XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2015. Before the subsequent Con-way acquisition, XPO operated two reportable segments: Transportation and Logistics, serving more than 30,000 customers through approximately 56,000 employees and 900 locations in 27 countries.
The filing includes the June 2015 acquisition of Norbert Dentressangle SA (ND), along with BTT and UX acquisitions. XPO completed its approximately $3.0 billion acquisition of Con-way on October 30, 2015, after the reporting date; Con-way therefore is not included in the September 30 operating results.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $2,362.1 million | $662.5 million | $4,281.0 million | $1,525.9 million |
| Net revenue | $1,124.8 million | $175.1 million | $1,895.6 million | $355.4 million |
| Net revenue margin | 47.6% | 26.4% | 44.3% | 23.3% |
| Operating income (loss) | $44.1 million | $(13.6) million | $9.4 million | $(46.9) million |
| Net loss | $(35.4) million | $(11.6) million | $(128.7) million | $(53.7) million |
| Net loss attributable to common shareholders | $(93.1) million | $(12.3) million | $(183.5) million | $(55.9) million |
| Loss per diluted share | $(0.94) | $(0.23) | $(2.10) | $(1.13) |
| Cash flow from operations | Not separately provided | Not separately provided | $39.4 million | $(13.3) million |
Q3 revenue increased 256.5% and nine-month revenue increased 180.6%, primarily due to acquisitions and organic growth. Operating income turned positive, but XPO remained loss-making because of higher interest expense, foreign-currency losses, acquisition-related amortization and other costs.
- Transportation revenue was $1,396.8 million in Q3 and $2,820.4 million for nine months; operating income was $30.9 million and $57.7 million, respectively.
- Logistics revenue was $993.3 million in Q3 and $1,493.7 million for nine months; operating income was $36.0 million and $46.9 million, respectively.
- Q3 interest expense was $61.5 million, compared with $17.8 million in the prior-year quarter; nine-month interest expense was $120.9 million versus $31.3 million.
- Foreign-currency losses were $14.5 million in Q3 and $34.6 million for nine months, compared with zero in the prior-year periods.
- Cash and cash equivalents were $1,285.3 million at September 30, 2015, versus $644.1 million at December 31, 2014. Working capital was $1,291.9 million.
- Total debt was $3,470.3 million, including $120.3 million of current maturities; long-term debt, net of current maturities, was $3,359.1 million. The $415.0 million revolving credit facility was undrawn, with $24.2 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Revenue scale increased substantially from acquisitions, particularly ND and New Breed. ND contributed $1,529.7 million of Q3 revenue and $1,937.3 million of nine-month revenue.
- Net revenue margin expanded by 21.2 percentage points in Q3 and 21.0 percentage points for the first nine months, reflecting acquisition mix and improvement in brokerage, intermodal, last mile, expedite and global forwarding operations.
- SG&A as a percentage of revenue declined to 12.0% in Q3 from 17.8% and to 14.4% for nine months from 19.7%, despite higher absolute expenses and acquisition, integration and amortization costs.
- Cash generated from operations improved to $39.4 million from a $13.3 million use in the prior-year nine-month period, while investing cash use increased to $1,695.2 million, principally for acquisitions.
- XPO issued $1,600.0 million of 6.5% senior notes due 2022 and €500.0 million of 5.75% senior notes due 2021, and issued common and preferred securities with approximately $1,228.1 million of net proceeds.
- Series C preferred stock converted into 12.5 million common shares on September 8, 2015. The resulting $52.0 million beneficial conversion charge increased the loss attributable to common shareholders.
Guidance, outlook, risks and unusual items
The filing does not provide a quantitative earnings or revenue guidance range. Management emphasizes continued acquisition-led growth, integration of acquired businesses, cross-selling across Transportation and Logistics, technology investment, margin improvement and disciplined expansion.
- Con-way closed after quarter-end for approximately $3.0 billion. Financing included a $1.6 billion term loan and a new $1.0 billion asset-based revolving facility. The term loan carries a floating rate of LIBOR plus 4.50% or base rate plus 3.50% and matures October 30, 2021.
- Management identified integration execution, realization of synergies, acquisition financing, customer retention, competition, pricing, driver availability and compensation, labor organizing, fuel prices, weather and service disruptions, regulation, information technology and foreign exchange as significant risks.
- A uniform 10% strengthening of the U.S. dollar against the euro would reduce net assets by approximately $59.2 million; a comparable strengthening against the British pound would reduce net assets by approximately $39.7 million.
- Contractual cash obligations totaled $6,467.8 million, including $1,739.4 million of operating leases and $4,813.0 million of listed debt-related obligations.
- Restructuring reserves were $33.1 million at September 30, 2015. The company also reported substantial litigation exposure involving alleged independent-contractor misclassification and wage-and-hour claims; certain settlement proposals remained subject to court approval.
- Con-way-related legal contingencies included a Department of Justice investigation concerning compliance with a government transportation contract. The filing states that a possible loss or range of loss could not be estimated.
- Goodwill was $3,445.0 million at September 30, 2015. No goodwill impairment was recognized, although the ND purchase price allocation remained provisional for certain assets, taxes and liabilities.
Most important facts for an investor to verify
- Whether XPO can integrate Con-way and ND while achieving projected cost savings and operating synergies.
- The post-acquisition leverage profile, interest burden, refinancing requirements and compliance with debt covenants.
- Whether operating cash flow can keep pace with acquisition, capital expenditure, lease and debt obligations.
- The sustainability of reported margin improvements after adjusting for acquisition mix, foreign exchange, amortization, transaction costs and restructuring.
- The ultimate financial impact of driver shortages, union activity, independent-contractor classification litigation and other wage-and-hour claims.
- The valuation support for approximately $3.4 billion of goodwill and $1.2 billion of identifiable intangible assets.
- The effect of currency movements, fuel prices and floating interest rates on future earnings and cash flows.