XPO Logistics, Inc. — Form 10-Q Summary
Business Context and Reporting Period
XPO Logistics, Inc. operates global transportation and logistics businesses through two reportable segments: Transportation and Logistics. As of March 31, 2017, the company served more than 50,000 customers, employed more than 89,000 people, and operated 1,431 locations in 34 countries. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the same period in 2016.
Financial Results and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $3,539.5 million | $3,545.7 million | (0.2%) |
| Operating income | $113.6 million | $62.4 million | 82.1% |
| Operating margin | 3.2% | 1.8% | Up 1.4 percentage points |
| Net income attributable to XPO | $21.3 million | $(22.5) million | Improved |
| Basic EPS | $0.18 | $(0.21) | Improved |
| Diluted EPS | $0.16 | $(0.21) | Improved |
| Cash flow from operations | $15.0 million | $6.9 million | Improved |
| Capital expenditures | $122.4 million | $114.7 million | Higher |
- Cost of transportation and services declined to $1,887.3 million, or 53.3% of revenue, from 54.9% of revenue.
- Direct operating expense increased to 32.1% of revenue from 31.2%.
- SG&A declined to $400.9 million, or 11.3% of revenue, from $432.0 million, or 12.2%.
- Interest expense decreased to $75.6 million from $93.1 million, reflecting lower average indebtedness and refinancing benefits.
- Net income included a $9.0 million debt extinguishment charge and a $9.8 million income tax benefit. The tax benefit included $10.7 million of excess tax benefits from share-based compensation, a $2.6 million release of uncertain-tax-position reserves, and a $3.3 million state tax valuation-allowance release.
- Cash and cash equivalents were $342.0 million at March 31, 2017, compared with $373.4 million at December 31, 2016.
- Total debt principal was $5,122.6 million, with carrying value of $4,945.9 million. Current maturities were $135.0 million and long-term debt was $4,810.9 million.
- ABL facility availability was $557.5 million, based on a $902.8 million borrowing base, $100.0 million of outstanding advances, and $245.3 million of letters of credit.
Segment Performance and Material Changes
- Transportation: Revenue decreased 0.9% to $2,277.2 million, while operating income increased 33.7% to $100.8 million. Results benefited from cost savings, improved LTL dock efficiency, closure of unprofitable global-forwarding locations, U.S. last-mile growth, freight brokerage growth, and a 4.8% increase in U.S. LTL weight per day. Revenue was adversely affected by the divestiture of North American truckload operations, unfavorable currency movements, and lower U.S. expedite and global-forwarding revenue.
- Logistics: Revenue increased 3.1% to $1,300.1 million, while operating income increased 48.0% to $47.2 million. Growth was driven primarily by European contract logistics, including new e-commerce and cold-chain contracts. Higher temporary labor costs related to North American contract start-ups partly offset the improvement.
- The October 2016 divestiture of the North American truckload operation reduced revenue but also contributed to lower costs and indebtedness. The company used proceeds from the divestiture to repurchase debt.
- On March 10, 2017, XPO refinanced its existing term loan. New principal totaled $1,494.0 million versus $1,481.9 million outstanding under the prior facility. The LIBOR margin declined from 3.25% to 2.25%, the LIBOR floor declined from 1.0% to zero, and the new term loan matures October 30, 2021. Management expects approximately $15 million of annual cash interest savings.
- Restructuring charges of $4.6 million were incurred during the quarter, leaving a restructuring reserve of $23.3 million at March 31, 2017.
Cash Flow, Liquidity, Outlook, and Risks
Operating cash flow of $15.0 million was more than offset by $101.9 million of cash used in investing activities, principally $122.4 million of property and equipment purchases. Financing activities provided $53.6 million, and cash decreased by $31.4 million during the quarter.
Management stated that cash on hand, operating cash generation, and available ABL capacity were sufficient to support existing operations for the following 12 months. The company was in compliance with the covenants of its ABL facility, term loans, senior notes, and other applicable indentures. The filing does not provide a specific full-year revenue, earnings, or margin guidance range.
- Foreign-exchange exposure is significant, particularly to the euro and British pound. The company recorded a $10.6 million foreign-currency loss in the quarter and uses derivatives to manage currency and interest-rate exposure.
- Legal exposure includes owner-operator and contract-carrier classification claims, wage-and-hour litigation, meal and rest-break claims, and a Telephone Consumer Protection Act putative class action. The company believes probable and reasonably estimable losses are adequately accrued, but cannot estimate potential losses in excess of accrued amounts for several matters.
- The company disclosed eight historical forwarding transactions involving Iran, including transactions involving Iran Air and a government-linked consignee. It is continuing an investigation and expects to provide a complete report to the U.S. Treasury’s Office of Foreign Assets Control.
- Operating lease obligations were $2,144.3 million at December 31, 2016 and will require evaluation under the forthcoming lease-accounting standard.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes were reported to the risk factors in the 2016 Form 10-K.
Important Facts for Investors to Verify
- Whether operating improvement and cost savings persist after the North American truckload divestiture and restructuring actions.
- The sustainability of positive operating cash flow relative to capital expenditures and debt-service requirements.
- The impact of foreign-currency movements, fuel costs, labor costs, and temporary labor associated with new logistics contracts.
- Future debt refinancing needs, covenant headroom, ABL availability, and realization of the stated annual interest savings.
- Potential liabilities from independent-contractor classification, wage-and-hour, TCPA, and other litigation, including amounts exceeding recorded accruals.
- The outcome of the OFAC investigation and any related regulatory, financial, or reputational consequences.
- The magnitude of future tax-rate fluctuations, given the significant discrete tax benefits recognized in Q1 2017.