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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-27754
HUB GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4007085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
377 East Butterfield Road, Suite 700
Lombard, Illinois 60148
(Address, including zip code, of principal executive offices)
(630) 271-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
On November 13, 1997, the registrant had 6,990,950 outstanding shares
of Class A common stock, par value $.01 per share, and 662,296 outstanding
shares of Class B common stock, par value $.01 per share.
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HUB GROUP, INC.
INDEX
Page
PART I. Financial Information:
Hub Group, Inc. - Registrant
Unaudited Condensed Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 3
Unaudited Condensed Consolidated Statements of Operations - Three Months
and Nine Months Ended September 30, 1997 and 1996 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1997 5
Unaudited Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1997 and 1996 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Hub Partnerships - Predecessor
Unaudited Condensed Combined Statement of Operations for the Period
January 1, 1996 through March 17, 1996 15
Unaudited Condensed Combined Statement of Stockholders' Equity for the
Period January 1, 1996 through March 17, 1996 16
Unaudited Condensed Combined Statement of Cash Flows for the Period
January 1, 1996 through March 17, 1996 17
Notes to Unaudited Condensed Combined Financial Statements 18
PART II. Other Information 19
2
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
---------------- -----------------
1997 1996
---------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 78,526 $ 13,893
Accounts receivable, net 123,392 114,125
Prepaid expenses and other current assets 4,685 3,532
---------------- -----------------
TOTAL CURRENT ASSETS 206,603 131,550
PROPERTY AND EQUIPMENT, net 19,319 14,058
GOODWILL, net 102,336 42,255
DEFERRED TAXES 10,842 11,357
OTHER ASSETS 664 2,005
---------------- -----------------
TOTAL ASSETS $ 339,764 $ 201,225
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 110,639 $ 94,884
Other 7,463 8,144
Accrued expenses
Payroll 6,157 4,988
Other 7,193 3,186
Deferred taxes 1,708 1,307
Purchase price payable 59,379 -
Minority interest 3,356 -
Current portion of long-term debt 15,050 3,164
---------------- -----------------
TOTAL CURRENT LIABILITIES 210,945 115,673
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 10,541 28,714
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST 10,589 10,714
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 77 59
Additional paid-in capital 109,878 55,083
Purchase price in excess of predecessor basis (25,764) (25,764)
Tax benefit of purchase price in excess of predecessor basis 10,306 10,306
Retained earnings 13,192 6,440
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 107,689 46,124
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 339,764 $ 201,225
================ =================
See notes to unaudited condensed consolidated financial statements.
3
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- --------------------------
1997 1996 1997 1996
------------- ------------- ------------ -------------
REVENUE:
Trade $ 273,521 $ 238,584 $ 792,841 $ 493,158
Affiliates - - - 3,459
------------- ------------- ------------ -------------
Total revenue 273,521 238,584 792,841 496,617
TRANSPORTATION COSTS 239,754 209,877 696,400 437,401
------------- ------------- ------------ -------------
Net revenue 33,767 28,707 96,441 59,216
COSTS AND EXPENSES:
Salaries and benefits 16,153 13,888 47,450 28,989
Selling, general and administrative 6,776 5,073 19,856 11,018
Depreciation and amortization 1,132 795 3,121 1,660
------------- ------------- ------------ -------------
Total costs and expenses 24,061 19,756 70,427 41,667
Operating income 9,706 8,951 26,014 17,549
------------- ------------- ------------ -------------
OTHER INCOME (EXPENSE):
Interest expense (511) (292) (1,653) (631)
Interest income 458 256 1,019 561
Other, net 99 8 155 (30)
------------- ------------- ------------ -------------
Total other income (expense) 46 (28) (479) (100)
INCOME BEFORE MINORITY INTEREST AND
PROVISION FOR INCOME TAXES 9,752 8,923 25,535 17,449
------------- ------------- ------------ -------------
MINORITY INTEREST 5,490 5,415 14,282 10,101
------------- ------------- ------------ -------------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,262 3,508 11,253 7,348
PROVISION FOR INCOME TAXES 1,705 1,403 4,501 2,698
------------- ------------- ------------ -------------
NET INCOME $ 2,557 $ 2,105 $ 6,752 $ 4,650
============= ============= ============ =============
PRO FORMA PROVISION FOR ADDITIONAL INCOME TAXES - - - 241
------------- ------------- ------------ -------------
PRO FORMA NET INCOME $ 2,557 $ 2,105 $ 6,752 $ 4,409
============= ============= ============ =============
PRO FORMA EARNINGS PER SHARE $ 0.41 $ 0.35 $ 1.10 $ 0.93
============= ============= ============ =============
PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND SHARE EQUIVALENTS OUTSTANDING 6,301 5,989 6,120 4,740
============= ============= ============ =============
See notes to unaudited condensed consolidated financial statements.
4
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1997
(in thousands, except shares)
Tax Benefit
Purchase of Purchase
Price in Price
Common Stock Additional Excess of in Excess of Total
---------------------- Paid-in Predecessor Predecessor Retained Stockholders'
Shares Amount Capital Basis Basis Earnings Equity
---------- ----------- ------------ ------------- --------------- ---------- ---------------
Balance at December 31, 1996 5,923,546 $ 59 $ 55,083 $ (25,764) $ 10,306 $ 6,440 $ 46,124
Net income - - - - - 6,752 6,752
Sale of common stock in
initial public offering, net - - (45) - - - (45)
Sale of common stock in
secondary offering, net 1,725,000 18 54,745 - - - 54,763
Exercise of non-qualified
stock options 4,700 - 95 - - - 95
========== =========== ============ ============= =============== =========== ==============
Balance at September 30, 1997 7,653,246 $ 77 $ 109,878 $ (25,764) $ 10,306 $ 13,192 $ 107,689
========== =========== ============ ============= =============== =========== ==============
See notes to unaudited condensed consolidated financial statements.
5
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
-------------------------------------
1997 1996
------------------ -----------------
Cash flows from operating activities:
Net income $ 6,752 $ 4,650
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,927 1,774
Deferred taxes 916 604
Minority interest 14,282 10,101
Loss/(Gain) on sale of assets 20 (58)
Changes in working capital, net of effects of purchase transactions:
Accounts receivable, net (9,267) (24,847)
Prepaid expenses and other current assets (1,153) (503)
Accounts payable 15,074 20,666
Accrued expenses 5,176 4,263
Other assets 1,341 264
------------------ -----------------
Net cash provided by operations 37,068 16,914
------------------ -----------------
Cash flows from investing activities:
Cash used in acquisitions, net - (37,544)
Purchase of minority interest (1,575) (2,554)
Purchases of property and equipment, net (8,335) (4,340)
------------------ -----------------
Net cash used in investing activities (9,910) (44,438)
------------------ -----------------
Cash flows from financing activities:
Proceeds from sale of common stock in initial public offering, net (45) 52,945
Proceeds from sale of common stock in secondary offering, net 54,763 -
Proceeds from sale of common stock 95 -
Purchase of common stock - (2)
Distributions to stockholders - (1,767)
Distributions to minority interest (14,407) (2,762)
Payments on long-term debt (6,392) (4,619)
Proceeds from issuance of long-term debt 3,461 1,624
------------------ -----------------
Net cash provided by (used in) financing activities 37,475 45,419
------------------ -----------------
Net increase in cash 64,633 17,895
Cash, beginning of period 13,893 2
------------------ -----------------
Cash, end of period $ 78,526 $ 17,897
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Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 230 $ 70
Income taxes 240 957
Non-cash investing and financing activities:
Notes payable issued as distributions to stockholders $ - $ 663
Liability assumed to purchase minority interest 59,379 -
See notes to unaudited condensed consolidated financial statements.
6
HUB GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
of Hub Group, Inc. (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements have been
condensed or omitted pursuant to those rules and regulations. However, the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading.
The financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to present fairly the Company's financial position and results of operations.
NOTE 2. Business Combinations
On March 18, 1996, the Company acquired a controlling interest in each
of 27 operating partnerships (collectively referred to as "Hub Partnerships")
for a total purchase price of approximately $43,309,000 in cash. The purchase
price of these acquisitions was allocated to the assets acquired and liabilities
assumed based on the fair value at the date of acquisition using the purchase
method of accounting.
The portion of the difference between fair value and historical cost of
individual assets acquired and liabilities assumed attributable to interests
acquired by the Company from non-control group stockholders was recorded at fair
market value. This resulted in goodwill of approximately $17,207,000. The
remaining portion of the difference between fair value and historical cost
attributable to interests acquired from control group stockholders,
approximately $25,764,000, has been charged to equity as purchase price in
excess of predecessor basis.
In connection with the purchase of the controlling interest in Hub
Partnerships, approximately $10,306,000 has been recorded as a deferred tax
benefit utilizing an assumed effective tax rate of 40% representing the tax
effect of the purchase price in excess of predecessor basis, with the
corresponding credit recorded as an increase to equity.
On May 2, 1996, the Company purchased the rights to service the
customers of American President Lines Domestic Distribution Services, a division
of APL Land Transport Services, Inc., for approximately $8,000,000. The
$8,000,000 was financed with $2,000,000 in cash and $6,000,000 in notes. The
notes bear interest at an annual rate of 6% with three equal annual principal
payments due beginning May 2, 1997. The acquisition was recorded using the
purchase method of accounting resulting in goodwill of approximately $8,090,000.
Results of operations from acquisitions recorded under the purchase
method of accounting are included in the Company's financial statements from
their respective dates of acquisition.
7
The following summarizes the effects of businesses acquired and
accounted for as purchases in 1996 as if they had been acquired as of January 1,
1996:
Nine Months
Ended September 30,
1996
-------------------
(000's)
Revenue as reported $ 496,617
Revenue of purchased business for period prior to acquisitions,
net of eliminations 184,660
-------------------
Pro forma revenue $ 681,277
-------------------
Net income as reported $ 4,650
Net income of purchased businesses for period prior to acquisitions (261)
Adjustment for goodwill amortization (95)
-------------------
Pro forma net income $ 4,294
-------------------
Earnings per share as reported $ 0.93
Effect of purchased businesses prior to acquisitions (0.19)
-------------------
Pro forma earnings per share $ 0.74
-------------------
Business acquisitions which involved the use of cash were accounted for as
follows:
Nine Months
Ended September 30,
1996
-------------------
(000's)
Accounts receivable $ 75,576
Prepaid expenses and other current assets 1,585
Property and equipment 9,309
Goodwill 25,515
Deferred tax benefit, net 10,306
Other assets 701
Accounts payable (74,693)
Accrued expenses (5,190)
Long-term debt (20,921)
Minority interest (102)
Purchase price in excess of predecessor basis 25,764
Tax benefit of purchase price in excess of predecessor basis (10,306)
-------------------
Cash used in acquisitions, net $ 37,544
-------------------
NOTE 3. Purchase Of Minority Interest
On March 1, 1997, the Company purchased an approximate 44% minority
interest in Hub Group Distribution Services for approximately $1,500,000 in
cash.
On September 17, 1997, the Company exercised its option to purchase the
remaining 70% minority interests in Hub City Los Angeles, L.P. and Hub City
Golden Gate, L.P. by giving notice to the selling entities. The terms of the
option require that the purchase price plus any previously undistributed
retained earnings prior to the notice date be paid 30 days after the notice
date. The total purchase price for the minority interests was $59.4 million
which was recorded as goodwill and purchase price payable. The previously earned
but undistributed retained earnings are reflected in current liabilities as they
were required to be distributed on October 17, 1997.
8
NOTE 4. Property And Equipment
Property and equipment consist of the following:
September 30, December 31,
1997 1996
---------------- -------------------
(000's)
Land $ 92 $ 92
Building and improvements 457 841
Leasehold improvements 880 629
Computer equipment and software 13,211 7,258
Furniture and equipment 4,155 3,419
Transportation equipment and automobiles 5,818 4,541
---------------- -------------------
24,613 16,780
Less: Accumulated depreciation and amortization (5,311) (2,722)
---------------- -------------------
PROPERTY AND EQUIPMENT, net $ 19,302 $ 14,058
================ ===================
NOTE 5. Equity Offering
In September 1997, the Company completed a secondary offering of
1,725,000 shares of its Class A Common Stock. The net proceeds of the offering
were $54.8 million.
NOTE 6. Credit Facility
On September 17, 1997, the Company closed on a new unsecured $36.0
million five-year revolving line of credit with Harris Trust and Savings Bank.
The amount available under the line will decrease by $5.4 million at the
beginning of year three and by $7.2 million at the beginning of each of years
four and five. The Company can borrow at the prime rate on a day-to-day basis or
may borrow for 30, 90 or 180 day periods at LIBOR (London Interbank Offered
Rate) plus 0.80% to 1.25% based on the Company's funded debt to EBITDA (earnings
before interest expense, income taxes, depreciation and amortization) ratio. The
credit facility also contains certain covenants customary for credit facilities
of similar size and type.
NOTE 7. Statement of Financial Accounting Standards (SFAS) No. 128
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 - Earnings per Share. This statement's objective is to simplify the
computation of earnings per share (EPS) to make the U.S. standard for computing
EPS more compatible with the EPS standards of other countries and with that of
the International Accounting Standards Committee. This statement is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted.
The Company does not expect the future adoption of this standard to
have a material impact, if any, on its financial statements.
NOTE 8. Subsequent Events
On October 31, 1997, the Company acquired the remaining 50% interest in
its international logistics joint venture, HLX Company, LLC, for a purchase
price of $300,000.
On October 31, 1997, the Company exercised its right to purchase the
remaining 70% minority interest in Hub City New Orleans, L.P. for a purchase
price of one dollar.
9
HUB GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996.
Revenue
Total revenue for Hub Group, Inc. ("Hub Group" or the "Company")
increased 14.6% to $273.5 million from $238.6 million in 1996. Logistics revenue
increased 83.9% to $22.8 million from $12.4 million in 1996. The majority of the
increase in logistics was generated from specialized logistics services while
the remainder was generated from third-party logistics services. Brokerage
revenue increased 30.8% to $33.7 million from $25.8 million in 1996. Hub Group
continues to experience strong growth in its brokerage operations aided by the
robust demand for such services in the truckload industry. Intermodal revenue
increased 8.3% to $217.1 million from $200.4 million in 1996. Significant
intermodal service disruptions associated with the Union Pacific/Southern
Pacific merger manifested in the latter part of September 1997, negatively
impacting the North American intermodal system. Although management is unable to
quantify the effect, management believes these service issues have inhibited Hub
Group's intermodal revenue growth rate.
Net Revenue
Net revenue as a percentage of revenue increased to 12.3% from 12.0% in
1996. Management believes this increase is due to stronger intermodal margins
due to more favorable pricing from the railroads.
Salaries and Benefits
Salaries and benefits increased to $16.2 million from $13.9 million in
1996. As a percentage of revenue, salaries and benefits increased to 5.9% of
revenue from 5.8% in 1996. The increase in expenditures is principally
attributable to operating and customer service personnel required by increased
volume. To a lesser degree, increased expenditures were made to increase the
Company's sales force as it expands its marketing initiatives.
Selling, General and Administrative
Selling, general and administrative expenses increased to $6.8 million
from $5.1 million in 1996. These expenses as a percentage of revenue increased
to 2.5% from 2.1% in 1996. This increase is primarily attributable to
expenditures related to information systems, rent and advertising. The company
continues to make expenditures for technology enhancements, to accommodate
customer requirements and to maintain communications links such as the new Hub
Group web site. Rent and related office expense increased due to the expanded
facilities required as a result of recent growth.
Depreciation and Amortization
Depreciation and amortization expense increased to $1.1 million from
$0.8 million in 1996. This expense as a percentage of revenue increased to 0.4%
from 0.3% in 1996. The increase is primarily attributable to increased goodwill
amortization related to the purchase of the 70% minority interest in Hub City
Tennessee, L.P. in August 1996, the 70% minority interest in Hub City North
Central, L.P. in December 1996, a 44% minority interest in Hub Group
Distribution Services in March 1997 and the 70% minority interests in Hub City
Los Angeles, L.P. and Hub City Golden Gate, L.P. in September 1997.
10
Other Income (Expense)
Other income (expense) netted to $0.0 million in both 1997 and 1996.
Interest expense increased to $0.5 million from $0.3 million in 1996. This
increase is attributable to the $15.0 million note issued in connection with the
purchase of the 70% minority interest in Hub City North Central, L.P. Interest
income increased 78.9% to $0.5 million from $0.3 million in 1996. This increase
is attributed to improved cash flows from operations and the temporary
investment of approximately $58.4 million in proceeds from the secondary
offering in September 1997 (see "Liquidity and Capital Resources").
Minority Interest
Minority interest increased to $5.5 million from $5.4 million in 1996.
Minority interest as a percentage of income before minority interest decreased
to 56.3% from 60.7% in 1996. The purchase of the minority interests as discussed
in "Depreciation and Amortization" had the effect of lowering minority interest
as a percentage of income before minority interest when comparing 1997 to 1996.
Income Taxes
The provision for income taxes increased to $1.7 million from $1.4
million in 1996. The Company is providing for income taxes at an effective rate
of 40%.
Net Income
Net income increased 21.5% to $2.6 million from $2.1 million in 1996.
Earnings Per Share
Earnings per share increased 17.1% to $0.41 from $0.35 in 1996.
Nine Months Ended September 30, 1997, Compared to Nine Months Ended September
30, 1996.
Revenue
Revenue increased 59.6% to $792.8 million from $496.6 million in 1996.
Revenue increased 16.4% over pro forma 1996 revenue of $681.2 million. The 1996
pro forma revenue was impacted significantly by the addition of the revenue
reported by American President Lines Domestic Distribution Services ("APLDDS"),
a division of APL Land Transport Services, Inc. The business acquired from
APLDDS on May 2, 1996 had been experiencing significant decline during 1995 and
the first quarter of 1996. This decline had a negative influence on the pro
forma growth rate. Despite the declining trend, management believes the Company
successfully transitioned and retained greater than 90% of the APLDDS business
that existed on May 2, 1996.
Excluding the revenue relating to APLDDS prior to the acquisition on
May 2, 1996, Hub City Terminals, Inc. ("Hub Chicago") and the Company's 27
operating partnerships (collectively referred to as "Hub Partnerships"), on a
combined basis assuming Hub Chicago had acquired Hub Partnerships on January 1,
1996, experienced a revenue increase of 24.7% when comparing 1997 to 1996. This
percentage increase is principally the result of strong growth in truckload
brokerage, logistics and intermodal service offerings.
Net Revenue
Net revenue increased 62.9% to $96.4 million from $59.2 million in
1996. As a percentage of revenue, net revenue increased to 12.2% from 11.9% in
1996. This increase is primarily a reflection of the higher net revenue as a
percentage of revenue experienced by Hub Partnerships as compared to Hub Chicago
11
due to Hub Chicago's larger proportion of high volume/low margin accounts.
Salaries and Benefits
Salaries and benefits increased to $47.4 million from $29.0 million in
1996. These expenses as a percentage of revenue increased to 6.0% from 5.8% in
1996. Some administrative services for Hub Chicago were performed by Hub
Partnerships for a fee. This fee was reflected in selling, general and
administrative expenses prior to March 1, 1996. After the acquisition of Hub
Partnerships by Hub Chicago, this fee is eliminated in consolidation and the
costs of the aforementioned administrative services are reported as salaries and
benefits. This causes salaries and benefits as a percentage of revenue to
increase over the prior year.
Selling, General and Administrative
Selling, general and administrative expenses increased to $19.9 million
from $11.0 million in 1996. These expenses as a percentage of revenue increased
to 2.5% from 2.2% in 1996. Despite the elimination in consolidation of the fees
between Hub Chicago and Hub Partnerships in 1997, Hub Chicago provided greater
leverage on its selling, general and administrative expenses than did the
Company as a whole. The increase in the percentage is also attributed to
increased spending related to information systems, rent and advertising.
Depreciation and Amortization
Depreciation and amortization increased to $3.1 million from $1.7
million in 1996. This expense as a percentage of revenue increased to 0.4% from
0.3% in 1996. The percentage increase is attributable to the amortization of
goodwill that was recorded in connection with the purchase of Hub Partnerships
and APLDDS, as well as the purchase of additional minority interest in Hub City
Tennessee, L.P., Hub City North Central, L.P., Hub Group Distribution Services,
Hub City Los Angeles, L.P. and Hub City Golden Gate, L.P.
Other Income (Expense)
Other income (expense) netted to an expense of $0.5 million in 1997
compared to a net expense of $0.1 million in 1996. Interest expense increased
162.0% to $1.7 million from $0.6 million in 1996. The increase is attributed to
the assumption of $12.5 million of balloon notes in March 1996, the issuance of
a $6.0 million note in May 1996 and the issuance of a $15.0 million note in
December 1996. Interest income increased 81.6% to $1.0 million from $0.6 million
in 1996. This increase is attributed to improved cash flow from operations and
the temporary investment of the $58.4 million proceeds from the secondary
offering in September 1997.
Minority Interest
Minority interest increased to $14.3 million from $10.1 million in
1996. Minority interest as a percentage of income before minority interest
decreased to 55.9% from 57.9% in 1996. The decrease is attributed to the
purchase of minority interest in Hub City Tennessee, L.P. in August 1996, Hub
City North Central, L.P. in December 1996, Hub Group Distribution Services in
March 1997 and Hub City Los Angeles, L.P. and Hub City Golden Gate, L.P. in
September 1997.
Income Taxes
The provision for income taxes increased to $4.5 million from $2.7
million in 1996. Other than an insignificant provision for Illinois replacement
tax, the Company had no provision for income taxes prior to March 18, 1996, as
the Company was a federally non-taxable subchapter S Corporation. The
12
Company is providing for income taxes at an effective rate of 40% for all income
subsequent to March 17, 1996.
Pro Forma Provision for Additional Income Taxes
Additional pro forma income taxes were zero in 1997 compared to $0.2
million in 1996. Additional pro forma provision for income taxes are shown to
provide an assumed effective federal and state effective tax rate of 40% of
income before income taxes prior to March 18, 1996.
Pro Forma Net Income
Pro forma net income (pro forma only to provide for income taxes)
increased 53.1% to $6.8 million from $4.4 million in 1996.
Pro Forma Earnings Per Share
Pro forma earnings per share (pro forma only to provide for income
taxes) increased 18.3% to $1.10 from $0.93 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company successfully completed a secondary
offering of 1,725,000 shares of its Class A Common Stock, resulting in net
proceeds of $54.8 million. On September 17, 1997, the Company also exercised its
option to acquire the remaining 70% minority interests in Hub City Los Angeles,
L.P. and Hub City Golden Gate, L.P. for $59.4 million. The purchase price was
paid, together with any earned but previously undistributed retained earnings
through September 16, 1997, on October 17, 1997.
On September 17, 1997, the Company also closed on a new unsecured $36.0
million five-year revolving line of credit with Harris Trust and Savings Bank
(the "Harris Line"). The amount available under the Harris Line will decrease by
$5.4 million at the beginning of year three and by $7.2 million at the beginning
of each of years four and five. The Company can borrow at the prime rate on a
day-to-day basis or may borrow for 30, 90 or 180 day periods at LIBOR (London
Interbank Offered Rate) plus 0.80% to 1.25% based on the Company's funded debt
to EBITDA (earnings before interest expense, income taxes, depreciation and
amortization) ratio. The credit facility also contains certain covenants
customary for credit facilities of similar size and type. The Company continues
to maintain its previous $5.0 million line of credit with Cass Bank and Trust
Company (the "Cass Line").
At December 31, 1996, the Company owned 83 tractors which it used in
its Company-owned drayage operations. At that time, it was the Company's
intention to continue acquiring tractors through debt financing. The Company had
estimated it would acquire an additional 110 tractors in 1997 and possibly
start-up three more Company-owned drayage operations. During the third quarter,
the Company decided to start adding tractors through the use of operating
leases. Of the 16 tractors that were added to operations in the first nine
months of 1997, 10 of them are under operating leases. The Company has not
started any new Company-owned drayage operations in 1997.
At September 30, 1997, the unused and available portion of the Cass
Line was $5.0 million. At September 30, 1997, the unused and available portion
of the Harris Line was $36.0 million. The Company anticipates using the Harris
Line to pay off any portion of the $15.0 million note which is due January 1,
1998, that can not be paid from available cash at that time.
13
OUTLOOKS, RISKS AND UNCERTAINTIES
This "Outlook, Risks and Uncertainties" section contains statements
regarding expectations, hopes, beliefs, intentions or strategies regarding the
future which are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and involve risks and uncertainties
described below that could cause actual results to differ materially from those
projected. The Company assumes no liability to update any such forward-looking
statements. In addition to those mentioned elsewhere in this section, such risks
and uncertainties include the impact of competitive pressures in the
marketplace, the degree and rate of market growth in the markets served by the
Company, changes in industry-wide capacity, further consolidation of rail
carriers, changes in governmental regulation, changes in the cost of services
from vendors and fluctuations in interest rates.
Intermodal Service
The Company anticipates continued challenges in meeting its customers'
intermodal service requirements in some locations until the well-publicized
service disruptions are resolved. Union Pacific has informed the Company that
Union Pacific management has a plan in place that Union Pacific believes will
substantially resolve these service issues in the fourth quarter of 1997.
However, there can be no assurances that Union Pacific will resolve these
service issues by the end of the fourth quarter of 1997 or by any time in the
future. The congestion created by the Union Pacific service problems has caused
back-ups at several major terminals and has negatively impacted North American
intermodal service. As part of the Union Pacific's plan to restore overall rail
service, they are diverting locomotives from certain intermodal lanes to move
commodities such as grain and coal. This action will temporarily suspend
Union Pacific service in the Texas/Midwest corridor effective November 1, 1997.
In order to continue intermodal service in some of these effected lanes, Union
Pacific negotiated agreements with Norfolk Southern and Kansas City Southern to
provide service in some of the affected lanes. Union Pacific also negotiated
with Conrail to divert some traffic around routes with curtailed service. Union
Pacific officials have indicated that their Texas/Midwest corridor service
should be restored by January 1, 1998, however, the Company can make no
assurances as to when the suspended service will be restored. The Company cannot
predict what level of impact these issues will have on financial performance in
the fourth quarter or any future quarters.
Where possible, the Company has taken steps to re-route intermodal
traffic around the most congested areas by using alternate carriers and terminal
facilities. For extremely time-sensitive freight where current intermodal
service cannot meet delivery requirements, the Company is advising its customers
to use over-the-road transportation which the Company may also be able to
arrange through its brokerage operations, assuming available capacity exists. To
further aid its customers in planning their freight shipments, the Company has
established a section in its website dedicated to intermodal service. Transit
information, service issues and other pertinent information are updated several
times daily as conditions change.
14
HUB PARTNERSHIPS
UNAUDITED CONDENSED COMBINED STATEMENT OF OPERATIONS
(in thousands)
January 1,
through
March 17, 1996
----------------
REVENUE:
Trade $ 142,413
Affiliate 3,992
----------------
Total revenue 146,405
PURCHASED TRANSPORTATION 128,405
----------------
Net revenue 18,000
COSTS AND EXPENSES:
Salaries and benefits 9,807
Selling, general and administrative 3,393
Depreciation and amortization 553
----------------
Total costs and expenses 13,753
Operating income 4,247
----------------
OTHER INCOME (EXPENSE):
Interest expense (56)
Interest income 120
Other, net 95
----------------
Total other income 159
INCOME BEFORE INCOME TAXES 4,406
INCOME TAXES 126
----------------
NET INCOME $ 4,280
================
See notes to unaudited condensed combined financial statements.
15
HUB PARTNERSHIPS
UNAUDITED CONDENSED COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
For the period January 1, 1996 through March 17, 1996
(in thousands, except shares)
Common Stock Additional Total
------------------------ Paid-in Treasury Retained Stockholders'
Shares Amount Capital Stock Earnings Equity
------------ ----------- ----------- ----------- ------------ ---------------
Balance at December 31, 1995 105,800 $ 1,943 $ 629 $ (32) $ 9,197 $ 11,737
Net income - - - - 4,280 4,280
Distributions to stockholders - (1,730) (629) 32 (13,477) (15,804)
============ =========== =========== =========== ============ ===============
Balance at March 17, 1996 105,800 $ 213 $ - $ - $ - $ 213
============ =========== =========== =========== ============ ===============
See notes to unaudited condensed combined financial statements.
16
HUB PARTNERSHIPS
UNAUDITED CONDENSED COMBINED STATEMENT OF CASH FLOWS
(in thousands)
January 1,
through
March 17, 1996
-----------------
Cash flows from operating activities:
Net income $ 4,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 553
Loss (gain) on sale of assets 3
Changes in working capital:
Accounts receivable, net 604
Prepaid expenses and other current assets 889
Accounts payable 4,783
Accrued expenses (140)
Other assets (407)
-----------------
Net cash provided by operations 10,565
-----------------
Cash flows from investing activities:
Purchases of property and equipment, net (775)
-----------------
Cash flows from financing activities:
Distributions to stockholders (13,014)
Payments on long-term debt (361)
Proceeds from issuance of long-term debt 418
-----------------
Net cash used in financing activities (12,957)
-----------------
Net decrease in cash (3,167)
Cash, beginning of period 10,949
=================
Cash, end of period $ 7,782
=================
Supplemental disclosures of cash flow information:
Cash paid for:
Interest 56
Income taxes 130
Non-cash financing activity:
Notes payable issued as distributions to stockholders $ 13,176
See notes to unaudited condensed combined financial statements.
17
HUB PARTNERSHIPS
NOTES TO UNAUDITED CONDENSED COMBINED
FINANCIAL STATEMENTS
NOTE 1. Interim Financial Statements
The accompanying unaudited condensed combined financial statements of
26 Subchapter S corporations and the Hub Group Distribution Services partnership
(collectively referred to as "Hub Partnerships" or the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to those rules and regulations. However, the Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading.
The financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to present fairly the Company's financial position and results of operations.
NOTE 2. Basis of Financial Statement Presentation
The unaudited condensed combined financial statements of Hub
Partnerships are presented herein to reflect the financial condition and results
of operations of the Hub Partnerships for the period in which Hub Partnerships
was the predecessor to the business acquired by Hub Group, Inc. on March 18,
1996, as necessary to disclose the financial statements of the business acquired
by Hub Group, Inc. pursuant to the rules and regulations of the Securities and
Exchange Commission.
NOTE 3. Special Distribution
Immediately prior to March 18, 1996, the Company distributed
substantially all of its equity, including retained earnings through March 17,
1996, to its shareholders in the form of cash and notes. The notes are five-year
balloon notes bearing interest at an annual rate of 5.45%. Interest is
compounded annually with all principal and interest due in March of 2001.
18
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
A list of exhibits included as part of this Report is set
forth in the Exhibit Index appearing elsewhere herein and is
incorporated herein by this reference.
19
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly authorized this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUB GROUP, INC.
DATE: November 13, 1997 /s/ William L. Crowder
William L. Crowder
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit No.
10.8 Credit Agreement dated as of September 17, 1997 among the Registrant,
Hub City Terminals, Inc., Hub Holdings, Inc. and Harris Trust and
Savings Bank.