XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2020, filed May 5, 2020. XPO operated two reportable segments: Transportation and Logistics, with approximately 97,000 employees, 1,506 locations in 30 countries and more than 50,000 customers. Results were materially affected by the COVID-19 pandemic, particularly the sharp decline in demand during the second half of March.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $3.864 billion | $4.120 billion | (6.2%) |
| Operating income | $81 million | $132 million | (38.6%) |
| Operating margin | 2.1% | 3.2% | Down 110 bps |
| Net income | $25 million | $52 million | (51.9%) |
| Net income attributable to XPO | $23 million | $47 million | Down |
| Diluted EPS | $0.20 | $0.37 | Down |
| Operating cash flow | $180 million | $(96) million | Improved $276 million |
| Capital expenditures | $139 million | $118 million | Up $21 million |
Transportation revenue was $2.459 billion, down 7.5%, and operating income was $120 million, down 6.3%; the segment margin increased to 4.9% from 4.8%. Logistics revenue was $1.437 billion, down 3.8%, and operating income was $38 million, down 17.4%; the segment margin declined to 2.6% from 3.1%.
Cash, cash equivalents and restricted cash totaled $1.137 billion at March 31, 2020, including $1.127 billion of cash and cash equivalents. Total debt was $6.175 billion principal amount, or $6.026 billion carrying value, compared with $5.418 billion and $5.266 billion, respectively, at December 31, 2019. Available ABL capacity was $186 million after outstanding letters of credit. Management reported approximately $1.3 billion of available liquidity, including cash and cash equivalents, at quarter-end.
Financing activities provided $668 million, primarily from $600 million of net ABL borrowings and $182 million of securitization-related borrowings. Cash increased by $750 million during the quarter. The company repurchased approximately 2 million shares for $114 million, leaving $503 million under the authorized repurchase program.
Material changes versus the prior comparable period
- Revenue and profitability declined as COVID-19 reduced shipment volumes, especially in Europe, and the company curtailed direct postal injection activity and experienced lower volumes from its largest customer.
- SG&A increased 8.0% to $525 million, or 13.6% of revenue versus 11.8%, including approximately $40 million of costs related to the terminated strategic-alternatives review.
- Cost of transportation and services improved to 49.1% of revenue from 50.9%, reflecting lower third-party transportation and fuel costs and a higher mix of contract logistics revenue. Direct operating expense increased to 35.2% of revenue from 34.1%.
- Foreign currency results changed from a $2 million loss to an $8 million gain. The prior-year $5 million debt extinguishment loss did not recur.
- Debt increased principally from $600 million of ABL borrowings and $181 million of securitization-program borrowings. The company remained in compliance with debt covenants.
- Operating cash flow improved substantially, partly because accounts receivable generated cash in 2020 versus using $246 million in the prior-year quarter; the filing attributes this partly to lower revenue and higher factoring proceeds.
- Restructuring charges declined to $3 million from $13 million. Completed initiatives are expected to generate approximately $9 million of annualized pretax savings in 2021.
Guidance, outlook, risks and unusual items
Management expected COVID-19 to have a more significant adverse effect on results, liquidity and financial condition in the second quarter and subsequent periods, but stated that the full impact could not reasonably be estimated. The company planned aggressive cost actions, including reduced contractor use, lower employee hours, furloughs, layoffs and paid-time-off requirements. It also expected to reduce capital spending substantially.
Net capital expenditures for 2020 were projected at $200 million to $250 million, approximately $275 million below the estimate in the 2019 Form 10-K. Management stated that existing liquidity and capital sources were sufficient to support operations for the next 12 months.
In April 2020, after quarter-end, XPO entered into a $150 million committed secured term-loan facility and a $200 million uncommitted letter-of-credit facility. It also issued $850 million of 6.25% senior notes due 2025, generating approximately $837 million of net proceeds. The company had drawn none of the new term-loan commitments as of the filing date and intended to use the note proceeds for general corporate purposes, including potential debt repayment or redemption.
XPO announced an agreement to acquire most of Kuehne + Nagel’s U.K. contract-logistics operations, which generated approximately £500 million of 2019 revenue. The transaction was expected to close in the second half of 2020, subject to customary conditions and regulatory approvals, and was not expected to be material to operating results.
Material risks include prolonged COVID-19 disruption, lower customer demand, customer credit deterioration, higher bad-debt expense, reduced access to receivables facilities or capital markets, covenant compliance, foreign-exchange and interest-rate exposure, cybersecurity and business-continuity risks, and potential liability from claims that independent contractors should be classified as employees. The filing states that loss amounts for certain classification and shareholder litigation matters cannot currently be estimated.
Important facts for investors to verify
- Subsequent-quarter revenue volumes, margins and cash generation as the full COVID-19 impact emerged.
- Actual liquidity after the April 2020 debt issuance, new credit facilities, debt repayments and any further ABL borrowings.
- Debt maturities, interest expense and compliance with ABL, term-loan and securitization covenants.
- Whether the $200 million to $250 million capital-expenditure target was achieved and whether additional restructuring charges were incurred.
- Progress, regulatory status and financing of the proposed Kuehne + Nagel U.K. acquisition.
- Exposure and potential costs from contractor-classification claims and shareholder litigation.
- Receivables factoring and securitization volumes, availability and dependence on customer collections.