XPO Logistics, Inc. Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and six months ended June 30, 2021. XPO operated two reportable segments: Transportation and Logistics. On August 2, 2021, after the reporting date, XPO completed the tax-intended spin-off of its Logistics segment into GXO Logistics, Inc. Historical Logistics results are included in this filing, but future XPO results will primarily reflect transportation services, including less-than-truckload transportation and truck brokerage.
As of June 30, 2021, XPO had approximately 141,000 team members, 1,623 locations in 30 countries and more than 50,000 customers. In January 2021, XPO acquired the majority of Kuehne + Nagel’s U.K. and Ireland contract logistics operations.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $5,036 million | $3,502 million | $9,810 million | $7,366 million |
| Revenue growth | 43.8% | — | 33.2% | — |
| Operating income (loss) | $246 million | $(141) million | $448 million | $(60) million |
| Operating margin | 4.9% | (4.0)% | 4.6% | (0.8)% |
| Net income (loss) | $158 million | $(134) million | $276 million | $(109) million |
| Net income attributable to XPO | $156 million | $(131) million | $271 million | $(108) million |
| Diluted EPS | $1.38 | $(1.45) | $2.40 | $(1.20) |
| Net cash from operating activities | — | — | $539 million | $394 million |
Q2 2021 revenue growth reflected recovery from COVID-19-affected 2020 results, organic growth, foreign currency benefits of approximately 4.5 percentage points and approximately 4.3 percentage points from the Kuehne + Nagel acquisition. Six-month revenue growth included approximately 3.8 percentage points from foreign currency and 3.6 percentage points from the acquisition.
- Transportation: Q2 revenue was $3.186 billion, up 49.8%, with operating income of $255 million versus a $15 million loss. Six-month revenue was $6.175 billion, up 34.6%, with operating income of $464 million versus $105 million.
- Logistics: Q2 revenue was $1.881 billion, up 34.0%, with operating income of $71 million versus a $43 million loss. Six-month revenue was $3.699 billion, up 30.2%, with operating income of $139 million versus a $5 million loss.
- Cost structure: Q2 cost of transportation and services increased to 49.9% of revenue from 46.9%; direct operating expense declined to 33.4% from 39.1%; and SG&A declined to 11.8% from 18.0%. Lower COVID-19-related costs, improved revenue leverage and lower restructuring costs supported profitability.
- Cash flow and capital spending: Six-month operating cash flow was $539 million. Capital expenditures were $250 million, proceeds from asset sales were $62 million and investing cash use was $154 million.
Balance sheet, debt and liquidity
| Balance sheet item | June 30, 2021 | December 31, 2020 |
|---|---|---|
| Cash and cash equivalents | $801 million | $2,054 million |
| Total assets | $15,564 million | $16,169 million |
| Total debt, carrying value | $5,273 million | $6,707 million |
| Long-term debt, carrying value | $5,181 million | $5,369 million |
| Total equity | $2,967 million | $2,849 million |
- XPO reported approximately $1.9 billion of available liquidity, including $801 million of cash.
- Availability under the ABL facility was $1.084 billion, after $16 million of outstanding letters of credit. XPO was in compliance with its debt covenants.
- During the first six months, XPO redeemed $1.2 billion of 2022 senior notes, repaid $200 million under the ABL facility and acquired the remaining noncontrolling interest in XPO Logistics Europe for $128 million plus expenses.
- Interest expense declined to $63 million in Q2 and $132 million for six months, from $82 million and $154 million, respectively, primarily because of lower debt balances.
Material changes versus the prior comparable period
- Revenue, operating income and net income recovered sharply from COVID-19-affected 2020 results.
- Operating performance improved in both segments, with Transportation and Logistics each moving from an operating loss in Q2 2020 to operating income in Q2 2021.
- Transaction and integration costs were $35 million in Q2 and $53 million for six months in 2021, primarily related to the Logistics spin-off and Kuehne + Nagel acquisition. The comparable 2020 periods included $46 million and $90 million, respectively, largely related to the terminated strategic-alternatives review.
- Restructuring expense declined substantially: Q2 2021 included a $2 million restructuring credit and the six-month period included $2 million of expense, compared with $50 million and $53 million of expense in the prior-year periods.
- Cash declined by $1.253 billion during the first six months, primarily because of debt redemption, ABL repayment and the purchase of noncontrolling interests.
- All preferred stock and warrants were exchanged or eliminated by June 30, 2021. Common shares outstanding increased materially from year-end, including through these exchanges.
Guidance, outlook, risks and unusual items
- Management expects 2021 full-year net capital expenditures of $250 million to $275 million, excluding net capital expenditures associated with the spun-off Logistics segment.
- Management stated that existing liquidity and capital sources were sufficient to support operations for the next 12 months and that maintaining liquidity and pursuing investment-grade credit ratings were priorities.
- The COVID-19 pandemic continued to create uncertainty regarding demand, volumes, operating costs and recovery timing across countries. XPO incurred costs for personal protective equipment, site cleaning and enhanced employee benefits.
- After quarter-end, GXO issued $800 million of notes and paid XPO $794 million. XPO also completed a July equity offering, receiving approximately $385 million net, and announced redemptions of its $1.0 billion 2024 notes and $535 million 2023 notes.
- The post-spin-off ABL facility commitment was reduced from $1.1 billion to $1.0 billion. The trade receivables securitization program was divided into separate $200 million-equivalent programs for XPO and GXO.
- Changes to the legal-entity structure related to the spin-off are expected to create one-time cash and non-cash tax expenses in the second half of 2021.
- XPO faces litigation, including independent-contractor misclassification claims. Two California intermodal drayage class actions were scheduled for trial in September 2021, but the filing states that a possible loss or range of loss could not be estimated.
- Management disclosed no material changes to previously reported risk factors and stated that disclosure controls were effective as of June 30, 2021.
Important facts for investors to verify
- Post-spin-off financial comparability: future XPO results will exclude GXO, while historical periods in this filing include Logistics.
- The actual debt balances and cash deployment after the GXO payment, equity offering and announced 2023 and 2024 note redemptions.
- The impact of the spin-off on one-time taxes, transaction costs, ongoing transition services and corporate overhead.
- Sustainability of Transportation segment margins after normalization of COVID-19 comparisons, fuel costs, carrier pricing and freight volumes.
- Liquidity after the ABL commitment reduction and the separation of the receivables securitization program.
- Developments and potential exposure in the intermodal contractor-classification litigation and other legal contingencies.