HUBG

Hub Group, Inc. 10-K Summary: Fiscal Year Ended December 31, 1999

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 1999, for Hub Group, Inc., the largest intermodal marketing company (IMC) in the United States. The Company operates a network of 29 offices ("Hubs") providing intermodal, truck brokerage, and logistics services. A defining event of the period was the "April Purchase" on April 1, 1999, where the Company exercised options to acquire the remaining 70% minority interests in 17 Hub Partnerships for approximately $108.7 million in cash, resulting in the Company wholly owning all Hub Partnerships except for Hub Distribution (65% owned) and Hub City Texas.

Key Financial Metrics

Margins: Net revenue margin improved to 12.5% in 1999 from 12.1% in 1998. Net income margin remained flat at 0.8%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 13.2% to $1.30 billion. Logistics revenue surged 88.3% due to niche services, and truckload brokerage grew 19.3%. Intermodal revenue grew a modest 6.2%, impacted by Conrail service disruptions.
• Profitability: Net income rose 21.8% to $10.8 million. This growth was driven by a 47.9% reduction in minority interest expense (due to the April Purchase) and higher net revenue margins, which offset a significant increase in interest expense.
• Debt Structure: Long-term debt increased nearly five-fold to $131.4 million to finance the acquisition of minority interests. Interest expense jumped from $2.5 million to $8.6 million.
• Cash Flow: Net cash provided by operating activities decreased significantly to $11.8 million from $28.7 million, primarily due to a $42.1 million increase in accounts receivable and heavy investing cash outflows ($119.9 million) for the minority interest purchases.
• Goodwill: Amortization of goodwill increased 74.1% to $5.1 million due to the April 1999 acquisition.

Outlook, Risks, and Management Commentary

• Divestiture: On March 13, 2000, the Company signed a letter of intent to sell its 65% interest in Hub Distribution for $65 million in cash and warrants. The transaction is subject to customary conditions.
• Operational Risks: Management cites railroad service performance as the most significant factor influencing revenue growth. Potential disruptions from the proposed Burlington Northern Santa Fe and Canadian National Railway merger are noted as a risk.
• Competition: The industry is highly competitive with emerging web-based competitors. Competition is based on rates, service quality, and reliability.
• Year 2000: The Company reported no material system failures post-December 31, 1999, having spent approximately $2.7 million on remediation.
• Capital Resources: The Company maintains a $50 million revolving line of credit ($16 million available) and a $50 million term debt facility. Management believes current liquidity is sufficient for short-term needs and debt repayment.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with financial covenants (EBITDAM, funded debt ratios) given the significant increase in leverage.
• Hub Distribution Sale: Confirm the status and closing of the proposed $65 million sale of the Hub Distribution interest.
• Railroad Service Levels: Monitor intermodal service disruptions, particularly regarding the BNSF/Canadian National merger, as this directly impacts the core revenue stream.
• Accounts Receivable: Review the aging of the $190.2 million accounts receivable balance, which increased significantly year-over-year.
• Interest Rate Exposure: Assess the impact of rising interest rates on the floating-rate portion of the debt, despite the $25 million interest rate swap hedge.