Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q and other written reports and oral statements we make from time to time contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terms such as "anticipate," "estimate," "believe," "continue," "could," "intend," "may," "plan," "potential," "predict," "should," "will," "expect," "objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target," "trajectory" or the negative of these terms or other comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference include those discussed below and the risks discussed in the Company’s other filings with the Securities and Exchange Commission (the "SEC"). All forward-looking statements set forth in this Quarterly Report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The following discussion should be read in conjunction with the Company’s unaudited Condensed Consolidated Financial Statements and related Notes thereto included elsewhere in this Quarterly Report. Forward-looking statements set forth in this Quarterly Report speak only as of the date hereof, and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, changes in expectations or the occurrence of unanticipated events, except as required by law.
Reference should be made to the audited consolidated financial statements and notes thereto and related "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's 2016 Annual Report on Form 10-K.
Executive Summary
XPO Logistics, Inc., a Delaware corporation together with its subsidiaries ("XPO," the "Company," "we" or "our"), is a top ten global provider of cutting-edge supply chain solutions to the most successful companies in the world. The Company operates as a highly integrated network of people, technology and physical assets. We use our network to help our customers manage their goods more efficiently throughout their supply chains. As of
June 30, 2017
, we served more than 50,000 customers and operated with over 90,000 employees and 1,435 locations in 31 countries.
We run our business on a global basis, with two segments: Transportation and Logistics. Within each segment, we have built robust service offerings that are positioned to capitalize on fast-growing areas of customer demand. Substantially all of our businesses operate under the single brand of XPO Logistics.
We are not reliant on the economy of any one country, region or industry. Based on where orders originated, approximately 60% of our 2016 revenue was generated in the United States, 13% in France, 12% in the United Kingdom, and 15% in other countries. Our customers are also highly diversified across every major industry, with retail and e-commerce historically accounting for approximately a quarter of our revenue.
In our Transportation segment, we are the second largest freight brokerage provider globally, and we hold industry-leading positions in North America and Europe. In North America, we are the largest provider of last mile logistics for heavy goods; the largest manager of expedite shipments; the second largest provider of less-than-truckload ("LTL") transportation; and the third largest provider of intermodal services; as well as a global freight forwarder with a large network of ocean, air, ground and border services.
In Europe, we have the largest owned road transportation fleet. We offer full truckload transportation in Europe as dedicated, non-dedicated and brokered services; last mile logistics services; and LTL transportation through one of the largest LTL networks in Western Europe.
Our blended model of owned, contracted and brokered capacity gives us the flexibility to offer solutions that best serve the interests of our customers and the Company. As of
June 30, 2017
, globally, we had approximately 11,000 independent owner
operators under contract to provide drayage, expedite, last mile and LTL services to our customers, and more than 50,000 independent brokered carriers representing approximately 1,000,000 trucks on the road.
We employ professional drivers who transport goods for customers using our fleet of owned and leased trucks and trailers. Globally, our fleet encompasses approximately 16,000 tractors and 39,000 trailers primarily related to our LTL and full truckload operations. These assets also provide capacity for our freight brokerage operations. Our company overall is asset-light, with assets accounting for just under a third of our revenue.
In our Logistics segment, which we sometimes refer to as "supply chain" or "contract business," we provide a range of services, including highly engineered and customized solutions, value-added warehousing and distribution, cold chain solutions and other inventory management solutions. We perform e-commerce fulfillment, order personalization, reverse logistics, recycling, storage, factory support, aftermarket support, manufacturing, distribution, packaging and labeling, as well as supply chain optimization services such as production flow management and transportation management.
XPO is the second largest contract logistics provider worldwide, with a broad footprint of shared and dedicated facilities that makes us attractive to multinational customers. Our logistics customers include the preeminent names in aerospace, retail, technology, manufacturing, food and beverage, wireless, chemical, agribusiness, life sciences and healthcare.
We also benefit from a strong presence in the high-growth e-commerce sector. E-commerce is predicted to continue to grow globally at a double-digit rate through at least 2020 and, increasingly, order fulfillment is being outsourced. We are the largest outsourced e-fulfillment provider in Europe, and we have a major platform for e-fulfillment in North America, where we provide highly customized solutions that include reverse logistics and omni-channel services.
We believe that our ability to provide customers with integrated, end-to-end supply chain solutions gives us a competitive advantage. Many customers, particularly large companies, are increasingly turning to multi-modal providers to handle their supply chain requirements. We have built XPO to capitalize on this trend, as well as the trend toward outsourcing in both transportation and logistics, the boom in e-commerce, and the adoption of just-in-time inventory practices. All of our service lines are run by highly experienced operators who know how to deliver results.
Two hallmarks of our operations worldwide are technology and sustainability. We place massive importance on innovation because we believe that great technology in the hands of well-trained employees is the ultimate competitive advantage. Our annual investment in technology is among the highest in our industry.
Our focus is on using innovation to differentiate our services and deliver tangible value to our customers and investors. We have built a highly scalable and integrated system on a cloud-based platform that speeds up innovation. Our global team of approximately 1,600 IT professionals can deploy proprietary software very rapidly. We concentrate our efforts in the following areas of innovation: automation; visibility and customer service business-specific analytics; and far-reaching new capabilities.
We also have a strong, global commitment to sustainability. XPO owns the largest natural gas truck fleet in Europe and launched government-approved mega-trucks in Spain, both of which reduce CO
2
emissions. We have been awarded the label "Objectif CO
2
" for outstanding environmental performance of transport operations in Europe by the French Ministry of the Environment and the French Environment and Energy Agency.
Many of our logistics facilities in North America are ISO14001-certified, which ensures environmental and other regulatory compliances. We monitor fuel emissions from forklifts, with systems in place to take immediate corrective action if needed. Company packaging engineers ensure that the optimal carton size is used for each product slated for distribution and, as a byproduct of reverse logistics, we recycle millions of electronic components and batteries each year. These are just a few of the many initiatives that reflect our commitment to operating in a progressive and environmentally sound manner, with the greatest efficiency and least waste possible.
XPO Logistics, Inc.
Consolidated Summary Financial Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Percent of Revenue
|
|
Change
|
|
Six Months Ended June 30,
|
|
Percent of Revenue
|
|
Change
|
(In millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017 vs. 2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017 vs. 2016
|
Revenue
|
$
|
3,760.3
|
|
|
$
|
3,683.3
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
2.1
|
%
|
|
$
|
7,299.8
|
|
|
$
|
7,229.0
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
1.0
|
%
|
Cost of transportation and services
|
1,969.6
|
|
|
1,973.3
|
|
|
52.4
|
%
|
|
53.6
|
%
|
|
(0.2
|
)%
|
|
3,856.9
|
|
|
3,918.4
|
|
|
52.8
|
%
|
|
54.2
|
%
|
|
(1.6
|
)%
|
Direct operating expense
|
1,194.2
|
|
|
1,130.2
|
|
|
31.8
|
%
|
|
30.7
|
%
|
|
5.7
|
%
|
|
2,331.9
|
|
|
2,236.4
|
|
|
31.9
|
%
|
|
30.9
|
%
|
|
4.3
|
%
|
SG&A expense
|
411.5
|
|
|
409.5
|
|
|
10.9
|
%
|
|
11.1
|
%
|
|
0.5
|
%
|
|
812.4
|
|
|
841.5
|
|
|
11.1
|
%
|
|
11.6
|
%
|
|
(3.5
|
)%
|
Operating income
|
185.0
|
|
|
170.3
|
|
|
4.9
|
%
|
|
4.6
|
%
|
|
8.6
|
%
|
|
298.6
|
|
|
232.7
|
|
|
4.1
|
%
|
|
3.2
|
%
|
|
28.3
|
%
|
Other (income) expense
|
(2.6
|
)
|
|
(4.4
|
)
|
|
(0.1
|
)%
|
|
(0.1
|
)%
|
|
(40.9
|
)%
|
|
0.7
|
|
|
(5.6
|
)
|
|
—
|
%
|
|
(0.1
|
)%
|
|
(112.5
|
)%
|
Foreign currency loss (income)
|
28.3
|
|
|
(3.4
|
)
|
|
0.8
|
%
|
|
(0.1
|
)%
|
|
(932.4
|
)%
|
|
38.9
|
|
|
2.1
|
|
|
0.5
|
%
|
|
—
|
%
|
|
1,752.4
|
%
|
Debt extinguishment loss
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
9.0
|
|
|
—
|
|
|
0.1
|
%
|
|
—
|
%
|
|
100.0
|
%
|
Interest expense
|
74.3
|
|
|
94.7
|
|
|
2.0
|
%
|
|
2.6
|
%
|
|
(21.5
|
)%
|
|
149.9
|
|
|
187.8
|
|
|
2.1
|
%
|
|
2.6
|
%
|
|
(20.2
|
)%
|
Income before income tax provision
|
85.0
|
|
|
83.4
|
|
|
2.3
|
%
|
|
2.3
|
%
|
|
1.9
|
%
|
|
100.1
|
|
|
48.4
|
|
|
1.4
|
%
|
|
0.7
|
%
|
|
106.8
|
%
|
Income tax provision
|
27.8
|
|
|
33.0
|
|
|
0.7
|
%
|
|
0.9
|
%
|
|
(15.8
|
)%
|
|
18.0
|
|
|
17.3
|
|
|
0.2
|
%
|
|
0.2
|
%
|
|
4.0
|
%
|
Net income
|
$
|
57.2
|
|
|
$
|
50.4
|
|
|
1.5
|
%
|
|
1.4
|
%
|
|
13.5
|
%
|
|
$
|
82.1
|
|
|
$
|
31.1
|
|
|
1.1
|
%
|
|
0.4
|
%
|
|
164.0
|
%
|
Consolidated Results
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Revenue
for the
second quarter
of
2017
increased
2.1%
to
$3,760.3 million
as compared to the same period in
2016
. The increase was primarily driven by growth in our European contract logistics business, high single digit improvement in LTL weight per day, high-teens growth in North American brokerage operations, and mid-teens growth in Last Mile revenue. These items were partially offset by the October 2016 divestiture of our North American truckload operation, which had revenue of $133.4 million in the second quarter of 2016, as well as the unfavorable impact of relative currency values as the U.S. dollar has strengthened relative to the GBP and Euro on a year-over-year basis.
Cost of transportation and services
represents the cost of providing or procuring freight transportation services for our customers, and includes salaries paid to employee drivers in our full truckload and LTL businesses, as well as commissions paid to independent station owners in our global forwarding business.
Cost of transportation and services for the
second quarter
of
2017
was
$1,969.6 million
, or
52.4%
of revenue, compared to
$1,973.3 million
, or
53.6%
of revenue, in the
second quarter
of
2016
. The reduction as a percentage of revenue was primarily driven by the divestiture of our North American truckload operation and a lower mix of managed transportation in North American Supply Chain, partially offset by higher third-party transportation costs in freight brokerage and intermodal operations.
Direct operating expense
includes: operating costs related to our contract logistics facilities; intermodal equipment lease expense; depreciation expense; maintenance and repair costs; property taxes; operating costs of our local drayage and last mile warehousing facilities; costs related to our LTL service centers and European pallet network, such as direct labor, facilities and forklift trucks; and fixed terminal and cargo handling expenses. Operating costs of our contract logistics facilities consist mainly of personnel costs, facility and equipment expenses, materials and supplies, information technology costs, and depreciation expense. Operating costs of our local drayage and last mile warehousing facilities consist mainly of personnel costs, rent, maintenance, utilities and other facility-related costs. Operating costs of our LTL facilities consist mainly of personnel costs, rent and depreciation of service center equipment. Fixed terminal and cargo handling costs primarily relate to the fixed rent and storage expense charged by terminal operators.
Direct operating expense for the
second quarter
of
2017
was
$1,194.2 million
, or
31.8%
of revenue, compared to
$1,130.2 million
, or
30.7%
of revenue, in the
second quarter
of
2016
. The increase as a percentage of revenue was primarily driven by higher benefits and temporary labor expense to support growth in our contract logistics business.
Sales, general and administrative expense
("SG&A") consists of costs relating to customer acquisition, carrier procurement, billing, customer service, salaries and related expenses of our executive and administrative staff, integration-related costs, office expenses, technology services, professional fees and other purchased services relating to the aforementioned functions, travel and entertainment costs, bad debt expense, and depreciation and amortization expense.
SG&A for the
second quarter
of
2017
was $
411.5 million
, or
10.9%
of revenue, compared to
$409.5 million
, or
11.1%
of revenue, in the
second quarter
of
2016
. The improvement in SG&A expense as a percentage of revenue primarily reflects the benefit of cost-saving actions initiated in 2016 and lower professional fees and consulting costs.
Foreign currency loss (income)
for the
second quarter
of
2017
was
$28.3 million
as compared to
$(3.4) million
in the
second quarter
of
2016
. The loss for the
second
quarter of
2017
primarily relates to unrealized losses on the Company's foreign currency option and forward contracts. For additional information on the Company's foreign currency option and forward contracts, see
Note 5-Derivative Instruments
of the condensed consolidated financial statements.
Interest expense
decreased to
$74.3 million
in the
second quarter
of
2017
, from
$94.7 million
in the
second quarter
of
2016
. The decrease in interest expense is consistent with the year-over-year reduction in average total indebtedness of approximately 10% and also reflects the lower rates attributable to our recent refinancings. The reduction in average total indebtedness reflects the benefit of utilizing the proceeds from the sale of our North American Truckload operation of $555.0 million in October 2016 to repurchase outstanding indebtedness.
Our effective income tax rates
for the
second
quarter of
2017
and
2016
were
32.7%
and
39.6%
, respectively. The effective tax rate for the
second
quarter of
2017
was based on forecasted effective tax rates, adjusted for discrete items that occurred within the period presented. The effective tax rate was impacted by $3.7 million of tax benefits associated with share-based payment arrangements and deferred tax asset revaluations. The effective tax rate for the
second
quarter of
2016
was based on forecasted effective tax rates, adjusted for discrete items that occurred within the period presented. The discrete items were not significant to the effective tax rate for the second quarter of 2016.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Revenue
for the
first six months
of
2017
increased
1.0%
to
$7,299.8 million
as compared to the same period in
2016
. The increase was primarily driven by growth in our European contract logistics business, improvement in LTL weight per day, and mid-teens growth in North American brokerage and Last Mile operations. These items were partially offset by the October 2016 divestiture of our North American truckload operation, which had revenue of $262.2 million in the six months ended June 30, 2016, as well as the unfavorable impact of relative currency values as the U.S. dollar has strengthened relative to the GBP and Euro on a year-over-year basis.
Cost of transportation and services
for the
first six months
of
2017
was
$3,856.9 million
, or
52.8%
of revenue, compared to
$3,918.4 million
, or
54.2%
of revenue, in the
first six months
of
2016
. The reduction as a percentage of revenue was primarily driven by a lower mix of managed transportation in North American Supply Chain, partially offset by higher third-party transportation costs in freight brokerage and intermodal operations.
Direct operating expense
for the
first six months
of
2017
was
$2,331.9 million
, or
31.9%
of revenue, compared to
$2,236.4 million
, or
30.9%
of revenue, in the
first six months
of
2016
. The increase as a percentage of revenue was primarily driven by higher benefits and temporary labor expense to support growth in our contract logistics business.
SG&A
for the
first six months
of
2017
was
$812.4 million
, or
11.1%
of revenue, compared to
$841.5 million
, or
11.6%
of revenue, in the
first six months
of
2016
. The improvement in SG&A expense as a percentage of revenue for the
six-
months ended
June 30, 2017
primarily reflects the benefit of cost-saving actions initiated in 2016 and lower professional fees and consulting costs.
Foreign currency loss
for the
first six months
of
2017
was
$38.9 million
as compared to
$2.1 million
in the
first six months
of
2016
. The loss for the
first six months
of
2017
primarily relates to unrealized losses on the Company's foreign currency option and forward contracts.
Debt extinguishment loss
for the
first six months
of
2017
relates to the refinancing of the Company's Term Loan facility. As discussed further below (see Liquidity and Capital Resources - Refinancing of Existing Term Loan), in March 2017, the Company incurred a
$9.0 million
charge related to the refinancing of this facility.
Interest expense
decreased to
$149.9 million
in the
first six months
of
2017
, from
$187.8 million
in the
first six months
of
2016
. The decrease in interest expense is consistent with the year-over-year reduction in average total indebtedness of approximately 10% and also reflects the lower rates attributable to our recent refinancings. The reduction in average total indebtedness reflects the benefit of utilizing the proceeds from the sale of our North American Truckload operation of $555.0 million in October 2016 to repurchase outstanding indebtedness.
Our effective income tax rates
for the
first six months
of
2017
and
2016
were
18.0%
and
35.7%
, respectively. The effective tax rate for the
first six months
of
2017
was based on forecasted effective tax rates, adjusted for discrete items that occurred within the period presented. The effective tax rate was impacted by tax benefits associated with share-based payment arrangements, release of valuation allowance on state tax matters, release of uncertain tax positions, and certain deferred tax asset revaluations. The effective tax rate for the
first six months
of
2016
was based on forecasted effective tax rates, adjusted for discrete items that
occurred within the period presented. The discrete items were not significant to the effective tax rate for the first six months of 2016.
Transportation
Summary Financial Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Percent of Revenue
|
|
Change
|
|
Six Months Ended June 30,
|
|
Percent of Revenue
|
|
Change
|
(In millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017 vs. 2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017 vs. 2016
|
Revenue
|
$
|
2,405.2
|
|
|
$
|
2,418.9
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
(0.6
|
)%
|
|
$
|
4,682.4
|
|
|
$
|
4,716.3
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
(0.7
|
)%
|
Cost of transportation and services
|
1,701.7
|
|
|
1,715.9
|
|
|
70.8
|
%
|
|
70.9
|
%
|
|
(0.8
|
)%
|
|
3,342.9
|
|
|
3,363.0
|
|
|
71.4
|
%
|
|
71.3
|
%
|
|
(0.6
|
)%
|
Direct operating expense
|
293.7
|
|
|
297.8
|
|
|
12.2
|
%
|
|
12.3
|
%
|
|
(1.4
|
)%
|
|
584.1
|
|
|
610.2
|
|
|
12.5
|
%
|
|
12.9
|
%
|
|
(4.3
|
)%
|
SG&A expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries & benefits
|
131.3
|
|
|
142.7
|
|
|
5.5
|
%
|
|
5.9
|
%
|
|
(8.0
|
)%
|
|
261.5
|
|
|
290.0
|
|
|
5.6
|
%
|
|
6.1
|
%
|
|
(9.8
|
)%
|
Other SG&A expense
|
46.0
|
|
|
30.6
|
|
|
1.9
|
%
|
|
1.3
|
%
|
|
50.3
|
%
|
|
88.1
|
|
|
67.6
|
|
|
1.9
|
%
|
|
1.4
|
%
|
|
30.3
|
%
|
Purchased services
|
30.7
|
|
|
37.1
|
|
|
1.3
|
%
|
|
1.5
|
%
|
|
(17.3
|
)%
|
|
62.8
|
|
|
77.0
|
|
|
1.3
|
%
|
|
1.6
|
%
|
|
(18.4
|
)%
|
Depreciation & amortization
|
41.8
|
|
|
41.6
|
|
|
1.7
|
%
|
|
1.7
|
%
|
|
0.5
|
%
|
|
82.2
|
|
|
79.9
|
|
|
1.8
|
%
|
|
1.7
|
%
|
|
2.9
|
%
|
Total SG&A expense
|
249.8
|
|
|
252.0
|
|
|
10.4
|
%
|
|
10.4
|
%
|
|
(0.9
|
)%
|
|
494.6
|
|
|
514.5
|
|
|
10.6
|
%
|
|
10.9
|
%
|
|
(3.9
|
)%
|
Operating income
|
$
|
160.0
|
|
|
$
|
153.2
|
|
|
6.7
|
%
|
|
6.3
|
%
|
|
4.4
|
%
|
|
$
|
260.8
|
|
|
$
|
228.6
|
|
|
5.6
|
%
|
|
4.8
|
%
|
|
14.1
|
%
|
Note: Total depreciation and amortization for the Transportation segment included in cost of transportation and services, direct operating expense and SG&A was
$111.4 million
and
$112.5 million
for the
three
months ended
June 30, 2017
and
2016
, respectively, and $217.6 million and $227.1 million for the
six
months ended
June 30, 2017
and
2016
, respectively.
Transportation
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Revenue in our Transportation segment decreased
0.6%
to
$2,405.2 million
in the
second quarter
of
2017
compared to
$2,418.9 million
in the
second quarter
of
2016
. The decrease was primarily driven by the divestiture of our North American truckload operations, which had revenue of $133.4 million in the second quarter of 2016, the unfavorable impact of relative currency values as the U.S. dollar has strengthened relative to the GBP and Euro on a year-over-year basis and lower revenue in global forwarding. The impact of these items was partially offset by: mid-teens revenue growth in our U.S. last mile service offering; growth in U.S. freight brokerage; and a 7.1% year-on-year increase in weight per day within our U.S. LTL business.
Cost of transportation and services for the
second quarter
of
2017
was
$1,701.7 million
, or
70.8%
of revenue, compared to
$1,715.9 million
, or
70.9%
of revenue, in the
second quarter
of
2016
. The 0.1 percentage point decrease as a percentage of revenue compared to the
second
quarter of
2016
was primarily driven by the divestiture of our North American truckload operations, offset by the increased cost of third party transportation in brokerage and intermodal operations.
Direct operating expense for the
second quarter
of
2017
was
$293.7 million
, or
12.2%
of revenue, compared to
$297.8 million
, or
12.3%
of revenue, in the
second quarter
of
2016
. Cost savings initiatives and improved dock efficiency largely offset increased payroll and benefits expense in the U.S. LTL business.
SG&A decreased to
$249.8 million
in the
second quarter
of
2017
from
$252.0 million
in the
second quarter
of
2016
. As a percentage of revenue, SG&A was flat at
10.4%
, reflecting improved technology-enabled labor efficiencies in North American brokerage and intermodal operations, as well as cost-discipline within European Transport operations, offset by modest increases in professional fees and services in LTL.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Revenue in our Transportation segment decreased
0.7%
to
$4,682.4 million
in the
first six months
of
2017
compared to
$4,716.3 million
in the
first six months
of
2016
. The decrease was primarily driven by the divestiture of our North American truckload operations, which had revenue of $262.2 million in the six months ended June 30, 2016, the unfavorable impact of relative currency values as the U.S. dollar has strengthened relative to the GBP and Euro on a year-over-year basis and lower revenue in global forwarding. The impact of these items was partially offset by: mid-teens revenue growth in our U.S. last mile service offering; growth in U.S. freight brokerage; and a 5.9% increase in weight per day within our U.S. LTL business.
Cost of transportation and services for the
first six months
of
2017
was
$3,342.9 million
, or
71.4%
of revenue, compared to
$3,363.0 million
, or
71.3%
of revenue, in the
first six months
of
2016
. Increased cost of third party transportation in brokerage operations and higher fuel expenses were partially offset by line-haul savings in LTL.
Direct operating expense for the
first six months
of
2017
was
$584.1 million
, or
12.5%
of revenue, compared to
$610.2 million
, or
12.9%
of revenue, in the
first six months
of
2016
. The improvement as a percentage of revenue was driven primarily by cost savings initiatives and improved dock efficiency in the U.S. LTL business.
SG&A decreased to
$494.6 million
in the
first six months
of
2017
from
$514.5 million
in the
first six months
of
2016
. As a percentage of revenue, SG&A decreased from
10.9%
in the
first six months
of
2016
to
10.6%
in the
first six months
of
2017
reflecting technology-enabled labor efficiencies in our North American brokerage and intermodal operations.
Logistics
Summary Financial Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Percent of Revenue
|
|
Change
|
|
Six Months Ended June 30,
|
|
Percent of Revenue
|
|
Change
|
(In millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017 vs. 2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017 vs. 2016
|
Revenue
|
$
|
1,395.2
|
|
|
$
|
1,332.0
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
4.7
|
%
|
|
$
|
2,695.3
|
|
|
$
|
2,592.7
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
4.0
|
%
|
Cost of transportation and services
|
307.0
|
|
|
323.2
|
|
|
22.0
|
%
|
|
24.3
|
%
|
|
(5.0
|
)%
|
|
589.5
|
|
|
633.4
|
|
|
21.9
|
%
|
|
24.4
|
%
|
|
(6.9
|
)%
|
Direct operating expense
|
892.4
|
|
|
832.8
|
|
|
64.0
|
%
|
|
62.5
|
%
|
|
7.2
|
%
|
|
1,747.0
|
|
|
1,626.6
|
|
|
64.8
|
%
|
|
62.7
|
%
|
|
7.4
|
%
|
SG&A expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries & benefits
|
63.7
|
|
|
54.6
|
|
|
4.6
|
%
|
|
4.1
|
%
|
|
16.7
|
%
|
|
123.9
|
|
|
123.8
|
|
|
4.6
|
%
|
|
4.8
|
%
|
|
0.1
|
%
|
Other SG&A expense
|
20.8
|
|
|
24.5
|
|
|
1.5
|
%
|
|
1.8
|
%
|
|
(15.1
|
)%
|
|
37.3
|
|
|
36.7
|
|
|
1.4
|
%
|
|
1.4
|
%
|
|
1.6
|
%
|
Purchased services
|
26.2
|
|
|
23.5
|
|
|
1.9
|
%
|
|
1.8
|
%
|
|
11.5
|
%
|
|
44.7
|
|
|
45.2
|
|
|
1.7
|
%
|
|
1.7
|
%
|
|
(1.1
|
)%
|
Depreciation & amortization
|
20.8
|
|
|
22.3
|
|
|
1.5
|
%
|
|
1.7
|
%
|
|
(6.7
|
)%
|
|
41.4
|
|
|
44.0
|
|
|
1.5
|
%
|
|
1.7
|
%
|
|
(5.9
|
)%
|
Total SG&A expense
|
131.5
|
|
|
124.9
|
|
|
9.4
|
%
|
|
9.4
|
%
|
|
5.3
|
%
|
|
247.3
|
|
|
249.7
|
|
|
9.2
|
%
|
|
9.6
|
%
|
|
(1.0
|
)%
|
Operating income
|
$
|
64.3
|
|
|
$
|
51.1
|
|
|
4.6
|
%
|
|
3.8
|
%
|
|
25.8
|
%
|
|
$
|
111.5
|
|
|
$
|
83.0
|
|
|
4.1
|
%
|
|
3.2
|
%
|
|
34.3
|
%
|
Note: Total depreciation and amortization for the Logistics segment included in cost of transportation and services, direct operating expense and SG&A was
$51.5 million
and
$48.6 million
for the
three
months ended
June 30, 2017
and
2016
, respectively, and $100.2 million and $95.7 million for the
six
months ended
June 30, 2017
and
2016
, respectively.
Logistics
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Revenue in our Logistics segment increased by
4.7%
to
$1,395.2 million
in the
second quarter
of
2017
compared to
$1,332.0 million
in the
second quarter
of
2016
. The increase in revenue was primarily driven by strong demand for contract logistics in both Europe and North America, partially offset by a decline in managed transportation revenue and the unfavorable impact of relative currency values, particularly in the United Kingdom. European logistics revenue growth reflected a significant benefit from new contract starts, notably with e-commerce and cold chain customers in the United Kingdom, Italy and the Netherlands.
Cost of transportation and services for the
second quarter
of
2017
was
$307.0 million
, or
22.0%
of revenue, compared to
$323.2 million
, or
24.3%
of revenue, in the
second quarter
of
2016
. The
5.0%
reduction relative to the
second quarter
of
2016
was primarily driven by the lower cost of third party transportation in the managed transportation operations of North American supply chain, consistent with lower volumes of business.
Direct operating expense in the
second quarter
of
2017
was
$892.4 million
, or
64.0%
as a percentage of revenue, compared to
$832.8 million
, or
62.5%
as a percentage of revenue, in the
second quarter
of
2016
. The
7.2%
increase relative to the
second quarter
of
2016
was primarily driven by higher temporary labor costs related to new contract startups in North American supply chain.
SG&A increased to
$131.5 million
in the
second quarter
of
2017
from
$124.9 million
in the
second quarter
of
2016
. As a percentage of revenue, SG&A remained flat at
9.4%
.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Revenue in our Logistics segment increased by
4.0%
to
$2,695.3 million
in the
first six months
of
2017
compared to
$2,592.7 million
in the
first six months
of
2016
. The increase in revenue was primarily driven by strong demand for contract logistics in both Europe and North America, partially offset by a decline in managed transportation revenue and the unfavorable impact of
relative currency values, particularly in the United Kingdom. European logistics revenue growth reflected a significant benefit from new contract starts, notably with e-commerce and cold chain customers in the United Kingdom, Italy and the Netherlands.
Cost of transportation and services for the
first six months
of
2017
was
$589.5 million
, or
21.9%
of revenue, compared to
$633.4 million
, or
24.4%
of revenue, in the
first six months
of
2016
. The
6.9%
reduction relative to the
first six months
of
2016
was primarily driven by the lower cost of third party transportation in the managed transportation operations of North American supply chain, consistent with lower volumes of business.
Direct operating expense in the
first six months
of
2017
was
$1,747.0 million
, or
64.8%
as a percentage of revenue, compared to
$1,626.6 million
, or
62.7%
as a percentage of revenue, in the
first six months
of
2016
. The
7.4%
increase relative to the
first six months
of
2016
was primarily driven by higher temporary labor costs related to new contract startups in North American supply chain.
SG&A decreased to
$247.3 million
in the
first six months
of
2017
from
$249.7 million
in the
first six months
of
2016
. As a percentage of revenue, SG&A decreased to
9.2%
in the
first six months
of
2017
compared to
9.6%
in the
first six months
of
2016
. The
1.0%
reduction relative to the
first six months
of
2016
was primarily driven by cost reduction initiatives on purchased services.
Liquidity and Capital Resources
We manage our liquidity using internal cash management practices, which are subject to: (i) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services, (ii) the terms and other requirements of the agreements to which we are a party, and (iii) the statutes, regulations and practices of each of the local jurisdictions in which we operate.
Our principal existing sources of cash are cash generated from operations and borrowings available under the Second Amended and Restated Revolving Loan Credit Agreement (the "ABL Facility"). As of
June 30, 2017
, we had cash and cash equivalents of
$291.4 million
and availability under the ABL Facility of
$679.0 million
. Availability under the ABL Facility is based on a borrowing base of
$924.4 million
, as well as outstanding letters of credit of
$245.4 million
, respectively.
We continually evaluate our liquidity requirements, capital needs and the availability of capital resources based on our operating needs and our planned growth initiatives. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months.
Equity Offering
In July 2017, the Company completed a registered underwritten offering of 11 million shares of its common stock at a public offering price of $60.50 per share, plus up to an additional 1.65 million shares of its common stock pursuant to an option granted to the underwriters to purchase additional shares of the Company’s common stock directly from the Company (the “Offering”). Of the 11 million shares of common stock, 5 million shares were offered directly by the Company and 6 million shares were offered in connection with forward sale agreements (the "Forward Sale Agreements") described below. The Offering closed on July 25, 2017.
In connection with the Offering, the Company entered into separate Forward Sale Agreements with Morgan Stanley & Co. LLC and JPMorgan Chase Bank, National Association, London Branch (the "Forward Counterparties") pursuant to which the Company has agreed to sell, and each Forward Counterparty agreed to purchase, 3 million shares of the Company’s common stock (or 6 million shares of the Company common stock in the aggregate) subject to the terms and conditions of the Forward Sale Agreements, including the Company’s right to elect cash settlement or net share settlement. The initial forward price under each of the Forward Sale Agreements is $58.08 per share (which is the public offering price of our common stock, less the underwriting discount) and is subject to certain adjustments pursuant to the terms of the Forward Sale Agreements. Settlement of each of the Forward Sale Agreements is expected to occur no later than approximately one year after the closing of the Offering but may occur earlier at the option of the Company or, in certain circumstances described in the Forward Sale Agreements, at the option of the relevant Forward Counterparty. A Forward Counterparty’s decision to exercise its right to accelerate the Forward Sale Agreements entered into with it and to require the Company to settle the Forward Sale Agreements will be made irrespective of the Company’s interests, including the Company’s need for capital. The Company could be required to issue and deliver the Company’s common stock under the terms of the physical settlement provisions of the Forward Sale Agreements irrespective of the Company’s capital needs, which would result in dilution to the Company’s earnings per share and return on equity.
In addition, in connection with the Offering, the Company entered into Amendment No. 1 (the “Revolving Loan Credit Amendment”) to the Company’s Second Amended and Restated Revolving Loan Credit Agreement, dated as of October 30, 2015 (as previously amended, amended and restated, supplemented or otherwise modified, the “Existing Credit Agreement”), by and among the Company and certain subsidiaries signatory thereto, Morgan Stanley Senior Funding, Inc., as agent, and the
Lenders party thereto, pursuant to which the Existing Credit Agreement was amended to permit certain transactions, including the transactions contemplated by the Forward Sale Agreements.
The Company received proceeds of $290.4 million from the sale of 5 million shares of common stock in the Offering. The Company did not initially receive any proceeds from the sale of shares of its common stock by the Forward Counterparties pursuant to the Forward Sale Agreements. The Company expects to use the net proceeds of the shares issued and sold by the Company in the Offering and any net proceeds received upon the settlement of the Forward Sale Agreements for general corporate purposes, which may include strategic acquisitions and the repayment or refinancing of outstanding indebtedness.
Refinancing of Existing Term Loan
On March 10, 2017, we entered into a Refinancing Amendment (Amendment No. 2 to Credit Agreement) (the "Amendment"), by and among XPO, its subsidiaries signatory thereto, as guarantors, the lenders party thereto and Morgan Stanley Senior Funding, Inc., in its capacity as administrative agent (the "Administrative Agent"), amending that certain Senior Secured Term Loan Credit Agreement, dated as of October 30, 2015 (as amended, amended and restated, supplemented or otherwise modified, including by that certain Incremental and Refinancing Amendment (Amendment No. 1 to Credit Agreement), dated as of August 25, 2016, the "Term Loan Credit Agreement").
Pursuant to the Amendment, the outstanding
$1,481.9 million
principal amount of term loans under the Term Loan Credit Agreement (the "Existing Term Loans") were replaced with
$1,494.0 million
in aggregate principal amount of new term loans (the "New Term Loans") having substantially similar terms as the Existing Term Loans, other than with respect to the applicable interest rate and prepayment premiums in respect of certain voluntary prepayments. Proceeds from the New Term Loans were used primarily to refinance the Existing Term Loans and to pay interest, fees and expenses in connection therewith, and up to $1.5 million may be used for general corporate purposes.
The interest rate margin applicable to the New Term Loans was reduced from
2.25%
to
1.25%
, in the case of base rate loans, and from 3.25% to 2.25%, in the case of LIBOR loans and the LIBOR floor was reduced from
1.0%
to
0%
. The interest rate on the New Term Loans was
3.41%
at
June 30, 2017
. The New Term Loans maturity will remain October 30, 2021. The refinancing resulted in an extinguishment charge of
$9.0 million
in the six months ended June 30, 2017. The Company expects annual cash interest savings of approximately $15 million per year related to the refinancing.
Loan Covenants and Compliance
As of
June 30, 2017
, we were in compliance with the covenants and other provisions of the ABL Facility, the New Term Loans, the senior notes due 2018, 2021, 2022 and 2023 (collectively the "Senior Notes"), and the other applicable indentures. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.
Sources and Uses of Cash
During the
six
months ended
June 30, 2017
, we: (i) generated cash from operating activities of
$231.0 million
, (ii) generated proceeds from sales of assets of
$42.2 million
, and (iii) received proceeds, net of repayments, on our Term Loan facility of $12.1 million. We used cash during this period principally to (i) purchase property and equipment of
$262.0 million
, (ii) make payments on long-term debt and capital leases of
$60.3 million
, (iii) make repayments, net of advances, on our ABL Facility of $30.0 million, (iv) make payments for tax withholdings on restricted shares of $14.2 million and (v) make payments for debt issuance costs of
$8.9 million
in connection with the refinancing of our Term Loan facility.
During the
six
months ended
June 30, 2016
, we: (i) generated cash from operating activities of
$267.6 million
, (ii) generated proceeds from sales of assets of
$35.6 million
, and (iii) received advances, net of repayments, of $100 million on our ABL Facility.
We used cash during this period principally to (i) purchase property and equipment of
$224.0 million
and (ii) make payments on long-term debt and capital leases of
$90.0 million
.
Off-Balance Sheet Arrangements
The Company guarantees the lease payments of certain tractor and trailer equipment utilized by subcontract carriers. These guarantees continue through the end of the lease of the equipment, which is typically four years. The maximum amount of the guarantee is limited to the amount of unpaid principal and interest. As of
June 30, 2017
, the maximum amount of these guarantees was approximately
$20.1 million
.
New Accounting Standards
Information related to new accounting standards is included in Note 1 to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
We have a significant proportion of our net assets and income in non-U.S. dollar currencies, primarily the EUR and GBP. We are exposed to currency risk from the potential changes in functional currency values of our foreign currency denominated assets, liabilities and cash flows. Consequently, a depreciation of the EUR and GBP relative to the U.S. dollar could have an adverse impact on our financial results. In order to mitigate against the risk of a reduction in the value of foreign currency from the Company’s international operations, the Company uses foreign currency option and forward contracts and gains or losses on these contracts are recorded in foreign currency gain/loss in the condensed consolidated statements of operations. See
Note 5-Derivative Instruments
for further information.
There have been no material changes to our quantitative and qualitative disclosures about market risk during the six months ended June 30, 2017 as compared to the quantitative and qualitative disclosures about market risk described in our Annual Report on Form 10-K for the year ended December 31, 2016.
Item 4.
Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of such time such that the information required to be included in our SEC reports is: (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to the Company, including our consolidated subsidiaries, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended
June 30, 2017
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.