XPO Logistics, Inc. Form 10-Q Summary
Business context and reporting period
Filed May 8, 2013 for the quarter ended March 31, 2013. XPO Logistics operated as a non-asset-based transportation and logistics provider through Freight Brokerage, Expedited Transportation, and Freight Forwarding. The company operated 59 locations, including 37 company-owned branches and 22 agent-owned offices.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $114.0 million | $44.6 million |
| Gross margin | $16.3 million; 14.3% | $6.8 million; 15.2% |
| SG&A | $27.6 million; 24.2% of revenue | $11.0 million; 24.7% |
| Operating loss | $11.4 million | $4.2 million |
| Net loss | $14.5 million | $2.7 million |
| Net loss available to common shareholders | $15.3 million; $0.85 per share | $3.4 million; $0.36 per share |
| Cash flow from operations | $(28.0) million | $(2.8) million |
Cash and cash equivalents were $206.2 million at March 31, 2013, compared with $252.3 million at December 31, 2012. Working capital was $243.7 million. Total debt and capital leases were $111.6 million, including $109.7 million of convertible senior notes. The notes have a 4.50% coupon and mature October 1, 2017; their initial conversion price was approximately $16.43 per share.
Gross margin declined to 14.3% from 15.2%, primarily because Freight Brokerage represented a larger share of revenue and generally carries lower margins, while Expedited Transportation margins also weakened. The company reported a 1.6% effective tax rate and maintained a $6.3 million valuation allowance against deferred tax assets.
Material changes versus the prior comparable period
- Revenue increased 155.8%, driven primarily by acquisitions and expansion of Freight Brokerage.
- Freight Brokerage revenue increased 886.8% to $78.2 million, but the segment reported a $3.8 million operating loss as the company invested in sales personnel, technology, and training.
- Expedited Transportation revenue increased 6.5% to $23.9 million, while operating income declined to $0.8 million from $1.8 million because of lower gross margins and higher SG&A.
- Freight Forwarding revenue increased 5.0% to $16.2 million, and operating income increased to $0.4 million from $0.2 million.
- SG&A increased by $16.6 million, reflecting acquisitions, recruitment, new offices, technology investments, and higher corporate costs. Corporate SG&A included $1.1 million of litigation-related legal costs, $1.1 million of non-cash share-based compensation, and $0.3 million of acquisition-related transaction costs.
- Operating cash use increased substantially because of the net loss, working-capital needs, and payments to transportation providers. Investing cash use was $17.5 million, including $16.6 million for acquisitions.
- The company acquired East Coast Air Charter for $9.3 million in cash and Covered Logistics for $8.0 million in cash plus 173,712 common shares valued at approximately $3.0 million.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide quantitative revenue, earnings, or margin guidance in the filing. Management stated that its strategy remained focused on acquisitions, new brokerage offices, sales-force expansion, technology investment, and operational optimization. The company expected existing cash balances to fund operations and growth initiatives for the next twelve months.
Material risks include execution and integration of acquisitions, continued operating losses and negative operating cash flow, dependence on third-party carriers and independent contractors, competition, access to capital, employee retention, information-technology implementation, foreign-currency exposure, regulation, and litigation.
The company is defending litigation brought by C.H. Robinson Worldwide concerning former employees and alleged contractual, fiduciary, trade-secret, and related violations. A court order restricts the company from conducting business within a specified radius of Phoenix, Arizona, with certain identified customers until July 1, 2014. The outcome is uncertain and could materially affect results.
Other notable items include approximately $22.3 million of operating and real-estate lease obligations, $20.0 million of employment-contract obligations, and $183.5 million of total contractual cash obligations. The company reported no material off-balance-sheet arrangements. Subsequent to quarter-end, it acquired Interide Logistics for $3.1 million in cash and 36,878 shares valued at approximately $0.6 million.
Important facts for investors to verify
- Whether Freight Brokerage investments and acquisitions can achieve sustainable profitability and operating leverage.
- The pace and cash cost of future acquisitions, including the integration of East Coast Air Charter, Covered Logistics, and Interide Logistics.
- Cash-burn trends, working-capital requirements, and the sufficiency of the stated cash balance.
- The potential dilution and refinancing implications of the convertible senior notes, preferred stock, warrants, options, and restricted stock units.
- The effect and ultimate resolution of the C.H. Robinson litigation and related operating restrictions.
- The implementation of the new Oracle financial reporting system and integration of acquired businesses into internal controls.
- Segment margin trends, particularly the decline in Expedited Transportation margins and the consolidated gross-margin impact of higher Freight Brokerage mix.