XPO Logistics, Inc. 2016 Third-Quarter Form 10-Q Summary
Business context and reporting period
XPO Logistics, Inc. reported results for the three and nine months ended September 30, 2016. The company operated through two segments: Transportation and Logistics, serving customers through freight brokerage, last mile, intermodal, less-than-truckload, truckload, forwarding, managed transportation and contract logistics services. Results include the substantial impact of the 2015 acquisitions of Con-way and Norbert Dentressangle.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | First nine months 2016 | First nine months 2015 |
|---|---|---|---|---|
| Revenue | $3,713.8 million | $2,362.1 million | $10,942.8 million | $4,281.0 million |
| Operating income | $168.8 million | $44.1 million | $401.5 million | $9.4 million |
| Operating margin | 4.5% | 1.9% | 3.7% | 0.2% |
| Net income attributable to XPO | $15.1 million | $(40.4) million | $39.2 million | $(129.3) million |
| Diluted EPS | $0.11 | $(0.94) | $0.30 | $(2.10) |
| Cash flow from operations | Not separately provided | Not separately provided | $404.6 million | $39.4 million |
Q3 net revenue margin was 45.9%, down from 47.6% in the prior-year quarter. For the first nine months, net revenue margin increased to 45.8% from 44.3%. SG&A declined as a percentage of revenue to 10.3% in Q3 and 11.2% year to date, compared with 12.0% and 14.4%, respectively.
Cash and cash equivalents were $360.3 million at September 30, 2016, compared with $289.8 million at December 31, 2015. Working capital was $477.8 million, compared with $262.8 million at year-end 2015. Capital expenditures were $318.5 million in the first nine months, while investing cash outflows totaled $252.0 million.
Total long-term debt had a carrying value of $5.297 billion at September 30, 2016, with total principal balance of $5.495 billion. The company had $731.0 million of availability under its $1.0 billion asset-based revolving facility after $239.0 million of outstanding letters of credit and was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Revenue increased 57.2% in Q3 and 155.6% for the first nine months, primarily from acquisitions and organic growth, partly offset by foreign-exchange effects and lower fuel-related revenue.
- Transportation revenue increased 72.5% in Q3 and 152.6% year to date; segment operating income increased to $125.4 million and $354.0 million, respectively.
- Logistics revenue increased 35.6% in Q3 and 163.8% year to date; segment operating income increased to $75.3 million and $158.3 million, respectively.
- The company returned to profitability, with Q3 net income attributable to XPO of $15.1 million versus a $40.4 million loss in Q3 2015.
- Interest expense increased to $93.0 million in Q3 and $280.8 million year to date, reflecting debt used to finance the Con-way and Norbert Dentressangle acquisitions.
- The company issued $535.0 million of 6.125% senior notes due 2023, refinanced its term loan, added $450.0 million of incremental term loans and redeemed its 2019 notes. Debt extinguishment losses totaled $53.2 million in the first nine months.
- Operating cash flow improved substantially, while acquisition spending fell to zero in the first nine months of 2016 from $1.610 billion in the comparable 2015 period.
Guidance, outlook, commentary, risks and unusual items
Management stated that it expected 2016 net capital expenditures of approximately $450 million to $460 million and believed operating cash flow, existing cash and revolver availability would be sufficient to fund operations. The filing does not provide a clear quantitative revenue, earnings or EBITDA forecast.
Management emphasized integration of acquired businesses, cost savings, cross-selling, technology investment and optimization of transportation assets. Margin pressure remained evident in certain transportation businesses and in contract logistics operations acquired from Con-way and Norbert Dentressangle.
- After the quarter, on October 27, 2016, XPO agreed to sell its North American Truckload operations for approximately $558 million in cash, subject to adjustments. The business generated $360.5 million of revenue and $29.8 million of operating income in the first nine months of 2016.
- On November 3, 2016, XPO used sale proceeds to repurchase $555 million of term-loan debt at par. The company expected an approximately $16.5 million non-cash debt extinguishment charge in Q4 2016.
- Legal exposures include independent-contractor classification, wage-and-hour and meal-break litigation. The company stated that probable and reasonably estimable losses were accrued, but excess exposure could not be estimated for several matters.
- The company disclosed ongoing investigations and a voluntary disclosure to the U.S. Department of Treasury regarding certain acquired-business transactions involving sanctioned countries and Mahan Air. Potential consequences include investigations, penalties and reputational harm.
- Key market risks include interest rates, foreign currencies, fuel prices, labor organization efforts, customer retention, acquisition integration, driver and carrier availability, regulatory compliance and substantial indebtedness.
- Restructuring charges incurred during the first nine months totaled $20.4 million, with a remaining restructuring reserve of $30.6 million at September 30, 2016.
Most important facts for an investor to verify
- Whether the reported operating improvement and margin expansion are sustainable after acquisition-related benefits and integration savings.
- The company’s debt-reduction progress following the North American Truckload divestiture and the effect of refinancing on future interest expense.
- Execution of the Con-way and Norbert Dentressangle integrations, including expected synergies and remaining restructuring costs.
- The final purchase-price allocation for Con-way, which remained preliminary, and the carrying values of goodwill and intangible assets.
- Potential liabilities from contractor-classification, wage-and-hour, labor and other litigation matters.
- The outcome of the OFAC investigation and any related penalties, disclosures or compliance costs.
- Cash conversion, working-capital requirements and capital expenditures relative to management’s stated 2016 range.