XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2022. At quarter-end, XPO operated two reportable segments: North American Less-than-Truckload (LTL) and Brokerage and Other Services. The filing includes the historical results of businesses subsequently spun off as RXO and GXO as discontinued operations where applicable.
XPO completed the spin-off of its truck brokerage, managed transportation, last mile and freight forwarding businesses into RXO on November 1, 2022. Following the spin-off, LTL became XPO’s sole North American business. XPO also sold its intermodal operation in March 2022 and intends to divest its European business, although the timing and terms were not assured.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $3,042 million | $3,270 million | $9,747 million | $9,445 million |
| Operating income | $185 million | $112 million | $1,040 million | $442 million |
| Operating margin | 6.1% | 3.4% | 10.7% | 4.7% |
| Income from continuing operations | $131 million | $21 million | $761 million | $197 million |
| Net income attributable to XPO | $131 million | $(57) million | $760 million | $214 million |
| Diluted EPS from continuing operations | $1.13 | $0.19 | $6.58 | $1.73 |
| Adjusted EBITDA | $352 million | $307 million | $1,078 million | $916 million |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $664 million | $558 million |
Q3 revenue declined 7.0%, primarily due to the intermodal sale and unfavorable foreign exchange, partly offset by LTL growth and higher fuel surcharge revenue. Nine-month revenue increased 3.2%. The intermodal sale reduced reported revenue growth by approximately 9.5 percentage points in Q3 and 5.1 percentage points year to date; foreign exchange reduced growth by approximately 2.6 and 2.0 percentage points, respectively.
North American LTL revenue increased 12.4% in Q3 and 13.9% year to date. LTL adjusted EBITDA increased to $258 million in Q3 from $222 million and to $757 million year to date from $694 million. LTL adjusted EBITDA margin was 21.5% in Q3 and 21.3% year to date, compared with 20.8% and 22.3%, respectively, in the prior-year periods. Pounds per day declined 2.9% in Q3 and 3.1% year to date, while gross revenue per hundredweight excluding fuel surcharges increased 7.0% and 8.8%.
Brokerage and Other Services revenue declined 15.0% in Q3 and 1.1% year to date. Adjusted EBITDA declined 6.1% in Q3 to $123 million but increased 13.7% year to date to $439 million. Segment margin improved to 6.4% in Q3 and 6.8% year to date from 5.8% and 5.9%, respectively.
Cash and cash equivalents were $544 million at September 30, 2022, compared with $260 million at December 31, 2021. Total assets were $8.5 billion and total equity was $1.8 billion. Accounts receivable were $2.0 billion.
Total debt principal was $3.020 billion at September 30, 2022, compared with $3.693 billion at year-end 2021. The balance included a $2.003 billion term loan facility, $520 million of 6.25% senior notes due 2025, $300 million of 6.70% senior debentures due 2034, and $197 million of finance leases and other debt. Interest expense declined to $35 million in Q3 and $103 million year to date, from $53 million and $176 million, respectively.
Material changes versus the prior comparable period
- Operating income increased 65.2% in Q3 and 135.3% year to date; continuing-operations income increased 523.8% in Q3 and 286.3% year to date.
- SG&A declined to 9.8% of revenue in Q3 and 9.9% year to date, versus 10.4% and 10.6%, partly because 2021 included $29 million of legal settlement costs associated with intermodal contractor classification.
- Cost of transportation and services decreased to 67.2% of revenue in Q3 and 68.1% year to date, versus 70.5% and 69.3%.
- Nine-month results included a $434 million gain on the intermodal sale, net of transaction costs, and a $26 million debt extinguishment loss related to the redemption of $630 million of senior notes due 2025.
- Transaction and integration costs increased to $25 million in Q3 and $60 million year to date, versus $15 million and $26 million, largely reflecting strategic initiatives, spin-offs, divestitures and retention awards.
- Other comprehensive loss was $60 million in Q3 and $128 million year to date, primarily from foreign-currency translation.
Cash flow, liquidity and outlook
- Operating cash flow from continuing operations was $664 million for the first nine months, versus $558 million in 2021.
- Investing activities generated $351 million, including $705 million of intermodal-sale proceeds, $29 million from cross-currency swap settlements and $394 million of capital expenditures.
- Financing activities used $706 million, primarily for the $651 million redemption of senior notes and $47 million of debt and finance-lease repayments.
- Availability under the ABL Facility was $996 million, based on a $1.0 billion borrowing base and $4 million of letters of credit. Total liquidity was approximately $1.5 billion, and management stated that liquidity and capital sources were sufficient for the next 12 months.
- Following the RXO spin-off, ABL commitments were scheduled to decline from $1.0 billion to $600 million. On that basis, management estimated pro forma liquidity at approximately $1.0 billion as of September 30, 2022.
- Management expected full-year 2022 net capital expenditures of $375 million to $425 million, excluding net capital expenditures associated with the RXO spin-off.
- No formal revenue or earnings guidance was provided in the filing.
Management commentary, risks and unusual items
Management highlighted pricing, technology deployment, network density, trailer manufacturing and driver-training initiatives as LTL growth and productivity opportunities. XPO had added five terminals, representing 369 net new doors toward a goal of 900 net new doors by year-end 2023 from an October 2021 baseline.
External risks included labor and driver shortages, equipment and supply-chain constraints, inflation in fuel, wages and interest rates, recession-related demand declines, foreign-exchange movements, and the continuing effects of COVID-19. Management stated that fuel surcharge clauses and general rate increases had offset higher fuel and transportation procurement costs during the periods presented. XPO reported no direct exposure to Russia or Ukraine but noted uncertainty from the war and related sanctions.
Legal contingencies included an environmental investigation in California involving underground storage tanks, hazardous materials and hazardous waste. Potential monetary sanctions or costs were not estimable at the filing date. An insurance contribution matter also remained unresolved, with no liability accrued for potential exposures that were not reasonably estimable. Management stated that it did not expect current proceedings to have a material adverse effect, while acknowledging that unfavorable outcomes could materially affect results, liquidity or cash flows.
RXO raised $355 million of notes, entered into a $100 million term loan and a $500 million revolving facility before the spin-off. These proceeds and other RXO cash funded an approximately $488 million distribution to XPO, intended for debt repayment and related costs. XPO also commenced a tender offer for its remaining $520 million of senior notes due 2025.
Investor verification checklist
- Reconcile post-spin financial statements and segment definitions, including the treatment of RXO and intermodal as discontinued operations.
- Verify the final outcome and cash impact of the tender offer for the 2025 notes and the use of the approximately $488 million RXO distribution.
- Assess pro forma leverage and liquidity after the ABL commitment reduction from $1.0 billion to $600 million.
- Evaluate whether LTL pricing and fuel surcharges can offset lower freight volumes, labor costs, fuel costs and purchased transportation expense.
- Monitor the proposed European divestiture, transition-service obligations and any additional restructuring or separation costs.
- Track the California environmental investigation and the unresolved insurance contribution litigation, for which potential exposure was not clearly estimable.
- Confirm actual 2022 capital expenditures against the $375 million to $425 million outlook and assess free cash flow after capital spending.