Business Context and Reporting Period
XPO Logistics, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. XPO provides global transportation and contract logistics services through two reportable segments: Transportation and Logistics. At quarter-end, it served more than 50,000 customers, employed over 91,000 people, and operated 1,444 locations in 32 countries.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $3,887.1 million | $3,713.8 million | $11,186.9 million | $10,942.8 million |
| Operating income | $186.8 million | $168.8 million | $485.4 million | $401.5 million |
| Operating margin | 4.8% | 4.5% | 4.3% | 3.7% |
| Net income | $71.0 million | $21.3 million | $153.1 million | $52.4 million |
| Net income attributable to XPO | $62.5 million | $15.1 million | $135.7 million | $39.2 million |
| Diluted EPS | $0.44 | $0.11 | $0.99 | $0.30 |
| Cash flow from operations | Not separately provided | Not separately provided | $524.7 million | $404.6 million |
| Capital expenditures | Not separately provided | Not separately provided | $389.9 million | $318.5 million |
- Transportation revenue increased 2.5% in Q3 and 0.4% for the first nine months; segment operating income increased 15.8% and 14.7%, respectively.
- Logistics revenue increased 8.3% in Q3 and 5.4% for the first nine months; segment operating income increased 2.8% and 19.3%, respectively.
- Cash and cash equivalents were $473.1 million at September 30, 2017, compared with $373.4 million at December 31, 2016.
- ABL availability was $608.5 million, based on an $857.0 million borrowing base and $248.5 million of outstanding letters of credit.
- Total debt principal was $4,799.4 million, compared with $5,044.2 million at December 31, 2016. Carrying value of total debt was $4,631.0 million.
- Current maturities of long-term debt were $90.0 million and long-term debt carrying value was $4,541.0 million.
- Interest expense declined to $72.5 million in Q3 and $222.4 million for the first nine months, from $93.0 million and $280.8 million, respectively, in the comparable periods.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by European contract logistics, higher LTL weight per day, North American brokerage growth, and strong Last Mile growth. Results were partially offset by the October 2016 divestiture of North American truckload operations.
- Consolidated operating margin improved by 30 basis points in Q3 and 60 basis points for the first nine months.
- Transportation benefited from cost savings, improved dock efficiency, and technology-enabled labor efficiencies. Its Q3 operating margin increased to 5.9% from 5.2%.
- Logistics growth was accompanied by higher payroll and temporary labor costs related to new contract starts. Q3 Logistics operating margin declined to 5.3% from 5.6%, while the nine-month margin improved to 4.5% from 4.0%.
- Foreign currency loss increased to $15.0 million in Q3 and $53.9 million for the first nine months, compared with foreign currency income of $0.3 million and a loss of $1.8 million, respectively, in the prior-year periods. The losses primarily reflected unrealized losses on currency options and forward contracts.
- Debt extinguishment losses declined to $4.6 million in Q3 and $13.6 million for the first nine months, versus $53.2 million in each prior-year comparable period.
- The effective tax rate was 30.0% in Q3 2017 versus 11.3% in Q3 2016, and 24.0% for the first nine months versus 27.6%. The nine-month 2017 rate included tax benefits from share-based compensation and other discrete items.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that existing cash sources were sufficient to support existing operations for the next 12 months. The filing does not provide formal revenue or earnings guidance.
- XPO refinanced its term loan in March 2017, reducing applicable interest-rate margins and expecting approximately $15 million of annual cash interest savings. The new term loan had a 3.55% interest rate at September 30, 2017 and matures October 30, 2021.
- In August 2017, XPO redeemed all outstanding 7.25% senior notes due January 2018 using cash on hand, recording an approximately $5 million loss on extinguishment.
- XPO completed a July 2017 equity offering of 5 million shares for $287.6 million net proceeds and entered into forward sale agreements covering an additional 6 million shares. Future settlement could require cash or share issuance and may dilute EPS and return on equity.
- In October 2017, XPO Logistics Europe established a receivables securitization program with a maximum amount of approximately $315 million to provide additional liquidity. Borrowings will be recorded as long-term debt.
- Material risk areas include foreign currency exposure, transportation and logistics labor costs, fuel and third-party carrier costs, debt covenant compliance, acquisition integration, and legal claims involving classification of independent contractors.
- The company is involved in employment, wage-and-hour, meal-and-rest-break, TCPA, and other litigation. It believes probable and reasonably estimable losses have been accrued, but cannot estimate potential losses in excess of accrued amounts for certain matters.
- Restructuring reserves were $11.4 million at September 30, 2017 after $7.3 million of charges and $22.7 million of payments during the first nine months.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify the sustainability of operating-margin improvement, particularly whether Logistics labor and contract-startup costs moderate.
- Assess net leverage and debt maturities using total debt, cash, ABL availability, the term loan, senior notes, and the subsequent receivables securitization.
- Review the potential dilution and settlement terms of the 6 million-share forward sale agreements.
- Monitor foreign currency derivative losses and the effect of currency movements on earnings, comprehensive income, and equity.
- Evaluate contractor-classification and wage-and-hour litigation exposure, including amounts accrued and any potential loss beyond accrued liabilities.
- Confirm the effect of the October 2016 truckload divestiture when comparing reported revenue and segment trends.
- Review the expected accounting effects of upcoming revenue recognition, lease, cash-flow, pension, and hedging standards.