XPO Logistics, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
XPO Logistics, Inc. filed its Form 10-K for the fiscal year ended December 31, 2013. The company is a non-asset-based transportation logistics provider operating through Freight Brokerage, Expedited Transportation, and Freight Forwarding. At year-end, XPO operated 94 locations and employed 2,259 full-time employees.
The filing includes fourth-quarter 2013 results. XPO’s business strategy emphasized rapid expansion through acquisitions, new “cold-start” offices, sales-force growth, technology investment, and cross-selling.
Financial performance and key metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $702.3 million | $278.6 million | +152.1% |
| Gross margin | $123.5 million | $40.8 million | +202.5% |
| Gross margin percentage | 17.7% | 14.7% | +3.0 percentage points |
| SG&A expense | $175.8 million | $68.8 million | +155.6% |
| Operating loss | $52.3 million | $28.0 million | Loss increased |
| Net loss | $48.5 million | $20.3 million | Loss increased |
| Net loss available to common shareholders | $51.5 million | $23.3 million | Loss increased |
| Basic and diluted loss per share | $2.26 | $1.49 | Loss increased |
| Cash flow from operations | $(66.3) million | $(24.3) million | Higher cash use |
| Acquisition spending | $458.8 million | $57.2 million | Significant increase |
| Capital expenditures | $11.6 million | $7.0 million | Increased |
Fourth-quarter 2013 revenue was $257.2 million, gross margin was $53.1 million, operating expenses were $61.6 million, and net loss was $10.6 million, or $0.37 per diluted share. Fourth-quarter revenue and gross margin were substantially higher than fourth-quarter 2012 revenue of $108.5 million and gross margin of $15.7 million.
Freight Brokerage generated FY2013 revenue of $541.4 million, gross margin of $96.1 million, and an operating loss of $11.4 million. Expedited Transportation generated revenue of $101.8 million, operating income of $5.2 million, and a 5.1% operating margin. Freight Forwarding generated revenue of $73.2 million and an operating loss of $1.0 million.
At December 31, 2013, cash and cash equivalents were $21.5 million, restricted cash was $2.1 million, working capital was $72.8 million, and total assets were $780.2 million. Accounts receivable were $134.2 million, net of a $3.5 million allowance.
Total debt before discounts and issuance costs was $211.1 million, consisting primarily of $133.7 million of 4.50% convertible senior notes due October 2017 and $75.0 million drawn under a secured $125.0 million revolving credit facility. Net long-term debt was $181.6 million. The company reported compliance with its credit-facility covenants at year-end.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by six 2013 acquisitions, including 3PD, Optima, NLM, East Coast Air Charter, Covered Logistics, and Interide Logistics, together with organic growth from cold-start offices.
- Acquisition spending increased to $458.8 million from $57.2 million, while goodwill increased to $363.4 million from $55.9 million and identifiable intangible assets increased to $185.2 million from $22.5 million.
- Gross margin improved to 17.7% from 14.7%, primarily because of higher-margin acquired businesses and improved Freight Brokerage and Freight Forwarding performance.
- Despite stronger gross margin, operating and net losses widened because of acquisition-related costs, expanded sales and corporate infrastructure, technology investment, amortization, higher litigation costs, and substantially higher interest expense.
- Interest expense increased to $18.2 million from $3.2 million, reflecting the convertible notes, revolving-credit borrowings, and a $3.0 million undrawn commitment fee associated with the 3PD acquisition.
- Cash declined to $21.5 million from $252.3 million as operating cash use and acquisition spending exceeded financing inflows.
- The company changed its freight-forwarding brand from Concert Group Logistics to XPO Global Logistics and accelerated $3.1 million of amortization related to the former trade name.
Outlook, risks, contingencies, and unusual items
Management did not provide a specific numerical revenue, earnings, or cash-flow guidance target in the filing. Management expected to continue pursuing acquisitions, cold-start offices, technology investment, sales-force expansion, and cross-selling. The filing states that existing cash and revolver availability were expected to fund operations and growth initiatives for the next twelve months.
On January 5, 2014, XPO agreed to acquire Pacer International. Consideration was structured as $6.00 in cash plus approximately $3.00 in XPO stock per Pacer share, subject to a specified exchange-ratio range and customary closing conditions. On February 5 and February 11, 2014, XPO completed a common-stock offering totaling 17.25 million shares and received $413.3 million of net proceeds.
- Principal risks include continued operating losses, negative operating cash flow, acquisition integration failures, dilution from equity issuance and convertible securities, and increased leverage.
- The company relies heavily on third-party carriers, independent contractors, and independent station owners. Capacity constraints, fuel costs, carrier pricing, driver availability, and service disruptions could reduce margins.
- Independent-contractor classification is a material risk. 3PD faced state audits and class-action litigation regarding alleged misclassification of contract carriers; seller indemnification is subject to limits.
- XPO was involved in litigation with C.H. Robinson concerning former employees, alleged trade-secret and contractual violations, and customer restrictions. The outcome was uncertain and could materially affect results.
- Regulatory risks include driver hours-of-service, safety ratings, electronic logging requirements, environmental rules, air-cargo security, and possible reclassification of independent contractors as employees.
- Seasonality typically makes first-quarter revenue and profitability lower than the other quarters.
- Goodwill impairment was not recorded, but goodwill and intangible-asset valuations depend on forecasts, discount rates, and expected growth. Future underperformance could result in impairment charges.
- The company’s internal-control assessment was effective, but management and the auditor excluded 3PD, Optima, and NLM from the year-end internal-control assessment because of their proximity to the acquisitions. These businesses represented $554.8 million of assets and $140.0 million of 2013 revenue included in the consolidated statements.
Most important facts an investor should verify
- Whether the acquired businesses generate sufficient incremental gross profit and cash flow to offset acquisition costs, amortization, corporate overhead, and interest expense.
- The pace at which Freight Brokerage and Freight Forwarding can move from operating losses or low margins to sustainable profitability.
- Post-year-end liquidity after the $413.3 million equity offering, the Pacer transaction, additional convertible-note conversions, and future acquisition spending.
- The fully diluted share count, including preferred-stock conversion, warrants, stock awards, and convertible notes.
- Terms, closing status, financing, and integration results of the Pacer acquisition.
- Potential liabilities and indemnification recoveries related to 3PD carrier-classification litigation and the C.H. Robinson case.
- Whether operating cash flow improves from the FY2013 use of $66.3 million and whether working-capital requirements remain elevated as revenue grows.
- Credit-facility covenant compliance, revolver availability, convertible-note maturities, and the company’s ability to fund future acquisitions without excessive dilution or leverage.