XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
XPO Logistics provides transportation and contract-logistics services through its Transportation and Logistics segments, serving more than 30,000 customers across 27 countries. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared primarily with the same periods in 2014.
The results include major acquisitions, most significantly the June 8, 2015 acquisition of a controlling interest in Norbert Dentressangle SA (ND), as well as Bridge Terminal Transport, UX Specialized Logistics and prior acquisitions. ND contributed $407.0 million of revenue and $0.2 million of operating income during the six months ended June 30, 2015.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |
| Revenue | $1,215.9 million | $581.0 million | $1,918.9 million | $863.4 million |
| Net revenue | $508.6 million | $121.9 million | $770.9 million | $180.3 million |
| Net revenue margin | 41.8% | 21.0% | 40.2% | 20.9% |
| Operating loss | $(30.1) million | $(11.9) million | $(34.6) million | $(33.3) million |
| Net loss | $(78.8) million | $(13.8) million | $(93.2) million | $(42.1) million |
| Net loss available to common shareholders | $(75.1) million | $(14.5) million | $(90.3) million | $(43.6) million |
| Loss per diluted share | $(0.89) | $(0.28) | $(1.11) | $(0.92) |
- Second-quarter revenue increased 109.3%; six-month revenue increased 122.2%, primarily from acquisitions and organic growth.
- Transportation generated second-quarter revenue of $861.2 million and operating income of $23.0 million, compared with $3.2 million of operating income in the prior-year quarter. Six-month operating income was $26.7 million versus $3.3 million.
- Logistics generated second-quarter revenue of $359.6 million and operating income of $4.3 million. Six-month revenue was $500.4 million and operating income was $10.7 million. Comparable 2014 Logistics results were not presented because the segment was established through the New Breed acquisition in September 2014.
- Corporate SG&A was $57.4 million in the second quarter and $72.0 million for the first six months, including acquisition and integration costs, rebranding costs, share-based compensation and litigation-related costs.
- Interest expense increased to $36.3 million in the second quarter and $59.4 million for the first six months, driven by substantially higher debt and acquisition-related financing costs.
- Cash used in operating activities was $23.2 million for the first six months, compared with $26.7 million used in 2014. Investing cash flow used $1,635.2 million, including $1,610.7 million for acquisitions. Financing activities provided $2,189.7 million.
- At June 30, 2015, cash and cash equivalents were $1,175.8 million, including $690.5 million of current restricted cash held for the ND tender offer. Working capital was $1,764.9 million.
- Total debt was $3,762.6 million, including $3,074.2 million of senior notes, $326.2 million of asset financing and $72.1 million of convertible notes. Long-term debt, net of current maturities and other adjustments, was $3,405.7 million.
- The company had no borrowings under its $415.0 million secured revolving credit facility and had $19.2 million of outstanding letters of credit. Management stated that the company was in compliance with its material debt covenants.
Material changes versus the prior comparable periods
- Scale expanded materially through acquisitions, increasing total assets from $2.8 billion at December 31, 2014 to $9.7 billion at June 30, 2015. Goodwill increased to $3.4 billion from $929.3 million.
- ND accounted for approximately 67% of the acquired share capital initially; XPO owned approximately 72% at June 30 and approximately 86.25% after the tender offer closed in July 2015. The transaction added $2.4 billion of preliminary goodwill and $667.8 million of redeemable noncontrolling interests at quarter-end.
- On June 3, 2015, XPO issued $697.5 million of common stock and $562.5 million of Series C convertible perpetual preferred stock, receiving $1,228.1 million of net proceeds. Subject to shareholder approval, the preferred stock was expected to convert into approximately 12.5 million common shares.
- On June 4, 2015, XPO issued $1.6 billion of 6.5% senior notes due 2022 and €500.0 million of 5.75% senior notes due 2021, generating $2,123.4 million of net proceeds.
- Profitability remained negative despite improved segment performance. Consolidated losses were pressured by higher interest expense, acquisition-related costs, amortization, foreign-currency losses and corporate expenses.
- During the second quarter, XPO rebranded its services under the single XPO Logistics brand and accelerated $1.9 million of amortization for certain trade names.
Outlook, risks, contingencies and unusual items
Management did not provide a specific numerical revenue, earnings or cash-flow guidance range in the filing. Management stated that it intends to continue growth through organic expansion, cross-selling and acquisitions, including an active pipeline of potential targets, while integrating acquired businesses and pursuing operating synergies.
- Key execution risks include integrating ND and other acquisitions, achieving expected synergies, managing rapid international expansion, retaining major customers and maintaining relationships with third-party carriers.
- Foreign-currency exposure increased substantially after the ND acquisition. Second-quarter other expense included $19.8 million of foreign-currency transaction and remeasurement losses and a $7.8 million loss on a foreign-exchange forward contract.
- ND carried significant pension obligations: the UK plans had a projected benefit obligation of $1,408.3 million, plan assets of $1,318.9 million and an $89.4 million funded-status liability at June 30.
- Legal matters include independent-contractor misclassification claims. A California court awarded $2.0 million to seven claimants, subject to appeal; additional proceedings could involve approximately 200 claimants, and a related putative class action could involve as many as 600 claimants. The filing states that potential losses beyond recorded accruals cannot be predicted reliably.
- Contractual cash obligations totaled $6,839.4 million, including $1,800.0 million of operating leases and substantial scheduled debt payments and interest.
- Subsequent to quarter-end, holders tendered €223.0 million of ND’s €235.0 million Euro private placement notes, which XPO redeemed at par on July 31, 2015.
Most important facts for investors to verify
- Whether ND integration produces the projected revenue growth, cost rationalization and operating synergies.
- The company’s ability to generate positive operating cash flow while funding acquisitions, working capital, debt service and pension obligations.
- Leverage, covenant compliance and refinancing requirements as the 2019, 2021 and 2022 senior notes mature.
- The final ownership, purchase accounting and cash cost of the ND tender offer, including the remaining redeemable noncontrolling interest.
- The potential financial exposure from contractor-classification litigation and other legal proceedings.
- The effect of foreign exchange movements, particularly against the euro and British pound, on earnings, equity and debt obligations.
- Shareholder approval and timing of the Series C preferred-stock conversion, including the resulting dilution to common shareholders.