================================================================================ 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. ================================================================================
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) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, -------------- --------------- 1999 1998 -------------- --------------- <S> <C> <C> 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 ============== =============== </TABLE> See notes to unaudited condensed consolidated financial statements. 3
HUB GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 -------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> 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 ============== ============= ============= ============== </TABLE> 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) <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 - - - - - 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 ============= ========== ============ =============== ============== =========== =============== </TABLE> See notes to unaudited condensed consolidated financial statements. 5
HUB GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ----------------------------------- 1999 1998 ----------------- ---------------- <S> <C> <C> 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 </TABLE> 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: <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1998 --------------- (000'S) <S> <C> 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 --------------- </TABLE> 7
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 JUNE 30, 1999 JUNE 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 $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 ------ ----- ----- ------ ----- ----- </TABLE> <TABLE> <CAPTION> 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 ------- ------ --------- ------- ------ --------- <S> <C> <C> <C> <C> <C> <C> 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 ------ ----- ----- ------ ----- ----- </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 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: <TABLE> <CAPTION> JUNE 30, DECEMBER 31, ----------------------------------- 1999 1998 ----------------- --------------- (000'S) <S> <C> <C> 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 =============== =============== </TABLE> NOTE 6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Fair value approximates book value at the balance sheet date. <TABLE> <CAPTION> JUNE 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 $ 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 ---------------- </TABLE> Aggregate principal payments, in thousands, due subsequent to June 30, 1999, are as follows: <TABLE> <CAPTION> <S> <C> 1999 (Remaining six months) $ 3,043 2000 6,250 2001 12,299 2002 8,003 2003 and thereafter 108,002 ---------------- $ 137,597 ---------------- </TABLE> 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.