XPO Logistics, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
XPO Logistics, Inc. reported results for the three months ended March 31, 2018. The company operates globally through two reportable segments: Transportation and Logistics. At quarter-end, XPO operated in 32 countries with 1,466 locations and more than 95,000 employees.
The filing was unaudited and prepared under U.S. GAAP. XPO adopted ASC Topic 606, Revenue from Contracts with Customers, on January 1, 2018, using the modified retrospective method. The adoption produced a $3.0 million benefit to opening retained earnings and had no material effect on first-quarter 2018 financial statements.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $4,191.5 million | $3,539.5 million | 18.4% increase |
| Operating income | $141.0 million | $103.8 million | 35.8% increase |
| Operating margin | 3.4% | 2.9% | 50 basis-point expansion |
| Net income | $79.1 million | $24.9 million | 217.7% increase |
| Net income attributable to XPO | $72.6 million | $21.3 million | Increase |
| Diluted EPS | $0.50 | $0.16 | Increase |
| Cash flow from operating activities | $(19.4) million | $15.5 million | Decline |
| Capital expenditures | $142.1 million | $122.4 million | Increase |
Revenue growth was driven primarily by European and North American contract logistics, Freight Brokerage and Truckload, and LTL. Foreign currency movements contributed approximately 6% of the revenue increase. Cost of transportation and services declined to 53.1% of revenue from 53.3%, while direct operating expense increased to 32.8% from 32.4%. SG&A improved to 10.7% of revenue from 11.3%.
- Transportation: Revenue was $2,774.1 million, up 16.0%; operating income was $139.0 million, or 5.0% of revenue, versus $105.3 million, or 4.4%, in the prior-year quarter.
- Logistics: Revenue was $1,448.1 million, up 23.2%; operating income was $47.5 million, or 3.3% of revenue, versus $32.9 million, or 2.8%.
- Tax rate: The effective tax rate was negative 0.3%, compared with negative 64.9% in Q1 2017. The quarter included discrete tax benefits of $19.1 million from share-based compensation and $4.3 million related to foreign taxes paid in prior years.
- Other items: Other income was $19.6 million, including $18.5 million of net periodic benefit income. Foreign currency loss was $12.0 million, debt extinguishment loss was $10.3 million, and interest expense was $59.4 million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $380.0 million at March 31, 2018, compared with $396.9 million at December 31, 2017. Cash, cash equivalents and restricted cash totaled $432.4 million at quarter-end.
- Total debt was $4,857.2 million in principal, with carrying value of $4,702.1 million, compared with principal debt of $4,683.9 million and carrying value of $4,521.2 million at year-end 2017.
- The ABL Facility had $514.8 million of availability after $237.3 million of outstanding letters of credit. The average interest rate on ABL borrowings was 3.32%.
- The European trade receivables securitization program had approximately $34.5 million of remaining borrowing capacity and a weighted-average interest rate of 0.99%.
- XPO stated that it was in compliance with its debt covenants and believed existing cash sources would support operations for the next 12 months.
Operating cash flow was negative because working-capital uses increased, particularly accounts receivable growth associated with higher revenue. Investing activities used $131.7 million, primarily for property and equipment purchases. Financing activities provided $126.0 million, including debt refinancing, net ABL borrowings and bank overdrafts.
Material changes versus the prior comparable period
- Revenue increased 18.4%, with operating income growing faster than revenue and consolidated operating margin expanding by 50 basis points.
- Net income and diluted EPS increased substantially, aided by higher operating income, lower interest expense and a significantly less negative effective tax rate.
- Interest expense declined to $59.4 million from $75.6 million, reflecting lower average indebtedness and refinancing benefits.
- Operating cash flow changed from $15.5 million of inflow to $19.4 million of outflow, primarily due to working-capital requirements.
- In February 2018, XPO refinanced approximately $1.494 billion of existing term loans with $1.503 billion of new term loans. The new loans mature February 23, 2025, versus the prior 2021 maturity, and have lower applicable interest-rate margins. The refinancing generated a $10.3 million debt extinguishment charge.
- The maximum availability under the European trade receivables securitization program was increased to €350 million during the quarter.
- The company adopted new accounting guidance for revenue, restricted cash, and presentation of pension costs. The pension presentation change had no impact on net income.
Outlook, commentary, risks and unusual items
The filing does not provide a specific quantitative revenue, earnings or cash-flow guidance target. Management cited continued opportunities from outsourcing, e-commerce, contract logistics, technology investment and integrated supply-chain services, while noting that interim results are not necessarily indicative of full-year results.
- Key operating risks include transportation and logistics demand, pricing and capacity conditions, labor and fuel costs, foreign currency movements, integration and execution of new contracts, and continued technology and capital-investment requirements.
- XPO has significant non-U.S. dollar exposure, primarily to the euro and British pound. It uses foreign currency options, forwards and cross-currency swaps to manage portions of this exposure.
- Legal matters include claims concerning the classification of owner operators and contract carriers as employees, wage-and-hour claims, last-mile classification litigation and a Telephone Consumer Protection Act matter. XPO believes probable and reasonably estimable losses have been accrued, but stated that potential losses in excess of accrued amounts cannot currently be estimated for certain matters.
- The company reported approximately $1 billion of fixed consideration related to remaining performance obligations at March 31, 2018, with approximately 83% expected to be recognized over the next three years. Actual amounts may change with foreign exchange movements, contract revisions and terminations.
- Operating lease obligations reported at December 31, 2017 totaled $1,978.5 million. The company was evaluating the future balance-sheet effects of the new lease accounting standard, which was not yet effective for the quarter.
- The filing stated that there were no material changes to previously disclosed risk factors.
Investor verification checklist
- Verify whether revenue growth and margin expansion continued after the favorable Q1 foreign-exchange contribution and contract-logistics growth.
- Monitor operating cash conversion, accounts receivable growth, capital expenditures and the effect of working capital on liquidity.
- Review total leverage, ABL availability, securitization capacity, debt maturities and compliance with financial covenants.
- Assess the sustainability of the unusually low effective tax rate, including the impact of discrete share-based compensation benefits and Tax Act accounting.
- Track restructuring costs, new-contract startup expenses and productivity improvements in the Transportation and Logistics segments.
- Review developments in employee-classification, wage-and-hour and other legal proceedings, including potential losses beyond accrued amounts.
- Evaluate the future balance-sheet impact of operating leases and the adoption of ASC Topic 842.