XPO Logistics, Inc. — FY2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual Form 10-K, not a standalone quarterly filing; fourth-quarter 2012 results are included in the annual and unaudited quarterly data. XPO was a non-asset-based transportation and logistics provider operating Freight Brokerage, Expedited Transportation and Freight Forwarding segments.
Business Context
- Operated 55 locations at year-end: 33 company-owned branches and 22 agent-owned offices.
- Growth strategy centered on acquisitions, new “cold-start” offices, operating optimization and technology investment.
- Completed four acquisitions in 2012: Turbo, BirdDog, Kelron and Continental. Acquired East Coast Air Charter and Covered Logistics after year-end in February 2013.
- Had 892 full-time employees at December 31, 2012, versus 38 Freight Brokerage employees at December 31, 2011.
Financial Performance
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenue | $278.6 million | $177.1 million | +57.3% |
| Gross margin | $40.8 million | $29.8 million | +37.1% |
| Gross margin percentage | 14.7% | 16.8% | Down 210 bps |
| SG&A expense | $68.8 million | $28.1 million | +144.9% |
| Operating income | $(28.0) million | $1.7 million | Turned to loss |
| Net income (loss) | $(20.3) million | $0.8 million | Turned to loss |
| Net loss available to common shareholders | $(23.3) million | $(44.6) million | Improved due to 2011 preferred-stock charge |
| Basic and diluted loss per share | $(1.49) | $(5.41) | Improved |
Revenue growth was primarily acquisition-driven and supported by eight Freight Brokerage cold-start offices. Profitability declined because SG&A rose substantially for acquisitions, recruiting, new offices, corporate infrastructure, technology and compliance. The 2012 results included $2.9 million of acquisition-related transaction costs, $2.5 million of litigation-related legal costs, $2.0 million of compliance costs and $4.4 million of stock compensation expense.
Segment Results
| Segment | 2012 Revenue | 2012 Operating Income (Loss) | 2011 Revenue | 2011 Operating Income (Loss) |
|---|---|---|---|---|
| Freight Brokerage | $125.1 million | $(5.6) million | $29.2 million | $1.3 million |
| Expedited Transportation | $94.0 million | $6.8 million | $87.6 million | $8.2 million |
| Freight Forwarding | $67.7 million | $1.1 million | $65.1 million | $1.5 million |
- Freight Brokerage revenue increased 328.7%, but gross margin fell to 12.9% from 16.1% and the segment moved to an operating loss because of lower-margin cold-start activity and higher staffing and integration costs.
- Expedited Transportation revenue increased 7.4%, while operating income declined. Gross margin decreased to 18.0% from 20.9%, primarily because of higher rates paid to independent fleet owners and owner-operators and fleet recruiting costs.
- Freight Forwarding revenue increased 3.9%; operating income declined as investment in company-owned branches increased SG&A.
Fourth-Quarter 2012
| Metric | Q4 2012 | Q4 2011 |
|---|---|---|
| Operating revenue | $108.5 million | $44.1 million |
| Gross margin | $15.7 million | $7.2 million |
| SG&A expense | $26.8 million | $9.6 million |
| Net loss | $(9.3) million | $(1.5) million |
| Net loss available to common shareholders | $(10.1) million | $(2.2) million |
| Basic and diluted loss per share | $(0.57) | $(0.27) |
Fourth-quarter interest expense was $3.2 million, compared with $0.05 million in the prior-year quarter, reflecting the 2012 convertible debt issuance.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $252.3 million at December 31, 2012, compared with $74.0 million at December 31, 2011.
- Working capital increased to $271.9 million from $83.1 million.
- Operating activities used $24.3 million of cash, compared with $6.6 million provided in 2011.
- Investing activities used $64.7 million, including $57.2 million for acquisitions and $7.0 million for property and equipment.
- Financing activities provided $267.2 million, principally from $137.0 million of net proceeds from a common-stock offering and $138.5 million of net proceeds from convertible senior notes.
- Convertible senior notes had a $125.0 million principal amount, a 4.5% coupon and an October 1, 2017 maturity; the carrying value was $108.3 million at year-end.
- Total debt and capital leases were $109.4 million, compared with $2.1 million at year-end 2011. Preferred stock had a $42.8 million carrying value and required approximately $3.0 million of annual dividends.
- Management stated that existing cash balances were expected to fund operations and planned growth initiatives for at least the next twelve months.
Material Changes, Outlook and Unusual Items
- The company substantially expanded through acquisitions, branch openings and hiring, but the resulting cost structure exceeded gross-margin generation and produced a significant operating loss.
- Management expected continued investment and stated that substantial losses were likely to continue until revenue growth and scale generated sufficient gross margin to absorb SG&A.
- Management planned continued acquisitions, cold-start offices, technology development, carrier recruitment and expansion in specialized transportation markets.
- Net loss available to common shareholders improved from 2011 because 2011 included a $44.2 million preferred-stock beneficial-conversion charge; 2012 still included $3.0 million of preferred dividends.
- Goodwill increased to $55.9 million from $17.0 million, largely from 2012 acquisitions. No goodwill or identified intangible-asset impairment was recorded.
- Internal control over financial reporting was deemed effective, although management excluded Kelron and Turbo from its assessment while those businesses were being integrated.
Principal Risks and Contingencies
- Execution and integration risk from a rapid acquisition and expansion strategy, including potential dilution, additional debt, working-capital needs and impairment charges.
- Economic cyclicality, reduced freight volumes, customer concentration, competitive pricing and the absence of minimum volume commitments in most customer contracts.
- Dependence on independent contractors, carriers and agent-owned stations; shortages, higher compensation, fuel costs or carrier failures could reduce margins and capacity.
- Regulatory risks involving driver hours of service, safety ratings, electronic onboard recorders, environmental requirements, hazardous materials and independent-contractor classification.
- Potential claims exceeding insurance coverage, including cargo, personal injury, employment and environmental matters.
- Material litigation with C.H. Robinson concerning former employees, alleged misuse of information and customer solicitation. A January 2013 temporary injunction imposed restrictions, although a key customer restriction was stayed; the outcome was uncertain and could materially affect results.
- Technology implementation, cybersecurity, system integration and scalability risks.
- Significant potential dilution from preferred-stock conversion, warrants, options, restricted stock units and convertible notes. Bradley Jacobs beneficially controlled approximately 52% of voting power on an assumed fully diluted basis.
Investor Verification Checklist
- Verify whether the acquisition and cold-start strategy can produce gross-margin expansion sufficient to cover the substantially higher SG&A base.
- Reconcile reported revenue growth with cash usage, accounts-receivable growth and working-capital requirements.
- Review the terms, conversion triggers and potential dilution of the convertible notes, preferred stock and warrants.
- Monitor the C.H. Robinson litigation, related injunctions and any potential damages or operating restrictions.
- Assess independent-contractor classification, hours-of-service, CSA and electronic-recording requirements and their effect on carrier costs and capacity.
- Evaluate goodwill and intangible-asset balances relative to the performance of acquired businesses.
- Confirm post-year-end acquisitions, including East Coast Air Charter and Covered Logistics, and their financing and integration effects.
- Review the full audited financial statements and acquisition notes because the filing text contains extensive pro forma and purchase-accounting information not reflected in reported 2012 results.