XPO Logistics, Inc. — Fiscal 2014 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2014, with quarterly information for the fourth quarter ended December 31, 2014. XPO was an asset-light third-party logistics provider operating through Transportation and Logistics segments. Transportation included brokerage, intermodal, last-mile, expedited transportation and freight forwarding. Logistics was established through the September 2014 acquisition of New Breed and provided technology-enabled contract logistics services.
During 2014, XPO acquired Pacer, Atlantic Central Logistics and New Breed, continued opening brokerage and freight-forwarding cold-start locations, and expanded its technology platform and cross-selling strategy.
Key financial metrics
| Metric | 2014 | 2013 | Change or commentary |
|---|---|---|---|
| Revenue | $2,356.6 million | $702.3 million | Increased 235.6%, primarily from acquisitions and organic growth |
| Net revenue | $654.8 million | $123.6 million | Increased 429.8% |
| Net revenue margin | 27.8% | 17.6% | Improved 10.2 percentage points |
| Operating loss | $40.9 million | $52.3 million | Improved, but remained negative |
| Interest expense | $48.0 million | $18.2 million | Increased 163.7% |
| Net loss | $63.6 million | $48.5 million | Loss increased |
| Net loss available to common stockholders | $107.4 million | $51.5 million | Included a $40.9 million preferred-stock beneficial conversion charge |
| Basic and diluted loss per share | $2.00 loss | $2.26 loss | Per-share loss improved despite higher total loss |
| Cash flow from operations | $21.3 million used | $66.3 million used | Operating cash usage declined |
| Capital expenditures | $44.6 million | $11.6 million | Increased with expansion and acquisitions |
| Cash used for acquisitions | $814.0 million | $458.8 million | Major use of investing cash |
Fourth-quarter revenue was $830.7 million, operating income was $6.0 million, and net loss was $9.9 million. Fourth-quarter revenue rose from $257.2 million in the comparable 2013 quarter, while the company reported its first quarterly operating profit in the disclosed 2014 quarterly data.
Segments and margins
| 2014 segment | Revenue or net revenue | Operating income |
|---|---|---|
| Transportation | $2,140.0 million revenue; $438.2 million net revenue | $18.9 million |
| Logistics | $216.6 million net revenue | $17.6 million |
| Corporate | Not applicable | $77.4 million expense |
Transportation’s net revenue margin improved to 20.5% from 17.6%, and the segment moved from a $7.2 million operating loss in 2013 to $18.9 million of operating income. Logistics generated an 8.2% operating margin on net revenue, although it contributed only from the September 2014 New Breed acquisition onward.
Liquidity, debt and capital structure
- Cash and cash equivalents were $644.1 million at December 31, 2014, compared with $21.5 million at year-end 2013.
- Working capital was $852.0 million, compared with $70.7 million in 2013.
- Total debt was $608.8 million before unamortized discounts and current maturities; reported long-term debt was $592.1 million.
- The company had $500.0 million of 7.875% senior notes due September 2019 and $106.8 million principal amount of 4.50% convertible senior notes due October 2017.
- The $415 million secured revolving credit facility had no borrowings outstanding at year-end, although $14.1 million of letters of credit were outstanding.
- Financing activities provided $1,502.2 million, including $733.8 million from common-stock offerings, $363.6 million from preferred-stock issuance, $489.6 million from senior notes and net borrowings from the revolving facility.
- The company paid $2.9 million of preferred dividends and had no immediate plans to pay dividends on common stock.
Material changes versus the prior comparable period
- Revenue and net revenue expanded substantially because of the Pacer, ACL and New Breed acquisitions, prior acquisitions and organic growth in brokerage locations.
- The company added the Logistics segment through New Breed, which contributed $216.6 million of net revenue and $17.6 million of operating income for the post-acquisition period.
- Goodwill increased to $929.3 million from $363.4 million, while identifiable intangible assets increased to $341.5 million from $185.2 million.
- Sales, general and administrative expense increased to $422.5 million from $169.5 million, reflecting acquired operations, technology investment, sales-force expansion, integration and transaction costs, and higher amortization.
- The company incurred $11.4 million of restructuring costs related primarily to Pacer facility rationalization and severance.
- Interest expense increased materially because of acquisition-related debt commitments, the new senior notes, and convertible-note conversion costs.
- Equity financing materially increased liquidity and common shares outstanding. The Series B preferred stock issued in September 2014 automatically converted into 12.1 million common shares after stockholder approval.
Guidance, outlook, risks and unusual items
Management did not provide a specific numerical earnings or revenue outlook in the supplied filing. Management expected to continue pursuing acquisitions, cold-start locations, technology investment, operational optimization and cross-selling. The company reported more than 200 planned technology projects for 2015 and intended to continue expanding its logistics footprint.
- Growth depends heavily on successfully integrating acquisitions, realizing expected synergies and managing increased working-capital and capital requirements.
- Transportation volumes, pricing and margins are exposed to economic cycles, freight demand, carrier capacity, fuel prices, weather, labor disruptions and rail or port congestion.
- The company relies extensively on independent contractors and third-party carriers. Driver availability, carrier failures, safety ratings and changes in independent-contractor classification could materially affect costs and service capacity.
- Independent-contractor misclassification claims involving Pacer included 153 California administrative claims, additional litigation involving 175 claimants and a putative class action that could involve as many as 600 claimants. The company recorded a reserve for probable losses but stated that possible losses above the reserve could not be estimated.
- West Coast port slowdowns and shutdowns had adversely affected intermodal, drayage, NVOCC and freight-forwarding operations as of the filing date.
- The Union Pacific agreement governing the U.S.-Mexico wholesale intermodal automotive business contemplated a step-down and termination of that role by December 31, 2015, creating transition and margin risk.
- In June 2014, the company rebranded Express-1 as XPO Express and accelerated $3.3 million of amortization related to the former trade name.
- At year-end, management reported no goodwill impairment and concluded disclosure controls and internal control over financial reporting were effective. However, internal controls for ACL and New Breed, representing $864.1 million of assets and $258.6 million of revenue, were excluded from the year-end assessment because of the proximity of the acquisitions to year-end.
Important facts for investors to verify
- Confirm the final financial contribution, integration progress and profitability of Pacer, ACL and New Breed after full-period ownership.
- Monitor operating cash flow, acquisition spending and whether the company can fund expansion without continued substantial equity or debt issuance.
- Review leverage, interest expense, debt covenants and the effect of the February 2015 issuance of an additional $400 million of senior notes.
- Assess the ultimate resolution and potential exposure from Pacer and other independent-contractor classification litigation.
- Evaluate goodwill and intangible-asset impairment sensitivity, particularly following the rapid increase in acquired goodwill.
- Track the transition of the Union Pacific cross-border automotive business and the impact of port, rail and carrier disruptions.
- Account for subsequent events, including the February 2015 UX acquisition and the conversion of $30.6 million principal amount of convertible notes into 1,859,231 common shares.