NOTE 2.

Acquisition

Hub Group Trucking (HGT), a wholly owned subsidiary of Hub Group, Inc., acquired all of the outstanding equity interests of Estenson Logistics, LLC (“Estenson”) on July 1, 2017 (the “Estenson Acquisition”). Estenson is now our wholly owned subsidiary, operating under the name Hub Group Dedicated (“HGD”). As a result of the Estenson Acquisition, HGT acquired substantially all of the assets of Estenson, which include tractors and trailers, as well as assumed certain liabilities, including equipment debt. HGD is included in the Hub segment.

HGD has an operating fleet of approximately 1,000 tractors and over 3,600 trailers. Dedicated services have been requested by our customers and we believe HGD is an excellent service offering that we can provide to our customers.

The base purchase price for Estenson was approximately $285 million, including contingent consideration related to an earn-out provision included in the Purchase Agreement, which will not exceed $6 million and is based on Estenson’s EBITDA results through June 30, 2019. In accordance with the agreement, the base purchase price was adjusted by the assumed debt to arrive at the final consideration of $172 million. To facilitate the acquisition, we assumed $113 million of Estenson debt and paid $166 million in cash, including $55 million of cash, which was borrowed under our new line of credit (See Note 6).

The following table summarizes the total purchase price allocated to the net assets acquired (in thousands):


Cash paid	$	165,945
Consideration payable		1,366
Contingent consideration, fair value		4,703
Total consideration		172,014
Equipment debt assumed		112,677
Total base purchase price	$	284,691

Pending finalization of the fair market value of assets acquired and liabilities assumed, revenue and lease contracts, and deferred taxes related to tax valuation/tax goodwill the measurement period remains open. The following table summarizes the preliminary allocation of the total consideration to the assets acquired and liabilities assumed as of the date of the acquisition (in thousands):

	July 1, 2017
Cash and cash equivalents	$	12
Accounts receivable trade		27,000
Accounts receivable other		165
Prepaid expenses and other current assets		1,500
Property and equipment		128,477
Other intangibles		66,400
Goodwill		86,294
Other assets		64
Total assets acquired	$	309,912

Accounts payable trade	$	4,542
Accrued payroll		5,661
Accrued other		15,018
Equipment debt		112,677
Total liabilities assumed	$	137,898

Total consideration	$	172,014

The Estenson acquisition was accounted for as a purchase business combination in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of July 1, 2017 with the remaining unallocated purchase price recorded as goodwill. The goodwill recognized in the Estenson acquisition was primarily attributable to potential expansion and future development of the acquired business. The fair value assigned to the customer relationships identifiable intangible was determined using an income approach based on management’s estimates and assumptions. The fair value assigned to the property and equipment was determined based on a market approach. A probability weighted expected return model was used to estimate the value of the contingent consideration. Equipment debt was valued using a discounted cash flow analysis whereby future contractual principal repayments and interest payments for each instrument were discounted to the purchase date at a risk-adjusted discount rate.

We incurred approximately $1.6 million of acquisition costs associated with this transaction prior to the closing date that are reflected in general and administrative expense in the Unaudited Consolidated Statements of Income for the nine months ended September 30, 2017.

The components of “Other intangibles” listed in the above table as of the acquisition date are preliminarily estimated as follows (in thousands):

			Accumulated		Balance at		Estimated Useful
	Amount		Amortization		September 30, 2017		Life
Customer relationships	$	66,000	$	1,100	$	64,900	15 years
Trade name		400		400	-		3 months

The above intangible assets are amortized using the straight-line method. Amortization expense related to this acquisition for both the three and nine month periods ended September 30, 2017 was $1.5 million. The intangible assets have a weighted average useful life of approximately 15 years. Amortization expense related to HGD for the next five years is as follows (in thousands):

Remainder 2017	$	1,100
2018		4,400
2019		4,400
2020		4,400
2021		4,400

The following unaudited pro forma consolidated results of operations for 2017 and 2016 assume that the acquisition of Estenson was completed as of January 1, 2016 (in thousands, except for per share amounts):

	Three Months
	Ended
	September 30, 2016
Revenue	$	988,345
Net income	$	20,249
Earnings per share
Basic	$	0.61
Diluted	$	0.61

	Nine Months		Nine Months
	Ended		Ended
	September 30, 2017		September 30, 2016
Revenue	$	2,986,342	$	2,752,660
Net income	$	39,387	$	62,212
Earnings per share
Basic	$	1.19	$	1.82
Diluted	$	1.18	$	1.82

The unaudited pro forma consolidated results for the three and nine month periods were prepared using the acquisition method of accounting and are based on the historical financial information of Hub and HGD. The historical financial information has been adjusted to give effect to the pro forma adjustments that are: (i) directly attributable to the acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisition on January 1, 2016.