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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, 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 November 10, 1999, the registrant had 7,043,950 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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<PAGE>
HUB GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
HUB GROUP, INC. - REGISTRANT
Unaudited Condensed Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 3
Unaudited Condensed Consolidated Statements of Operations - Three
Months and Nine Months Ended September 30, 1999 and 1998 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1999 5
Unaudited Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 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 18
2
<PAGE>
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------- ----------------
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,970 $ 15,178
Accounts receivable, net 183,734 148,104
Prepaid expenses and other current assets 4,730 6,036
---------------- ---------------
TOTAL CURRENT ASSETS 196,434 169,318
PROPERTY AND EQUIPMENT, net 21,125 19,111
GOODWILL, net 221,086 115,858
OTHER ASSETS 2,014 504
---------------- ---------------
TOTAL ASSETS $ 440,659 $ 304,791
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 145,876 $ 123,513
Other 11,713 7,909
Accrued expenses
Payroll 8,969 6,339
Other 6,497 6,332
Deferred taxes 1,751 1,751
Current portion of long-term debt 6,106 3,161
---------------- ---------------
TOTAL CURRENT LIABILITIES 180,912 149,005
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 127,986 29,589
DEFERRED TAXES 3,035 556
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST 668 5,968
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 77 77
Additional paid-in capital 110,786 110,181
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 32,653 24,873
---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 128,058 119,673
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 440,659 $ 304,791
================ ===============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ---------------------------
1999 1998 1999 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 333,337 $ 295,859 $ 960,467 $ 834,043
Transportation costs 291,844 259,336 840,760 733,453
-------------- ------------- ------------- -------------
Net revenue 41,493 36,523 119,707 100,590
Costs and expenses:
Salaries and benefits 21,014 18,396 62,413 52,861
Selling, general and administrative 9,492 7,994 27,972 23,159
Depreciation and amortization of property and equipment 975 739 2,994 2,568
Amortization of goodwill 1,434 752 3,632 2,153
Change in estimate/impairment of property and equipment - - 884 -
-------------- ------------- ------------- -------------
Total costs and expenses 32,915 27,881 97,895 80,741
Operating income 8,578 8,642 21,812 19,849
-------------- ------------- ------------- -------------
Other income (expense):
Interest expense (3,071) (620) (5,647) (1,913)
Interest income 191 260 706 712
Other, net 131 (37) 1,113 103
-------------- ------------- ------------- -------------
Total other expense (2,749) (397) (3,828) (1,098)
Income before minority interest and provision for income taxes 5,829 8,245 17,984 18,751
-------------- ------------- ------------- -------------
Minority interest 407 3,902 4,798 8,238
-------------- ------------- ------------- -------------
Income before provision for income taxes 5,422 4,343 13,186 10,513
Provision for income taxes 2,223 1,737 5,406 4,204
-------------- ------------- ------------- -------------
Net income $ 3,199 $ 2,606 $ 7,780 $ 6,309
============== ============= ============= =============
Basic earnings per common share $ 0.42 $ 0.34 $ 1.01 $ 0.82
============== ============= ============= =============
Diluted earnings per common share $ 0.41 $ 0.34 $ 1.00 $ 0.82
============== ============= ============= =============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
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
------------- ---------- ------------ ------------- -------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 7,672,246 $ 77 $ 110,181 $ (25,764) $ 10,306 $ 24,873 $ 119,673
Net income - - - - - 7,780 7,780
Exercise of non-qualified
stock options 34,000 - 605 - - - 605
============= ========== ============ ============= ============== ========== ===============
Balance at September 30, 1999 7,706,246 $ 77 $ 110,786 $ (25,764) $ 10,306 $ 32,653 $ 128,058
============= ========== ============ ============= ============== ========== ===============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,780 $ 6,309
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 3,753 3,384
Amortization of goodwill 3,632 2,153
Change in estimate/impairment of property and equipment 884 -
Deferred taxes 2,479 4,043
Minority interest 4,798 8,238
Loss/(Gain) on sale of assets 140 (51)
Changes in working capital, net of effects of purchase transaction:
Accounts receivable, net (35,630) (9,528)
Prepaid expenses and other current assets 1,306 (1,217)
Accounts payable 26,167 10,480
Accrued expenses 2,795 1,508
Other assets (1,510) (13)
---------------- ---------------
Net cash provided by operating activities 16,594 25,306
---------------- ---------------
Cash flows from investing activities:
Cash used in acquisitions, net - (3,989)
Purchases of minority interest (108,710) (6,152)
Purchases of property and equipment, net (6,791) (3,145)
---------------- ---------------
Net cash used in investing activities (115,501) (13,286)
---------------- ---------------
Cash flows from financing activities:
Proceeds from sale of common stock 605 49
Distributions to minority interest (10,098) (7,349)
Payments on long-term debt (49,447) (25,706)
Proceeds from issuance of long-term debt 150,639 26,383
---------------- ---------------
Net cash provided by/(used in) financing activities 91,699 (6,623)
---------------- ---------------
Net increase (decrease) in cash and cash equivalents (7,208) 5,397
Cash and cash equivalents, beginning of period 15,178 12,056
---------------- ---------------
Cash and cash equivalents, end of period $ 7,970 $ 17,453
================ ===============
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 4,256 $ 1,873
Income taxes 1,624 1,041
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE>
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 $9,028,000 at September 30, 1998. The
purchase price was subsequently adjusted resulting in goodwill of $9,608,000.
On August 1, 1998, Hub Distribution acquired all the outstanding stock
of Corporate Express Distribution Services ("CEDS") for $750,000 in cash. The
acquisition was recorded using the purchase method of accounting resulting in
goodwill of $390,750.
Business acquisitions which involved the use of cash were accounted for as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
1998
-------------------
(000'S)
<S> <C>
Accounts receivable $ 8,698
Prepaid expenses and other current assets 57
Property and equipment 779
Goodwill 9,419
Other assets 15
Accounts payable (7,483)
Accrued expenses (461)
Long-term debt (7,035)
-------------------
Cash used in acquisitions, net $ 3,989
-------------------
</TABLE>
7
<PAGE>
NOTE 3. EARNINGS PER SHARE
The following is a reconciliation of the Company's Earnings per Share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------- -------------------------
(000'S) (000'S)
--------------- --------------
Per-Share Per-Share
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to
common stockholders $3,199 7,704 $0.42 $2,606 7,655 $0.34
------ ----- ----- ------ ----- -----
EFFECT OF DILUTIVE SECURITIES
Stock options - 82 - - 60 -
------ ----- ----- ------ ----- -----
DILUTED EARNINGS PER SHARE
Income available to
common stockholders
plus assumed exercises $3,199 7,786 $0.41 $2,606 7,715 $0.34
------ ----- ----- ------ ----- -----
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------- -------------------------
(000'S) (000'S)
--------------- --------------
Per-Share Per-Share
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to
common stockholders $7,780 7,688 $1.01 $6,309 7,654 $0.82
------ ----- ----- ------ ----- -----
EFFECT OF DILUTIVE SECURITIES
Stock options - 76 - - 83 -
------ ----- ----- ------ ----- -----
DILUTED EARNINGS PER SHARE
Income available to
common stockholders
plus assumed exercises $7,780 7,764 $1.00 $6,309 7,737 $0.82
------ ----- ----- ------ ----- -----
</TABLE>
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 City 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 City, 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 preliminary goodwill of $108,710,000
to be amortized over a 40 year life.
8
<PAGE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------------------------
1999 1998
----------------- -------------------
(000'S)
<S> <C> <C>
Building and improvements $ 55 $ 53
Leasehold improvements 1,435 1,206
Computer equipment and software 18,719 15,816
Furniture and equipment 7,181 5,722
Transportation equipment and automobiles 4,706 5,318
----------------- ------------------
32,096 28,115
Less: Accumulated depreciation and amortization (10,971) (9,004)
----------------- ------------------
PROPERTY AND EQUIPMENT, net $ 21,125 $ 19,111
================= ==================
</TABLE>
NOTE 6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Fair value approximates book value at the balance sheet date.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1999
------------------
(000'S)
<S> <C>
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 $ 977
Bank lines of credit (see below) 29,000
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
September 30, 1999, interest rates range from 7.8% to 8.37% 48,750
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 140
------------------
Total long-term debt 134,092
Less current portion (6,106)
------------------
$ 127,986
------------------
</TABLE>
Aggregate principal payments, in thousands, due subsequent to September
30, 1999, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 (Remaining three months) $ 1,538
2000 6,250
2001 12,299
2002 8,003
2003 and thereafter 106,002
------------------
$ 134,092
------------------
</TABLE>
9
<PAGE>
On March 18, 1996, the Company assumed a line of credit for $5,000,000.
This line of credit was not used at September 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
September 30, 1999. Advances on this line of credit at September 30, 1999 were
$29,000,000 with interest rates ranging between 7.83% and 7.88% 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 September 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 8.08% 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.
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. The Notes
contain certain covenants which the Company was in compliance with at September
30, 1999.
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 and
subsequently purchased a new logistics operating software application that is
expected to be installed by December 31, 1999. This new software will provide
greater functionality than the existing application.
10
<PAGE>
HUB GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CALL OPTIONS
On April 1, 1999, Hub Group, Inc. ("Hub Group" or 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 City
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 City, 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 SEPTEMBER 30, 1999, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUE
Revenue for Hub Group increased 12.7% to $333.3 million from $295.9
million in 1998. Intermodal revenue increased 6.1% to $249.1 million from $234.9
million in 1998. Management believes the intermodal growth was somewhat
negatively impacted by service disruption from the split-up of Conrail which
began on June 1, 1999. Truckload brokerage revenue increased 16.5% to $50.1
million from $43.0 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 89.9% to $34.1 million from $18.0 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 $41.5 million from $36.5 million in 1998. As a
percentage of revenue, net revenue increased to 12.4% of revenue from 12.3% 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 14.2% to $21.0 million from $18.4
million in 1998. As a percentage of revenue, salaries and benefits increased to
6.3% 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 18.7% to $9.5
million from $8.0 million in 1998. As a percentage of revenue, these expenses
increased to 2.8% of revenue from 2.7% in 1998. This increase in percentage is
primarily attributed to expenditures made related to information systems, travel
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. Travel and related expenses increased due to a
national sales meeting held in 1999 and not in the previous year. Outside
service expenditures relate to contracted temporary labor and other services to
handle increased business for niche logistic services and outside sales
commissions.
11
<PAGE>
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment increased 31.9%
to $1.0 million from $0.7 million in 1998. The expense as a percentage of
revenue increased to 0.3% from 0.2% in 1998. Third quarter 1999 depreciation and
amortization expense is consistent with that of the second quarter of 1999.
Third quarter 1998 expense included an adjustment that reduced the actual level
of depreciation and amortization for that quarter.
AMORTIZATION OF GOODWILL
Amortization of goodwill increased 90.7% to $1.4 million from $0.8
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.
OTHER INCOME (EXPENSE)
Other income (expense) netted to $(2.7) million in 1999 compared to
$(0.4) million in 1998. Interest expense increased to $(3.1) million from $(0.6)
million in 1998. 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 decreased to $0.2 million from $0.3 million
in 1998. The decrease in interest income is due to fewer short-term investments
of cash as the Company seeks to minimize the amounts outstanding under its lines
of credit. Other income of $0.1 million in 1999 is an increase of $0.2 million
over the prior year. This increase in other income is primarily due to the gain
on the sale of various fixed assets.
MINORITY INTEREST
Minority interest decreased 89.6% to $0.4 million from $3.9 million in
1998. This reduction in expense is due to the purchase of the remaining 70%
minority interests in the April 1999 Rollup. The $0.4 million in expense in 1999
represents the 35% minority interest in Hub Distribution.
INCOME TAXES
The provision for income taxes increased 28.0% to $2.2 million from
$1.7 million in 1998. The Company is providing for income taxes at an effective
rate of 41% in 1999.
NET INCOME
Net income increased 22.8% to $3.2 million from $2.6 million in 1998.
EARNINGS PER SHARE
Basic earnings per share increased 23.5% to $0.42 from $0.34 in 1998.
Diluted earnings per share increased 20.6% to $0.41 from $0.34 in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
REVENUE
Revenue for Hub Group increased 15.2% to $960.5 million from $834.0
million in 1998. Intermodal revenue increased 7.1% to $717.1 million from $669.6
million in 1998. Management believes the intermodal growth was somewhat
negatively impacted by concerns over service disruption and actual service
disruption from the split-up of Conrail which began on June 1, 1999. Truckload
brokerage revenue increased 20.9% to $143.9 million from $119.1 million in 1998.
12
<PAGE>
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 119.1% to $99.4 million from $45.4
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 $119.7 million from $100.6 million in 1998. As
a percentage of revenue, net revenue increased to 12.5% from 12.1% 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 18.1% to $62.4 million from $52.9
million in 1998. As a percentage of revenue, salaries and benefits increased to
6.5% of revenue from 6.3% 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 $28.0 million
from $23.2 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 16.6%
to $3.0 million from $2.6 million in 1998. This expense as a percentage of
revenue remained constant at 0.3%.
AMORTIZATION OF GOODWILL
Amortization of goodwill increased 68.7% to $3.6 million from $2.2
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
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 and
subsequently purchased a new logistics operating software application that is
expected to be installed by December 31, 1999. This new software will provide
greater functionality than the existing application.
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OTHER INCOME (EXPENSE)
Other income (expense) netted to $(3.8) million in 1999 compared to
$(1.1) million in 1998. Interest expense increased to $(5.6) million from $(1.9)
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 $0.7 million in both
periods. Other income increased to $1.1 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 41.8% to $4.8 million from $8.2 million in
1998. Minority interest as a percentage of income before minority interest
decreased to 26.7% from 43.9% 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 28.6% to $5.4 million from
$4.2 million in 1998. The Company is providing for income taxes at an effective
rate of 41% in 1999.
NET INCOME
Net income increased 23.3% to $7.8 million from $6.3 million in 1998.
EARNINGS PER SHARE
Basic earnings per share increased 23.2% to $1.01 from $0.82 in 1998.
Diluted earnings per share increased 22.0% to $1.00 from $0.82 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 September 30, 1999, there was $48.8 million
outstanding term debt and $29.0 million outstanding and $21.0 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).
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.
14
<PAGE>
At September 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
STATE OF READINESS
Management has broken down its Year 2000 program into four phases.
Those phases are awareness, assessment, renovation and validation. The Company
contracted with an outside consulting firm to perform a readiness review
designed to verify that the Company is aware of all material relevant areas of
concern regarding Year 2000 compatibility. This review was completed in December
1998.
Management believes that it is aware of the risk areas facing the
Company regarding Year 2000 and has broken that area into seven categories. The
seven categories are: (i) the Company's main operating system that has been
created and enhanced in-house, (ii) the Company's ancillary operating software
applications which were purchased, (iii) desktop hardware and software
applications, (iv) the Company's financial reporting system, (v) the Company's
telephone systems, (vi) embedded technology in the Company's office equipment,
physical environment and drayage tractors and (vii) the state of readiness of
the Company's customers, transportation service providers and other vendors.
The Company's main operating system has been renovated. The renovation,
which consists of reprogramming the source code, was completed in March 1999.
The validation phase was started in March 1999 and completed in September 1999.
The Company is planning on testing and re-certifying the system throughout the
fourth quarter of 1999.
The Company believes all of its ancillary operating software
applications have been assessed. All of the supporting vendors have stated their
products are Year 2000 compliant. The validation phase began in March 1999 and
was completed in October 1999.
The Company's financial reporting system vendor has stated that their
application is Year 2000 compliant. The Company executed the validation phase
for the financial reporting system, successfully processing data with date
parameters beyond December 31, 1999. The validation phase was started in April
1999 and completed in September 1999.
The Company's desktop hardware and software application assessment is
ongoing. The Company has created an inventory of all hardware and software
applications. The Company is currently working with an outside consulting firm
to execute the renovation and validation phases. The renovation phase will
consist of updating or replacing the hardware or software application if it is
not Year 2000 compliant. The renovation phase began during the second quarter of
1999. The Company has contracted with the outside consulting firm to complete
the validation phase by December 31, 1999.
The Company has assessed its telecommunications system during the
second quarter of 1999. The Company has completed testing and upgrading of phone
systems and believes that they are now Year 2000 compliant.
15
<PAGE>
The Company is aware of the potential issues regarding embedded
technology in its office equipment, physical environment and drayage tractors.
During the second quarter of 1999, the Company sent out surveys to the Hub
Operating Companies to obtain the relevant information in order to determine
whether their embedded systems were compliant. A variety of office equipment was
analyzed and assessed for Year 2000 issues. The Company has upgraded or replaced
office equipment that it identified as failing to meet Year 2000 compliance
standards. Similarly, the Company recognizes the potential issues regarding its
physical environment, such as heat, electricity, elevators, security systems,
etc., and has taken the appropriate steps to assess any issues. The Company has
assessed its embedded technology in its drayage tractors and received a
statement from the engine manufacturers that the tractors' embedded technology
is Year 2000 compliant.
The Company has identified four categories of key third parties with
which the Company has a material relationship that should be assessed. Those
categories are: (i) transportation needs, (ii) key vendors such as the railroads
and significant providers of drayage and over-the-road services, (iii) our
information network communications provider and (iv) significant third-party
freight payment vendors utilized by the Company's customers. The Company has
received statements from certain major customers and from certain major
customers' third-party freight payment vendors regarding their Year 2000
readiness. The Company has no plans to obtain such statements from all its
customers or all its customers' third-party freight payment vendors. The Company
has received statements from the major railroads and many of the Company's
drayage and over-the-road service providers that they are Year 2000 compliant.
The Company believes, at this time, that its information network communication
provider is Year 2000 compliant.
COSTS
In 1999, through October 31, the Company has expensed approximately
$1,761,000 related to Year 2000.
CONTINGENCY PLAN
The Company has developed formal written contingency plans. Certain
aspects of the Year 2000 contingency plans, such as dealing with an inoperative
system, were simply a matter of integrating the Company's current contingency
plans for dealing with the potential temporary shut downs that may occur from
time to time. Other aspects of the contingency plans were developed as the
Company worked through the phases of readiness. The maintenance of the
contingency plans will be an ongoing process.
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 September 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 September 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
16
<PAGE>
average receive rate of 8.08% 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.
17
<PAGE>
PART II. OTHER INFORMATION
None.
18
<PAGE>
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 10, 1999 /S/ JAY E. PARKER
-----------------
Jay E. Parker
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
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