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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 June 30, 1999 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 August 16, 1999, the registrant had 7,039,950 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 - June 30, 1999 and
December 31, 1998 3
Unaudited Condensed Consolidated Statements of Operations - Three Months
and Six Months Ended June 30, 1999 and 1998 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity - Six
Months Ended June 30, 1999 5
Unaudited Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1999 and 1998 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II. OTHER INFORMATION 16
2
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
-------------- ---------------
1999 1998
-------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,905 $ 15,178
Accounts receivable, net 169,059 148,104
Prepaid expenses and other current assets 4,810 6,036
-------------- ---------------
TOTAL CURRENT ASSETS 182,774 169,318
PROPERTY AND EQUIPMENT, net 18,013 19,111
GOODWILL, net 222,520 115,858
OTHER ASSETS 2,084 504
-------------- ---------------
TOTAL ASSETS $ 425,391 $ 304,791
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 136,772 $ 123,513
Other 9,400 7,909
Accrued expenses
Payroll 6,921 6,339
Other 5,394 6,332
Deferred taxes 1,751 1,751
Current portion of long-term debt 5,925 3,161
-------------- ---------------
TOTAL CURRENT LIABILITIES 166,163 149,005
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 131,672 29,589
DEFERRED TAXES 2,014 556
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST 737 5,968
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 77 77
Additional paid-in capital 110,732 110,181
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 29,454 24,873
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 124,805 119,673
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 425,391 $ 304,791
============== ===============
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
-------------- ------------- ------------- --------------
Revenue $ 319,448 $ 283,051 $ 627,130 $ 538,184
Transportation costs 280,403 249,431 548,916 474,117
-------------- ------------- ------------- --------------
Net revenue 39,045 33,620 78,214 64,067
Costs and expenses:
Salaries and benefits 20,553 17,577 41,399 34,465
Selling, general and administrative 9,357 7,542 18,480 15,165
Depreciation and amortization of property and equipment 967 986 2,019 1,830
Amortization of goodwill 1,436 742 2,198 1,400
Change in estimate/impairment of property and equipment 884 - 884 -
-------------- ------------- ------------- --------------
Total costs and expenses 33,197 26,847 64,980 52,860
Operating income 5,848 6,773 13,234 11,207
-------------- ------------- ------------- --------------
Other income (expense):
Interest expense (2,054) (735) (2,576) (1,293)
Interest income 213 226 515 452
Other, net 965 50 982 140
-------------- ------------- ------------- --------------
Total other expense (876) (459) (1,079) (701)
Income before minority interest and provision for income taxes 4,972 6,314 12,155 10,506
-------------- ------------- ------------- --------------
Minority interest 501 2,855 4,391 4,336
-------------- ------------- ------------- --------------
Income before provision for income taxes 4,471 3,459 7,764 6,170
Provision for income taxes 1,833 1,383 3,183 2,467
-------------- ------------- ------------- --------------
Net income $ 2,638 $ 2,076 $ 4,581 $ 3,703
============== ============= ============= ==============
Basic earnings per common share $ 0.34 $ 0.27 $ 0.60 $ 0.48
============== ============= ============= ==============
Diluted earnings per common share $ 0.34 $ 0.27 $ 0.59 $ 0.48
============== ============= ============= ==============
See notes to unaudited condensed consolidated financial statements.
4
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(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, 1998 7,672,246 $ 77 $ 110,181 $ (25,764) $ 10,306 $ 24,873 $ 119,673
Net income - - - - - 4,581 4,581
Exercise of non-qualified
stock options 30,000 - 551 - - - 551
============= ========== ============ =============== ============== =========== ===============
Balance at June 30, 1999 7,702,246 $ 77 $ 110,732 $ (25,764) $ 10,306 $ 29,454 $ 124,805
============= ========== ============ =============== ============== =========== ===============
See notes to unaudited condensed consolidated financial statements.
5
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1999 1998
----------------- ----------------
Cash flows from operating activities:
Net income $ 4,581 $ 3,703
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 2,531 2,382
Amortization of goodwill 2,198 1,400
Change in estimate/impairment of property and equipment 884 -
Deferred taxes 1,458 2,467
Minority interest 4,391 4,336
Loss/(Gain) on sale of assets 178 26
Changes in working capital, net of effects of purchase transaction:
Accounts receivable, net (20,955) (2,680)
Prepaid expenses and other current assets 1,226 (1,094)
Accounts payable 14,750 6,637
Accrued expenses (356) (625)
Other assets (1,580) 120
----------------- ----------------
Net cash provided by operating activities 9,306 16,672
----------------- ----------------
Cash flows from investing activities:
Cash used in acquisitions, net - (3,239)
Purchases of minority interest (108,710) (6,152)
Purchases of property and equipment, net (2,495) (2,781)
----------------- ----------------
Net cash used in investing activities (111,205) (12,172)
----------------- ----------------
Cash flows from financing activities:
Proceeds from sale of common stock 551 17
Distributions to minority interest (9,622) (4,976)
Payments on long-term debt (46,083) (19,660)
Proceeds from issuance of long-term debt 150,780 23,677
----------------- ----------------
Net cash provided by/(used in) financing activities 95,626 (942)
----------------- ----------------
Net increase (decrease) in cash (6,273) 3,558
Cash and cash equivalents, beginning of period 15,178 12,056
----------------- ----------------
Cash and cash equivalents, end of period $ 8,905 $ 15,614
================= ================
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 2,621 $ 1,921
Income taxes 656 43
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 April 1, 1998, the Company acquired all the outstanding
stock of Quality Intermodal Corporation for $4,080,000 in cash and $6,100,000
through the issuance of a three-year note, bearing interest at an annual rate of
5.6%. The acquisition was recorded using the purchase method of accounting
resulting in preliminary goodwill of $8,963,000 at June 30, 1998. The purchase
price was subsequently adjusted resulting in goodwill of $9,608,000.
Business acquisitions which involved the use of cash were accounted for as
follows:
SIX MONTHS
ENDED JUNE 30,
1998
---------------
(000'S)
Accounts receivable $ 8,698
Prepaid expenses and other current assets 57
Property and equipment 420
Goodwill 8,963
Other assets 15
Accounts payable (7,483)
Accrued expenses (396)
Long-term debt (7,035)
---------------
Cash used in acquisitions, net $ 3,239
---------------
7
NOTE 3. EARNINGS PER SHARE
The following is a reconciliation of the Company's Earnings per Share:
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------------------ ----------------------------
(000'S) (000'S)
--------------- ---------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------- ------ --------- ------- ------ ---------
BASIC EARNINGS PER SHARE
Income available to
common stockholders $2,638 7,688 $0.34 $2,076 7,654 $0.27
------ ----- ----- ------ ----- -----
EFFECT OF DILUTIVE SECURITIES
Stock options - 88 - - 85 -
------ ----- ------ ------ ----- -----
DILUTED EARNINGS PER SHARE
Income available to
common stockholders
plus assumed exercises $2,638 7,776 $0.34 $2,076 7,739 $0.27
------ ----- ----- ------ ----- -----
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
----------------------------- ---------------------------
(000'S) (000'S)
--------------- ---------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------- ------ --------- ------- ------ ---------
BASIC EARNINGS PER SHARE
Income available to
common stockholders $4,581 7,680 $0.60 $3,703 7,653 $0.48
------ ----- ----- ------ ----- -----
EFFECT OF DILUTIVE SECURITIES
Stock options - 73 - - 95 -
------ ----- ----- ------ ----- -----
DILUTED EARNINGS PER SHARE
Income available to
common stockholders
plus assumed exercises $4,581 7,753 $0.59 $3,703 7,748 $0.48
------ ----- ----- ------ ----- -----
NOTE 4. PURCHASE OF MINORITY INTERESTS
On April 1, 1998, the Company purchased the remaining 70% minority
interests in Hub City Dallas, L.P., Hub City Houston, L.P. and Hub City Rio
Grande, L.P. for approximately $6,152,000 in cash. As the amount paid for each
of the purchases of minority interest equaled the basis in excess of the fair
market value of assets acquired and liabilities assumed, the amount paid was
recorded as goodwill. The purchase price was subsequently adjusted resulting in
goodwill of $6,730,000.
On April 1, 1999, the Company purchased the remaining 70% minority
interests in Hub City Alabama, L.P., Hub City Atlanta, L.P., Hub City Boston,
L.P., Hub Group Canada, L.P., Hub City Cleveland, L.P., Hub City Detroit, L.P.,
Hub City Florida, L.P., Hub City Indianapolis, L.P., Hub City Kansas, L.P., Hub
City Mid-Atlantic, L.P., Hub City New York/New Jersey, L.P., Hub City New York
State, L.P., Hub City Ohio, L.P., Hub City Philadelphia, L.P., Hub City
Pittsburgh, L.P., Hub City Portland, L.P. and Hub City St. Louis, L.P. for
approximately $108,710,000 in cash. The acquisition was recorded using the
purchase method of accounting resulting in goodwill of $108,710,000 to be
amortized over a 40 year life.
8
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30, DECEMBER 31,
-----------------------------------
1999 1998
----------------- ---------------
(000'S)
Building and improvements $ 53 $ 53
Leasehold improvements 1,418 1,206
Computer equipment and software 15,718 15,816
Furniture and equipment 6,133 5,722
Transportation equipment and automobiles 5,055 5,318
--------------- ---------------
28,377 28,115
Less: Accumulated depreciation and amortization (10,364) (9,004)
--------------- ---------------
PROPERTY AND EQUIPMENT, net $ 18,013 $ 19,111
=============== ===============
NOTE 6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Fair value approximates book value at the balance sheet date.
JUNE 30,
----------------
1999
----------------
(000'S)
Installment notes payable due through 2001, monthly installments ranging from
$365 - $16,103, including interest, ranging from 2.9%
to 12.0%, collateralized by certain equipment $ 1,225
Bank lines of credit (see below) 31,000
Unsecured term notes, with quarterly payments ranging from $1,250,000 to
$2,000,000 with a balloon payment of $19 million due March 31, 2004;
interest is due quarterly at a floating rate based upon
LIBOR (London Interbank Offered Rate) or Prime rate (see below). At
June 30, 1999, interest rates range from 7.5% to 8.37% 50,000
Unsecured notes, mature on June 25, 2009 with annual payments
of $10,000,000 commencing on June 25, 2005; interest is paid quarterly
at 8.64% 50,000
Unsecured notes payable due in one balloon payment of $5,225,000 on
April 1, 2001; interest is due annually and is paid at 5.6% 5,225
Capital lease obligations, collateralized by certain equipment 147
----------------
Total long-term debt 137,597
Less current portion (5,925)
----------------
$ 131,672
----------------
Aggregate principal payments, in thousands, due subsequent to June 30,
1999, are as follows:
1999 (Remaining six months) $ 3,043
2000 6,250
2001 12,299
2002 8,003
2003 and thereafter 108,002
----------------
$ 137,597
----------------
9
On March 18, 1996, the Company assumed a line of credit for $5,000,000.
This line of credit was not used at June 30, 1999.
On April 30, 1999, the Company closed on an unsecured $50.0 million
five-year revolving line of credit with a bank. The Company can borrow at the
prime rate or up to prime plus 1% on a day-to-day basis or may borrow for 30,
60, 90 or 180 day periods at LIBOR plus 1.25% to 2.50% based on the Company's
funded debt to EBITDAM (earnings before interest expense, income taxes,
depreciation, amortization and minority interest) ratio. The credit facility
also contains certain financial covenants which, among others, requires that the
Company maintain required levels of EBITDAM, funded debt to EBITDAM, fixed
charge coverage and current assets to current liabilities. In addition, there
are limitations on additional indebtedness as well as acquisitions and minority
interest purchases. The Company was in compliance with these covenants at June
30, 1999. Advances on this line of credit at June 30, 1999 were $31,000,000 with
interest rates ranging between 7.40% and 8.75% and are classified as long term
debt.
The unsecured term notes have a floating interest rate. The Company can
borrow at the prime rate or up to prime plus 1.25% on a day-to-day basis or may
borrow for 30, 60, 90 or 180 day periods at LIBOR plus 1.50% to 2.75% based on
the Company's funded debt to EBITDAM ratio.
On April 30, 1999, under the term notes and the $50.0 million line of
credit debt agreement, the Company was required to enter into an interest rate
swap agreement designated as a hedge on a portion of the Company's variable rate
debt. The purpose of the swap was to fix the interest rate on a portion of the
variable rate debt and reduce certain exposures to interest rate fluctuations.
At June 30, 1999, the Company had an interest rate swap with a notional amount
of $25.0 million, a weighted average pay rate of 8.37%, a weighted average
receive rate of 7.75% and a maturity date of September 30, 2002. This swap
agreement involves the exchange of amounts based on the variable interest rate
for amounts based on the fixed interest rate over the life of the agreement,
without an exchange of the notional amount upon which the payments are based.
The differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the debt.
NOTE 7. CHANGE IN ESTIMATE/IMPAIRMENT OF PROPERTY AND EQUIPMENT
In the second quarter of 1999, an $884,000 pretax charge was recorded
due to a change in estimate and an impairment loss relating to certain operating
software applications. Specifically, $662,000 of this charge was attributable to
a change in estimate of the useful life for the Visual Movement software
previously used primarily for brokerage. The Visual Movement software is no
longer being used by the Company and was replaced with enhancements to the
Company's proprietary intermodal operating software during the second quarter of
1999. These enhancements allow for greater network visibility of loads in a year
2000 compliant program. The $222,000 impairment loss related to the write-down
of a logistics software program. The fair value was determined based on the
estimated future cash flows attributable to the single customer using this
asset. During the quarter ended June 30, 1999, management decided to purchase a
new logistics operating software application that is expected to be operating by
December 31, 1999. This new software will provide greater functionality than the
existing application.
10
HUB GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CALL OPTIONS
On April 1, 1999, the Company exercised its call options to acquire the
remaining 70% minority interests in Hub City Alabama, L.P., Hub City Atlanta,
L.P., Hub City Boston, L.P., Hub Group Canada, L.P., Hub City Cleveland, L.P.,
Hub City Detroit, L.P., Hub City Florida, L.P., Hub City Indianapolis, L.P.,
Hub City Kansas, L.P., Hub City Mid-Atlantic, L.P., Hub City New York/New
Jersey, L.P., Hub City New York State, L.P., Hub City Ohio, L.P., Hub City
Philadelphia, L.P., Hub City Pittsburgh, L.P., Hub City Portland, L.P. and Hub
City St. Louis, L.P. (collectively referred to as the "April 1999 Rollup"). The
Company paid $108.7 million in cash.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999, COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUE
Revenue for Hub Group, Inc. ("Hub Group" or the "Company") increased
12.9% to $319.4 million from $283.1 million in 1998. Intermodal revenue
increased 4.9% to $238.1 million from $227.0 million in 1998. Management
believes the intermodal growth was somewhat negatively impacted by concerns over
service disruption from the split-up of Conrail which began on June 1, 1999.
Truckload brokerage revenue increased 14.9% to $48.3 million from $42.1 million
in 1998. A change in business mix to a greater proportion of short haul loads
accounted for the lower growth rate in truckload brokerage than has been
experienced in recent quarters. Logistics revenue increased 136.4% to $33.0
million from $13.9 million in 1998. This increase is primarily due to the
increase in revenue from the Company's niche logistic services performed by Hub
Group Distribution Services ("Hub Distribution").
NET REVENUE
Net revenue increased to $39.0 million from $33.6 million in 1998. As a
percentage of revenue, net revenue increased to 12.2% of revenue from 11.9% in
1998. The increase in the percentage is principally attributed to the growth in
niche logistic services which earns a higher net revenue percentage of revenue
than does the Company's core intermodal and brokerage service offerings.
SALARIES AND BENEFITS
Salaries and benefits increased 16.9% to $20.6 million from $17.6
million in 1998. As a percentage of revenue, salaries and benefits increased to
6.4% of revenue from 6.2% in 1998. The increase in the percentage is primarily
attributable to the growth in niche logistic services. The Company's niche
logistic services requires a higher level of salaries and benefits as compared
to revenue than does the Company's core intermodal and brokerage service
offerings.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 24.1% to $9.4
million from $7.5 million in 1998. As a percentage of revenue, these expenses
increased to 2.9% of revenue from 2.7% in 1998. This increase in percentage is
primarily attributed to expenditures made related to information systems, rent
and outside services. The Company's information systems expenditures relate to
consulting, Year 2000 remediation and validation, and enhancements to the
Company's operating system. Rent expense increased due to the expansion of some
of Hub's operating facilities. Outside service expenditures relate to contracted
temporary labor to handle increased business for niche logistic services and
outside sales commissions.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment remained at
$1.0 million. This expense as a percentage of revenue remained constant at 0.3%.
11
AMORTIZATION OF GOODWILL
Amortization of goodwill increased 93.5% to $1.4 million from $0.7
million in 1998. The expense as a percentage of revenue increased to 0.4% from
0.3% in 1998. The increase in expense is attributable to the purchase of the
remaining 70% minority interests in the April 1999 Rollup.
CHANGE IN ESTIMATE/IMPAIRMENT OF PROPERTY AND EQUIPMENT
In the second quarter of 1999, a $0.9 million pretax charge was
recorded due to a change in estimate and an impairment loss relating to certain
operating software applications. Specifically, $0.7 million of this charge was
attributable to a change in estimate of the useful life for the Visual Movement
software previously used primarily for brokerage. The Visual Movement software
is no longer being used by the Company and was replaced with enhancements to the
Company's proprietary intermodal operating software during the second quarter of
1999. These enhancements allow for greater network visibility of loads in a year
2000 compliant program. The $0.2 million impairment loss related to the
write-down of a logistics software program. The fair value was determined based
on the estimated future cash flows attributable to the single customer using
this asset. During the quarter ended June 30, 1999, management decided to
purchase a new logistics operating software application that is expected to be
operating by December 31, 1999. This new software will provide greater
functionality than the existing application.
OTHER INCOME (EXPENSE)
Other income (expense) netted to $(0.9) million in 1999 compared to
$(0.5) million in 1998. Interest expense increased to $(2.1) million from $(0.7)
million. This increase in interest expense is due to the additional debt
required to fund the purchases of the remaining 70% minority interests in the
April 1999 Rollup. Interest income remained constant at $0.2 million in both
periods. Other income increased to $1.0 million in 1999 from $0.1 million in
1998. This increase in other income is primarily due to $1.0 million of
non-recurring income recognized upon execution of a confidential agreement with
one of the company's vendors.
MINORITY INTEREST
Minority interest decreased 82.5% to $0.5 million from $2.9 million in
1998. This reduction in expense is due to the purchase of the remaining 70%
minority interests in the April 1999 Rollup. The $0.5 million in expense in
1999 represents the 35% minority interest in Hub Distribution.
INCOME TAXES
The provision for income taxes increased 32.5% to $1.8 million from
$1.4 million in 1998. The Company is providing for income taxes at an effective
rate of 41% in 1999.
NET INCOME
Net income increased 27.1% to $2.6 million from $2.1 million in 1998.
EARNINGS PER SHARE
Earnings per share increased 25.9% to $0.34 from $0.27 in 1998
12
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998.
REVENUE
Revenue for Hub Group increased 16.5% to $627.1 million from $538.2
million in 1998. Intermodal revenue increased 7.7% to $468.0 million from $434.7
million in 1998. Management believes the intermodal growth was somewhat
negatively impacted by concerns over service disruption from the split-up of
Conrail which began on June 1, 1999. Truckload brokerage revenue increased 23.3%
to $93.8 million from $76.1 million in 1998. A change in business mix to a
greater proportion of short haul loads accounted for the lower growth rate in
truckload brokerage than has been experienced in recent quarters. Logistics
revenue increased 138.2% to $65.3 million from $27.4 million in 1998. This
increase is primarily due to the increase in revenue from the Company's niche
logistic services performed by Hub Distribution.
NET REVENUE
Net revenue increased to $78.2 million from $64.1 million in 1998. As a
percentage of revenue, net revenue increased to 12.5% from 11.9% in 1998. The
increase in the percentage is principally attributed to the growth in niche
logistic services which earns a higher net revenue percentage of revenue than
does the Company's core intermodal and brokerage service offerings.
SALARIES AND BENEFITS
Salaries and benefits increased 20.1% to $41.4 million from $34.5
million in 1998. As a percentage of revenue, salaries and benefits increased to
6.6% of revenue from 6.4% in 1998. The increase in the percentage is primarily
attributable to the growth in niche logistic services. The Company's niche
logistic services requires a higher level of salaries and benefits as compared
to revenue than does the Company's core intermodal and brokerage service
offerings.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $18.5 million
from $15.2 million in 1998. As a percentage of revenue, these expenses increased
to 2.9% from 2.8% in 1998. This increase in percentage is primarily attributed
to expenditures made related to information systems, rent and outside services.
The Company's information systems expenditures relate to consulting, Year 2000
remediation and validation, and enhancements to the Company's operating system.
Rent expense increased due to the expansion of some of Hub's operating
facilities. Outside service expenditures relate to contracted temporary labor to
handle increased business for niche logistic services and outside sales
commissions.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment increased 10.3%
to $2.0 million from $1.8 million in 1998. This expense as a percentage of
revenue remained constant at 0.3%.
AMORTIZATION OF GOODWILL
Amortization of goodwill increased 57.0% to $2.2 million from $1.4
million in 1998. The expense as a percentage of revenue increased to 0.4% from
0.3% in 1998. The increase in expense is primarily attributable to the purchase
of the remaining 70% minority interests in the April 1999 Rollup.
CHANGE IN ESTIMATE/IMPAIRMENT OF PROPERTY AND EQUIPMENT
In the second quarter of 1999, an $0.9 million pretax charge was
recorded due to a change in estimate and an impairment loss relating to certain
operating software applications. Specifically, $0.7 million of this charge was
attributable to a change in estimate of the useful life for the Visual Movement
software previously used primarily for brokerage. The Visual Movement software
13
is no longer being used by the Company and was replaced with enhancements to the
Company's proprietary intermodal operating software during the second quarter of
1999. These enhancements allow for greater network visibility of loads in a year
2000 compliant program. The $0.2 million impairment loss related to the
write-down of a logistics software program. The fair value was determined based
on the estimated future cash flows attributable to the single customer using
this asset. During the quarter ended June 30, 1999, management decided to
purchase a new logistics operating software application that is expected to be
operating by December 31, 1999. This new software will provide greater
functionality than the existing application.
OTHER INCOME (EXPENSE)
Other income (expense) netted to $(1.1) million in 1999 compared to
$(0.7) million in 1998. Interest expense increased to $(2.6) million from $(1.3)
million. This increase in interest expense is primarily due to the additional
debt required to fund the purchases of the remaining 70% minority interests in
the April 1999 Rollup. Interest income remained constant at $0.5 million in
both periods. Other income increased to $1.0 million in 1999 from $0.1 million
in 1998. This increase in other income is primarily due to $1.0 million of
non-recurring income recognized upon execution of a confidential agreement with
one of the company's vendors.
MINORITY INTEREST
Minority interest increased 1.3% to $4.4 million from $4.3 million in
1998. Minority interest as a percentage of income before minority interest
decreased to 36.1% from 41.3% in 1998. The purchase of the remaining 70%
minority interests in the April 1999 Rollup had the effect of lowering minority
interest as a percentage of income before minority interest when comparing 1999
to 1998.
INCOME TAXES
The provision for income taxes increased 29.0% to $3.2 million from
$2.5 million in 1998. The Company is providing for income taxes at an effective
rate of 41% in 1999.
NET INCOME
Net income increased 23.7% to $4.6 million from $3.7 million in 1998.
EARNINGS PER SHARE
Basic earnings per share increased 25.0% to $0.60 from $0.48 in 1998.
Diluted earnings per share increased 22.9% to $0.59 from $0.48 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
On April 30, 1999, the Company borrowed approximately $108 million of
unsecured debt to pay for its purchase of the 70% limited partnership interests
in the remaining limited partnerships which had a minority interest ownership.
On April 30, 1999, the Company closed on a new bank facility with
Harris Trust and Savings Bank ("Harris") which replaced the previous facility.
The new facility is comprised of $50.0 million in term debt and a $50.0 million
revolving line of credit. At June 30, 1999, there was $50.0 million outstanding
term debt and $31.0 million outstanding and $19.0 million unused and available
under the new line of credit with Harris. The facility is unsecured and has a
five-year term with a floating interest rate based upon the LIBOR (London
Interbank Offered Rate) or Prime Rate. The term debt has quarterly payments
ranging from $1,250,000 to $2,000,000 with a balloon payment of $19 million due
on March 31, 2004. Additionally, the Company closed and drew down on a $40.0
million bridge facility with Harris on April 30, 1999. The bridge facility had
a three-month term and bore interest at the bank's prime rate plus 1%. This
bridge facility of $40.0 million was paid off on June 25, 1999 and replaced
with the "Notes" (see below).
14
On June 25, 1999, the Company closed on $50.0 million of private
placement debt (the "Notes"). These Notes are unsecured and have an eight-year
average life with a coupon interest rate of 8.64% paid quarterly. These Notes
mature on June 25, 2009, with annual payments of $10.0 million commencing on
June 25, 2005.
At June 30, 1999, the unused and available portion of the line of
credit with Cass Bank and Trust Company was $5.0 million.
OUTLOOK, 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.
YEAR 2000
In 1999, through July 31, the Company has expensed approximately
$1,406,000 related to Year 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its cash from operations and its lines of credit
will be sufficient to meet its debt obligations as they become due.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest
rates which may adversely affect its results of operations and financial
condition. The Company seeks to minimize the risk from interest rate volatility
through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. The Company
does not use financial instruments for trading purposes.
The Company uses both fixed and variable rate debt as described in Note 8
of the Notes to Consolidated Financial Statements in Form 10-K for the year
ended December 31, 1998 and Note 6 in Form 10-Q for the quarterly period ended
June 30, 1999. The Company has entered into an interest rate swap agreement
designated as a hedge on a portion of the Company's variable rate debt. The
purpose of the swap is to fix the interest rate on a portion of the variable
rate debt and reduce certain exposures to interest rate fluctuations. At June
30, 1999, the Company had an interest rate swap with a notional amount of $25.0
million, a weighted average pay rate of 8.37%, a weighted average receive rate
of 7.75% and a maturity date of September 30, 2002. This swap agreement involves
the exchange of amounts based on the variable interest rate for amounts based on
the fixed interest rate over the life of the agreement, without an exchange of
the notional amount upon which the payments are based. The differential to be
paid or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt.
The main objective of interest rate risk management is to reduce the total
funding cost to the Company and to alter the interest rate exposure to the
desired risk profile.
15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Stockholders of Hub Group, Inc. was
held on May 12, 1999. At this meeting, the following six
directors were reelected with the following votes: Phillip C.
Yeager: 18,848,561 votes for and 79,840 votes withheld;
David P. Yeager: 18,848,561 votes for and 79,840 votes
withheld; Thomas L. Hardin: 18,848,561 votes for and 79,840
votes withheld; Gary D. Eppen: 18,917,053 votes for and
11,348 votes withheld; Charles R. Reaves: 18,917,053 votes
for and 11,348 votes withheld; Martin P. Slark: 18,917,053
votes for and 11,348 votes withheld.
Also at this meeting, the Stockholders voted on a proposal to
approve the Company's 1999 Long-Term Incentive Plan. This
proposal was approved by the following votes: 17,058,631 votes
for, 1,070,928 votes against and 26,370 votes withheld.
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 by this reference.
16
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: August 16, 1999 /S/ JAY E. PARKER
-----------------
Jay E. Parker
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit No.
10.11 $50 million Note Purchase Agreement dated as of June 25, 1999 among the
Registrant, Hub City Terminals, Inc., Hub Holdings, Inc. and various
purchasers.