XPO Logistics, Inc. — First Quarter 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with the three months ended March 31, 2014. XPO provides transportation and technology-enabled contract logistics through its Transportation and Logistics segments. The period reflects the acquisitions of Pacer, ACL and New Breed during 2014 and UX Specialized Logistics on February 9, 2015.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $703.0 million | $282.4 million | 148.9% increase |
| Net revenue | $262.2 million | $58.4 million | 349.0% increase |
| Net revenue margin | 37.3% | 20.7% | Up 16.6 percentage points |
| Operating loss | $4.8 million | $21.4 million | Improved by $16.6 million |
| Loss before tax | $28.3 million | $31.6 million | Improved by $3.3 million |
| Net loss | $14.7 million | $28.3 million | Improved by $13.6 million |
| Net loss available to common shareholders | $15.4 million | $29.1 million | Improved by $13.7 million |
| Loss per diluted share | $0.20 | $0.70 | Improved |
| Cash flow from operations | $47.3 million | $(8.7) million | Improved by $56.0 million |
Operating expenses were $707.8 million, including $440.8 million of purchased transportation and services, $151.2 million of direct operating expense and $115.8 million of sales, general and administrative expense. SG&A declined to 16.4% of revenue from 26.9% in the prior-year quarter. Interest expense increased to $23.1 million from $10.1 million, including $6.5 million related to convertible-note conversions.
Transportation generated $562.2 million of revenue and $3.6 million of operating income. Logistics, established through the New Breed acquisition, generated $140.8 million of revenue and $6.4 million of operating income. Corporate costs produced a $14.8 million operating loss.
At March 31, 2015, cash and cash equivalents were $1,034.3 million, working capital was $1,169.0 million, and total assets were $3,133.1 million. Total debt was $974.3 million before premiums, discounts and current maturities, compared with $608.8 million at December 31, 2014. The company had no borrowings under its $415 million secured revolving facility and had $16.5 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Revenue and net revenue increased substantially, primarily from acquisitions and organic growth.
- Net revenue margin improved materially, reflecting the addition of New Breed and Pacer and better margins in freight brokerage and last-mile operations.
- Operating losses narrowed, but the company remained unprofitable at the consolidated level.
- Operating cash flow turned positive, while investing cash outflows declined to $69.6 million from $194.7 million, including $58.2 million for acquisitions and $11.4 million for property and equipment.
- Financing activities generated $412.5 million, principally from the issuance of $400 million of additional 7.875% senior notes due 2019.
- The company issued 2.1 million common shares upon conversion of $34.7 million of convertible notes; $72.1 million of convertible-note principal remained outstanding at quarter-end.
- Goodwill increased to $967.8 million from $929.3 million, including $28.8 million related to UX and $10.5 million associated with litigation-liability adjustments.
Guidance, outlook, risks and unusual items
The filing does not provide quantified earnings or revenue guidance. Management emphasized continued growth through acquisitions, transportation and logistics cold-starts, cross-selling, technology investment, sales-force expansion and operational optimization. Management stated that existing cash and revolving-credit availability were expected to be sufficient for existing operations.
On April 28, 2015, after quarter-end, XPO agreed to acquire approximately 67% of Norbert Dentressangle SA followed by a cash tender offer for the remaining shares. XPO arranged a potential €2.40 billion unsecured bridge facility, with margins escalating from EURIBOR plus 4.25% to EURIBOR plus 5.75%; the transaction remained subject to antitrust and other conditions. On May 4, 2015, XPO agreed to acquire Bridge Terminal Transport for $100 million, excluding working-capital adjustments and assuming no debt.
Significant contingencies include independent-contractor misclassification litigation. A California court found seven owner operators to be employees and awarded an aggregate $2.0 million, subject to final judgment and possible appeal. Additional proceedings involve approximately 200 claimants, and a putative class action could involve as many as 600 claimants. The company increased related liabilities and stated that unfavorable outcomes could materially affect financial condition, results or cash flows.
The first quarter included $0.4 million of restructuring charges, $0.8 million of acquisition-related transaction costs, $1.2 million of litigation-related legal costs and $2.3 million of share-based compensation in corporate SG&A. The company also recognized a $13.6 million income-tax benefit and had $8.4 million of valuation allowances on certain deferred tax assets.
Other notable obligations included $263.0 million of future operating-lease payments, $1.587 billion of total contractual cash obligations and $1,213.1 million of scheduled senior-note payments, including interest, through maturity. The company reported effective disclosure controls and no material change in internal control, while noting that acquired businesses were still being integrated.
Investor verification items
- Verify the sustainability of revenue growth and the 37.3% net revenue margin after the acquisition effects are fully annualized.
- Assess whether Transportation and Logistics can generate consistent consolidated operating profitability after corporate costs, amortization and integration expenses.
- Review leverage, interest burden and refinancing requirements following the additional senior-note issuance and the proposed Norbert Dentressangle financing.
- Evaluate the potential financial exposure from independent-contractor misclassification claims, including the California proceedings and proposed class settlement.
- Confirm the closing, financing structure and integration costs for the pending Norbert Dentressangle and Bridge Terminal Transport acquisitions.
- Monitor cash conversion, acquisition spending and the company’s ability to fund its growth strategy without further equity or debt issuance.