XPO Logistics, Inc. — Q2 2013 Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2013, compared with the corresponding periods in 2012. Financial statements are unaudited and amounts are generally in thousands, except per-share data.
Business Context
XPO provides asset-light transportation and logistics services through Freight Brokerage, Expedited Transportation, and Freight Forwarding. As of June 30, 2013, it operated 62 locations in the United States and Canada, served more than 8,500 customers, and used relationships with more than 22,000 transportation carriers.
Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Revenue | $137.1 million | $54.5 million | $251.1 million | $99.1 million |
| Gross margin | $19.3 million; 14.1% | $8.5 million; 15.5% | $35.6 million; 14.2% | $15.2 million; 15.4% |
| SG&A expense | $33.4 million; 24.3% | $11.8 million; 21.7% | $61.0 million; 24.3% | $22.8 million; 23.0% |
| Operating loss | $(14.0) million | $(3.4) million | $(25.4) million | $(7.6) million |
| Net loss | $(17.4) million | $(5.2) million | $(31.9) million | $(7.9) million |
| Net loss available to common shareholders | $(18.1) million | $(5.9) million | $(33.4) million | $(9.4) million |
| Loss per share | $(1.00) | $(0.34) | $(1.84) | $(0.56) |
| Cash used in operating activities | Not separately provided for Q2 | Not separately provided for Q2 | $(49.1) million | $(10.1) million |
Liquidity and capital structure: Cash and cash equivalents were $178.2 million at June 30, 2013, down from $252.3 million at December 31, 2012. Working capital was $222.7 million, compared with $271.9 million at year-end. Total debt and capital leases were $112.8 million, including $111.2 million of convertible senior notes. The notes carry a 4.50% coupon, mature October 1, 2017, and had a reported fair value of $177.4 million.
Cash flow and investment: Six-month investing cash outflow was $23.4 million, including $19.7 million for acquisitions and $3.9 million for property and equipment. Financing cash outflow was $1.7 million, primarily reflecting $1.5 million of preferred dividends. The company paid $3.3 million of interest and $0.9 million of income taxes during the six months.
Material Changes Versus Prior Period
- Revenue increased 151.4% in Q2 and 153.4% for the first six months, primarily from acquisitions, Freight Brokerage cold-start locations, and East Coast Air Charter.
- Freight Brokerage revenue increased 587.2% in Q2 and 696.1% year to date. Its gross margin percentage improved, but the segment remained loss-making because of substantial investment in sales, procurement personnel, technology, and integration.
- Expedited Transportation revenue increased modestly, but gross margin declined to 15.9% from 20.0% in Q2 and operating income fell to $1.2 million from $2.6 million. Management cited a soft expedited freight environment and lower-margin air-charter revenue.
- Freight Forwarding revenue increased 17.4% in Q2 and 11.4% year to date. Gross margin and operating income improved, partly due to converting independent stations into company-owned branches.
- Consolidated gross margin percentage declined to 14.1% in Q2 from 15.5%, while SG&A rose to 24.3% of revenue from 21.7%. Management attributed the increased expense base to acquisitions, sales-force recruitment, new offices, corporate costs, and integration activities.
- Interest expense increased to $3.1 million in Q2 and $6.2 million year to date, compared with minimal expense in the prior-year periods, primarily because of the convertible notes.
- Cash used in operations increased to $49.1 million year to date, driven by the net loss and a $24.1 million increase in accounts receivable, while cash declined by $74.1 million from year-end.
Outlook, Commentary, Risks, and Unusual Items
- Management’s strategy emphasizes acquisitions, new “cold-start” offices, sales-force expansion, technology investment, cross-selling, and operational integration. The filing does not provide specific quantitative revenue, earnings, or margin guidance.
- On July 12, 2013, XPO agreed to acquire 3PD Holding, a heavy-goods, last-mile logistics provider, for approximately $365 million in cash, deferred payments, restricted stock, and assumed or repaid indebtedness. Closing was expected in the third quarter of 2013 and remained subject to customary conditions.
- Financing commitments for the 3PD transaction included a $140 million first-lien term loan and a $55 million second-lien term loan. XPO expected to use cash on hand and financing sources; the company itself was not an obligor under the commitment letter. Failure to close after conditions were satisfied could result in an $18 million termination fee.
- Q2 corporate SG&A included $1.5 million of litigation-related legal costs, $1.8 million of acquisition-related transaction costs, and $1.1 million of non-cash share-based compensation. Year-to-date amounts were $2.6 million, $2.1 million, and $2.1 million, respectively.
- XPO faces litigation brought by C.H. Robinson concerning former employees, alleged contract and trade-secret violations, and related claims. A court order restricts business with certain C.H. Robinson customers within a specified Phoenix-area radius through July 1, 2014. The outcome is uncertain and could materially affect results.
- The company had approximately $25.5 million of future operating lease payments and $80.9 million of total contractual cash obligations, including convertible-note interest and principal-related obligations as presented in the filing.
- Management identified economic conditions, competition, acquisition execution and integration, financing availability, customer and employee retention, carrier relationships, information technology implementation, contractor classification litigation, regulation, and foreign-exchange exposure as important risks.
- The company implemented a new Oracle financial reporting system during 2013 and was integrating Interide Logistics into its internal control framework. Management concluded disclosure controls were effective as of June 30, 2013.
Investor Verification Checklist
- Verify the completion, financing, purchase accounting, leverage impact, and integration performance of the planned 3PD acquisition.
- Assess whether Freight Brokerage growth can translate into positive operating income after acquisition, cold-start, and sales-force investments.
- Monitor gross-margin trends, particularly the mix shift toward Freight Brokerage and the performance of Expedited Transportation.
- Reconcile operating cash burn with revenue growth, accounts-receivable expansion, acquisition spending, and available liquidity.
- Review the convertible notes’ potential equity dilution, conversion terms, fair value, and October 2017 maturity.
- Track developments in the C.H. Robinson litigation and the operational impact of the Phoenix-area customer restriction.
- Evaluate the company’s ability to integrate acquisitions and maintain effective internal controls while implementing the new financial reporting system.