XPO Logistics, Inc. — 2018 Form 10-K Summary
Business context and reporting period
XPO Logistics, Inc. filed its Form 10-K for the fiscal year ended December 31, 2018. The company provides transportation and contract logistics services through two reportable segments: Transportation and Logistics. It operated in 32 countries with more than 100,000 employees, 1,535 locations and over 50,000 customers. Approximately 65% of 2018 revenue came from Transportation and 35% from Logistics.
The filing also presents unaudited fourth-quarter results. Results reflect adoption of ASC Topic 606 in 2018; the adoption had no material impact on the consolidated financial statements.
Key financial metrics
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Revenue | $17.279 billion | $15.381 billion | Up 12.3% |
| Operating income | $704 million | $582 million | Operating margin increased to 4.1% from 3.8% |
| Net income | $444 million | $360 million | Net margin increased to 2.6% from 2.3% |
| Net income attributable to XPO | $422 million | $340 million | Includes noncontrolling interests |
| Net income attributable to common shareholders | $390 million | $312 million | Basic EPS of $3.17 versus $2.72 |
| Diluted EPS | $2.88 | $2.45 | Up approximately 18% |
| Cash flow from operations | $1.102 billion | $785 million | Up $317 million |
| Capital expenditures | $551 million | $504 million | Net capital expenditures expected at $400–$450 million in 2019 |
| Cash and cash equivalents | $502 million | $397 million | Year-end balance |
| Total debt principal | $4.415 billion | $4.684 billion | Carrying value was $4.269 billion |
| Long-term debt | $3.902 billion | $4.418 billion | Excludes current maturities |
Cost of transportation and services declined to 52.2% of revenue from 52.9%, while direct operating expense increased to 33.1% from 32.5%. SG&A improved to 10.6% of revenue from 10.8%. Interest expense declined 23.6% to $217 million, primarily due to lower average debt and refinancing benefits.
Transportation revenue increased 10.4% to $11.343 billion and operating income increased to $646 million from $547 million. Logistics revenue increased 16.0% to $6.065 billion and operating income increased to $216 million from $202 million.
Material changes versus prior comparable period
- Fourth-quarter revenue was $4.389 billion versus $4.194 billion in the fourth quarter of 2017. Fourth-quarter operating income was $126 million in both periods, while net income fell to $91 million from $207 million.
- The fourth quarter of 2017 benefited from a $173 million tax benefit related to the Tax Cuts and Jobs Act. Fourth-quarter 2018 included a $26 million litigation charge, a $24 million gain on sale of an equity investment and a $19 million restructuring charge.
- Revenue growth was driven primarily by European and North American contract logistics and expansion in LTL, freight brokerage and last mile services. Foreign currency movements contributed approximately 1.6 percentage points to consolidated revenue growth.
- During the fourth quarter, XPO’s largest customer curtailed its business. The company estimated that the customer’s further downsizing in early 2019 would reduce full-year 2019 revenue by approximately $600 million, or approximately two-thirds of that customer’s 2018 revenue contribution.
- XPO completed a refinancing of its term loan, reduced the principal of its 6.50% senior notes due 2022 by $400 million and entered into a $500 million unsecured credit facility. It had borrowed $250 million under that facility at year-end and borrowed the remaining $250 million in January 2019.
- The company repurchased 10 million common shares for $536 million through December 31, 2018. An additional 8 million shares were repurchased for $464 million in January and February 2019, completing the $1 billion authorization.
Cash flow, liquidity and debt
Operating cash flow of $1.102 billion exceeded capital expenditures of $551 million. Investing activities used $400 million, and financing activities used $620 million, primarily reflecting debt repurchases, debt repayments and $536 million of share repurchases. Year-end cash, cash equivalents and restricted cash totaled $514 million.
ABL Facility availability was $704 million at December 31, 2018, based on a $934 million borrowing base and $230 million of outstanding letters of credit. Management stated that existing liquidity sources were sufficient to support operations over the following 12 months, and the company was in compliance with its debt covenants.
Debt included a $1.503 billion term loan maturing in 2025, $1.200 billion of 6.50% senior notes due 2022, $535 million of 6.125% senior notes due 2023, $300 million of senior debentures due 2034, $283 million under the trade securitization program and $250 million under the unsecured credit facility. Contractual cash obligations totaled $8.169 billion, including $4.126 billion of debt excluding capital leases, $1.200 billion of estimated debt interest and $2.436 billion of operating lease obligations.
Guidance, outlook, commentary and unusual items
- Management expected annualized pre-tax cost savings of approximately $55 million to $60 million from restructuring initiatives, contingent on successful completion in 2019.
- Net capital expenditures were expected to be $400 million to $450 million in 2019.
- Management emphasized continued investment in technology, including approximately $500 million invested in 2018, automation, robotics, data science and digital freight marketplace capabilities.
- The company identified e-commerce, outsourcing and integrated supply-chain services as long-term growth drivers, while noting that revenue and profitability are typically lower in the first quarter because of post-holiday demand reductions and winter operating conditions.
- No goodwill impairment was recorded in 2018 or 2017. Pension income was $74 million in 2018, benefiting reported earnings, although pension assets experienced negative investment returns during the year.
- XPO expects to recognize approximately $2 billion of right-of-use assets and corresponding lease liabilities upon adoption of the new lease standard on January 1, 2019.
Principal risks and contingencies
- Exposure to economic cycles, freight volumes, transportation rates, fuel prices, driver shortages, carrier capacity and intense competition.
- Substantial indebtedness, floating-rate exposure, refinancing needs and restrictive debt covenants. A hypothetical 1% rate increase would have increased annual interest expense by approximately $15 million on the term loan, assuming the stated balance, with additional exposure from other floating-rate facilities.
- Risks from independent-contractor classification disputes, wage-and-hour claims, labor organizing, litigation, insurance claims and potential changes to the company’s operating model.
- Cybersecurity, information-technology system failures, data-protection requirements and integration challenges from acquisitions.
- Foreign currency, Brexit, international regulatory, trade-compliance and environmental risks.
- Pending shareholder litigation filed in December 2018; one action was voluntarily dismissed and another remained pending. The company could not estimate any possible loss or range of loss.
- Numerous owner-operator and contract-carrier classification matters remained outstanding. The company stated that probable and estimable losses had been accrued but could not estimate potential losses beyond accrued amounts.
Important facts for investors to verify
- Whether the approximately $600 million expected 2019 revenue reduction from the largest customer was offset by new business or other growth.
- Progress toward the $55 million–$60 million restructuring savings target and the associated implementation costs.
- 2019 cash generation after share repurchases, capital expenditures and debt maturities, particularly the $250 million unsecured facility maturity in December 2019.
- Net leverage, covenant headroom and the availability of receivables-based liquidity, including the trade securitization program’s reported zero remaining borrowing capacity at year-end.
- Developments in independent-contractor classification litigation, shareholder litigation and other legal contingencies.
- Effects of fuel prices, driver and temporary-labor costs, foreign exchange, Brexit and economic conditions on segment margins.
- Impact of the January 2019 lease-accounting adoption and whether the approximately $2 billion estimated right-of-use asset and lease liability affect reported leverage or covenant calculations.