XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter and nine months ended September 30, 2020. XPO operated through two reportable segments: Transportation and Logistics, serving more than 50,000 customers across approximately 1,499 locations in 30 countries with approximately 97,000 employees.
COVID-19 materially affected demand, operating costs and financial results, although management reported that the impact on demand abated during the third quarter. Results are not necessarily indicative of full-year performance.
Financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $4.221 billion | $4.154 billion | $11.587 billion | $12.512 billion |
| Operating income | $223 million | $229 million | $163 million | $619 million |
| Operating margin | 5.3% | 5.5% | 1.4% | 4.9% |
| Net income attributable to XPO | $93 million | $130 million | $(15) million | $312 million |
| Diluted EPS | $0.83 | $1.14 | $(0.18) | $2.63 |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $692 million | $442 million |
Q3 net margin was approximately 2.3%, compared with 3.3% in the prior-year quarter. Nine-month results included $93 million of transaction and integration costs and $53 million of restructuring charges; 2019 included $2 million and $28 million, respectively.
- Transportation revenue was $2.675 billion in Q3, down 0.3%, with operating income of $202 million versus $208 million. Nine-month revenue declined 10.2% and operating income declined 47.0%.
- Logistics revenue was $1.580 billion in Q3, up 4.6%, with operating income of $77 million versus $61 million. Nine-month revenue declined 2.4% and operating income declined 57.1%.
- Q3 SG&A increased 9.4% year over year to $499 million, or 11.8% of revenue. Nine-month SG&A increased 18.5% to $1.656 billion.
- Interest expense increased to $86 million in Q3 and $240 million for the nine months, primarily because of higher average debt, including the 2025 senior notes.
Cash flow, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $2.035 billion at September 30, 2020, including $2.025 billion of cash and cash equivalents on the balance sheet.
- Total debt carrying value was $6.675 billion, compared with $5.266 billion at December 31, 2019. Long-term debt carrying value was $6.545 billion.
- The company issued $1.15 billion of 6.25% senior notes due 2025 and invested the net proceeds in cash and cash equivalents.
- ABL availability was $884 million after $200 million of borrowings and $16 million of letters of credit. An additional $150 million was available under the secured term loan commitment.
- Management reported total available liquidity of approximately $3.1 billion and stated that existing liquidity and capital sources were sufficient for the next 12 months.
- Operating cash flow increased to $692 million from $442 million, helped by changes in accrued expenses and other liabilities, including deferred tax payments and higher compensation, insurance and severance accruals.
- Capital expenditures were $377 million through nine months, while proceeds from property and equipment sales were $148 million. Net cash used in investing activities was $224 million.
- Net cash provided by financing activities was $1.182 billion, including debt issuance and borrowings, partially offset by $114 million of share repurchases and $65 million of debt and finance lease repayments.
Material changes versus the prior comparable period
- Q3 revenue increased 1.6%, but operating income declined 2.6% and net income attributable to XPO declined 28.5%.
- Nine-month revenue declined 7.4%, operating income declined 73.7%, and the company moved from $312 million of attributable net income to a $15 million loss.
- Margins were pressured by COVID-19-related costs, higher facility and payroll costs, increased bad debt and self-insurance expenses, restructuring charges and strategic-alternatives expenses.
- Logistics and European e-commerce activity supported Q3 revenue growth, while Transportation revenue remained approximately flat.
- Debt increased materially following the 2025 note issuance and ABL borrowings; interest expense consequently increased.
- The company completed a July 2020 purchase of a noncontrolling interest in XPO Logistics Europe for approximately $20 million, reducing the remaining noncontrolling interest to approximately 4%.
- Share repurchases fell to $114 million for the nine months from $1.347 billion in the prior-year period; $503 million remained under the authorization.
Guidance, outlook, commentary and risks
- Management expected COVID-19 to continue affecting results in the fourth quarter of 2020 and stated that the pace and extent of recovery remained uncertain.
- Net capital expenditures were expected to be approximately $100 million to $120 million in Q4 and $330 million to $350 million for full-year 2020, approximately $160 million below the prior estimate.
- Management expected approximately $10 million of additional restructuring charges in Q4. Actions initiated through September were expected to generate approximately $100 million of annualized pretax savings by mid-2021.
- The proposed acquisition of the majority of Kuehne + Nagel’s U.K. contract logistics operations remained subject to customary conditions and review by the U.K. Competition and Markets Authority. It was not expected to be material to 2020 results.
- Key risks include prolonged or renewed COVID-19 disruption, weaker customer demand, workforce and operational constraints, increased bad debt, reduced access to financing, credit-rating pressure, interest-rate and foreign-exchange exposure, and cybersecurity or business-continuity risks.
- Legal proceedings include independent-contractor misclassification claims involving intermodal drayage and last-mile operations, as well as shareholder litigation. The filing states that possible losses could not be estimated for certain matters.
- The company stated that it was in compliance with debt covenants and that its disclosure controls were effective as of September 30, 2020.
Investor verification points
- Verify whether the improvement in Q3 demand, particularly in Logistics and European e-commerce, persisted after September 30, 2020.
- Assess the sustainability of operating margins after excluding or normalizing COVID-19 costs, restructuring charges and strategic-alternatives expenses.
- Reconcile cash balances and available liquidity with debt maturities, the April 2021 secured facility maturity and the July 2022 securitization-program expiration.
- Monitor covenant compliance, receivables securitization utilization and the effect of customer credit quality on borrowing capacity.
- Evaluate the execution and cash costs of restructuring actions and whether the projected $100 million annualized savings are realized.
- Track the Kuehne + Nagel U.K. transaction, COVID-19 developments, capital expenditures and unresolved legal contingencies.