XPO Logistics, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021. The filing is unaudited and reflects XPO’s post-spin-off business, primarily North American less-than-truckload (LTL) and Brokerage and Other Services. On August 2, 2021, XPO completed the tax-free spin-off of its Logistics segment to shareholders as GXO Logistics, Inc.; historical Logistics results are presented as discontinued operations.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $3.270 billion | $2.675 billion | $9.445 billion | $7.261 billion |
| Operating income | $112 million | $138 million | $442 million | $75 million |
| Operating margin | 3.4% | 5.2% | 4.7% | 1.0% |
| Income from continuing operations | $21 million | $37 million | $197 million | $(79) million |
| Net income (loss) | $(57) million | $98 million | $219 million | $(11) million |
| Adjusted EBITDA | $307 million | $268 million | $916 million | $558 million |
| Cash flow from continuing operations | Not provided for the quarter | Not provided for the quarter | $558 million | $292 million |
- Q3 revenue increased 22.2%; nine-month revenue increased 30.1%, reflecting growth in LTL and truck brokerage and easier comparisons with COVID-19-affected 2020 results.
- Q3 adjusted EBITDA was $307 million, or approximately 9.4% of revenue, versus $268 million, or approximately 10.0%, in the prior-year quarter. Nine-month adjusted EBITDA margin was approximately 9.7% versus 7.7%.
- North American LTL revenue increased 14.8% in Q3 and 18.7% for nine months. Q3 adjusted EBITDA declined to $222 million, or 20.8% of revenue, from $238 million, or 25.3%; nine-month adjusted EBITDA increased to $694 million, or 22.3%.
- Brokerage and Other Services revenue increased 27.2% in Q3 and 37.0% for nine months. Adjusted EBITDA increased 45.6% in Q3 to $131 million and 142.8% for nine months to $386 million.
- Q3 net loss included a $78 million after-tax loss from discontinued operations, primarily reflecting spin-off-related costs and tax effects. Continuing operations generated $21 million of income.
- Cash and cash equivalents were $254 million at September 30, 2021, compared with $1.731 billion at December 31, 2020. Total liquidity was approximately $1.2 billion, including cash.
- Total debt carrying value was $3.571 billion, including $3.515 billion of long-term debt. Debt fair value was $3.825 billion.
- Capital expenditures were $212 million for the first nine months, partially offset by $72 million of proceeds from property and equipment sales. Full-year 2021 net capital expenditures were expected to be $250 million to $275 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was accompanied by higher transportation costs: cost of transportation and services rose to 70.5% of revenue in Q3 from 67.8%, and to 69.3% for nine months from 67.7%, primarily due to labor constraints and higher third-party transportation costs.
- Q3 operating income decreased 18.8% despite higher revenue, reflecting increased transportation costs, transaction and integration costs, restructuring costs, and a $29 million legal settlement charge related to independent-contractor classification matters.
- Interest expense declined 34.6% in Q3 and 22.1% for nine months because of lower average debt balances and debt redemptions.
- XPO redeemed its 2022 notes in January 2021 and its 2023 and 2024 senior notes in Q3. Debt extinguishment losses were $46 million in Q3 and $54 million for nine months.
- Financing cash flow was a $1.880 billion use in the first nine months, including $2.769 billion of debt repurchases, partially funded by a $794 million distribution from GXO and $384 million of net proceeds from an equity offering.
- In July 2021, XPO issued 2.875 million shares directly, including shares sold under the underwriters’ option, at a public offering price of $138 per share. An equal number of shares were also sold by an affiliate of the company’s chairman and CEO, but XPO received no proceeds from those sales.
- Stockholders’ equity declined to $1.016 billion from $2.849 billion at year-end 2020, primarily due to the GXO spin-off distribution and related accounting effects.
Outlook, Commentary, Risks and Unusual Items
- Management targeted leverage of 1.0x to 2.0x by the first half of 2023 as part of its objective to achieve an investment-grade credit rating.
- Management cited favorable LTL pricing, e-commerce growth, technology investments, digital brokerage capabilities and network density as key growth and margin drivers.
- The company planned to pull forward its January 2022 LTL general rate increase to November 2021, introduce certain accessorial charges, expand driver-training capacity, increase trailer production and add approximately 900 LTL doors over 12 to 24 months.
- Management expected restructuring initiatives recorded in the first nine months to generate approximately $20 million of annualized pretax run-rate savings by mid-2022.
- Supply-chain disruptions, labor and driver shortages, equipment constraints, semiconductor shortages, inflation, fuel and wage costs may pressure service levels, margins and cash flow. Higher pricing only partially offset increased transportation costs in the period.
- The company stated that existing liquidity and capital sources were sufficient to support operations for the next 12 months and that it remained in compliance with debt covenants. The ABL facility had $993 million of availability at September 30, 2021, with maturity in April 2024.
- Two California independent-contractor classification settlements totaling $29.5 million were accrued in Q3, subject to final court approval. The company also disclosed ongoing shareholder and insurance contribution litigation for which the potential loss was not clearly estimable.
- The company had $198 million of letters of credit outstanding under a $200 million uncommitted facility and approximately $22 million of availability under its receivables securitization program.
Important Facts for Investors to Verify
- Reconcile continuing-operations performance with consolidated net income after the GXO discontinued-operations presentation and spin-off-related charges.
- Assess whether LTL margin pressure from labor, purchased transportation and supply-chain constraints persists after pricing actions and network investments.
- Verify the timing and cash cost of the $2.769 billion debt redemptions, the $794 million GXO distribution and the $384 million equity issuance.
- Monitor liquidity, ABL availability, letters of credit, receivables securitization capacity and progress toward the 1.0x–2.0x leverage target.
- Evaluate the effect of the GXO separation, including tax, indemnification, transition-services and other separation-agreement obligations.
- Track approval and payment of the $29.5 million contractor-classification settlements and developments in the remaining disclosed legal proceedings.
- Confirm whether the projected $250 million–$275 million of 2021 net capital expenditures and approximately $20 million of restructuring savings are achieved.