Business Context and Reporting Period
XPO Logistics, Inc. is a global transportation and contract logistics provider operating through Transportation and Logistics segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the same periods in 2018. The company operated in 30 countries with approximately 100,000 employees and 1,531 locations.
Financial Performance and Key Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $4.154 billion | $4.335 billion | $12.512 billion | $12.890 billion |
| Operating income | $229 million | $209 million | $619 million | $578 million |
| Operating margin | 5.5% | 4.8% | 4.9% | 4.5% |
| Net income | $136 million | $115 million | $333 million | $353 million |
| Net income attributable to XPO | $130 million | $109 million | $312 million | $331 million |
| Diluted EPS | $1.14 | $0.74 | $2.63 | $2.26 |
| Operating cash flow | Not separately provided | Not separately provided | $442 million | $536 million |
- Transportation revenue declined 5.8% in the quarter and 5.0% for the nine-month period, while operating income increased to $208 million and $579 million, respectively.
- Logistics revenue declined 0.5% in the quarter but increased 1.3% year to date. Logistics operating income was $61 million in the quarter and $168 million year to date.
- Cost of transportation and services improved to 49.8% of quarterly revenue from 51.9%, primarily reflecting lower third-party transportation and fuel costs and growth in North American logistics.
- Cash and cash equivalents were $425 million at September 30, 2019, compared with $502 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $435 million at quarter-end.
- Total debt carrying value was $5.185 billion, versus $4.269 billion at December 31, 2018. Fair value of debt was $5.481 billion.
- The company had $768 million of availability under its $1.1 billion ABL facility, after $203 million of outstanding letters of credit, and was in compliance with its debt covenants.
- Capital expenditures were $413 million during the first nine months. Proceeds from property sales were $192 million, including sale-leaseback activity.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 4.2% in the third quarter and 2.9% for the first nine months. Management attributed approximately $170 million of third-quarter revenue reduction to downsizing by its largest customer and estimated approximately $600 million of full-year 2019 revenue impact.
- Foreign currency movements reduced revenue by approximately 1.8 percentage points in the quarter and 2.4 percentage points year to date.
- Operating income and margins improved despite lower revenue, helped by lower transportation costs, fuel costs and gains on property sales. Gains on property sales were $33 million in the quarter and $73 million year to date.
- Interest expense increased 47.1% in the quarter and 32.1% year to date, primarily because of higher average indebtedness used for share repurchases and general corporate purposes.
- Net income declined 5.7% for the first nine months despite higher quarterly net income. Year-to-date results included higher interest expense and lower operating cash flow.
- The company issued $1.0 billion of 6.75% senior notes due 2024 and borrowed an additional $500 million under its term loan facility. The proceeds supported debt refinancing, general corporate purposes and share repurchases.
- The company repurchased and retired 17 million shares for $883 million during the first nine months, completing its prior program and leaving $617 million available under the 2019 program. No repurchases occurred in the third quarter.
- Operating lease assets and liabilities of approximately $2.1 billion were recognized upon adoption of the new lease standard on January 1, 2019; management stated that the adoption did not materially affect income or cash flows.
Guidance, Outlook, Risks and Unusual Items
- Management expects restructuring initiatives to generate approximately $52 million of annualized pretax savings upon successful completion in 2020. Restructuring charges were $28 million in the first nine months, with $11 million recorded in the third quarter.
- Management stated that existing liquidity and capital sources were sufficient to support operations for the next 12 months.
- The new European receivables securitization program has a maximum capacity of €400 million; approximately $101 million was available at September 30, 2019. Receivable sales under the new program are accounted for as sales rather than debt.
- Key operating risks include customer concentration and the largest customer’s downsizing, foreign currency exposure, transportation demand and pricing, labor and fuel costs, leverage and interest expense, and execution of new logistics contracts.
- The company is party to litigation involving alleged misclassification of independent contractors, wage and hour claims, shareholder securities claims and derivative actions. The company believes it has adequately accrued for probable and estimable losses but cannot estimate potential losses in excess of accrued amounts for several matters.
- Management stated that no material changes occurred in previously disclosed risk factors and that disclosure controls were effective as of September 30, 2019.
Important Facts for Investors to Verify
- Verify the magnitude and duration of the largest customer’s volume reduction and whether the estimated $600 million full-year revenue impact changed after the filing.
- Assess whether operating-margin improvement is sustainable without recurring gains from property sales and other unusual items.
- Review debt maturities, interest-rate exposure, ABL availability, covenant requirements and the effect of increased leverage on future cash flow.
- Reconcile operating cash flow of $442 million with capital expenditures of $413 million and substantial share repurchases and debt repayments.
- Monitor restructuring execution and whether the projected $52 million annualized savings are realized in 2020.
- Evaluate the potential financial exposure from contractor-classification, wage-and-hour, shareholder and derivative litigation, for which excess loss estimates were not clearly provided.