XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
XPO Logistics, Inc. reported results for the quarter and nine months ended September 30, 2014. The company provided freight brokerage, expedited transportation, freight forwarding and, beginning with the September 2, 2014 acquisition of New Breed Logistics, contract logistics services. The period reflects significant expansion through the acquisitions of Pacer, Atlantic Central Logistics and New Breed.
Key financial metrics
| Metric | Three months ended Sept. 30, 2014 | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2013 |
|---|---|---|---|---|
| Revenue | $662.5 million | $194.0 million | $1,525.9 million | $445.1 million |
| Net revenue | $175.1 million | $34.8 million | $355.4 million | $70.4 million |
| Net revenue margin | 26.4% | 18.0% | 23.3% | 15.8% |
| Operating loss | $(13.6) million | $(18.4) million | $(46.9) million | $(43.8) million |
| Net loss | $(11.7) million | $(6.0) million | $(53.6) million | $(37.9) million |
| Net loss available to common shareholders | $(12.4) million | $(6.8) million | $(55.8) million | $(40.2) million |
| Loss per share | $(0.23) | $(0.28) | $(1.13) | $(1.99) |
Cash used in operating activities was $13.3 million for the first nine months of 2014, compared with $61.5 million in the prior-year period. Investing cash use was $834.9 million, including $813.7 million for acquisitions and $21.6 million for property and equipment. Financing activities provided $1.51 billion, primarily from common and preferred stock issuances and senior notes.
Cash and cash equivalents were $680.1 million at September 30, 2014, compared with $21.5 million at December 31, 2013. Working capital was $858.2 million. Total debt was $623.8 million, including $500.0 million of 7.875% senior notes due 2019 and $120.7 million of convertible senior notes due 2017, net of the reported unamortized discount. The company had no borrowings outstanding under its $415 million revolving credit facility, although letters of credit totaled $15.0 million.
Operating margin was negative 2.1% in the third quarter and negative 3.1% for the first nine months. The effective tax rates were negative 63.2% and negative 31.9%, respectively, reflecting tax benefits and release of valuation allowances, including the effect of deferred tax liabilities acquired with New Breed.
Material changes versus the prior comparable period
- Revenue increased 241.5% in the third quarter and 242.8% for the first nine months, primarily from acquisitions and organic growth in Freight Brokerage.
- Net revenue margin improved substantially, driven by acquisitions, revenue recorded on a net basis in certain businesses, and improved Freight Brokerage performance.
- Freight Brokerage generated operating income of $2.0 million in the quarter and $2.4 million year to date, versus losses of $3.4 million and $12.2 million, respectively, in the comparable periods.
- Contract Logistics contributed $50.1 million of revenue and $4.5 million of operating income following the New Breed acquisition.
- Interest expense increased to $17.8 million in the quarter and $31.3 million year to date, reflecting new senior notes, acquisition-related commitment fees, revolving-facility activity and convertible-debt conversion costs.
- SG&A rose to $117.7 million in the quarter and $300.1 million year to date, but declined as a percentage of revenue to 17.8% and 19.7%, respectively.
- The company issued $734.0 million of net common-stock proceeds, $363.9 million of net preferred-stock proceeds and $489.6 million of net senior-note proceeds during the first nine months.
- New Breed added $352.2 million of goodwill; total goodwill reached $918.5 million at September 30, 2014.
Outlook, commentary, risks and unusual items
Management’s strategy remained focused on acquisitions, opening new sales offices, expanding the sales and service workforce, technology investment, operational optimization and cross-selling services across segments. Management stated that existing cash and availability under the revolving facility were expected to be sufficient to finance existing operations, but the company continued to depend on access to debt and equity capital to support growth.
- The company incurred $10.1 million of restructuring charges in the first nine months related to Pacer facility rationalization and severance, with $5.8 million remaining in the restructuring reserve at September 30.
- Acquisition, integration and transaction costs were material, including $20.7 million of restructuring, integration and transaction costs described in management’s discussion.
- The company accelerated $3.3 million of amortization after rebranding Express-1 as XPO Express and incurred an additional $0.8 million of rebranding costs during the third quarter.
- New Breed was highly concentrated: approximately 77.8% of its nine-month revenue came from its five largest clients, and its largest customer represented approximately 29.7%. Contracts generally lacked minimum volume commitments and could be terminable on short notice.
- Key risks included integration of acquisitions, customer retention, long selling and implementation cycles in Contract Logistics, labor and independent-contractor classification claims, economic conditions, competition, service disruptions, technology execution and access to capital.
- Pacer-related California owner-operator classification claims involved 153 claimants. Seven claimants had received awards totaling $2.2 million, but the claims were under appeal and no reserve had been established as of September 30, 2014.
- If shareholders did not approve conversion of the Series B preferred stock by May 31, 2015, cumulative dividends would begin at 7.5% annually, or approximately $27.9 million per year.
- Total contractual cash obligations were $1.18 billion, including operating leases, debt obligations, employment contracts, severance and purchase commitments. Acquisition-related purchase-price holdbacks of up to $21.7 million were additional potential obligations.
Important facts for investors to verify
- Whether New Breed, Pacer and ACL are integrated successfully and deliver the expected synergies and margin improvement.
- The sustainability of improved net revenue margins and Freight Brokerage profitability after excluding acquisition-related and unusual items.
- Cash generation and the company’s ability to service approximately $602.6 million of reported long-term debt while continuing its acquisition strategy.
- The outcome of the Series B preferred-stock conversion vote and the potential $27.9 million annual dividend obligation if conversion is not approved.
- Customer concentration, retention and contract terms within New Breed’s Contract Logistics business.
- Potential exposure from owner-operator classification claims, other litigation and acquisition-related indemnification matters.
- The effect of acquisition-related amortization, restructuring charges, rebranding costs and tax valuation-allowance releases on recurring earnings.