XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
Filing for the quarter and six months ended June 30, 2020. XPO operated two reportable segments: Transportation and Logistics, with approximately 96,000 employees, 1,506 locations in 30 countries and more than 50,000 customers. The filing identifies the registrant as XPO Logistics, Inc.; the company later became XPO, Inc.
Results were materially affected by the COVID-19 pandemic. Demand declined beginning in the first quarter, reached its lowest levels in April, and strengthened sequentially in May and June. Most sites remained open because XPO was treated as an essential business.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $3.502 billion | $4.238 billion | $7.366 billion | $8.358 billion |
| Revenue change | -17.4% | -11.9% | ||
| Operating income (loss) | $(141) million | $258 million | $(60) million | $390 million |
| Operating margin | -4.0% | 6.1% | -0.8% | 4.7% |
| Net income (loss) | $(134) million | $145 million | $(109) million | $197 million |
| Net income (loss) attributable to XPO | $(131) million | $135 million | $(108) million | $182 million |
| Diluted EPS | $(1.45) | $1.19 | $(1.20) | $1.51 |
| Cash flow from operations | Not separately provided | Not separately provided | $394 million | $164 million |
Q2 operating loss included $50 million of restructuring expense and $46 million of transaction and integration costs. Six-month operating loss included $53 million of restructuring expense and $90 million of transaction and integration costs, primarily associated with the terminated strategic-alternatives review and restructuring actions.
Segment revenue and operating results for Q2 were $2.127 billion and $(15) million for Transportation, versus $2.747 billion and $243 million in 2019; and $1.404 billion and $(43) million for Logistics, versus $1.526 billion and $61 million. Six-month segment revenue was $4.586 billion for Transportation and $2.841 billion for Logistics.
Liquidity, debt and cash flow
- Cash and cash equivalents were $2.285 billion at June 30, 2020, compared with $377 million at December 31, 2019. Management reported total available liquidity of approximately $2.8 billion, including cash.
- Total debt carrying value was $7.137 billion, compared with $5.266 billion at year-end 2019. Long-term debt was $6.939 billion; short-term borrowings and current maturities were $198 million.
- XPO issued $1.15 billion of 6.25% senior notes due May 2025. Net proceeds were invested in cash and cash equivalents.
- The ABL facility had $600 million outstanding and $354 million of availability after letters of credit. The company also had $150 million available under a new secured term-loan commitment and had issued $199 million of related letters of credit without drawing the term loan.
- Six-month operating cash flow was $394 million, investing cash flow was $(172) million and financing cash flow was $1.701 billion. Cash increased by $1.908 billion, including the effects of exchange rates.
- Capital expenditures were $255 million in the first six months. Management expected 2020 net capital expenditures of $250 million to $300 million, approximately $225 million below the prior estimate.
- The company stated that existing liquidity and capital sources were sufficient to support operations for the next 12 months and that it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue declined 17.4% in Q2 and 11.9% for the first six months, primarily due to COVID-19. Transportation was more heavily affected than Logistics.
- Operating performance shifted from profit to loss. Q2 operating margin declined to -4.0% from 6.1%, while six-month margin declined to -0.8% from 4.7%.
- SG&A increased to 18.0% of revenue in Q2 from 10.7%, reflecting strategic-alternatives expenses, restructuring, increased bad debt and self-insurance costs, and COVID-19 expenses.
- Direct operating expense increased to 39.1% of revenue in Q2 from 33.4%, primarily because of lower revenue and COVID-19-related costs. Cost of transportation and services improved to 46.9% of revenue from 49.7%.
- Interest expense increased to $82 million in Q2 from $72 million and to $154 million for the first six months from $143 million, primarily due to higher average indebtedness.
- Operating cash flow increased by $230 million year over year, principally because accounts receivable and other working-capital changes provided more cash, despite the net loss.
- Share repurchases were $114 million in the first six months of 2020, versus $1.347 billion in the prior-year period. The remaining authorization under the 2019 program was $503 million.
Guidance, outlook, risks and unusual items
- Management expected COVID-19 to continue affecting results in the third and fourth quarters but could not reasonably estimate the full-year effect on operations, liquidity or financial position. The pace and extent of recovery remained uncertain.
- XPO expected approximately $15 million of additional restructuring charges during the remainder of 2020 and could incur further restructuring costs to right-size operations in response to COVID-19. Completed restructuring actions were expected to generate approximately $100 million of annualized pretax savings by mid-2021.
- COVID-19 costs included personal protective equipment, site cleaning, temporary closures, enhanced employee benefits and frontline appreciation pay. The company reduced contractor use, employee hours, furloughs and other expenses to align costs with demand.
- The company agreed to acquire most of Kuehne + Nagel’s U.K. contract logistics operations, with 2019 revenue of approximately £500 million. Closing was expected in the second half of 2020 and was not expected to be material to 2020 operating results.
- Remaining fixed performance obligations were approximately $1.6 billion at June 30, 2020, with approximately 75% expected to be recognized over the next three years.
- Risks included prolonged pandemic-related demand weakness, customer and counterparty credit deterioration, access to capital, covenant compliance, labor and staffing disruptions, cybersecurity and business-continuity risks, foreign-exchange and interest-rate exposure, and potential asset impairments.
- Legal matters included independent-contractor classification claims involving intermodal drayage and last-mile operations, as well as shareholder and derivative litigation. The company could not estimate possible losses for these matters, although it believed existing accruals were adequate for probable and estimable losses.
- On July 31, 2020, the company entered into four-year employment agreements with Bradley S. Jacobs, Troy A. Cooper and Mario A. Harik, including base salaries of $1.0 million, $650,000 and $500,000, respectively, and new cash long-term incentive awards.
Investor verification checklist
- Verify the sustainability of cash flow from operations, particularly the contribution from receivables sales, factoring and working-capital changes.
- Assess leverage, refinancing requirements and interest burden after the $1.15 billion 2025 notes issuance and ABL borrowings.
- Track COVID-19 demand recovery, especially Transportation volumes and Logistics customer activity, margins and incremental operating costs.
- Evaluate whether restructuring savings are realized and whether additional restructuring or impairment charges are required.
- Review debt-covenant headroom, ABL availability, the receivables-securitization program and the April 2021 maturity of the secured term-loan facility.
- Monitor the Kuehne + Nagel U.K. acquisition closing, integration requirements and any change to the stated earnings impact.
- Review developments in contractor-classification litigation and shareholder litigation, for which the filing does not provide a clear possible-loss amount.