XPO Logistics, Inc. Form 10-Q Summary
Business Context and Reporting Period
Filed November 5, 2013 for the quarter and nine months ended September 30, 2013. XPO Logistics provided non-asset transportation and logistics services through Freight Brokerage, Expedited Transportation, and Freight Forwarding. The company operated 89 locations in the United States and Canada, serving more than 9,500 customers through relationships with more than 23,000 carriers.
The company pursued an acquisition-led growth strategy, supplemented by new branch openings, sales-force expansion, technology investment, and operational integration. The most significant transaction was the August 15, 2013 acquisition of 3PD, a heavy-goods last-mile logistics provider.
Financial Performance and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $194.0 million | $71.0 million | $445.1 million | $170.1 million |
| Gross margin | $34.8 million | $9.9 million | $70.4 million | $25.2 million |
| Gross margin percentage | 18.0% | 14.0% | 15.8% | 14.8% |
| SG&A expense | $53.3 million | $19.2 million | $114.2 million | $42.0 million |
| Operating loss | $(18.4) million | $(9.3) million | $(43.8) million | $(16.9) million |
| Net loss | $(6.0) million | $(3.1) million | $(37.9) million | $(11.0) million |
| Loss per diluted share | $(0.28) | $(0.22) | $(1.99) | $(0.89) |
- Revenue increased 173.3% year over year in the third quarter and 161.7% for the first nine months, primarily from acquisitions and Freight Brokerage expansion.
- Freight Brokerage revenue increased 374.4% in Q3 and 504.4% year to date. The segment remained loss-making, with operating losses of $3.4 million in Q3 and $12.2 million year to date.
- Expedited Transportation revenue increased 5.7% in Q3 and 4.9% year to date. Q3 operating income improved to $1.7 million, but nine-month operating income declined to $3.7 million from $5.8 million.
- Freight Forwarding revenue increased 10.5% in Q3 and 11.1% year to date. The segment reported a Q3 operating loss of $2.6 million, partly because of accelerated amortization of the former CGL trade name.
- Cash used in operating activities was $61.5 million for the first nine months, compared with $16.9 million in the prior-year period. Capital expenditures were $6.5 million.
- Cash used in acquisitions was $352.3 million, compared with $7.0 million in the prior-year period. Financing activities provided $235.2 million, including $239.7 million of net proceeds from the August 2013 common-stock offering.
- Cash and cash equivalents declined to $67.3 million at September 30, 2013 from $252.3 million at December 31, 2012. Working capital declined to $118.1 million from $271.9 million.
- Total debt and capital leases were $144.9 million, including $143.8 million principal amount of 4.50% convertible senior notes due October 1, 2017. The carrying amount of convertible senior notes was $112.7 million.
- Total assets increased to $700.3 million from $413.2 million at year-end 2012, primarily reflecting acquisitions. Goodwill increased to $302.8 million from $55.9 million.
Material Changes Versus the Prior Comparable Period
- The acquisition of 3PD for approximately $364.3 million added approximately $232.5 million of goodwill and substantial customer, carrier, technology, and other intangible assets. 3PD contributed $46.5 million of Q3 revenue and $33.3 million of direct expense.
- Other 2013 acquisitions included Interide, Covered Logistics & Transportation, and East Coast Air Charter. The company stated that it completed four acquisitions during the first nine months of 2013.
- The August 2013 equity offering issued approximately 11.1 million shares at $22.75 per share and generated $239.7 million of net proceeds, materially increasing common equity and share count.
- Direct expense declined to 82.0% of revenue in Q3 from 86.0%, supporting the improvement in gross margin. However, SG&A increased to 27.5% of revenue from 27.0%, and operating losses widened in absolute dollars.
- Interest expense increased to $6.4 million in Q3 and $12.6 million year to date, primarily because of the convertible notes and a $3.0 million undrawn debt commitment fee associated with the 3PD acquisition.
- The company accelerated $3.1 million of amortization related to the CGL trade name after rebranding the freight-forwarding business as XPO Global Logistics.
- The effective tax benefit was unusually high at 76.0% in Q3 and 33.1% for the first nine months, primarily because the 3PD acquisition created deferred tax liabilities that enabled release of a previously recorded valuation allowance.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific numerical revenue, earnings, or margin guidance. Management expected to continue pursuing acquisitions, opening new locations, expanding the sales and service workforce, investing in technology, converting selected agent-owned freight-forwarding stations to company-owned branches, and integrating acquired businesses.
- On October 18, 2013, after the reporting date, the company entered into a five-year, $125.0 million multicurrency secured revolving credit facility, expandable by up to $75.0 million. Borrowings bear interest at LIBOR plus 1.75% to 2.25% or a base rate plus 0.75% to 1.25%, subject to customary covenants and financial requirements.
- On October 10, 2013, holders converted $10.0 million of convertible notes into 608,467 common shares. The company paid a negotiated cash premium, with related amounts expected to increase fourth-quarter interest expense.
- The company was subject to litigation brought by C.H. Robinson Worldwide. A court order restricted business with certain CHR customers within a specified area near Phoenix through July 1, 2014. Management stated that an adverse outcome could materially affect the business and results of operations.
- 3PD was involved in lawsuits alleging misclassification of independent contractors and improper wage deductions. Former 3PD owners agreed to indemnify the company for certain related costs and liabilities, subject to limits. A $22.5 million holdback was recorded for indemnifiable matters.
- Future contractual cash obligations totaled approximately $229.9 million, including $170.1 million related to convertible senior notes, $38.8 million of operating and real-estate leases, and $19.8 million of employment contracts.
- Management stated that existing cash and availability under the new revolving facility were expected to be sufficient to finance existing operations. The filing also noted risks from integration, acquisition execution, competition, economic conditions, customer retention, carrier relationships, information technology, regulation, litigation, and the need to obtain future debt or equity capital.
- Goodwill and indefinite-lived intangible asset testing did not identify impairment, although the company’s substantial goodwill and intangible balances remain dependent on future operating performance and valuation assumptions.
Important Facts for Investors to Verify
- Whether the substantial revenue growth from 3PD and other acquisitions converts into sustainable operating profitability and positive operating cash flow.
- The pace and cost of integrating 3PD, including the effect of contractor-classification litigation and the recoverability of related indemnities.
- Cash burn, working-capital requirements, acquisition funding needs, and actual availability under the secured revolving credit facility.
- The dilution implications of the convertible notes, preferred stock, warrants, stock options, restricted stock units, and the October 2013 note conversion.
- The durability of improved gross margins relative to continued high SG&A, corporate costs, amortization, and acquisition-related expenses.
- The effect of the C.H. Robinson litigation, the Phoenix-area restriction, insurance coverage, and other legal contingencies.
- The sustainability of the reported tax benefits and the company’s ability to realize deferred tax assets without further valuation allowances.