XPO Logistics, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
XPO Logistics, Inc. operates globally through two reportable segments: Transportation and Logistics. At September 30, 2018, the company operated in 32 countries with 1,529 locations and more than 98,000 employees. The filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Financial statements are unaudited.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $4,335.1 million | $3,887.1 million | $12,890.1 million | $11,186.9 million |
| Operating income | $209.0 million | $176.7 million | $578.0 million | $455.6 million |
| Operating margin | 4.8% | 4.5% | 4.5% | 4.1% |
| Net income | $115.2 million | $71.0 million | $353.4 million | $153.1 million |
| Net income attributable to XPO | $109.0 million | $62.5 million | $330.6 million | $135.7 million |
| Diluted EPS | $0.74 | $0.44 | $2.26 | $0.99 |
| Cash flow from operations | Not separately provided | Not separately provided | $536.2 million | $519.5 million |
Q3 net margin was approximately 2.7%, and nine-month net margin was approximately 2.7%, based on consolidated net income. Cash capital expenditures were $413.1 million in the first nine months, compared with $389.9 million in 2017; cash flow from operations less property and equipment purchases was approximately $123.1 million.
- Transportation: Q3 revenue increased 10.5% to $2,850.6 million and operating income increased 34.4% to $195.2 million, with operating margin improving to 6.8% from 5.6%. Nine-month revenue rose 13.6% to $8,512.4 million and operating income rose 29.9% to $539.6 million.
- Logistics: Q3 revenue increased 13.1% to $1,516.8 million, but operating income declined 11.6% to $59.5 million, reducing margin to 3.9% from 5.0%. Nine-month revenue rose 18.3% to $4,472.7 million and operating income increased 16.5% to $174.3 million.
- Liquidity: Cash and cash equivalents were $427.9 million at September 30, 2018. ABL facility availability was $697.2 million after $238.2 million of outstanding letters of credit.
- Debt: Total debt principal was $4,234.7 million and carrying value was $4,089.3 million, compared with principal of $4,683.9 million and carrying value of $4,521.2 million at December 31, 2017. Long-term debt carrying value was $4,005.3 million.
Material changes versus the prior comparable period
- Revenue grew 11.5% in Q3 and 15.2% for the first nine months, driven principally by European and North American contract logistics, freight brokerage and last mile services.
- Operating margin improved as cost of transportation and services declined to 51.9% of revenue in Q3 from 52.6%, although direct operating expense increased to 33.0% from 32.6%.
- Interest expense declined 29.7% in Q3 and 25.7% for the first nine months, reflecting lower average indebtedness and refinancing benefits.
- Foreign currency loss declined to $3.3 million in Q3 from $15.0 million and to $5.3 million for the first nine months from $53.9 million.
- Net income attributable to XPO increased 74.4% in Q3 and 143.7% for the first nine months. The comparison benefited from higher operating income, lower interest expense, lower foreign currency losses and a lower effective tax rate.
- Logistics Q3 profitability weakened because of higher bad debt expense, while higher payroll, temporary labor and purchased-service costs associated with new contract startups affected the nine-month period.
Guidance, outlook, commentary, risks and unusual items
- Management stated that existing cash sources are expected to support existing operations for the next 12 months. The filing does not provide a specific revenue, earnings or adjusted EBITDA guidance target.
- XPO refinanced approximately $1.5 billion of term loans in February 2018, extending maturity to February 2025 and reducing the LIBOR margin to 2.00%. The refinancing generated a $10.3 million debt extinguishment charge.
- In July 2018, XPO redeemed $400 million of 6.50% senior notes due 2022, incurring a $16.8 million extinguishment loss. The redemption was primarily funded with approximately $348.5 million of net proceeds from settling six million forward-sale shares.
- Remaining fixed consideration under customer contracts was approximately $1.7 billion at September 30, 2018; approximately 75% was expected to be recognized over the next three years. Actual amounts may vary with foreign exchange, contract revisions and terminations.
- The company adopted the new revenue recognition standard using the modified retrospective method. The adoption had no material impact on the financial statements. The company was evaluating the impact of the new lease standard, with adoption required for fiscal years beginning after December 15, 2018.
- Key exposures include foreign currency movements, interest rates, leverage and debt covenant compliance, transportation capacity and labor costs, customer credit and bad debt, and execution of new logistics contract startups.
- Legal matters include claims concerning the classification of owner-operators and contract carriers as employees, wage-and-hour claims, last mile litigation and a settled TCPA class action. The company believes probable and estimable losses are adequately accrued, but cannot estimate potential losses in excess of accruals for certain matters.
- The company reported no material changes to previously disclosed risk factors and stated that its disclosure controls were effective as of September 30, 2018.
Important facts for investors to verify
- Whether Transportation margin improvements continue and whether Logistics margins recover as new contract startups mature.
- Progress on reducing leverage and the timing and terms of future debt maturities, particularly the $1.2 billion of senior notes due 2022 and approximately $1.5 billion of term loans due 2025.
- Cash conversion after capital expenditures and the effect of working-capital growth, particularly accounts receivable.
- Potential exposure from employee-classification, wage-and-hour and other legal claims, for which excess loss estimates were not clearly quantifiable.
- The effect of foreign exchange volatility, interest rates and derivative positions on earnings, accumulated other comprehensive income and cash flows.
- The eventual balance-sheet impact of adopting the lease accounting standard and the company’s unresolved policy decision regarding deferred taxes on GILTI.