XPO Logistics, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2019, compared with the same period in 2018. XPO operates globally through two reportable segments: Transportation and Logistics. At quarter-end, it operated in 32 countries with approximately 1,540 locations and 100,000 employees.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $4.120 billion | $4.192 billion | (1.7%) |
| Operating income | $132 million | $141 million | (6.4%) |
| Operating margin | 3.2% | 3.4% | (20 bps) |
| Net income | $52 million | $79 million | (34.2%) |
| Net income attributable to XPO | $47 million | $73 million | (35.6%) |
| Diluted EPS | $0.37 | $0.50 | (26.0%) |
| Net cash used in operating activities | $96 million | $19 million | Higher use of $77 million |
| Capital expenditures | $118 million | $142 million | Down $24 million |
Transportation revenue was $2.659 billion, down 4.1%, with operating income of $128 million, or 4.8% of revenue. Logistics revenue increased 3.2% to $1.494 billion, while operating income declined 4.2% to $46 million, or 3.1% of revenue.
Cash, cash equivalents and restricted cash were $389 million at March 31, 2019, including $376 million of cash and cash equivalents. The company had $5.476 billion of debt at carrying value, including $5.362 billion of long-term debt, compared with $4.269 billion and $3.902 billion, respectively, at December 31, 2018. ABL availability was $727 million after $226 million of outstanding letters of credit. Management stated that existing liquidity sources were sufficient for existing operations over the next 12 months.
Material changes versus the prior comparable period
- Revenue declined primarily because of an approximately $90 million reduction in business from the largest customer and unfavorable foreign currency movements, which reduced revenue growth by approximately 3.2 percentage points.
- Transportation revenue and profit decreased, driven by lower last-mile and freight brokerage activity, higher payroll and depreciation expense, and the discontinuation of direct postal injection service. A $6 million impairment of customer-relationship intangibles related to exiting that business was recorded.
- Logistics revenue grew through strong North American contract logistics demand, particularly in e-commerce, food and beverage, consumer packaged goods and aerospace, but profit was pressured by new-contract startup costs and higher insurance costs.
- Net income was affected by a $19 million income-tax provision versus no provision in Q1 2018, and interest expense increased to $71 million from $59 million because of higher average debt.
- Cost of transportation and services improved to 50.9% of revenue from 53.1%, but direct operating expense and SG&A increased to 34.1% and 11.8% of revenue, respectively.
- The company adopted ASC 842 leases prospectively on January 1, 2019, recognizing approximately $2.1 billion of operating lease assets and liabilities without a material income-statement or cash-flow impact.
- The company issued $1.0 billion of 6.75% senior notes due 2024, borrowed an additional $500 million under its term loan facility, repaid and terminated its $500 million unsecured credit facility, and repurchased $1.227 billion of common stock during the quarter.
Outlook, commentary, risks and unusual items
Management did not provide specific financial guidance in the filing. It expects restructuring initiatives approved in Q1 2019 to produce approximately $9 million of annualized pretax savings upon successful completion in 2020. The Q1 restructuring charge was $13 million, including costs related to downsizing by the largest customer.
On April 30, 2019, after quarter-end, XPO amended its ABL facility to extend maturity to April 30, 2024, increase commitments to $1.1 billion and reduce certain pricing and fees, subject to specified maturity provisions.
Key risks include transportation and logistics demand volatility, customer concentration and downsizing, foreign currency exposure, higher interest costs and leverage, reliance on receivables securitization and factoring, labor and contractor-classification claims, and execution risk from contract startups and restructuring. The company reported compliance with debt covenants and stated that no material changes had occurred to previously disclosed risk factors.
Legal matters include owner-operator and last-mile contractor misclassification claims, wage-and-hour litigation and a shareholder securities class action. The company believes probable and estimable losses are adequately accrued, but cannot estimate potential losses in excess of accrued amounts for certain matters.
Important facts for investors to verify
- Reconcile the substantial increase in debt with the $1.227 billion of Q1 share repurchases and assess leverage, maturities and interest burden.
- Evaluate whether the largest-customer revenue reduction is temporary or represents a continuing structural decline.
- Monitor operating cash flow, accounts-receivable growth and the company’s continued use of securitization and factoring programs.
- Assess whether Logistics growth and restructuring savings offset Transportation weakness and higher operating costs.
- Review the April 30 ABL amendment, including availability, covenants, pricing and springing-maturity provisions.
- Track contractor-classification litigation, shareholder litigation and any liabilities beyond recorded accruals.