XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2019, filed August 1, 2019. XPO is a global supply-chain provider organized into Transportation and Logistics segments, operating in 30 countries with approximately 100,000 employees and 1,537 locations.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $4.238 billion | $4.363 billion | $8.358 billion | $8.555 billion |
| Operating income | $258 million | $228 million | $390 million | $369 million |
| Operating margin | 6.1% | 5.2% | 4.7% | 4.3% |
| Net income | $145 million | $159 million | $197 million | $238 million |
| Net income attributable to XPO | $135 million | $149 million | $182 million | $222 million |
| Diluted EPS | $1.19 | $1.03 | $1.51 | $1.53 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $164 million | $248 million |
Q2 Transportation revenue was $2.747 billion, down 4.9%, while operating income increased to $243 million and margin improved to 8.8% from 7.1%. Logistics revenue increased 1.2% to $1.526 billion, but operating income declined to $61 million and margin decreased to 4.0% from 4.4%.
At June 30, 2019, cash and cash equivalents were $497 million, versus $502 million at December 31, 2018. Total debt carrying value was $5.474 billion, up from $4.269 billion. Debt principal was $5.634 billion. The company reported $838 million of availability under its $1.1 billion ABL facility, after $208 million of letters of credit, and was in compliance with debt covenants.
Total assets were $14.314 billion and total equity was $2.912 billion. Operating lease assets and liabilities of approximately $2.1 billion were recognized upon adoption of the new lease standard on January 1, 2019.
Material changes versus the prior comparable period
- Consolidated Q2 revenue declined 2.9%; six-month revenue declined 2.3%. Foreign currency movements reduced reported revenue by approximately 2.3 percentage points in Q2 and 2.7 percentage points year to date.
- The largest customer downsized its business with XPO, reducing Q2 revenue by approximately $130 million. Management estimated a full-year 2019 revenue impact of approximately $600 million.
- Operating income increased despite lower revenue, primarily because of lower third-party transportation costs, productivity savings, logistics mix, and gains on property and equipment sales.
- Net income declined 8.8% in Q2 and 17.2% year to date. Higher interest expense, foreign-currency losses, lower other income, and a higher year-to-date effective tax rate contributed to the decline.
- Interest expense increased to $72 million in Q2 from $55 million and to $143 million year to date from $114 million, primarily due to higher average indebtedness.
- Operating cash flow declined $84 million year to date, partly reflecting greater working-capital use and classification of collections on deferred purchase-price receivables as investing cash flow.
- XPO issued $1.0 billion of 6.75% senior notes due 2024 and borrowed $500 million under an incremental term-loan facility. It repaid and terminated its $500 million unsecured credit facility.
- The company repurchased and retired $1.347 billion of common stock during the first six months, including $120 million in Q2. Approximately $617 million remained authorized under the 2019 repurchase program at June 30.
Outlook, risks, contingencies, and unusual items
- Management stated that existing liquidity sources were sufficient to support operations over the next 12 months; no formal earnings guidance was provided in the filing text.
- Restructuring charges totaled $17 million in the first six months, with management expecting approximately $14 million of annualized pretax savings upon successful completion in 2020.
- The company exited its direct postal-injection business; related customer-relationship intangible impairment was $6 million in the first six months. Postal-injection operations ceased in Q1 2019.
- In July 2019, XPO Logistics Europe replaced its trade receivables securitization program with a new three-year program offering up to approximately $450 million of net proceeds and no deferred purchase-price mechanism.
- Material legal matters include independent-contractor classification claims, wage-and-hour claims, and shareholder securities and derivative litigation. The company believes probable and estimable losses are adequately accrued but cannot estimate possible losses in excess of accrued amounts for certain matters.
- Key operating risks include customer concentration and downsizing, foreign-exchange exposure, higher leverage and interest costs, labor and contractor-classification claims, economic and freight-market conditions, and compliance with debt covenants.
- The company used derivatives to manage interest-rate and foreign-currency exposure. Foreign-currency option and forward contracts produced an $8 million Q2 loss and a $10 million year-to-date loss.
Most important facts for investors to verify
- Whether the estimated $600 million full-year revenue reduction from the largest customer is offset by growth in contract logistics, LTL, managed transportation, and e-commerce.
- Whether Transportation margin improvements are sustainable after excluding property-sale gains and other favorable cost items.
- Debt maturities, interest-rate exposure, refinancing requirements, and available ABL capacity, including the ABL springing-maturity provisions.
- Operating cash conversion, accounts-receivable trends, and reliance on factoring and receivables securitization programs.
- Progress and realized savings from restructuring initiatives, including the expected 2020 savings.
- Potential financial exposure from contractor-classification, wage-and-hour, and shareholder litigation.
- The effect of ongoing share repurchases on leverage, liquidity, and per-share results.