XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
XPO Logistics, Inc. operates globally through two reportable segments: Transportation and Logistics. The filing covers the quarter and six months ended June 30, 2018, compared primarily with the same periods in 2017. As of June 30, 2018, the company operated in 32 countries with approximately 1,505 locations and more than 97,000 employees.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $4,363.5 million | $3,760.3 million | $8,555.0 million | $7,299.8 million |
| Operating income | $228.0 million | $175.1 million | $369.0 million | $278.9 million |
| Operating margin | 5.2% | 4.7% | 4.3% | 3.8% |
| Net income | $159.1 million | $57.2 million | $238.2 million | $82.1 million |
| Net income attributable to XPO | $149.0 million | $51.9 million | $221.6 million | $73.2 million |
| Diluted EPS | $1.03 | $0.38 | $1.53 | $0.54 |
| Cash flow from operations | Not separately provided | Not separately provided | $248.0 million | $225.9 million |
| Capital expenditures | Not separately provided | Not separately provided | $267.7 million | $262.0 million |
Transportation generated Q2 revenue of $2,887.7 million and operating income of $205.4 million, compared with $2,522.7 million and $165.0 million, respectively, in the prior-year quarter. Logistics generated Q2 revenue of $1,507.8 million and operating income of $67.3 million, compared with $1,265.7 million and $49.4 million.
At June 30, 2018, cash and cash equivalents were $361.4 million, total debt carrying value was $4,491.0 million, and total equity was $4,139.7 million. ABL availability was $740.0 million after letters of credit. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Q2 revenue increased 16.0%; first-half revenue increased 17.2%. Management attributed growth primarily to European and North American contract logistics, freight brokerage, and last mile services. Foreign exchange contributed approximately 3.1% of Q2 growth and 4.5% of first-half growth.
- Q2 operating income increased 30.2% and first-half operating income increased 32.3%, with margins improving by 50 basis points and 50 basis points, respectively.
- Q2 net income attributable to XPO increased 187.1%; first-half net income attributable to XPO increased 202.7%. Comparability was affected by foreign currency gains and losses, lower interest expense, tax effects, and other items.
- Interest expense declined to $54.9 million in Q2 from $74.3 million and to $114.3 million for the first half from $149.9 million, reflecting lower average indebtedness and refinancing benefits.
- Operating cash flow increased $22.1 million year over year, while capital expenditures remained elevated at $267.7 million. Cash, cash equivalents, and restricted cash declined $74.4 million during the first half.
- The company refinanced approximately $1.494 billion of existing term loans with $1.503 billion of new term loans due February 2025. The refinancing reduced the applicable interest-rate margin but generated a $10.3 million debt-extinguishment loss.
Outlook, commentary, risks, and unusual items
- Management stated that existing cash resources and ABL availability should be sufficient to support operations for the next 12 months. No formal earnings or revenue guidance is provided in the filing text.
- Logistics growth benefited from new contract starts, particularly in retail, e-commerce, and fashion. Temporary labor, payroll, and purchased-service costs related to new contract startups partially offset productivity gains.
- The effective tax rate was 25.4% in Q2 2018 versus 32.7% in Q2 2017, and 18.5% for the first half versus 18.0%. The 2018 first-half rate included $23.0 million of discrete share-based compensation tax benefits and $4.3 million related to deductions for prior-year foreign taxes.
- Foreign currency results were volatile: Q2 included a $10.0 million foreign currency gain versus a $28.3 million loss in the prior-year quarter. The first half included a $2.0 million loss versus a $38.9 million loss in 2017.
- Other expense included an approximately $9 million gain related to a terminated swap during both the three- and six-month periods. Comprehensive income was reduced by a $122.6 million other comprehensive loss in Q2, primarily from foreign currency translation.
- In July 2018, the company physically settled forward-sale agreements for six million shares, receiving approximately $351 million in net proceeds. It used the proceeds primarily to redeem $400 million of 6.50% senior notes due 2022 at 103.25% of principal. An approximately $17 million debt-extinguishment loss is expected in Q3 2018.
- Material contingencies include owner-operator and contract-carrier classification claims, wage-and-hour matters, and other transportation and employment litigation. The company believes probable and estimable losses are adequately accrued but cannot estimate potential losses exceeding accrued amounts in certain matters.
- The company identifies foreign currency exposure, fuel and transportation-market conditions, labor and contractor classification, customer demand, integration and contract-startup execution, leverage, and compliance with debt covenants as important risks. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether revenue growth and margin expansion continue after adjusting for favorable foreign exchange and discrete tax benefits.
- The sustainability of Logistics profitability as new contracts mature and temporary labor and startup costs decline.
- Post-quarter debt balances, interest savings, and the Q3 impact of the approximately $17 million note-redemption loss.
- Available liquidity after the July 2018 debt redemption and the remaining capacity under the ABL and trade-receivables securitization programs.
- Potential financial exposure from contractor misclassification and other litigation, including amounts in excess of recorded accruals.
- The balance-sheet and disclosure effects of adopting the new lease accounting standard, which the company was evaluating and did not plan to adopt early.