchase price in excess of predecessor basis, net of tax benefit of $10,306 (15,458) (15,458) Retained earnings 146,243 97,557 Unearned compensation - (6,259) Treasury stock; at cost, 2,281,670 shares in 2006 and 1,262,308 shares in 2005 (51,563) (17,708) TOTAL STOCKHOLDERS' EQUITY 258,844 242,075 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $484,548 $444,418 The accompanying notes to consolidated financial statements are an integral part of these statements.31HUB GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) Years Ended 2006 2005 2004 Revenue $1,609,529 $1,481,878 $1,380,722 Transportation costs 1,391,111 1,307,136 1,213,660 Gross margin 218,418 174,742 167,062 Costs and expenses: Salaries and benefits 95,152 83,392 83,801 General and administrative 39,929 34,541 34,993 Depreciation and amortization 6,101 8,905 10,164 Total costs and expenses 141,182 126,838 128,958 Operating income 77,236 47,904 38,104 Other income (expense): Interest expense (115) (124) (3,598)Interest income 2,311 971 259 Debt extinguishment expenses - - (7,296)Other, net 76 120 82 Total other income (expense) 2,272 967 (10,553) Income from continuing operations before provision for income taxes 79,508 48,871 27,551 Provision for income taxes 31,803 19,695 11,681 Income from continuing operations 47,705 29,176 15,870 Discontinued operations: Income from discontinued operations of HGDS (including loss on disposal of $70 in 2006) 1,634 6,315 2,447 Provision for income taxes 653 2,545 1,038 Income from discontinued operations 981 3,770 1,409 Net income $48,686 $32,946 $17,279 Basic earnings per common share Income from continuing operations $1.19 $0.73 $0.45 Income from discontinued operations $0.03 $0.10 $0.04 Net income $1.22 $0.83 $0.49 Diluted earnings per common share Income from continuing operations $1.17 $0.71 $0.42 Income from discontinued operations $0.02 $0.09 $0.04 Net income $1.19 $0.80 $0.46 Basic weighted average number of shares outstanding 39,958 39,860 35,200 Diluted weighted average number of shares outstanding 40,823 41,392 37,556 The accompanying notes to consolidated financial statements are an integral part of these statements. 32 HUB GROUP, INC CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except shares) Years ended December 31, 2006 2005 2004 Class A & B Common Stock Shares Outstanding Beginning of year 40,624,780 41,191,812 32,211,184 Exercise of non-qualified stock options - 692,516 1,491,532 Issuance of restricted stock - 2,760 208,296 Purchase of treasury shares (2,126,255) (2,378,712) (512,960)Stock offering - - 7,200,000 Treasury shares issued under restricted stock and stock options exercised 1,106,893 1,116,404 593,760 Ending balance 39,605,418 40,624,780 41,191,812 Class A & B Common Stock Amount Beginning of year $419 $412 $324 Issuance of restricted stock and exercise of stock options - 7 16 Stock offering - - 72 Ending balance 419 419 412 Additional Paid-in Capital Beginning of year 183,524 182,056 115,577 Equity reclassification impact of adopting SFAS No. 123 (R) (6,259) - - Exercise of non-qualified stock options (12,516) (7,663) 3,045 Share-based compensation expense 3,405 - - Tax benefit of share-based compensation plans 12,337 8,523 5,319 Issuance of restricted stock awards, net of forfeitures (1,288) 608 2,316 Stock offering - - 55,799 Ending balance 179,203 183,524 182,056 Purchase Price in Excess of Predecessor Basis, Net of Tax Beginning of year (15,458) (15,458) (15,458)Ending balance (15,458) (15,458) (15,458) Retained Earnings Beginning of year 97,557 64,611 47,332 Net income 48,686 32,946 17,279 Ending balance 146,243 97,557 64,611 Unearned Compensation Beginning of year (6,259) (4,685) (4,448)Issuance of restricted stock awards, net of forfeitures - (3,751) (2,385)Compensation expense related to restricted stock awards - 2,177 2,148 Equity reclassification impact of adopting SFAS No. 123 (R) 6,259 - - Ending balance - (6,259) (4,685) Treasury Stock Beginning of year (17,708) - (292)Purchase of treasury shares (49,622) (33,245) (4,110)Issuance of restricted stock and exercise of stock options 15,767 15,537 4,402 Ending balance (51,563) (17,708) - Total stockholders’ equity $258,844 $242,075 $226,936 The accompanying notes to consolidated financial statements are an integral part of these statement.33HUB GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2006 2005 2004 Cash flows from operating activities: Income from continuing operations $47,705 $29,176 $15,870 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 8,170 9,319 10,454 Deferred taxes 690 18,382 11,714 Compensation expense related to share-based compensation plans 3,405 2,148 2,113 Gain on sale of assets (131) (271) (353) Changes in operating assets and liabilities excluding effects of purchase transaction: Restricted investments (1,630) (1,387) - Accounts receivable, net 393 (18,931) (9,797) Prepaid taxes 2,234 (6,151) - Prepaid expenses and other current assets (297) 722 (455) Other assets 246 200 124 Accounts payable 4,754 3,039 (2,546) Accrued expenses 9,440 8,497 8,048 Deferred compensation 1,608 (1,534) 1,381 Net cash provided by operating activities 76,587 43,209 36,553 Cash flows from investing activities: Proceeds from sale of equipment 394 579 294 Purchases of property and equipment (8,372) (4,078) (3,377) Cash used in acquisition of Comtrak, Inc. (39,942) - - Proceeds from the disposal of discontinued operations 12,203 - - Net cash used in investing activities (35,717) (3,499) (3,083)Cash flows from financing activities: Proceeds from stock offering - - 55,871 Proceeds from stock options exercised 1,963 4,738 7,394 Purchase of treasury stock (49,622) (33,245) (4,110) Excess tax benefits from share-based compensation 12,337 - - Net payments on revolver - - (6,000) Payments on long-term debt - - (69,034) Net cash used in financing activities (35,322) (28,507) (15,879) Cash flows from operating activities of discontinued operations 1,848 8,416 (702)Cash flows used in investing activities of discontinued operations (38) (292) (83) Net cash provided by (used in) discontinued operations 1,810 8,124 (785) Net increase in cash and cash equivalents 7,358 19,327 16,806 Cash and cash equivalents beginning of period 36,133 16,806 - Cash and cash equivalents end of period $43,491 $36,133 $16,806 Supplemental disclosures of cash paid for: Interest $114 $124 $2,995 Income taxes $16,801 $6,811 $591 The accompanying notes to consolidated financial statements are an integral part of these statement. 34HUB GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. Description of Business and Summary of Significant Accounting PoliciesBusiness: Hub Group, Inc. (“we,” “us” or “our”) provides intermodal transportation services utilizing primarily third party arrangements with railroads anddrayage companies. We also arrange for transportation of freight by truck and perform logistics and drayage services.Principles of Consolidation: The consolidated financial statements include our accounts and all entities in which we have more than a 50% equity ownershipor otherwise exercise unilateral control. All significant intercompany balances and transactions have been eliminated.Cash and Cash Equivalents: We consider as cash equivalents all highly liquid instruments with an original maturity of three months or less. We invest ourcash overnight in commercial paper of which $37.0 million and $36.0 million was outstanding at December 31, 2006 and 2005, respectively.Accounts Receivable and Allowance for Uncollectible Accounts: In the normal course of business, we extend credit to customers after a review of eachcustomer’s credit history. An allowance for uncollectible trade accounts has been established through an analysis of the accounts receivable aging, anassessment of collectibility based on historical trends and an evaluation of the current economic conditions. To be more specific, we reserve a portion of everyaccount balance that has aged over one year, a portion of certain customers in bankruptcy and account balances specifically identified as uncollectible. Theallowance is reported on the balance sheet in net accounts receivable. Actual collections of accounts receivable could differ from management’s estimates due tochanges in future economic, industry or customer financial conditions. Our reserve for uncollectible accounts was approximately $6,299,000 and$6,815,000 at December 31, 2006 and 2005, respectively. Recoveries of receivables previously charged off are recorded when received.Property and Equipment: Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line and variousaccelerated methods at rates adequate to depreciate the cost of the applicable assets over their expected useful lives: building and improvements, 1 to 8 years;leasehold improvements, the shorter of useful life or lease term; computer equipment and software, 3 to 5 years; furniture and equipment, 3 to 11 years; andtransportation equipment and automobiles, 3 to 8 years. Direct costs related to internally developed software projects are capitalized and amortized over theirexpected useful life on a straight-line basis not to exceed five years. Interest is capitalized on qualifying assets under development for internal use. Maintenanceand repairs are charged to operations as incurred and major improvements are capitalized. The cost of assets retired or otherwise disposed of and theaccumulated depreciation thereon are removed from the accounts with any gain or loss realized upon sale or disposal charged or credited to operations. Wereview long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the eventthat the undiscounted future cash flows resulting from the use of the asset group is less than the carrying amount, an impairment loss equal to the excess of theassets carrying amount over its fair value is recorded. Goodwill: Goodwill represents the excess of purchase price over the fair market value of net assets acquired in connection with our business combinations.Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“Statement 142”), goodwill and intangible assets thathave indefinite useful lives are not amortized but are subject to annual impairment tests.We review goodwill and other indefinite-lived intangibles for impairment on an annual basis as of November 1, or whenever events or changes incircumstances indicate the carrying amount of goodwill or other intangibles may not be recoverable. We utilize a third-party independent valuation firm toassist in performing the necessary valuations to be used in the impairment testing. These valuations are based on market capitalization, discounted cash flowanalysis or a combination of both methodologies. The assumptions used in the valuations include expectations regarding future operating performance,discount rates, control premiums and other factors which are subjective in nature. Actual cash flows from operations could differ from management’sestimates due to changes in business conditions, operating performance and economic conditions. Should estimates differ materially from actual results, wemay be required to record impairment charges in the future.35Fair Value of Financial Instruments: The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates fair value atDecember 31, 2006 due to their short-term nature. Concentration of Credit Risk: Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents andaccounts receivable. We place our cash and temporary investments with high quality financial institutions. We primarily serve customers located throughoutthe United States with no significant concentration in any one region. No one customer accounted for more than 5% of revenue in 2006, 2005 or 2004. Wereview a customer’s credit history before extending credit. In addition, we routinely assess the financial strength of our customers and, as a consequence,believe that our trade accounts receivable risk is limited.Revenue Recognition: Revenue is recognized at the time 1) persuasive evidence of an arrangement exists, 2) services have been rendered, 3) the sales price isfixed and determinable and 4) collectibility is reasonably assured. In accordance with EITF 91-9, revenue and related transportation costs are recognized basedon relative transit time. Further, we report our revenue on a gross basis in accordance with the criteria in EITF 99-19, “Reporting Revenue Gross as aPrincipal versus Net as an Agent.” We are the primary obligor as we are responsible for providing the service desired by the customer. Our customers view usas responsible for fulfillment including the acceptability of the service. Services requirements may include, for example, on-time delivery, handling freight lossand damage claims, setting up appointments for pick up and delivery and tracing shipments in transit. We have discretion in setting sales prices and as aresult, the amount we earn varies. In addition, we have the discretion to select our vendors from multiple suppliers for the services ordered by our customers.Finally, we have credit risk for our receivables. These three factors, discretion in setting prices, discretion in selecting vendors and credit risk, further supportreporting revenue on a gross basis.Deferred Income Taxes: Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reportingusing tax rates in effect for the years in which the differences are expected to reverse. We believe that it is more likely than not that our deferred tax assets willbe realized with the exception of $248,000 related to state tax net operating losses and other state credits for which a valuation allowance has been established.In the event the probability of realizing the deferred tax assets do not meet the more likely than not threshold in the future, a valuation allowance would beestablished for the deferred tax assets deemed unrecoverable.New Accounting Pronouncement: In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (“FIN48”),Accounting for Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting forincome taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Inaddition, FIN 48 clearly scopes out income taxes from Financial Accounting Standards Board Statement No. 5, Accounting for Contingencies. FIN 48 iseffective for fiscal years beginning after December 15, 2006. We will implement this interpretation effective January 1, 2007. The Company has completed itsinitial evaluation of the impact of the January 1, 2007 adoption of FIN 48 and determined that such adoption is not expected to have a material impact on theCompany’s financial position.Earnings Per Common Share: Basic earnings per common share are based on the average quarterly weighted average number of Class A and Class B sharesof common stock outstanding. Diluted earnings per common share are adjusted for the assumed exercise of dilutive stock options and for restricted stock. Incomputing the per share effect of the assumed exercise of stock options, funds which would have been received from the exercise of options, including taxbenefits assumed to be realized, are considered to have been used to purchase shares at current market prices, and the resulting net additional shares areincluded in the calculation of weighted average shares outstanding. The dilutive effect of restricted stock and stock options is computed using the treasurymethod.Stock based Compensation: Prior to January 1, 2006, we accounted for our share-based compensation plans under the recognition and measurementprovisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as permitted by Statement of FinancialAccounting Standard (SFAS) No. 123 “Accounting for Stock-Based Compensation.” No stock-option based employee compensation cost was recognized inthe income statement prior to 2006, as all stock options granted had an exercise price equal to the market value of the underlying common stock on the date ofgrant. Effective January 1, 2006, we adopted the fair value recognition provisions of FASB Statement No. 123 (R)36“Share-Based Payment” (SFAS No. 123 (R)), using the modified-prospective transition method. Under that transition method, compensation cost recognizedin 2006 includes: (a) compensation costs for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fairvalue estimated in accordance with the original provisions of SFAS No. 123 and (b) compensation cost for all share-based payments granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123 (R). Results for prior periods have not beenrestated. We have not granted any stock options since 2003.We have elected to calculate our initial pool of excess benefits under FASB Staff Position 123 (R)-3 (“FSP”). Prior to the adoption of SFAS No. 123 (R), wepresented all benefits of tax deductions resulting from the exercise of share-based compensation as operating cash flows in the Statement of Cash Flows.Beginning on January 1, 2006, we changed our cash flow presentation in accordance with the FSP which requires benefits of tax deductions in excess of thecompensation cost recognized (excess tax benefits) to be classified as a financing cash in-flow and an operating cash out-flow. The results for the year endedDecember 31, 2006 include $12.3 million of excess tax benefits as a financing cash in-flow and an operating cash out-flow. The following table illustrates the effect on the net income and net income per share if we had applied the fair value recognition provisions of SFAS No.123, to share-based employee compensation during the years ended December 31, (in thousands, except per share data): Years Ended December 31, 2005 2004 Income from continuing operations, as reported $29,176 $15,870 Income from discontinued operations, as reported 3,770 1,409 Total net income, as reported $32,946 $17,279 Add: Total share-based compensation included in net income, net of related tax effects 1,300 1,237 Deduct: Total share-based employee compensation expense determined under fair value based method for allawards, net of related tax effects (1,600) (1,820) Income from continuing operations, pro forma $28,876 $15,287 Income from discontinued operations, pro forma 3,770 1,409 Total net income, pro forma $32,646 $16,696 Earnings per share: Basic from continuing operations, as reported $0.73 $0.45 Basic from discontinued operations, as reported $0.10 $0.04 Basic — pro forma from continuing operations $0.72 $0.43 Basic — pro forma from discontinued operations $0.10 $0.04 Diluted from continuing operations, as reported $0.71 $0.42 Diluted from discontinued operations, as reported $0.09 $0.04 Diluted — pro forma from continuing operations $0.70 $0.41 Diluted — pro forma from discontinued operations $0.09 $0.04 37Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenue and expense during the reporting period. Significant estimates include the allowance for doubtful accounts and cost ofpurchased transportation. Actual results could differ from those estimates. Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2. Capital StructureWe have authorized common stock comprised of Class A Common Stock and Class B Common Stock. The rights of holders of Class A Common Stockand Class B Common Stock are identical, except each share of Class B Common Stock entitles its holder to approximately 80 votes, while each share ofClass A Common Stock entitles its holder to one vote. We have authorized 2,000,000 shares of preferred stock.NOTE 3. Earnings Per ShareThe following is a reconciliation of our earnings per share (in thousands, except for per share data): Year Ended Year Ended December 31, 2006 December 31, 2005 Income Shares Per ShareAmount Income Shares Per ShareAmount Basic EPS Income from continuing operations $47,705 39,958 $1.19 $29,176 39,860 $0.73 Income from discontinued operations 981 39,958 0.03 3,770 39,860 0.10 Net Income $48,686 39,958 $1.22 $32,946 39,860 $0.83 Effect of Dilutive Securities Stock options and restricted stock 865 1,532 Diluted EPS Income from continuing operations $47,705 40,823 $1.17 $29,176 41,392 $0.71 Income from discontinued operations 981 40,823 0.02 3,770 41,392 0.09 Net Income $48,686 40,823 $1.19 $32,946 41,392 $0.80 Year Ended December 31, 2004 Income Shares Per ShareAmount Basic EPS Income from continuing operations $15,870 35,200 $0.45 Income from discontinued operations 1,409 35,200 0.04 Net Income $17,279 35,200 $0.49 Effect of Dilutive Securities Stock options and restricted stock 2,356 Diluted EPS Income from continuing operations $15,870 37,556 $0.42 Income from discontinued operations 1,409 37,556 0.04 Net Income $17,279 37,556 $0.46 38NOTE 4. Property and EquipmentProperty and equipment consist of the following (in thousands): Years Ended December 31, 2006 2005 Building and improvements $54 $- Leasehold improvements 1,037 824 Computer equipment and software 47,156 46,160 Furniture and equipment 7,614 6,593 Transportation equipment 20,512 2,181 76,373 55,758 Less: Accumulated depreciation and amortization (49,399) (42,991)Property and Equipment, net $26,974 $12,767 Depreciation expense was $7,779,000, $9,320,000 and $10,454,000, for 2006, 2005 and 2004, respectively. NOTE 5. Income TaxesThe following is a reconciliation of our effective tax rate to the federal statutory tax rate: Years Ended December 31, 2006 2005 2004U.S. federal statutory rate35.0% 35.0% 35.0%State taxes, net of federal benefit3.5 3.3 4.1Nondeductible expenses1.5 1.1 1.2State tax impact of business restructuring- - (3.4)Provision for valuation allowance(0.3) 0.4 0.9Other0.3 0.5 4.6Net effective rate40.0% 40.3% 42.4%We and our subsidiaries file both unitary and separate company state income tax returns. The following is a summary of our provision for income taxes (in thousands): Years Ended December 31, 2006 2005 2004 Current Federal $27,986 $6,419 $3,692 State and local 3,078 983 567 31,064 7,402 4,259 Deferred Federal 332 11,301 6,318 State and local 407 992 1,104 739 12,293 7,422 Total provision $31,803 $19,695 $11,681 39 The following is a summary of our deferred tax assets and liabilities (in thousands): Years Ended December 31, 2006 2005 Reserve for uncollectible accounts receivable $2,295 $2,320 Accrued compensation 4,273 2,883 Other reserves 1,611 1,272 Current deferred tax assets 8,179 6,475 Operating loss carryforwards 790 1,376 Other 37 37 Income tax basis in excess of financial basis of goodwill 4,923 5,294 Less valuation allowance (248) (489) Long-term deferred tax assets 5,502 6,218 Total deferred tax assets $13,681 $12,693 Prepaids (1,258)$(958)Other Receivables (3,488) (6,477) Current deferred tax liabilities (4,746) (7,435) Property and equipment (2,940) (4,750)Goodwill (46,149) (39,922) Long-term deferred tax liabilities (49,089) (44,672) Total deferred tax liabilities $(53,835)$(52,107)Our state net operating losses of $790,000 expire between December 31, 2007 and December 31, 2023. Management believes it is more likely than not thatthe deferred tax assets will be realized with the exception of $248,000 related to state net operating losses and other state credits for which a valuation allowancehas been established. NOTE 6. Long-Term Debt and Financing ArrangementsOn March 23, 2005, we entered into a revolving credit agreement that provides for unsecured borrowings of up to $40.0 million. The interest rate rangesfrom LIBOR plus 0.75% to 1.25% or Prime plus 0.5%. The revolving line of credit expires on March 23, 2010. The financial covenants require a minimumnet worth of $175.0 million and a cash flow leverage ratio of not more than 2.0 to 1.0. The commitment fees charged on the unused line of credit are between0.15% and 0.25%.On February 21, 2006, we amended the revolving credit agreement to provide for unsecured borrowing up to $50.0 million. No other terms of theagreement were amended.Our unused and available borrowings under our bank revolving line of credit at December 31, 2006 and December 31, 2005 were $48.2 million and$39.0 million, respectively. We were in compliance with our debt covenants at December 31, 2006.We have standby letters of credit that expire from 2007 to 2012. As of December 31, 2006, our letters of credit were $1.8 million.40NOTE 7. Rental Expense, User Charges and Lease CommitmentsMinimum annual rental commitments, at December 31, 2006, under non-cancelable operating leases, principally for real estate, containers and equipmentare payable as follows (in thousands): 2007 $23,066 2008 16,173 2009 12,797 2010 10,699 2011 10,020 2012 and thereafter 12,728 $85,483 Total rental expense included in general and administrative expense, which relates primarily to real estate, was approximately $8,149,000, $7,607,000,and $9,074,000 for 2006, 2005 and 2004, respectively. Many of the real estate leases contain renewal options and escalation clauses which require paymentsof additional rent to the extent of increases in the related operating costs. We straight-line rental expense in accordance with Statement of Financial AccountingStandards No. 13, paragraph 15 and Financial Accounting Standards Board Technical Bulletin 85-3.In March 2006, we entered into a ten year lease agreement for a building and property (Comtrak’s Memphis facility) with a related party, the President ofComtrak. Rent paid under this lease agreement included in general and administrative expense totaled $550,000 for the year ended December 31, 2006. Theannual lease payments escalate by less than 1% per year.We incur rental expense for our leased containers and tractors that are included in transportation costs and totaled $8,057,000, $3,036,000 and$1,085,000 for 2006, 2005 and 2004, respectively.We incur charges for use of a fleet of rail owned chassis and dedicated rail owned containers on the Burlington Northern Santa Fe, Norfolk Southern andUnion Pacific which are included in transportation costs. Such charges were $42,759,000, $33,830,000 and $31,063,000 for the years ended December 31,2006, 2005 and 2004, respectively. At December 31, 2006, under these agreements, we have the ability to return the containers and pay for the chassis onlywhen we are using them. As a result, no minimum commitment has been included in the table above. NOTE 8. Stock-Based Compensation Plans In 1996, we adopted a Long-Term Incentive Plan (the “1996 Incentive Plan”). The number of shares of Class A Common Stock reserved for issuanceunder the 1996 Incentive Plan was 1,800,000. In 1997, we adopted a second Long-Term Incentive Plan (the “1997 Incentive Plan”). The number of shares ofClass A Common Stock reserved for issuance under the 1997 Incentive Plan was 600,000. In 1999 we adopted a third Long-Term Incentive Plan (the “1999Incentive Plan”). The number of shares of Class A Common Stock reserved for issuance under the 1999 Incentive Plan was 2,400,000. In 2002, we adopted afourth Long-Term Incentive Plan (the “2002 Incentive Plan”). The number of shares of Class A Common Stock reserved for issuance under the 2002 IncentivePlan was 2,400,000. In 2003, we amended our 2002 Incentive Plan to add an additional 2,000,000 shares of Class A Common Stock that are reserved forissuance. Under the 1996, 1997, 1999 and 2002 Incentive Plans, stock options, stock appreciation rights, restricted stock and performance units may begranted for the purpose of attracting and motivating our key employees and non-employee directors. The options granted to non-employee directors vest ratablyover a three-year period and expire 10 years after the date of grant. The options granted to employees vest over a range of three to five years and expire 10 yearsafter the date of grant. Restricted stock vests over a three to five year period. At December 31, 2006, 920,021 shares are available for future grant. Generally,when stock options are exercised, either new shares are issued or shares are issued out of treasury. 41We recognize the cost of all share-based awards on a straight-line basis over the vesting period of the award including an estimate of forfeitures. Share-based compensation expense for the years ended December 31, 2006, 2005 and 2004 was $3.4 million, $2.1 million and $2.1 million or $2.0 million, $1.3million and $1.2 million, net of taxes, respectively. Share-based compensation is included in salaries and benefits in the accompanying statements of income. Information regarding option plans for 2005 and 2004 is as follows: 2005 2004 Shares Weighted AvgExercise Price Shares Weighted AvgExercise Price Options outstanding, beginning of year 3,400,296 $2.49 5,709,736 $2.87 Options exercised (1,604,068) 2.96 (2,093,972) 3.53 Options granted - - - - Options forfeited (13,000) 3.52 (215,468) 2.43 Options outstanding, end of year 1,783,228 $2.06 3,400,296 $2.49 The following table summarizes the stock option activity for the year ended December 31, 2006:Stock Options Shares WeightedAverage ExercisePrice WeightedAverageRemainingContractual Life AggregateIntrinsicValue Outstanding January 1, 2006 1,783,228 $2.06 Options exercised (1,023,032)$1.92 Options forfeited (5,600)$3.70 Outstanding at December 31, 2006 754,596 $2.24 5.26 $19,099,512 Exercisable at December 31, 2006 612,196 $2.36 5.05 $15,421,594 Intrinsic value for stock options is defined as the difference between the current market value and the grant price. The total intrinsic value of optionsexercised during the years ended December 31, 2006, 2005 and 2004 was $21.3 million, $18.5 million and $11.5 million, respectively. Cash received fromstock options exercised during the years ended December 31, 2006, 2005 and 2004 was $2.0 million, $4.7 million and $7.4 million, respectively. The taxbenefit realized for tax deductions from stock options exercised for the years ended December 31, 2006, 2005 and 2004 was $7.9 million, $6.8 million and$4.0 million, respectively. 42The following table summarizes information about options outstanding at December 31, 2006: Options Outstanding Options Exercisable Weighted Avg Weighted Avg Weighted Avg Range of Number Remaining Exercise Number Exercise Exercise Prices of Shares ContractualLife Price of Shares Price $ 1.22 to $ 1.22 69,600 6.13 $1.22 10,400 $1.22 $ 1.22 to $ 1.30 219,332 5.96 $1.30 219,332 $1.30 $ 1.30 to $ 1.66 136,000 6.00 $1.46 104,000 $1.42 $ 1.66 to $ 2.43 140,464 5.32 $1.97 121,264 $1.97 $ 2.43 to $ 7.04 189,200 3.54 $4.47 157,200 $4.84 $ 1.22 to $ 7.04 754,596 5.26 $2.24 612,196 $2.36 The following table summarizes the non-vested restricted stock activity for the year ended December 31, 2006:Non-vested restricted stock Shares WeightedAverageGrantDate FairValue Non-vested January 1, 2006 743,504 $8.93 Granted 106,819 $21.58 Vested (513,399)$6.33 Forfeited (22,958)$9.17 Non-vested at December 31, 2006 313,966 $17.48 During 2005, we granted 223,460 shares of restricted stock to certain employees and 10,644 shares of restricted stock to outside directors with a weightedaverage grant date fair value of $16.68. The stock vests over a three year period.During 2004, we granted 235,380 shares of restricted stock to certain employees and 13,896 shares of restricted stock to outside directors with a weightedaverage grant date fair value of $10.40. The stock vests over a three year period.The fair value of non-vested restricted stock is equal to the market price of our stock at the date of grant.The total fair value of restricted shares vested during the years ended December 31, 2006, 2005 and 2004 was $13.3 million, $9.2 million and $4.2million, respectively.As of December 31, 2006, there was $4.9 million of unrecognized compensation cost related to non-vested share-based compensation that is expected to berecognized over a weighted average period of 1.52 years. 43In May 2006, the Board of Directors granted certain of our officers 593,542 performance units. The performance units entitle the recipients to receiverestricted shares of our Class A Common Stock contingent upon the achievement of an operating income earnings target. The aggregate operating income for thethree year period ending December 31, 2008 must meet a specified target amount in order for these performance units to be earned and converted to restrictedstock. Should the employees earn restricted stock under this program, the restricted stock will be granted in early 2009 and then vests ratably as of the firstbusiness day of January in each of 2010, 2011 and 2012 provided the officer remains an employee on each of the vesting dates. The maximum amount thatwould be recorded as salary expense over this 68 month period assuming the targets are met is $13.8 million, which is calculated based on the stock price onthe date the performance units were granted which was $23.25. We did not record expense related to the performance units during 2006.During January 2007, we granted 189,824 shares of restricted stock to certain employees and 10,644 shares of restricted stock to outside directors with aweighted average grant date fair value of $27.55. The stock vests over a three year period. NOTE 9. Business SegmentWe have no separately reportable segments. Under the enterprise wide disclosure requirements, we report revenue (in thousands), for Intermodal,Brokerage and Logistics Services as follows: Years Ended December 31, 2006 2005 2004 Transportation Intermodal $1,172,566 $1,079,798 $1,014,533 Brokerage 306,332 266,545 225,466 Logistics 130,631 135,535 140,723 Total revenue from continuing operations $1,609,529 $1,481,878 $1,380,722 NOTE 10. Employee Benefit PlansWe had two profit-sharing plans and trusts in 2006, and one in 2005 and 2004 under section 401(k) of the Internal Revenue Code. At our discretion, wepartially match qualified contributions made by employees to the plan. We expensed approximately $1,659,000, $1,078,000 and $1,054,000 related to theseplans in 2006, 2005 and 2004, respectively.In January 2005, we established the Hub Group, Inc. Nonqualified Deferred Compensation Plan (the “Plan”) to provide added incentive for the retentionof certain key employees. Under the Plan, participants can elect to defer certain compensation. Accounts will grow on a tax-deferred basis to the participant.Restricted investments included in the consolidated balance sheet represent the fair value of the mutual funds and other security investments related to the Planat December 31, 2006 and December 31, 2005. Both realized and unrealized gains and losses, which have not been material, are included in income andexpense and offset the change in the deferred compensation liability. We provide a 50% match on the first 6% of employee compensation deferred under thePlan, with a maximum match equivalent to 3% of base salary. In addition, we have a legacy deferred compensation plan. There are no new contributions beingmade into this legacy plan. We expensed $737,000, $647,000, and $876,000 related to these plans in 2006, 2005 and 2004, respectively. NOTE 11. Legal MattersWe are a party to litigation incident to our business, including claims for personal injury and/or property damage, freight lost or damaged in transit,improperly shipped or improperly billed. Some of the lawsuits to which we are party to are covered by insurance and are being defended by our insurancecarriers. Some of the lawsuits are not covered by insurance and we are defending them ourselves. Management does not believe that the outcome of thislitigation will have a materially adverse effect on our financial position or results of operations. 44NOTE 12. Restructuring ChargesDuring the year ended December 31, 2004, we recorded a severance charge for 99 employees of $661,000. We also recorded a liability of $118,000 for theestimated remaining lease obligations and closing costs related to two facilities.During the year ended December 31, 2005, we recorded a severance charge for 37 employees of $249,000.All severance charges are included in salaries and benefits in the statements of income and all lease obligation and closing costs are included in generaland administrative in the statements of income.The following table displays the activity and balances of the restructuring reserves in the consolidated balance sheets (in thousands): Headcount Consolidation Reduction of Facilities Total Balance at December 31, 2003 $75 $361 $436 Additional restructuring expenses 661 118 779 Cash payments (736) (333) (1,069)Balance at December 31, 2004 - 146 146 Additional restructuring expenses 249 - 249 Cash payments (222) (186) (408) Adjustments for previous estimate - 40 40 Balance at December 31, 2005 27 - 27 Cash payments (27) - (27)Balance at December 31, 2006 $- $- $- NOTE 13. Stock Buy Back PlansDuring the fourth quarter of 2003, the Board of Directors authorized the purchase of up to 1,000,000 shares of our Class A Common Stock from time totime. The timing of the program was determined by financial and market conditions. During the fourth of quarter of 2003, we purchased 80,800 shares for$292,000. We purchased an additional 386,000 shares for $2,763,000 in 2004. During the first quarter of 2005, the Board of Directors terminated the priorbuy back plan and authorized the purchase of up to $30.0 million worth of our Class A Common Stock. During the second quarter of 2005, we completed theauthorized purchase of $30.0 million worth of our Class A Common Stock. We intend to hold the repurchased shares in treasury for future use. On August 22, 2005, our Board of Directors authorized the purchase of up to $45.0 million of our Class A Common Stock. During the third quarter of2006, we completed the authorized purchase of $45.0 million of Class A common stock. We intend to hold the repurchased shares in treasury for future use.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 expiresJune 30, 2008 and we have not yet purchased any shares pursuant to this plan. We may make purchases from time to time as market conditions warrant andany repurchased shares are expected to be held in treasury for future use. 45The following table displays the number of shares purchased and available under the plans in 2006: Total Number ofShares Purchased Average Price PaidPer Share Total Number ofShares Purchasedas Part of PubliclyAnnounced Plan Maximum Value ofShares that MayYet Be PurchasedUnder the Plan (in000’s) January 1 toMarch 31 - $- - $45,000 April 1 toJune 30 - $- - $45,000 July 1 toJuly 31 393,300 $22.23 393,300 $36,258 August 1 toAugust 31 1,563,845 $23.19 1,563,845 $- September 1 toSeptember 30 - $- - $- October 1 toDecember 31 - $- - $75,000 Total 1,957,145 $22.99 1,957,145 $75,000 NOTE 14. Stock SplitThe Board of Directors approved a two-for-one stock split which was paid on May 11, 2005. All shares and per-share amounts have been retroactivelyrestated to give effect to the two-for-one stock split which was effected in the form of a 100% stock dividend. In addition, all options have been retroactivelyrestated for the stock split in accordance with the terms of the incentive plans. Each of our Class A stockholders and Class B stockholders received one ClassA share on each share of Class A Common Stock and each share of Class B Common Stock held by them on the record date in connection with the stocksplit. In accordance with the terms of our Certificate of Incorporation, the number of votes held by each shareholder of Class B Common Stock wasproportionately adjusted in connection with this stock dividend.The Board of Directors approved a two-for-one stock split which was paid on June 6, 2006. All shares and per-share amounts have been retroactivelyrestated to give effect to the two-for-one stock split which was effected in the form of a 100% stock dividend. In addition, all options and performance unitshave been retroactively restated for the stock split in accordance with the terms of the incentive plans. Each of our Class A stockholders and Class Bstockholders received one Class A share on each share of Class A Common Stock and each share of Class B Common Stock held by them on the record datein connection with the stock split. In accordance with the terms of our Certificate of Incorporation, the number of votes held by each shareholder of Class BCommon Stock was adjusted in connection with this stock dividend such that each share of Class B Common Stock now entitles its holder to approximately80 votes. Each share of Class A Common Stock entitles its holder to one vote.NOTE 15. Public Equity OfferingWe completed a public offering of Class A Common Stock priced at $8.25 per share, before underwriting discounts and commissions, on July 2, 2004.We sold 7,200,000 shares and selling stockholders sold 1,540,000 shares. The Company’s net proceeds of $55,871,000 were used to prepay the $50,000,000of 9.14% debt on July 6, 2004 as well as the majority of the make-whole payment of $6,804,000. 46NOTE 16. AcquisitionAt the close of business on February 28, 2006, we acquired certain assets of Comtrak, Inc. (“Comtrak”), a transportation company whose servicesinclude primarily rail and international drayage for the intermodal sector. Comtrak was established in 1983 and is headquartered in Memphis, Tennessee.Comtrak utilizes company drivers and third-party owner operators to serve its customers. Comtrak had net sales of $87.1 million, including sales to Hub of$8.6 million, for the year ended December 31, 2005. The acquisition is consistent with our strategic plan to increase the amount of local trucking (or drayage)we perform. Comtrak performs drayage for the international intermodal market and this transaction provides us with an immediate entry into this growingmarket.We paid the $38.0 million purchase price plus a working capital adjustment of $1.2 million, which was finalized during 2006, in accordance with theterms of the Asset Purchase Agreement, from available cash. There is an earn-out mechanism for 2006 and 2007, which will not exceed $10.0 million in totaland is based on Comtrak’s 2006 and 2007 EBITDA as defined in the Asset Purchase Agreement. The additional contingent consideration of $5 million for2006 has been added to the purchase price and has been applied to goodwill since it will be paid. The amount due the seller, and current President of Comtrak,is included in the related party payable in the accompanying consolidated balance sheet. The additional contingent consideration related to 2007 EBITDA willbe added to the purchase price and will be applied to goodwill when the contingency is resolved. The results of operations of Comtrak are included in ourconsolidated statements of income for the period March 1, 2006 to December 31, 2006.The Comtrak acquisition was accounted for as a purchase business combination in accordance with Statement of Financial Accounting Standards No.141 “Business Combinations.” Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their fair values as ofMarch 1, 2006.Pro forma results including the acquisition at the beginning of the periods presented are not materially different than actual results. The following table summarizes the allocation of the total purchase price to the assets acquired and liabilities assumed as of the date of theacquisition (in thousands): March 1, 2006 Accounts receivable Trade, net $9,012 Other 428 Prepaid expenses and other current assets 294 Property and equipment 13,507 Goodwill 12,298 Other intangible assets 7,894 Total assets acquired $43,433 Accounts payable Trade $832 Other 1,166 Accrued expenses Payroll 944 Other 549 Total liabilities assumed $3,491 Net assets acquired $39,942 Direct acquisition costs 766 Purchase price $39,176 47The property and equipment’s useful lives range from 6 months to 11 years. The above allocation is based on a valuation using management’s estimatesand assumptions and the use of an independent appraisal. We expect the amortization of all goodwill for tax purposes to be deductible over 15 years and forbook purposes it has an indefinite life.The components of the “Other intangible assets” listed in the above table as of the acquisition date are as follows (in thousands): Amount AccumulatedAmortization Balance atDecember 31,2006 Life Relationships with owner operators $647 $(90)$557 6 years Backlog/open orders 20 (20) - 1 month Trade name 2,904 - 2,904 Indefinite Customer relationships 3,823 (212) 3,611 15 years Information technology 500 (70) 430 6 years Total $7,894 $(392)$7,502 The above intangible assets will be amortized using the straight-line method. Amortization expense for the year ended December 31, 2006 was $0.4million. Amortization expense for the next five years is as follows (in thousands):2007 $445 2008 445 2009 445 2010 445 2011 445 NOTE 17. Discontinued OperationsOn May 1, 2006, we entered into a definitive agreement to sell certain assets of HGDS to a third party. As specified in the Asset Purchase Agreement, thebuyer assumed $4.5 million of liabilities and we received a cash payment of $12.2 million. The current and comparative period results of HGDS have beenreported as “discontinued operations” in our Consolidated Financial Statements. These discontinued operations generated diluted earnings per share of $0.02,$0.09 and $0.04 for the years ended December 31, 2006, 2005 and 2004, respectively.The financial results of HGDS included in discontinued operations are as follows (in thousands): Years Ended December 31, 2006 2005 2004 Revenue $19,194 $49,621 $46,084 Income from discontinued operations before income taxes 1,634 6,315 2,447 Income tax provision 653 2,545 1,038 Income from discontinued operations $981 $3,770 $1,409 48The total assets sold to and liabilities assumed by the purchaser of HGDS on May 1, 2006 as well as total assets and liabilities of HGDS included in thecaptions “Assets of discontinued operations” and “Liabilities of discontinued operations” at December 31, 2005 are as follows (in thousands): May 1, 2006 Dec. 31, 2005 Assets Accounts receivable-trade, net $8,845 $9,861 Prepaid expenses and other current assets 149 146 Property and equipment, net 670 758 Goodwill, net 7,026 7,026 Other assets 44 64 Total assets of discontinued operations $16,734 $17,855 Liabilities Accounts payable-trade $3,619 $3,618 Accounts payable-other 64 67 Accrued expenses-payroll 449 1,183 Accrued expenses-other 330 473 Total liabilities of discontinued operations $4,462 $5,341 NOTE 18. Selected Quarterly Financial Data (Unaudited) The following table sets forth selected quarterly financial data for each of the quarters in 2006 and 2005 (in thousands, except per share amounts): Quarters First (2) Second Third Fourth Year Ended December 31, 2006: Revenue $356,764 $395,296 $432,009 $425,460 Gross margin 47,373 55,491 57,336 58,218 Income from continuing operations 8,473 12,219 13,494 13,519 Income from discontinued operations (1) 657 324 - - Net income $9,130 $12,543 $13,494 $13,519 Basic earnings per share Income from continuing operations $0.21 $0.30 $0.34 $0.35 Income from discontinued operations 0.02 0.01 - - Net Income $0.23 $0.31 $0.34 $0.35 Diluted earnings per share Income from continuing operations $0.21 $0.29 $0.33 $0.34 Income from discontinued operations 0.01 0.01 - - Net Income $0.22 $0.30 $0.33 $0.34 (1) HGDS disposed of May 1, 2006 (2) Comtrak was acquired February 28, 2006 49 Quarters First Second Third Fourth Year Ended December 31, 2005: Revenue $329,405 $361,822 $387,434 $403,217 Gross margin 40,108 43,820 45,261 45,553 Income from continuing operations 4,713 7,229 8,426 8,808 Income from discontinued operations 635 696 1,184 1,255 Net Income $5,348 $7,925 $9,610 $10,063 Basic earnings per share Income from continuing operations $0.12 $0.18 $0.21 $0.22 Income from discontinued operations 0.02 0.02 0.03 0.03 Net Income $0.14 $0.20 $0.24 $0.25 Diluted earnings per share Income from continuing operations $0.11 $0.17 $0.21 $0.22 Income from discontinued operations 0.01 0.02 0.03 0.03 Net Income $0.12 $0.19 $0.24 $0.25 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.Item 9A. CONTROLS AND PROCEDURESMANAGEMENT’S REPORT ON DISCLOSURE CONTROLS AND PROCEDURES As of December 31, 2006, an evaluation was carried out under the supervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(f)under the Securities Exchange Act of 1934. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that thesedisclosure controls and procedures were effective.No significant changes were made in our internal control over financial reporting during the fourth quarter of 2006 that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting.Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGOur management is responsible for establishing and maintaining adequate controls over financial reporting as defined in Rule 13a-15(f) of the ExchangeAct. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, weconducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2006. On February 28, 2006, we acquiredComtrak Logistics, Inc. Consistent with published guidance of the Securities and Exchange Commission, management excluded from its assessment of theeffectiveness of our internal control over financial reporting as of December 31, 2006, Comtrak’s internal control over financial reporting. Total assets andtotal revenues from the Comtrak acquisition represent $52.7 million and $67.1 million, respectively of the related consolidated financial statement amounts ofHub Group, Inc. as of year ended December 31, 2006.50Based upon this evaluation, management believes our internal control over financial reporting was effective as of December 31, 2006. Management believes, however, that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives ofthe control system are met, and no evaluation controls can provide absolute assurance that all control issues and instances of fraud, if any, within theCompany have been detected.Ernst & Young LLP, an independent registered public accounting firm, who audited and reported on the consolidated financial statements, including inthis report, has issued an attestation report on management’s assessment of internal control over financial reporting.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTINGThe Board of Directors and ShareholdersHub Group, Inc.We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, thatHub Group, Inc. (the "Company") maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). TheCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’sinternal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion onthe effectiveness of internal control over financial reporting did not include the internal controls of Comtrak Logistics, Inc. (Comtrak), which is included inthe 2006 consolidated financial statements of the Company and constituted $52.7 million of total assets as of December 31, 2006 and $67.1 million ofrevenue for the ten months then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internalcontrol over financial reporting of Comtrak. 51In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairlystated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2006, based on the COSO criteria.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsof Hub Group, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each ofthe three years in the period ended December 31, 2006 of Hub Group, Inc. and our report dated February 22, 2007 expressed an unqualified opinion thereon. Ernst & Young LLPChicago, IllinoisFebruary 22, 2007 Item 9B. OTHER INFORMATIONNone. 52PART IIIItem 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCEThe sections entitled “Election of Directors” and “Ownership of the Capital Stock of the Company” appearing in our proxy statement for our annualmeeting of stockholders to be held on May 7, 2007, sets forth certain information with respect to our directors and Section 16 compliance and is incorporatedherein by reference. Certain information with respect to persons who are or may be deemed to be our executive officers is set forth under the caption “ExecutiveOfficers of the Registrant” in Part I of this report.Our code of ethics can be found on our website at www.hubgroup.com. Item 11. EXECUTIVE COMPENSATIONThe section entitled “Compensation of Directors and Executive Officers” appearing in our proxy statement for our annual meeting of stockholders to beheld on May 7, 2007, sets forth certain information with respect to the compensation of our management and is incorporated herein by reference.Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe sections entitled “Ownership of the Capital Stock of the Company” appearing in our proxy statement for our annual meeting of stockholders to beheld on May 7, 2007, sets forth certain information with respect to the ownership of our Common Stock and is incorporated herein by reference. Equity Compensation Plan Information- The following chart contains certain information regarding the Company’s Long-Term Incentive Plans: Plan Category Number of securitiesto be issuedupon exercise ofoutstanding options,warrants and rights(a) Weighted-averageexercise price ofoutstanding options,warrants and rightsNumber of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected in column (a))Equity compensationplans approved bysecurity holders 754,596 $2.24 920,021Equity compensationplans not approvedby security holders -- -- --Total754,596$2.24920,021Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The section entitled “Certain Transactions” appearing in our proxy statement for the annual meeting of our stockholders to be held on May 7, 2007, setsforth certain information with respect to certain business relationships and transactions between us and our directors and officers and it is incorporated hereinby reference.53Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The section entitled “Principal Accountant Fees and Services” appearing in our proxy statement for our annual meeting of stockholders to be held on May7, 2007, sets forth certain information with respect to certain fees we have paid to our principal accountant for services and it is incorporated herein byreference.Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) Financial StatementsThe following consolidated financial statements of the Registrant are included under Item 8 of this Form 10-K:Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets - December 31, 2006 and December 31, 2005Consolidated Statements of Income - Years ended December 31, 2006, December 31, 2005 and December 31, 2004Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2006, December 31, 2005 and December 31, 2004Consolidated Statements of Cash Flows - Years ended December 31, 2006, December 31, 2005 and December 31, 2004Notes to Consolidated Financial Statements (b) Financial Statement SchedulesThe following financial statement schedules of Hub Group, Inc. are filed as part of this report and should be read in conjunction with the consolidatedfinancial statements of Hub Group, Inc.:PageII. Valuation and qualifying accounts and reserves ……………………………………………………………….. S-1 All other schedules are omitted because they are not required, are not applicable, or the required information is shown in the consolidated financialstatements or notes thereto.(c) ExhibitsThe exhibits included as part of this Form 10-K are set forth in the Exhibit Index immediately preceding such Exhibits and are incorporated herein byreference. 54SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. Date: February 23, 2007 HUB GROUP, INC. By /s/ David P. Yeager David P. Yeager Chief Executive Officer and Vice ChairmanPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and onthe dates indicated: TitleDate /s/Phillip C. Yeager Phillip C. YeagerChairman and DirectorFebruary 23, 2007 /s/ David P. Yeager David P. YeagerVice Chairman, Chief Executive Officer and DirectorFebruary 23, 2007 /s/ Mark A. Yeager Mark A. YeagerPresident, Chief Operating Officer and DirectorFebruary 23, 2007 /s/ Thomas M. White Thomas M. WhiteSenior Vice President-Chief Financial Officer and Treasurer (Principal Financial andAccounting Officer)February 23, 2007 /s/ Charles R. Reaves Charles R. ReavesDirectorFebruary 23, 2007 /s/ Martin P. Slark Martin P. SlarkDirectorFebruary 23, 2007 /s/ Gary D. Eppen Gary D. EppenDirectorFebruary 23, 2007 55SCHEDULE II HUB GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Charged to Balance at Beginning Costs & Other End of Year Expenses Accounts (1) Deductions (2) of Year Year Ended December 31: Allowance for uncollectible trade accounts 2006 $6,815,000 $138,000 $644,000 $(1,298,000)$6,299,000 2005 $6,869,000 $476,000 $1,135,000 $(1,665,000)$6,815,000 2004 $5,835,000 $148,000 $886,000 $- $6,869,000 Deferred tax valuation allowance 2006 $489,000 $(241,000)$- $- $248,000 2005 $271,000 $218,000 $- $- $489,000 2004 $- $271,000 $- $- $271,000 (1) Expected customer account adjustments charged to revenue and write-offs, net of recoveries (2) Reserve adjustments S-1INDEX TO EXHIBITS Number Exhibit 3.1Amended Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 and 3.3 to the Registrant’sregistration statement on Form S-1, File No. 33-90210) 3.2By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s registration statement on Form S-1,File No. 33-90210) 10.1Amended and Restated Limited Partnership Agreement of Hub City Canada, L.P. (incorporated by reference to Exhibit 10.2 tothe Registrants report on Form 10-K dated March 26, 1997 and filed March 27, 1997, File No 000-27754) 10.2Stockholders' Agreement (incorporated by reference to Exhibit 10.7 to the Registrant’s report on Form 10-K dated March 26,1997 and filed March 27, 1997, File No. 000-27754) 10.3 Letter from the Registrant to Thomas M. White dated June 4, 2002 (incorporated by reference to Exhibit 10.28 to the Registrant’s report onForm 10-K dated March 12, 2003 and filed on March 13, 2003, File No. 000-27754) 10.4 Hub Group’s Nonqualified Deferred Compensation Plan Basic Plan Document (incorporated by reference to Exhibit 10.15 to the Registrant’sreport on Form 10-K dated February 25, 2005 and filed on February 28, 2005, File No. 000-27754) 10.5Hub Group’s Nonqualified Deferred Compensation Plan Adoption Agreement (incorporated by reference to Exhibit 10.16 to the Registrant’sreport on Form 10-K dated February 25, 2005 and filed on February 28, 2005, File No. 000-27754) 10.6 Hub Group’s Nonqualified Deferred Compensation Plan, Amendment 1 (incorporated by reference to Exhibit 10.17 to the Registrant’s reporton Form 10-K dated February 25, 2005 and filed on February 28, 2005, File No. 000-27754) 10.7Description of Executive Officer cash compensation for 2007 10.8Director compensation for 2007 10.9Hub Group’s 2002 Long Term Incentive Plan (as amended and restated effective December 3, 2003) (incorporated by reference from Exhibit4.1 from the Registrant’s report on Form S-8 dated and filed May 17, 2004) 10.10Purchase Option and Right of Refusal Agreement dated November 11, 2004 (incorporated by reference from Exhibit 10.1 to the Registrant’sReport on Form 8-K dated and filed November 16, 2004) 10.11Equipment Purchase Contract dated as of March 7, 2005 between Hub City Terminals, Inc., and Shanghai Jindo Container Co., Ltd.(incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K dated March 7, 2005 and filed March 8, 2005, File No. 000-27754) 10.12$40 million Credit Agreement dated as of March 23, 2005 among the Registrant, Hub City Terminals, Inc. and Harris Trust and SavingsBank (incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K dated March 23, 2005 and filed March 25, 2005, FileNo. 000-27754) 10.13Lease Agreement dated as of May 10, 2005, between Banc of America Leasing & Capital, LLC and Hub City Terminals, Inc., with form ofSchedule thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K dated May 10, 2005 and filed May 16,2005, File No. 000-27754) 10.14Guaranty of Corporation, dated as of May 10, 2005, made by Registrant to, and for the benefit of, Banc of America Leasing & Capital, LLC(incorporated by reference to Exhibit 10.2 to the Registrant’s report on Form 8-K dated May 10, 2005 and filed May 16, 2005, File No. 000-27754) 10.15Asset Purchase Agreement, dated January 19, 2006, by and among Hub Group, Inc., Comtrak, Inc. and Michael J. Bruns (incorporated byreference to Exhibit 10.1 to the Registrant’s report on Form 8-K dated January 19, 2006 and filed January 25, 2006, File No. 000-27754) 10.16Amendment to the $40 million Credit Agreement among the Registrant, Hub City Terminals, Inc. and Harris Trust and Savings Bank datedFebruary 21, 2006. (incorporated by reference to Exhibit 10.16 to the Registrant’s report on Form 10-K for the year ended December 31, 2005and filed February 27, 2006, File No. 000-27754) 10.17Equipment Purchase Contract dated as of March 21, 2006 between Hub City Terminals, Inc. and Singamas North America, Inc.(incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K dated March 21, 2006 and filed March 24, 2006, File No.000-27754) 10.18Asset Purchase Agreement, dated May 1, 2006, by and among Hub Group, Inc., Hub Group Distribution Services, LLC and HGDSAcquisition, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K dated May 1, 2006 and filed May 2,2006, File No. 000-27754) 10.19Form of Hub Group, Inc. 2006 Performance Unit Award Statement (incorporated by reference to Exhibit 10.1 to the Registrant’s report onForm 8-K dated May 22, 2006 and filed May 26, 2006, File No. 000-27754) 10.20Form of Terms of Restricted Stock Award under Hub Group, Inc. 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 tothe Registrant’s report on Form 8-K dated May 22, 2006 and filed May 26, 2006, File No. 000-27754) 14Hub Group’s Code of Business Conduct and Ethics (incorporated by reference from Exhibit 99.2 to the Registrant’s report on Form 10-Kdated March 12, 2003 and filed on March 13, 2003, File No. 000-27754) 21Subsidiaries of the Registrant 23.1Consent of Ernst & Young LLP 31.1Certification of David P. Yeager, Vice Chairman and Chief Executive Officer, Pursuant to Rule 13a-14(a) promulgated under the SecuritiesExchange Act of 1934 31.2Certification of Thomas M. White, Senior Vice President, Chief Financial Officer and Treasurer, Pursuant to Rule 13a-14(a) promulgatedunder the Securities Exchange Act of 1934 32.1Certification of David P. Yeager and Thomas M. White, Chief Executive Officer and Chief Financial Officer respectively, Pursuant to 18U.S.C. Section 1350 EXHIBIT 10.7Hub Group, Inc.Description of Executive Officer Cash CompensationFor 2007Annual Cash CompensationBase SalarySet forth below are the base salaries of the Chief Executive Officer and each of the four most highly compensated executive officers in 2006 effective January 1, 2007. TheCompany considers various factors in assigning executive officers to specific salary ranges, including job content, level of responsibility, accountability, and the competitivecompensation market. On an annual basis, all executive officers’ salaries are reviewed and adjusted to reflect individual performance and position within their respective ranges.Bonus PlanExecutive officers are eligible for annual performance-based awards under the Company’s bonus plan, as are all salaried employees. For 2006, goals were weighted uponachievement of targeted levels of earnings per share and, for some executives, upon achievement of personal goals. The goals for 2007 will also be weighted.Restricted StockThe Company makes periodic grants of restricted stock to executive officers. Grants of restricted stock have historically provided for vesting in three years after grant. David P. YeagerVice Chairman and Chief Executive OfficerBase2007 $574,867 Mark A. YeagerPresident and Chief Operating Officer Base2007 $399,489Thomas M. WhiteSr. Vice President, Treasurer and Chief Financial OfficerBase2007 $366,672David MarshExecutive Vice President-Highway Base2007 $283,894Donald G. MaltbyExecutive Vice President-LogisticsBase2007 $273,182EXHIBIT 10.8Hub Group, Inc.Directors’ Compensation For 2007Directors’ CompensationEach non-employee director receives an annual retainer fee of $60,000 in 2007, paid in quarterly installments. In addition, expenses are paid for attendance ateach Committee meeting. Directors who are also officers or employees of the Company receive no compensation for duties performed as a director.Stock PlanThe Company makes periodic grants of restricted stock to the directors. In connection with their 2007 compensation package, each independent directorreceived 3,548 shares of restricted stock in January 2007. EXHIBIT 21Subsidiaries of Hub Group, Inc.SUBSIDIARIESJURISDICTION OF INCORPORATION/ORGANIZATION Hub City Terminals, Inc. DelawareHub Group Atlanta, LLCDelawareHub Group Canada, L.P.DelawareHub City Texas, L.P.DelawareHub Group Associates, Inc.IllinoisHub Group Distribution Services, LLCIllinoisQuality Services L.L.C.MissouriHub Chicago Holdings, Inc.DelawareHub Group Transport, LLCDelawareHub Freight Services, Inc.DelawareComtrak Logistics, Inc.DelawareEXHIBIT 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statements (Forms S-8, Nos. 333-115576, 333-33006, 333-06327, 333-107745, 333-103845and 333-48185) of Hub Group, Inc. and the related Prospectuses of our reports dated February 22, 2007, with respect to the consolidated financial statementsand schedule of Hub Group, Inc., Hub Group, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and theeffectiveness of internal control over financial reporting of Hub Group, Inc., included in this Annual Report on Form 10-K for the year ended December 31,2006./s/ Ernst & Young LLPChicago, IllinoisFebruary 22, 2007 EXHIBIT 31.1CERTIFICATIONI, David P. Yeager, certify that:1) I have reviewed this report on Form 10-K of Hub Group, Inc.;2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reportingand;5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: February 23, 2007 /s/ David P.Yeager Name: David P. Yeager Title: Vice Chairman and Chief Executive Officer EXHIBIT 31.2CERTIFICATION I, Thomas M. White, certify that:1) I have reviewed this report on Form 10-K of Hub Group, Inc.;2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reportingand; 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: February 23, 2007 /s/ Thomas M. White Name: Thomas M. White Title: Senior Vice President - Chief Financial Officer and TreasurerEXHIBIT 32.1Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The following statement is provided by the undersigned to accompany the Annual Report on Form 10-K for the year ended December 31, 2006 ofHub Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and shall not be deemed filed pursuant to any provision of theExchange Act of 1934 or any other securities law. Each of the undersigned certifies that the foregoing Report on Form 10-K fully complies with the requirements of Section 13(a) of the SecuritiesExchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the Form 10-K fairly presents, in all material respects, the financial conditionand results of operations of Hub Group, Inc. /s/ David P.Yeager /s/ Thomas M. White Name: David P. YeagerName: Thomas M. WhiteTitle: Vice Chairman and ChiefTitle: Senior Vice President -Executive OfficerChief Financial Officer and Treasurer

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