XPO Logistics, Inc. Form 10-Q Summary
Business context and reporting period
XPO Logistics provides asset-light freight brokerage, expedited transportation and freight forwarding services through 132 locations as of June 30, 2014. The filing covers the three and six months ended June 30, 2014, compared with the same periods in 2013. Results include the March 31, 2014 acquisition of Pacer and the full-period impact of 2013 acquisitions, including 3PD and NLM.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $581.0 million, up 323.8% | $863.4 million, up 243.9% |
| Net revenue | $121.9 million; 21.0% margin | $180.3 million; 20.9% margin |
| Operating loss | $11.9 million, versus $14.0 million | $33.3 million, versus $25.4 million |
| Net loss | $13.8 million, versus $17.4 million | $41.9 million, versus $31.9 million |
| Loss per share | $0.28, versus $1.00 | $0.92, versus $1.84 |
| Cash flow from operations | Not separately provided for the quarter | $(26.6) million, versus $(49.1) million |
Operating expenses for the first six months included $683.1 million of purchased transportation and services, $31.1 million of direct operating expense and $182.4 million of SG&A. Six-month SG&A was 21.1% of revenue, compared with 24.3% in 2013. Interest expense increased to $13.5 million from $6.2 million.
At June 30, 2014, cash and cash equivalents were $111.6 million, restricted cash was $17.0 million, working capital was approximately $210.7 million and total assets were $1.38 billion. Total debt was $122.7 million, including $120.7 million of 4.50% convertible senior notes due October 2017. The company had no borrowings under its $415.0 million secured revolving facility and had $8.3 million of fully cash-collateralized letters of credit.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by Pacer and 3PD acquisitions, NLM, and organic growth in Freight Brokerage.
- Net revenue margins improved substantially, from 14.1% to 21.0% in the quarter and from 14.2% to 20.9% for the six months.
- Freight Brokerage generated quarterly operating income of $4.4 million versus a $5.0 million loss and six-month operating income of $0.4 million versus an $8.8 million loss.
- Expedited Transportation reported a quarterly operating loss of $0.4 million versus $1.2 million of income, partly due to a one-time, non-cash $3.3 million accelerated amortization charge associated with the rebranding of Express-1 as XPO Express. Six-month operating income increased to $3.4 million from $1.9 million.
- Freight Forwarding shifted to operating losses of $0.9 million for the quarter and $0.4 million for the six months, reflecting Pacer-related mix and lower margins on international shipments.
- SG&A increased materially in absolute dollars because of acquisitions, sales-force and technology investments, integration costs, restructuring and higher amortization, although it declined as a percentage of revenue.
- The February 2014 common-stock offering generated $413.2 million of net proceeds. Financing cash flow was $327.3 million, while acquisition spending was $201.0 million.
Outlook, commentary, risks and unusual items
Management emphasized continued growth through acquisitions, new sales offices, cold-start locations, technology investment, cross-selling and operational optimization. The company was ramping 23 cold-start locations as of June 30, 2014. Management stated that cash balances and availability under the revolving facility were expected to be sufficient to finance existing operations; no formal quantitative earnings or revenue guidance was provided in the filing.
- The Pacer integration included a facility rationalization and severance program. The restructuring reserve was $4.2 million at June 30, 2014; six-month restructuring charges included approximately $7.0 million in corporate SG&A.
- As a subsequent event, XPO agreed to acquire New Breed for approximately $615 million in cash and equity, subject to closing conditions, and obtained commitments for a $430 million first-lien term loan and a $215 million second-lien term loan. The company also acquired Atlantic Central Logistics for $36.5 million in cash and deferred payments.
- Fifty-three Pacer-related California owner-operator claims remained outstanding; seven claims had resulted in awards totaling $2.2 million, which Pacer appealed. No reserve had been established as of June 30, 2014.
- Risks include acquisition execution and integration, reliance on third-party carriers and independent contractors, contractor misclassification litigation, customer retention, competition, economic and weather conditions, technology implementation, regulatory requirements and access to debt or equity capital.
- Contractual obligations totaled approximately $332.9 million, including $159.2 million of operating and real-estate leases, $138.3 million related to convertible senior notes and $15.2 million of purchase commitments. Acquisition-related holdbacks of up to $21.9 million were additional potential obligations.
- The company reported effective disclosure controls as of June 30, 2014, while Pacer’s internal controls were still being integrated.
Important facts for investors to verify
- Whether Pacer, 3PD and NLM integration produces the expected operating synergies and sustainable margin improvement.
- The effect of the planned New Breed acquisition and associated incremental financing on leverage, liquidity and dilution.
- Progress toward positive consolidated operating income and cash generation, given the six-month operating loss and negative operating cash flow.
- Exposure from owner-operator classification claims, including the unresolved Pacer California claims and broader litigation.
- The carrying value and future performance of goodwill and acquired intangible assets, which totaled approximately $772.9 million at June 30, 2014.
- The impact of acquisition-related amortization, restructuring, integration and transaction costs on reported profitability.