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.

As of March 31, 2018, HGD has an operating fleet of approximately 1,300 tractors and 4,500 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 $284.7 million, including contingent consideration related to an earn-out provision included in the Purchase Agreement, which will not exceed $6.0 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 $171.7 million. To facilitate the acquisition, we assumed $113.0 million of Estenson debt and paid $165.9 million in cash, including $55.0 million of cash which was borrowed under our credit agreement.

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

Cash paid	$	165,945
Consideration payable		1,081
Contingent consideration, fair value		4,703
Total consideration		171,729
Equipment debt assumed		112,962
Total base purchase price	$	284,691

The following table summarizes the 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		26,909
Accounts receivable other		165
Prepaid expenses and other current assets		1,500
Property and equipment		128,477
Other intangibles		66,400
Goodwill		86,059
Other assets		64
Total assets acquired	$	309,586

Accounts payable trade	$	4,110
Accrued payroll		5,727
Accrued other		15,058
Equipment debt		112,962
Total liabilities assumed	$	137,857

Total consideration	$	171,729

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.

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

			Accumulated		Balance at		Estimated Useful
	Amount		Amortization		March 31, 2018		Life
Customer relationships	$	66,000	$	3,300	$	62,700	15 years
Trade name	$	400	$	400	$	0	3 months

The above intangible assets are amortized using the straight-line method. Amortization expense related to this acquisition for the three month period ended March 31, 2018 was $1.1 million. The intangible assets have a weighted average useful life of approximately 14 years. Amortization expense related to HGD for the next five years is as follows (in thousands):

Remainder 2018	$	3,300
2019		4,400
2020		4,400
2021		4,400
2022		4,400

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

	Three Months
	Ended
	March 31, 2017
Revenue	$	947,344
Net income	$	11,603
Earnings per share
Basic	$	0.35
Diluted	$	0.35

The unaudited pro forma consolidated results for the three month period was prepared using the acquisition method of accounting and are based on the historical financial information of Hub Group 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, 2017.