HUBG

Business Context and Reporting Period

Company: Hub Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2000
Business Overview: Hub Group provides intermodal, truckload brokerage, and logistics services. The company operates through various subsidiaries, including Hub Distribution, which focuses on e-commerce and home delivery for large items.

Key Financial Metrics

Note: Total Debt calculated as Current portion of long-term debt ($11,906) + Long-term debt ($109,097).

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 6.4% for the quarter and 7.0% for the nine-month period compared to 1999. Logistics revenue saw significant growth (26.3% Q3, 28.2% YTD), while intermodal growth slowed (3.7%) due to a terminated customer contract and rail service disruptions.
• Profitability Decline: Net income decreased 51.1% for the quarter and 54.4% for the nine-month period. Operating income dropped 42.5% (Q3) and 36.0% (YTD).
• Expense Increases: Salaries and benefits rose 17.3% (Q3) and 15.3% (YTD) due to headcount increases for IT and e-business initiatives. Selling, general, and administrative expenses increased 23.2% (Q3) and 22.0% (YTD), driven by equipment leases and outside services.
• Interest Expense: Interest expense decreased 16.7% in the quarter due to lower average debt balances but increased 51.7% for the nine-month period due to debt incurred for the April 1999 minority interest purchase.
• Liquidity: Cash and cash equivalents dropped from $1.9 million at year-end 1999 to $0 at September 30, 2000, as cash was used to reduce debt and fund capital expenditures.

Guidance, Outlook, Risks, and Contingencies

• Debt Covenant Contingency: A critical risk involves the company's $50 million private placement debt ("Notes"). A second amendment to financial covenants is contingent upon successfully amending the Notes agreement by December 31, 2000. Failure to do so could result in a default on the Notes, the bank term debt, and the line of credit.
• Recent Credit Amendment: On November 7, 2000, the company amended its bank credit facility, increasing borrowing rate ranges based on the funded debt to EBITDAM ratio. The company was in compliance with covenants as of September 30, 2000.
• Capital Expenditures: The company spent approximately $20.0 million in the first nine months of 2000, primarily on new operating systems, e-business initiatives, and logistics applications.
• Market Risks: Management cites risks including competitive pressures from web-based entrants, rail service conditions, fuel surcharges, and fluctuations in interest rates.
• Outlook: Management believes cash from operations and the available line of credit ($28.0 million unused) are sufficient to meet short-term needs, provided the Notes agreement is amended successfully.

Investor Verification Checklist

• Covenant Compliance: Verify the status of the amendment to the $50 million private placement debt ("Notes") required by December 31, 2000, to avoid default.
• Cash Position: Confirm the company's ability to maintain liquidity given the $0 cash balance at period end and reliance on the revolving credit line.
• Logistics Growth Sustainability: Assess whether the high growth in logistics revenue (26-28%) can offset the slower growth in core intermodal and brokerage segments.
• IT Investment ROI: Monitor the return on the $20 million capital expenditure allocated to e-business and operating system upgrades.
• Interest Rate Exposure: Evaluate the impact of the November 2000 credit amendment on future interest expenses given the increased rate ranges.