XPO, Inc. (formerly Express-1 Expedited Solutions, Inc.) — Q2 2011 Form 10-Q Summary
Business context and reporting period
The unaudited filing covers the three and six months ended June 30, 2011, with comparisons to the same periods in 2010. The company provided premium transportation and logistics services through Express-1 expedited transportation, Concert Group Logistics freight forwarding, and Bounce Logistics truckload brokerage. The company was pursuing a proposed investment and control transaction with Jacobs Private Equity, LLC and other investors and had scheduled a shareholder vote for September 1, 2011, including a proposed name change to XPO Logistics, Inc.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $44.1 million | $40.3 million | $85.6 million | $72.0 million |
| Gross margin | $7.2 million; 16.3% | $7.2 million; 17.9% | $14.4 million; 16.8% | $12.8 million; 17.8% |
| Operating income | $1.6 million; 3.7% | $2.6 million; 6.5% | $3.6 million; 4.3% | $4.2 million; 5.8% |
| Net income | $914,000; $0.03 diluted EPS | $1.5 million; $0.05 diluted EPS | $2.0 million; $0.06 diluted EPS | $2.3 million; $0.07 diluted EPS |
| Cash flow from operations | Not separately provided | Not separately provided | $3.6 million | $792,000 |
- Q2 revenue increased 9.3%; six-month revenue increased 18.9%.
- Q2 gross margin declined 160 basis points, and six-month gross margin declined 100 basis points, primarily due to lower-margin international shipments, faster growth at Bounce, and competitive market conditions.
- Q2 SG&A increased 20.4% to $5.5 million; six-month SG&A increased 23.9% to $10.7 million.
- Cash was $647,000 at June 30, 2011, compared with $561,000 at December 31, 2010. Working capital was approximately $12.3 million.
- Total long-term debt and capital leases were $2.9 million, including $1.7 million of current maturities. The revolving credit facility had no outstanding borrowings, approximately $9.6 million of available capacity, and a March 31, 2013 maturity date. Standby letters of credit totaled $410,000.
- Total assets were $55.6 million and stockholders’ equity was $37.0 million at June 30, 2011.
Material changes versus prior comparable periods
- Express-1 Q2 revenue rose 12.2% to $23.1 million, but operating income fell 18.9% to $2.0 million as its gross margin declined to 19.5% from 23.5%. International revenue represented 22.6% of total company revenue, versus 14.7% in Q2 2010.
- CGL Q2 revenue decreased 2.2% to $15.7 million and operating income decreased 28.1% to $399,000. Six-month revenue increased 8.4% and operating income increased 7.4%.
- Bounce Q2 revenue increased 43.0% to $6.7 million and operating income increased 22.0% to $172,000. Six-month revenue increased 62.5% and operating income increased 30.3%.
- Corporate costs increased $405,000 in Q2, primarily because of approximately $440,000 of accounting, legal, financial consulting, and other costs related to the proposed equity investment.
- The company modified CGL revenue recognition to recognize revenue when delivery is completed rather than when freight is picked up. The change reduced Q2 revenue and direct expenses by approximately $1.4 million and $1.2 million, respectively, and management stated that the effect was immaterial to the financial statements.
- Six-month operating cash flow improved to $3.6 million from $792,000, while investing cash use increased to $710,000, including a $450,000 acquisition earn-out payment, and financing cash use increased to $2.8 million.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected solid Express-1 revenue growth for the remainder of 2011, supported by international shipments, but acknowledged that international and brokered-carrier activity generally produces lower margins.
- Management expected CGL SG&A as a percentage of revenue to remain near current levels and believed Bounce could reduce SG&A to approximately 12% of revenue while improving operating margins as volumes grow.
- The proposed equity investment contemplated up to $150 million of cash, including warrant exercises. The initial transaction contemplated $75 million of preferred stock and warrants, a 4-for-1 reverse stock split, and a change in control to JPE and Bradley Jacobs. Closing required shareholder and other customary approvals and was not assured.
- The proposed securities included 75,000 shares of Series A convertible perpetual preferred stock with a $75 million initial liquidation preference, a 4% minimum annual dividend, and warrants for 42,857,143 pre-split common shares. After the contemplated reverse split, the stated conversion and exercise price would be $7.00 per share and the warrants would cover 10,714,286 shares.
- Estimated direct incremental transaction costs were approximately $3.6 million if the investment closed and between approximately $650,000 and $5.5 million if it did not. A termination fee of up to $3.374 million could apply in certain circumstances.
- The company had approximately $6.1 million of contractual cash obligations, including $2.9 million of debt, $960,000 of operating and real estate leases, a $450,000 earn-out obligation, and $1.7 million of employment contracts.
- Management reported no material litigation, no off-balance-sheet arrangements, effective disclosure controls, and compliance with debt covenants as of June 30, 2011. Risks included competition, fuel and capacity conditions, regulatory and technology changes, quarterly volatility, and failure of the proposed equity investment to close.
Most important facts for investors to verify
- Whether the proposed JPE investment, preferred stock issuance, warrants, reverse stock split, control change, and name change were ultimately approved and completed.
- Whether the company’s revenue growth, particularly in international freight and Bounce, translated into sustainable margins despite increased brokered-carrier use and tightening truck capacity.
- The effect of approximately $440,000 of transaction costs already incurred and any additional transaction, termination, employment, or financing obligations.
- Liquidity after the required debt repayments, including the $1.7 million of current debt maturities, available revolver capacity, and $410,000 of outstanding letters of credit.
- The comparability of CGL revenue and direct expenses following the revenue-recognition change.
- Potential dilution from 2.693 million outstanding options and the proposed preferred-stock conversion and warrants.