Hub Group, Inc. 10-Q Summary: Period Ended June 30, 1999
Business Context and Reporting Period
This is an unaudited quarterly report (Form 10-Q) for Hub Group, Inc., covering the three and six months ended June 30, 1999. The Company operates in intermodal transportation, truckload brokerage, and logistics services. A significant corporate event during this period was the "April 1999 Rollup," where the Company exercised call options to acquire the remaining 70% minority interests in 18 limited partnerships for approximately $108.7 million in cash.
Key Financial Metrics
| Metric | Three Months Ended June 30, 1999 | Six Months Ended June 30, 1999 |
|---|---|---|
| Revenue | $319.4 million | $627.1 million |
| Net Revenue (Gross Profit) | $39.0 million (12.2% margin) | $78.2 million (12.5% margin) |
| Operating Income | $5.8 million | $13.2 million |
| Net Income | $2.6 million | $4.6 million |
| Diluted EPS | $0.34 | $0.59 |
| Cash from Operations | N/A | $9.3 million |
| Total Debt (Current + Long-Term) | $137.6 million | $137.6 million |
| Cash and Equivalents | $8.9 million | $8.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 12.9% for the quarter and 16.5% for the six-month period compared to 1998. Logistics revenue saw the most significant growth, up 136.4% (quarter) and 138.2% (six months), driven by niche services.
- Profitability: Net income rose 27.1% for the quarter and 23.7% for the six-month period. Net revenue margins improved slightly due to the higher-margin logistics segment.
- Debt Structure: Long-term debt increased significantly from $29.6 million (Dec 31, 1998) to $131.7 million (June 30, 1999) to fund the minority interest rollup. Interest expense consequently doubled for the quarter.
- Goodwill: Goodwill increased from $115.9 million to $222.5 million due to the $108.7 million purchase of minority interests, recorded entirely as goodwill.
- Unusual Items: A $0.9 million pretax charge was recorded in Q2 1999 for a change in estimate and impairment of software assets (Visual Movement and logistics software).
Guidance, Outlook, and Risks
Management Commentary: Management attributes revenue growth to the expansion of niche logistics services. However, intermodal growth was noted to be negatively impacted by service disruption concerns following the split-up of Conrail on June 1, 1999. The Company is transitioning to new Year 2000 compliant software systems.
Liquidity: The Company secured a new $50 million revolving line of credit and $50 million in term notes in April 1999. As of June 30, 1999, $19 million remained available under the revolving line. Management believes cash from operations and credit lines are sufficient to meet debt obligations.
Risks and Contingencies:
- Interest Rate Risk: The Company has significant variable-rate debt but has entered into a $25 million interest rate swap to hedge exposure.
- Market Risks: Competitive pressures, rail carrier consolidation, and regulatory changes.
- Year 2000: Approximately $1.4 million has been expensed for Y2K remediation through July 31, 1999.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the new credit facility covenants (EBITDAM, funded debt ratios) given the increased leverage.
- Software Transition: Confirm the successful implementation and operational status of the new logistics software expected by December 31, 1999.
- Conrail Impact: Monitor the actual impact of the Conrail split on intermodal service levels and revenue in subsequent quarters.
- Minority Interest: Review the remaining 35% minority interest in Hub Distribution and its impact on consolidated net income.