XPO Logistics, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
XPO Logistics, Inc. reported for the fiscal year ended December 31, 2019; the filing also presents fourth-quarter 2019 results. XPO operates two reportable segments: Transportation and Logistics. At year-end, the company had approximately 100,000 employees, 1,504 locations in 30 countries and more than 50,000 customers.
- Transportation: freight brokerage and truckload, less-than-truckload, last mile, managed transportation, global forwarding and related services.
- Logistics: contract logistics, warehousing, e-commerce fulfillment, reverse logistics, automation and supply-chain optimization.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $16.648 billion | $17.279 billion | Down 3.7% |
| Operating income | $821 million | $704 million | Up 16.6% |
| Operating margin | 4.9% | 4.1% | Up 0.8 percentage points |
| Income before taxes | $569 million | $566 million | Up slightly |
| Net income | $440 million | $444 million | Down 0.9% |
| Net income attributable to common shareholders | $379 million | $390 million | Down 2.8% |
| Diluted EPS | $3.57 | $2.88 | Up 24.0% |
| Net cash from operating activities | $791 million | $1.102 billion | Down $311 million |
Transportation revenue declined 5.8% to $10.687 billion, while operating income increased to $752 million, or 7.0% of revenue, from 5.7%. Logistics revenue increased 0.5% to $6.093 billion, and operating margin improved to 3.9% from 3.5%.
Consolidated cost of transportation and services declined to 49.9% of revenue from 52.2%, reflecting a higher mix of contract logistics, lower third-party transportation costs and lower fuel costs. Direct operating expense increased to 34.1% of revenue from 33.1%, while SG&A increased to 11.1% from 10.6%.
Fourth-quarter 2019 revenue was $4.136 billion, operating income was $202 million, net income was $107 million and diluted EPS was $0.93. The quarter included $21 million of restructuring charges and $37 million of gains on sales of property and equipment.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $377 million at December 31, 2019, compared with $502 million a year earlier.
- Working capital was $84 million, down from $375 million.
- Total debt was $5.418 billion in principal amount, compared with $4.415 billion at year-end 2018; carrying value was $5.266 billion.
- Long-term debt, less current maturities, was $5.182 billion.
- ABL availability was $713 million, based on a $927 million borrowing base and $214 million of outstanding letters of credit.
- The company stated that it was in compliance with debt covenants and believed available liquidity was sufficient for the next 12 months.
- 2019 capital expenditures were $601 million; anticipated 2020 net capital expenditures were $475 million to $525 million.
- XPO repurchased approximately $1.347 billion of common stock in 2019, including 17 million shares at an average price of $50.70. The remaining 2019 repurchase authorization was $617 million.
Debt increased principally through a $1.0 billion senior-notes issuance, incremental term-loan borrowings and financing used partly for share repurchases. Interest expense increased 34.6% to $292 million, primarily because of higher average indebtedness.
Material changes versus the prior comparable period
- Revenue decreased because of approximately $570 million less business from XPO’s largest customer, including approximately $510 million in Transportation and $60 million in Logistics.
- Foreign-currency movement reduced reported revenue growth by approximately 2.0 percentage points overall.
- Transportation operating income benefited from approximately $97 million higher gains on sales of property and equipment and lower litigation costs.
- Restructuring charges increased to $49 million from $21 million; a portion related to the largest customer’s downsizing. Management expects approximately $94 million of annualized pretax savings after completion of the initiatives in 2020.
- XPO adopted lease accounting standard ASC 842 on January 1, 2019, recognizing approximately $2.1 billion of operating lease assets and liabilities. Year-end operating lease liabilities totaled $2.244 billion.
- In July 2019, XPO replaced its European trade-receivables securitization program with a three-year program offering lower financing costs and a higher advance rate. Approximately $2.231 billion of receivables were sold under securitization programs during 2019.
- XPO purchased approximately 5% of the remaining noncontrolling interest in XPO Logistics Europe for approximately $258 million, reducing the remaining noncontrolling interest to approximately 5%.
Outlook, strategic actions, risks and unusual items
In January 2020, XPO announced a review of strategic alternatives, including a possible sale or spin-off of one or more business units. No timetable or transaction had been determined, and management stated that it did not intend to sell or spin off the North American LTL business.
Management emphasized technology investment, automation, digital freight marketplaces, productivity initiatives, e-commerce and outsourcing trends. The company invested approximately $550 million in technology during 2019. The filing does not provide formal revenue or earnings guidance.
- Key risks include economic recession, lower freight volumes, pricing and margin pressure, fuel and labor costs, driver shortages, carrier capacity constraints and intense competition.
- Substantial debt creates refinancing, interest-rate and covenant risks. Floating-rate exposure includes the term loan and ABL facilities; a hypothetical 100-basis-point increase would increase annual interest expense by approximately $20 million on the term loan and $11 million on the fully drawn ABL.
- LIBOR discontinuation and transition to alternative benchmarks could affect borrowing costs and debt obligations.
- Independent-contractor classification litigation could result in wage, benefit, tax and reimbursement liabilities and could require changes to the operating model.
- The company faces shareholder securities litigation and derivative litigation; the filing states that potential losses could not be estimated and outcomes were uncertain.
- Brexit, tariffs, trade restrictions, foreign exchange movements, cybersecurity incidents, regulatory changes, environmental liabilities and extreme weather could affect operations and financial results.
- Goodwill totaled $4.450 billion. No goodwill impairment was recorded in 2019, but valuation depends on forecast cash flows, discount rates and long-term growth assumptions.
Important facts for investors to verify
- Whether the revenue decline from the largest customer is temporary or represents a continuing structural reduction in volumes.
- Progress and realized savings from the $49 million restructuring program and the expected $94 million annualized pretax savings.
- Debt maturities, refinancing plans, floating-rate exposure and the effect of LIBOR replacement.
- Cash generation after capital expenditures, share repurchases, debt service and working-capital requirements.
- Details and potential financial consequences of the strategic-alternatives review.
- Exposure to independent-contractor classification claims, shareholder litigation and other contingencies, for which the filing does not provide a clear maximum loss estimate.
- Sensitivity of the $4.450 billion goodwill balance to changes in operating performance, foreign exchange rates, discount rates and growth assumptions.