XPO Logistics, Inc. Form 10-Q Summary
Business context and reporting period
XPO Logistics, Inc. (formerly Express-1 Expedited Solutions, Inc.) filed an unaudited Form 10-Q for the three and nine months ended September 30, 2011. The company operated three asset-light third-party logistics businesses: Express-1 expedited transportation, Concert Group Logistics freight forwarding, and Bounce premium truck brokerage.
On September 2, 2011, the company completed a $75.0 million equity investment from Jacobs Private Equity and other investors, changed its name to XPO Logistics, Inc., and completed a 4-for-1 reverse stock split.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $47.4 million | $44.4 million | $133.0 million | $116.4 million |
| Gross margin | $8.2 million; 17.3% | $8.1 million; 18.3% | $22.6 million; 17.0% | $21.0 million; 18.0% |
| Operating income | $0.5 million; 1.0% | $2.9 million; 6.6% | $4.1 million; 3.1% | $7.1 million; 6.1% |
| Net income | $0.2 million | $1.7 million | $2.2 million | $4.1 million |
| Net income available to common shareholders | $(44.4) million | $1.7 million | $(42.4) million | $4.1 million |
| EBITDA | $0.8 million | $3.2 million | $5.0 million | $8.0 million |
| Cash flow from operations | Not separately provided | Not separately provided | $3.3 million | $0.2 million |
Q3 revenue increased 6.6%, while nine-month revenue increased 14.2%. Direct expenses grew faster than revenue in both periods, contributing to lower gross margins. SG&A increased 48.5% in Q3 and 33.1% for the first nine months, largely because of equity-investment costs, executive recruiting, and expanded corporate infrastructure.
The common-shareholder loss and loss per share of $(5.38) in Q3 and $(5.15) for the nine months primarily reflect a $44.2 million deemed distribution for the beneficial conversion feature of the Series A Preferred Stock and $0.4 million of preferred dividends. Basic and diluted weighted-average common shares were 8.3 million for the nine-month period.
Segment performance
- Express-1: Q3 revenue increased 9.4% to $23.4 million; operating income was $2.5 million versus $2.5 million. Nine-month revenue increased 15.5% to $67.2 million, while operating income declined 4.4% to $6.4 million. Margin pressure reflected higher international and brokered-carrier activity.
- CGL: Q3 revenue decreased 9.0% to $16.9 million, but operating income increased 15.8% to $0.6 million due to improved mix and lower SG&A. Nine-month revenue increased 1.6% to $48.4 million and operating income increased 10.8% to $1.5 million.
- Bounce: Q3 revenue increased 44.8% to $8.2 million and operating income increased 78.2% to $0.5 million. Nine-month revenue increased 55.0% to $20.9 million and operating income increased 56.2% to $0.8 million.
Liquidity, cash flow, and debt
- Cash was $71.5 million at September 30, 2011, compared with $0.6 million at December 31, 2010. Working capital was $84.2 million versus $12.3 million at year-end 2010, primarily because of the equity investment.
- Nine-month operating cash flow was $3.3 million. Investing activities used $0.9 million, including $0.45 million for an acquisition earn-out and $0.44 million for property and equipment.
- Financing activities provided $68.5 million, including $71.6 million of net proceeds from preferred stock and warrants, partly offset by debt repayments.
- Total long-term debt and capital leases were $2.5 million, including $1.7 million of current maturities. The revolving credit facility had no borrowings, approximately $9.6 million of available capacity after letters of credit, and a March 31, 2013 maturity.
- The company was in compliance with its debt covenants and reported no defaults. Substantially all assets secured the revolving facility and term loan.
Material changes versus the prior comparable period
- Revenue growth was strongest at Bounce and Express-1, while CGL declined in Q3 because of lost large-customer and project-related revenue.
- Consolidated gross margin declined by 100 basis points in both Q3 and the nine-month period, principally due to a greater mix of lower-margin international shipments, brokered-carrier activity, and Bounce growth.
- Operating income declined 83.9% in Q3 and 41.9% year to date, primarily because corporate SG&A increased by $2.7 million in Q3 and $3.1 million year to date.
- Corporate costs included approximately $0.7 million of Q3 indirect equity-investment expenses and $1.6 million of executive recruiting and related costs; nine-month equity-investment-related costs were approximately $1.0 million.
- The preferred stock and warrants materially changed the capital structure. The preferred stock was initially convertible into 10.7 million common shares, and warrants were exercisable for an additional 10.7 million shares at an initial $7.00 exercise price.
Outlook, commentary, risks, and unusual items
Management described a growth strategy centered on targeted acquisitions, organic expansion of truck-brokerage offices, increased sales and service staffing, technology investment, and operational optimization. Management expected existing cash, operating cash flow, and revolver availability to fund existing operations for at least the next 12 months, but provided no specific revenue or earnings guidance.
Key risks include competition, economic and quarterly volatility, fuel and transportation-capacity conditions, dependence on independent contractors and brokered carriers, execution of acquisitions and expansion plans, availability of financing, technology changes, government regulation, and potential litigation or uninsured claims. Management reported no material litigation, no off-balance-sheet arrangements, and no goodwill or identified-intangible impairment.
Subsequent to quarter-end, the company declared and paid a $375,000 initial preferred dividend. It also agreed to aggregate guaranteed executive payments of $588,000 through July 2012. The filing identifies contractual cash obligations of $10.2 million, including debt, leases, the LRG International earn-out, and employment contracts.
Important facts for investors to verify
- Whether the preferred stock converts and the warrants are exercised, which could substantially dilute existing common shareholders.
- The sustainability of revenue growth at Bounce and Express-1 and the effect of international and brokered-carrier mix on gross margins.
- Whether elevated corporate SG&A and executive infrastructure costs decline as the new strategy is implemented.
- Progress, valuation discipline, financing, and integration risks associated with planned acquisitions and new brokerage offices.
- Compliance with debt covenants, revolver availability, and the company’s ability to meet near-term contractual obligations.
- The distinction between $2.2 million of reported net income and the $(42.4) million loss attributable to common shareholders caused by preferred-stock accounting charges.