XPO Logistics, Inc. — Form 10-K Summary
Business context and reporting period
Filing for the fiscal year ended December 31, 2011, with fourth-quarter data disclosed separately. XPO, formerly Express-1 Expedited Solutions, operated three asset-light transportation businesses: Expedited Transportation, Freight Forwarding and Freight Brokerage. The company generally relies on independent contractors and third-party carriers rather than owning transportation assets.
In September 2011, the company changed its name to XPO Logistics, completed a 4-for-1 reverse stock split and received a $75.0 million investment in Series A convertible preferred stock and warrants from Jacobs Private Equity and other investors.
Financial performance and key metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Operating revenue | $177.1 million | $158.0 million | Up 12.1% |
| Gross margin | $29.8 million; 16.8% | $27.4 million; 17.3% | Margin down 50 bps |
| Operating income | $1.7 million; 1.0% | $8.4 million; 5.3% | Down 79.6% |
| Income from continuing operations | $0.8 million | $4.9 million | Down 84.5% |
| Net income | $0.8 million | $4.9 million | Down 84.5% |
| Net loss available to common shareholders | $44.6 million | Net income of $4.9 million | Impacted by preferred-stock accounting |
| Basic and diluted EPS | $(5.41) | $0.61 basic; $0.59 diluted | Declined materially |
| Cash flow from operations | $6.6 million | $2.3 million | Improved |
| Capital expenditures | $0.8 million | $0.8 million | Approximately flat |
SG&A increased 48.0% to $28.1 million, or 15.8% of revenue, from 12.0% in 2010. The increase reflected a new executive team, recruiting, professional services, equity compensation and costs associated with the equity investment. Stock compensation expense was $1.2 million in 2011 versus $0.2 million in 2010.
- Expedited Transportation: Revenue rose 14.2% to $87.6 million; operating income increased 7.8% to $8.2 million. Segment gross margin declined to 20.9% from 22.7%, primarily because of increased international and brokered-carrier activity.
- Freight Forwarding: Revenue was essentially flat at $65.1 million; operating income fell 17.9% to $1.5 million as higher SG&A offset modest gross-margin improvement.
- Freight Brokerage: Revenue increased 46.0% to $29.2 million; operating income increased 50.9% to $1.3 million. Growth was supported by additional sales personnel and customer expansion.
Fourth-quarter 2011 revenue was $44.1 million, gross margin was $7.2 million, operating expenses were $9.6 million and net loss was $1.5 million. Net loss available to common shareholders was $2.2 million after preferred dividends.
Liquidity, debt and capital structure
- Cash increased to $74.0 million at December 31, 2011, from $0.6 million at year-end 2010. Working capital increased to $83.1 million from $12.3 million, primarily because of the equity investment.
- Financing activities provided $68.0 million, including $71.6 million of net proceeds from the preferred-stock and warrant issuance.
- Long-term debt and capital leases totaled $2.1 million, down from $6.5 million, and the revolving credit balance was zero versus $2.7 million in 2010.
- The revolving credit facility provided up to $10.0 million through March 31, 2013. Approximately $9.6 million was available after letters of credit, and $0.4 million of standby letters of credit were outstanding.
- The company reported $25.6 million of contractual obligations, including $16.8 million of employment commitments, $6.2 million of operating leases and $2.1 million of debt and capital leases.
Material changes versus the prior comparable period
- Revenue grew, but profitability deteriorated because SG&A and corporate costs increased substantially faster than gross margin.
- Corporate costs rose to $9.3 million from $1.9 million, including equity-investment expenses, executive compensation and related recruiting costs.
- The company recorded a $44.2 million deemed distribution for the beneficial conversion feature of the Series A Preferred Stock, plus preferred dividends of $1.1 million for 2011. These non-operating equity charges drove the net loss attributable to common shareholders.
- International expedited shipments increased, with Canada and Mexico representing 24.2% of Expedited Transportation revenue versus 20.1% in 2010. Management indicated that this mix generally carries lower margins.
- A Phoenix freight-brokerage office opened in the fourth quarter as the first of several planned greenfield sales offices.
- The company’s authorized common shares increased from 100 million to 150 million, and the preferred stock and warrants initially represented potential issuance of 21.4 million common shares in aggregate.
Guidance, outlook, commentary and risks
Management did not provide specific revenue or earnings guidance in the filing. Its stated strategy was to pursue targeted acquisitions, open additional freight-brokerage offices, expand sales and service personnel, develop an integrated information-technology platform and improve operating leverage. Management expected corporate costs in 2012 to run slightly above the fourth-quarter 2011 level.
- Growth depends on successfully executing acquisitions, integrating acquired businesses, raising capital and managing significantly expanded operations.
- Freight volumes, customer demand, competition, pricing and transportation capacity are cyclical and can materially affect revenue and margins.
- The company relies on independent contractors, independent freight-forwarding stations and third-party carriers. Equipment shortages, provider failures, service disruptions or higher carrier costs could impair results.
- Fuel prices, driver compensation, insurance costs and regulatory requirements may increase operating costs. Reclassification of independent contractors as employees could create substantial tax, labor and benefits liabilities.
- Transportation, safety, environmental, air-cargo and international trade regulations may increase costs or restrict operations.
- Customer contracts generally may be terminated on short notice and do not include minimum volume commitments. Automotive exposure remains significant; one domestic automotive manufacturer represented approximately 8% of 2011 revenue, and the domestic Big Three represented approximately 10%.
- The company disclosed that it was technically out of compliance with certain credit-agreement provisions relating to preferred dividends and other technical matters as of December 31, 2011. A subsequent lender waiver was obtained; the company stated that no other events of default existed.
- Preferred stock carries a 4% annual dividend rate, subject to the specified minimum formula, and a $75.0 million liquidation preference. Jacobs Private Equity controlled a substantial portion of potential voting power and could exert significant influence over corporate actions.
- Legal claims, cargo losses, accidents, environmental incidents and insurance claims could exceed coverage, although management did not expect currently known matters to be materially adverse.
Most important facts for an investor to verify
- Whether revenue growth and planned acquisitions can offset the substantially higher corporate and executive cost structure.
- The fully diluted share count, including 10.7 million shares issuable on preferred-stock conversion, 10.7 million warrant shares and outstanding equity awards.
- The terms, payment status and future cash burden of preferred dividends and the impact of the preferred stock on common-stock value.
- Compliance with credit-agreement covenants and the continuing validity of lender waivers.
- Underlying segment margins, particularly the effect of international freight and the faster-growing, lower-margin brokerage business.
- Execution of the planned information-technology system, new brokerage offices and acquisition program.
- Exposure to automotive customers, independent-contractor reclassification, transportation capacity, fuel prices and regulatory changes.