XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2017, filed August 4, 2017. XPO provides global transportation and contract logistics services through two segments: Transportation and Logistics. As of June 30, 2017, it served more than 50,000 customers, employed over 90,000 people and operated 1,435 locations in 31 countries.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3,760.3 million | $3,683.3 million | $7,299.8 million | $7,229.0 million |
| Operating income | $185.0 million | $170.3 million | $298.6 million | $232.7 million |
| Operating margin | 4.9% | 4.6% | 4.1% | 3.2% |
| Net income | $57.2 million | $50.4 million | $82.1 million | $31.1 million |
| Net income attributable to XPO | $51.9 million | $46.6 million | $73.2 million | $24.1 million |
| Diluted EPS | $0.38 | $0.35 | $0.54 | $0.19 |
| Cash flow from operations | Not separately provided | Not separately provided | $231.0 million | $267.6 million |
Q2 revenue increased 2.1% year over year, while six-month revenue increased 1.0%. Q2 net income rose 13.5%; six-month net income rose 164.0%, benefiting from lower interest expense and a significantly lower effective tax rate. Q2 effective tax rates were 32.7% in 2017 and 39.6% in 2016; six-month rates were 18.0% and 35.7%, respectively.
Transportation generated Q2 revenue of $2,405.2 million, down 0.6%, and operating income of $160.0 million, up 4.4%. Logistics generated Q2 revenue of $1,395.2 million, up 4.7%, and operating income of $64.3 million, up 25.8%.
Cash flow, debt and liquidity
- Operating cash flow for the first six months was $231.0 million, compared with $267.6 million in the prior-year period.
- Capital expenditures were $262.0 million, versus $224.0 million in the prior-year period, producing negative operating cash flow less capital expenditures of approximately $31.0 million.
- Cash and cash equivalents were $291.4 million at June 30, 2017, compared with $373.4 million at December 31, 2016.
- Total debt principal was $5,043.5 million, with $117.0 million of current maturities and $4,754.3 million of long-term debt at carrying value.
- The ABL facility had no outstanding balance and $679.0 million of availability at June 30, 2017, based on a $924.4 million borrowing base and $245.4 million of letters of credit.
- In March 2017, XPO refinanced its term loan, increasing principal from $1,481.9 million to $1,494.0 million, reducing the LIBOR margin from 3.25% to 2.25% and generating a $9.0 million debt extinguishment charge. Management expects annual cash interest savings of approximately $15 million.
- Management stated that existing cash sources were sufficient to support operations for the next 12 months and that the company was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Operating income increased 8.6% in Q2 and 28.3% for the first six months, with operating margin expanding by 30 basis points and 90 basis points, respectively.
- Cost of transportation and services declined as a percentage of revenue, while direct operating expense increased as a percentage of revenue, principally because of higher benefits and temporary labor costs supporting contract-logistics growth.
- SG&A improved to 10.9% of revenue in Q2 from 11.1% and to 11.1% for the first six months from 11.6%, reflecting cost-saving actions and lower professional fees.
- Interest expense decreased 21.5% in Q2 and 20.2% for the first six months, reflecting lower average indebtedness and refinancing benefits.
- Foreign currency losses increased to $28.3 million in Q2 and $38.9 million for the first six months, primarily from unrealized losses on foreign-currency options and forward contracts.
- Transportation revenue was pressured by the October 2016 divestiture of the North American truckload operation and unfavorable currency movements, but benefited from growth in brokerage, last mile and LTL weight per day.
- Logistics revenue and operating income benefited from European and North American contract-logistics growth, including new e-commerce and cold-chain contracts.
Guidance, outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the filing. Management highlighted growth opportunities in e-commerce, contract logistics, brokerage and integrated supply-chain services.
- In July 2017, XPO sold 5 million common shares for $290.4 million and entered into forward sale agreements covering an additional 6 million shares at an initial forward price of $58.08 per share. Future settlement could dilute EPS and return on equity.
- XPO announced redemption of all outstanding 7.25% senior notes due January 2018, funded with cash on hand, with redemption scheduled for August 25, 2017.
- Legal contingencies include independent-contractor classification, wage-and-hour, meal-and-rest-break, TCPA and other claims. The company believes probable and estimable losses are adequately accrued, but cannot estimate possible losses in excess of accruals for several matters.
- The company disclosed an August 2014 shipment to an Iranian entity subject to U.S. sanctions, generating $864.52 of revenue and $123.19 of net profit. XPO filed an initial voluntary disclosure with OFAC and is continuing its investigation.
- Key risks include acquisition and integration execution, realization of expected synergies, rapid growth, technology-system reliability, cybersecurity, foreign-currency exposure, labor classification claims and access to capital.
- Restructuring reserves totaled $18.1 million at June 30, 2017, after $5.7 million of charges and $14.0 million of payments during the first six months.
Important facts for investors to verify
- Whether operating-margin improvements persist as temporary labor, benefits, fuel and third-party transportation costs change.
- The conversion of revenue growth into free cash flow, given capital expenditures exceeded operating cash flow in the first six months.
- Debt maturities, refinancing needs and the effect of the July equity offering and forward-sale agreements on leverage and dilution.
- The magnitude and timing of potential legal or regulatory losses, particularly contractor-classification claims and the OFAC matter.
- Actual foreign-currency results and the effectiveness and cost of the company’s derivative hedging programs.
- Progress in integrating acquisitions, achieving targeted synergies and maintaining information-technology and cybersecurity controls.