Hub Group, Inc. 10-K Summary: Fiscal Year Ended December 31, 1998
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 1998, for Hub Group, Inc. (Hub Group), the largest intermodal marketing company (IMC) in the United States. The Company operates a network of 31 offices ("Hubs") providing intermodal, truck brokerage, and logistics services. The reporting period was significantly impacted by industry-wide railroad service disruptions and the Company's strategic acquisition of Quality Intermodal Corporation and minority interests in several regional partnerships.
Key Financial Metrics
| Metric (in thousands) | 1998 | 1997 |
|---|---|---|
| Total Revenue | $1,145,906 | $1,064,479 |
| Net Revenue | $138,334 | $129,855 |
| Operating Income | $26,406 | $33,495 |
| Historical Net Income | $8,908 | $9,525 |
| Diluted EPS | $1.15 | $1.46 |
| Net Revenue Margin | 12.1% | 12.2% |
| Working Capital | $20,313 | $15,209 |
| Total Assets | $304,791 | $267,826 |
| Long-Term Debt | $29,589 | $22,873 |
| Cash and Equivalents | $15,178 | $12,056 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 7.6% to $1.146 billion. Intermodal revenue grew 7.2%, while truckload brokerage revenue surged 27.3%. Conversely, logistics revenue declined 17.4% due to the cancellation of a major third-party logistics contract in January 1998.
- Profitability Decline: Operating income decreased 21.2% to $26.4 million, and net income fell 6.5% to $8.9 million. Management attributed this to severe rail service disruptions in 1998, which increased operating costs (salaries and benefits rose to 6.3% of revenue) faster than revenue growth.
- Acquisitions: The Company acquired Quality Intermodal Corporation for $4.1 million cash and a $6.0 million note. It also purchased remaining minority interests in Texas-based hubs for approximately $6.7 million cash.
- Debt Levels: Long-term debt increased by approximately $6.7 million, primarily due to financing the Quality acquisition and minority interest purchases.
Outlook, Risks, and Management Commentary
- Year 2000 Compliance: The Company is actively managing Year 2000 (Y2K) readiness. It estimates total costs of $2.5 million to $3.0 million, with approximately $680,000 expensed in 1998. Management expects validation phases to complete by September 30, 1999.
- Major Subsequent Event: On March 22, 1999, the Company announced its intention to acquire the remaining limited partnership interests in 17 Hub Partnerships for approximately $110 million. This transaction is expected to be financed through bank borrowings and unsecured senior debt, with completion targeted for the second quarter of 1999.
- Operational Risks: Management identifies railroad service performance as the most significant factor influencing revenue growth. Potential disruptions from the scheduled split of Conrail (June 1, 1999) are noted as a risk.
- Liquidity: The Company maintains a $36.0 million revolving credit facility (with $18.5 million drawn at year-end) and a $5.0 million line of credit ($2.05 million drawn). Management believes cash flow and credit facilities are sufficient to meet needs through 2003.
Investor Verification Checklist
- Acquisition Financing: Verify the terms and interest rates of the new debt instruments required to fund the $110 million acquisition of Hub Partnership interests announced in March 1999.
- Rail Service Stability: Monitor the impact of the Conrail split (June 1999) on intermodal service levels and Hub Group's ability to maintain revenue growth.
- Y2K Execution: Confirm the completion of the Y2K validation phase by September 30, 1999, and assess any potential operational disruptions or cost overruns.
- Logistics Segment Recovery: Track the replacement of the $32.5 million in lost logistics revenue from the cancelled contract in 1998.
- Debt Covenants: Review the financial covenants associated with the $36 million credit facility to ensure compliance following the increased debt load from the Quality acquisition and the pending $110 million buyout.