XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
XPO Logistics provides asset-light transportation and logistics services through Freight Brokerage, Expedited Transportation and Freight Forwarding. The filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013; balance-sheet amounts are compared with December 31, 2013.
The company completed its acquisition of Pacer International on March 31, 2014, expanding its intermodal and cross-border transportation operations. Pacer contributed little or no operating-period revenue because the transaction closed on the quarter-end date.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $282.4 million | $114.0 million | 147.7% |
| Net revenue | $58.4 million | $16.3 million | 259.1% |
| Net revenue margin | 20.7% | 14.3% | +6.4 percentage points |
| Operating loss | $21.4 million | $11.4 million | Loss increased $10.0 million |
| Operating margin | (7.6%) | (10.0%) | Improved 2.4 percentage points |
| Net loss | $28.1 million | $14.5 million | Loss increased $13.6 million |
| Net loss available to common shareholders | $28.9 million | $15.3 million | Loss increased $13.6 million |
| Loss per diluted share | $0.70 | $0.85 | Improved, partly reflecting higher share count |
| Cash flow used in operations | $8.7 million | $28.0 million | Use decreased $19.3 million |
| Cash flow used in investing | $194.7 million | $17.5 million | Primarily Pacer acquisition |
| Cash flow from financing | $325.8 million | $0.6 million use | Primarily equity offering |
Cost of purchased transportation and services was $224.0 million, or 79.3% of revenue, compared with $97.7 million, or 85.7%, in the prior-year quarter. Direct operating expense was $3.9 million, or 1.4% of revenue, versus none reported in the prior-year period. SG&A was $75.9 million, or 26.9% of revenue, compared with $27.6 million, or 24.1%.
Interest expense increased to $10.1 million from $3.1 million, driven primarily by a $4.5 million undrawn debt commitment fee related to the Pacer acquisition, $2.3 million associated with convertible-note conversions and $0.4 million related to the revolving credit agreement. The company recorded a $3.3 million income-tax benefit and reported a 10.5% effective tax rate.
Liquidity, capital structure and balance sheet
- Cash and cash equivalents were $143.9 million at March 31, 2014, up from $21.5 million at December 31, 2013. Cash and restricted cash totaled approximately $157.2 million.
- Working capital was $211.0 million, compared with $70.7 million at year-end 2013.
- Total debt was $122.9 million, including $120.7 million principal amount of 4.50% convertible senior notes due October 1, 2017. The company had no borrowings under its $125.0 million revolving facility at March 31.
- The February 2014 common-stock offering generated $413.2 million of net proceeds. The company also issued approximately 3.7 million shares valued at $108.8 million as partial consideration for Pacer.
- Total assets increased to $1.424 billion from $780.2 million, primarily due to Pacer and other acquisition-related assets. Goodwill increased to $539.2 million from $363.4 million.
- On April 1, 2014, the company replaced its $125.0 million facility with a $415.0 million secured revolving facility, expandable by up to $100.0 million subject to conditions. Management stated that cash and facility availability were sufficient for existing operations.
Material changes versus the prior comparable period
- Revenue growth was driven by the 2013 acquisitions of 3PD, NLM, Optima, Interide, Covered and East Coast Air Charter, growth in Freight Brokerage cold-start locations, and stronger existing operations.
- Freight Brokerage revenue increased 196.2% to $231.7 million, while its net revenue margin improved to 19.1% from 12.9%; the segment still reported a $4.0 million operating loss.
- Expedited Transportation revenue increased 41.6% to $33.8 million, and operating income increased to $3.7 million from $0.8 million. NLM contributed significantly to the reported margin improvement.
- Freight Forwarding revenue increased 20.2% to $19.5 million; operating income increased to $0.6 million from $0.4 million, while net revenue margin declined to 13.9% from 14.7%.
- SG&A increased due to acquisitions, hiring and sales-force expansion, technology investment, new offices, Pacer integration and transaction costs. Depreciation and amortization increased to $11.3 million from $1.6 million.
- The company initiated a Pacer-related facility rationalization and severance program, recording $6.4 million of charges and ending the quarter with a corresponding restructuring reserve.
Outlook, commentary, risks and unusual items
Management’s strategy emphasizes acquisitions, new sales offices and “cold-start” locations, technology investment, operational optimization, expanded sales and service capabilities, and cross-selling among business units. The company reported 24 active cold-starts at March 31, 2014 and stated that it intended to continue pursuing acquisitions that fit its strategy. The filing does not provide specific quarterly or annual revenue, earnings or EBITDA guidance.
- Pacer’s purchase accounting remained open at March 31, 2014; goodwill recorded from the transaction was approximately $176.2 million, and the total purchase consideration was $331.5 million.
- Pacer-related California owner-operator classification claims involved 153 claimants. Seven claims had resulted in awards totaling $2.2 million, which Pacer appealed; no reserve had been recorded as of March 31, 2014.
- The company disclosed numerous legal proceedings, including independent-contractor classification claims. Management believed probable and estimable losses were adequately accrued or covered by purchase-price holdbacks, but unfavorable outcomes could materially affect results.
- Contractual cash obligations totaled approximately $355.1 million, including operating and real-estate leases of $168.6 million, purchase commitments of $22.4 million and convertible-note obligations of $139.7 million. Additional acquisition-related holdbacks of up to $22.0 million may become payable.
- Key operating risks include integrating acquisitions, realizing expected synergies, retaining major customers and transportation providers, competition, technology execution, weather and service disruptions, regulatory requirements, and litigation involving independent contractors.
- Pacer’s intermodal operations depend significantly on Union Pacific and other rail providers. The filing warns that changes in equipment availability, rates, contract renewals or supplier preferences could reduce revenue, margins and cash flow.
- The company stated that disclosure controls were effective. Internal-control integration for Pacer was still in process.
Important facts for investors to verify
- How much of the substantial revenue and margin growth is organic versus acquired, particularly after the full-quarter contribution of Pacer.
- Whether Freight Brokerage can convert rapid revenue and net-revenue growth into sustained operating profitability.
- The recurring versus non-recurring components of Pacer restructuring charges, acquisition costs, conversion-related interest and elevated amortization.
- The final Pacer purchase-price allocation, including goodwill, intangible assets, deferred taxes and any changes to acquisition-related liabilities.
- The ultimate exposure from Pacer’s California worker-classification claims and other independent-contractor litigation.
- Cash conversion and working-capital requirements as the business scales, given negative operating cash flow in Q1 2014.
- Compliance with covenants and the availability, pricing and collateral requirements of the new $415.0 million revolving facility.