Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.
Organization, Description of Business and Basis of Presentation
XPO Logistics, Inc. and its subsidiaries (“XPO” or the “Company”) use an integrated network of people, technology and physical assets to help customers manage their goods most efficiently throughout their supply chains. The Company’s customers are multinational, national, mid-size and small enterprises. XPO runs its business on a global basis, with
two
reportable segments: Transportation and Logistics. See
Note 2
—Segment Reporting
for further information on the Company’s segments.
The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in its annual report on Form 10-K for the year ended
December 31, 2017
(the “
2017
Form 10-K”), except as described herein, and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the
2017
Form 10-K.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of financial condition, operating results and cash flows for the interim periods presented have been made. Interim results of operations are not necessarily indicative of the results of the full year. Certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.
Cash, Cash Equivalents and Restricted Cash
At
September 30, 2018
and
December 31, 2017
, the total amount of restricted cash included in
Other long-term assets
on the
Condensed Consolidated Balance Sheets
was approximately
$12.5 million
and
$52.1 million
, respectively. Restricted cash at
December 31, 2017
was primarily comprised of tax-deferred proceeds from a property sale in 2017; this amount was reclassified in the second quarter of 2018. In accordance with the adoption of Accounting Standards Update (“ASU”) 2016-18, as discussed below, restricted cash was included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown in the
Condensed Consolidated Statements of Cash Flows
for the
nine
months ended
September 30, 2018
and
2017
.
Accounts Receivable
Accounts receivable are recorded at the contractual amount. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical collection experience, the age of the accounts receivable balances, credit quality of the Company’s customers, any specific customer collection issues that have been identified, current economic conditions, and other factors that may affect the customers’ ability to pay. The Company writes off accounts receivable balances once the receivables are no longer deemed collectible from the customer. The Company sells certain accounts receivable to unrelated financial institutions. The cost of participating in these programs was immaterial to the Company’s results of operations for the
nine
months ended
September 30, 2018
and
2017
.
Property and Equipment
Property and equipment acquired through capital leases was
$72.2 million
and
$72.5 million
for the
nine
months ended
September 30, 2018
and 2017, respectively.
Fair Value Measurements
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”)
Topic 820, “Fair Value Measurements and Disclosures,” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and classifies the inputs used to measure fair value into the following hierarchy:
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•
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Level 1—Quoted prices for identical instruments in active markets;
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•
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Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and
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•
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Level 3—Valuations based on inputs that are unobservable, generally utilizing pricing models or other valuation techniques that reflect management’s judgment and estimates.
|
The fair value estimates are based upon certain market assumptions and information available to management.
The carrying values of the following financial instruments approximated their fair values as of
September 30, 2018
and
December 31, 2017
: cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and current maturities of long-term debt. Fair values approximate carrying values for these financial instruments since they are short-term in nature or are receivable or payable on demand. The Level 1 cash equivalents include money market funds valued using quoted prices in active markets and cash collected on receivables which collateralize borrowings related to the Company’s trade securitization program (see
Note 5
—Debt
). The Level 2 cash equivalents include short-term investments valued using published interest rates for instruments with similar terms and maturities.
For information regarding the fair value hierarchy of the Company’s derivative instruments and financial liabilities
, refer to
Note 4
—Derivative Instruments
and
Note 5
—Debt
, respectively.
The following table summarizes the fair value hierarchy of cash equivalents:
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As of September 30, 2018
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(In millions)
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Carrying Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
Cash equivalents
|
|
$
|
225.7
|
|
|
$
|
225.7
|
|
|
$
|
223.1
|
|
|
$
|
2.6
|
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|
As of December 31, 2017
|
(In millions)
|
|
Carrying Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
Cash equivalents
|
|
$
|
91.1
|
|
|
$
|
91.1
|
|
|
$
|
75.4
|
|
|
$
|
15.7
|
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Adoption of New Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue (Topic 606): “Revenue from Contracts with Customers.” Topic 606 includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As discussed further in
Note 3
—Revenue Recognition
, the Company adopted Topic 606 on January 1, 2018.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): “Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).” This ASU addresses eight specific cash flow classification issues with the objective of reducing diversity in practice. Under the new standard, cash payments for debt prepayments or debt extinguishment costs should be classified as outflows for financing activities. Additional cash flow issues covered under the standard include: settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The Company adopted this standard on January 1, 2018. Adoption was on a prospective basis and did not have a material effect on the Company’s
Condensed Consolidated Statements of Cash Flows
.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash.” This ASU requires that the statement of cash flows reconcile the change during the period in the total of cash, cash equivalents, and restricted cash. The Company adopted this standard on January 1, 2018 and applied its provisions retrospectively. The adoption of this standard reduced cash flows provided by
operating activities
by approximately
$14 million
and reduced cash flows used by investing activities by approximately
$40 million
on the Consolidated Statement of Cash Flows for the year ended
December 31, 2017
.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The ASU changes how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the cost of the benefits in the
Condensed Consolidated Statements of Operations
. This cost, commonly referred to as the “net periodic benefit cost,” is comprised of several components that reflect different aspects of the arrangement with the employee, including the effect of the related funding. Previously, the Company aggregated the various components of the net periodic benefit cost (including interest cost and the expected return on plan assets) for presentation purposes and included these costs within
Operating income
in the
Condensed Consolidated Statements of Operations
. Under the new guidance, these costs are presented below
Operating income
. The Company adopted the standard on January 1, 2018 and recast prior periods to reflect the new presentation. The adoption of the standard had no impact on
Net income
. The amount of net periodic benefit income included in
Other expense (income)
was
$17.8 million
and
$10.1 million
for the three months ended
September 30, 2018
and
2017
, respectively, and
$54.5 million
and
$29.8 million
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): “Scope of Modification Accounting.” This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new standard, modification accounting applies unless all of the following conditions are met: (i) the fair value of the modified award is the same as the fair value of the original award immediately before the modification, (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification, and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. Generally speaking, modification accounting requires an entity to calculate and recognize the incremental fair value of the modified award as compensation cost on the date of modification (for a vested award) or over the remaining service period (for an unvested award). The impact of this guidance, which was applied prospectively on January 1, 2018, is dependent on future modifications, if any, to the Company’s share-based payment awards.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): “Amendments to Securities and Exchange Commission (“SEC”) Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.” The ASU amends ASC 740 to provide further guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) and allows for the recognition of provisional amounts in the event that a company does not have the necessary information available, prepared, or analyzed to finalize its accounting under ASC 740. ASU 2018-05 allows for adjustments to provisional amounts in multiple reporting periods during the allowable one-year measurement period from the Tax Act enactment date. This standard was effective upon issuance. As of
December 31, 2017
, the Company accounted for the mandatory deemed repatriation of accumulated foreign earnings and potential Global Intangible Low-Taxed Income (“GILTI”) and Foreign Derived Intangible Income on a provisional basis. As of
September 30, 2018
, the Company has not made a policy decision regarding whether to record deferred taxes on GILTI as the decision may be impacted by future clarification and guidance regarding available tax accounting methods and elections and state tax conformity to the Tax Act. However, the accounting for the mandatory deemed repatriation of accumulated foreign earnings is no longer provisional as the Company filed its 2017 U.S. Corporation Income Tax Return in September 2018 and determined that it is not subject to a tax liability on the mandatory repatriation.
Accounting Pronouncements Issued but Not Yet Effective
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases, including operating leases. Under the new requirements, a lessee will recognize in the balance sheet a liability to make lease payments (the lease liability) and the right-of-use asset representing the right to the underlying asset for the lease term. For leases with a term of 12
months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which clarified certain aspects of ASU 2016-02 based on inquiries made by various stakeholders. Also, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): “Targeted Improvements,” which provides an optional transition method to allow entities, on adoption of ASU 2016-02, to report prior periods under previous lease accounting guidance. The Company is in the process of implementing software for facilitating compliance with the new guidance. The standards are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects to apply the transition method provided by ASU 2018-11 at the adoption date. The Company is currently evaluating the effects these ASUs will have on its Condensed Consolidated Financial Statements and related disclosures. As of
December 31, 2017
, the Company reported
$1,978.5 million
in operating lease obligations and will evaluate those contracts, as well as other existing arrangements, to determine if they qualify for lease accounting under the new standards.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): “Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” The ASU includes the removal of the requirement to disclose the amounts in
Accumulated other comprehensive (loss) income
(“
AOCI
”) expected to be recognized in expense over the next fiscal year and the effects of a
one
-percentage point change in assumed health care cost trend rates. Additionally, it requires the disclosure of an explanation of the reasons for significant gains/losses related to a change in the benefit obligation. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within that reporting period; however, early adoption is permitted. The Company expects to early-adopt the standard in the fourth quarter of 2018. The adoption, which is limited to disclosures only, will not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period; however, early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
2.
Segment Reporting
The Company is organized into
two
reportable segments: Transportation and Logistics.
In the Transportation segment, the Company provides multiple services to facilitate the movement of raw materials, parts and finished goods. The Company accomplishes this by using its proprietary transportation technology, third-party carriers and Company-owned trucks and service centers. XPO’s transportation services include: freight brokerage, last mile, less-than-truckload (“LTL”), truckload, global forwarding and managed transportation. Freight brokerage, last mile, global forwarding and managed transportation are all non-asset or asset-light businesses; the LTL and truckload operations are primarily asset-based.
In the Logistics segment, also referred to as supply chain, the Company provides a range of contract logistics services, including value-added warehousing and distribution, cold chain solutions, e-fulfillment, reverse logistics, packaging, factory support, aftermarket support and inventory management services for customers. In addition, the Company provides highly engineered, customized solutions and supply chain optimization services, such as production flow management.
Certain of the Company’s operating units provide services to other Company operating units outside of their reportable segment. Billings for such services are based on negotiated rates, which approximates fair value, and are reflected as revenues of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenues and expenses are eliminated in the Company’s consolidated results.
Corporate includes corporate headquarters costs for executive officers and certain legal and financial functions, as well as certain other costs and credits not attributed to the Company’s core business. These costs are not allocated to the business segments.
The Company’s chief operating decision maker (“CODM”) regularly reviews financial information at the reporting segment level in order to make decisions about resources to be allocated to the segments and to assess their performance. Segment results that are reported to the CODM include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis. Asset information by segment is not provided to the Company’s CODM, as the majority of the Company’s assets are managed at the corporate level.
The Company evaluates performance based on the various financial measures of its
two
business segments. The following table identifies selected financial data for the three and
nine
months ended
September 30, 2018
and
2017
:
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(In millions)
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Transportation
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Logistics
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Corporate
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Eliminations
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Total
|
Three Months Ended September 30, 2018
(1)
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Revenue
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$
|
2,850.6
|
|
|
$
|
1,516.8
|
|
|
$
|
—
|
|
|
$
|
(32.3
|
)
|
|
$
|
4,335.1
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|
Operating income (loss)
|
|
195.2
|
|
|
59.5
|
|
|
(45.7
|
)
|
|
—
|
|
|
209.0
|
|
Depreciation and amortization
|
|
117.4
|
|
|
59.3
|
|
|
3.2
|
|
|
—
|
|
|
179.9
|
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Three Months Ended September 30, 2017
(1)
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Revenue
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$
|
2,579.5
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|
$
|
1,340.7
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|
$
|
—
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|
$
|
(33.1
|
)
|
|
$
|
3,887.1
|
|
Operating income (loss)
|
|
145.2
|
|
|
67.3
|
|
|
(35.8
|
)
|
|
—
|
|
|
176.7
|
|
Depreciation and amortization
|
|
113.6
|
|
|
53.0
|
|
|
0.7
|
|
|
—
|
|
|
167.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
(1)
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|
|
|
|
|
|
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Revenue
|
|
$
|
8,512.4
|
|
|
$
|
4,472.7
|
|
|
$
|
—
|
|
|
$
|
(95.0
|
)
|
|
$
|
12,890.1
|
|
Operating income (loss)
|
|
539.6
|
|
|
174.3
|
|
|
(135.9
|
)
|
|
—
|
|
|
578.0
|
|
Depreciation and amortization
|
|
347.3
|
|
|
172.4
|
|
|
7.5
|
|
|
—
|
|
|
527.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
(1)
|
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|
|
|
|
|
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Revenue
|
|
$
|
7,494.0
|
|
|
$
|
3,781.9
|
|
|
$
|
—
|
|
|
$
|
(89.0
|
)
|
|
$
|
11,186.9
|
|
Operating income (loss)
|
|
415.5
|
|
|
149.6
|
|
|
(109.5
|
)
|
|
—
|
|
|
455.6
|
|
Depreciation and amortization
|
|
335.1
|
|
|
149.3
|
|
|
4.7
|
|
|
—
|
|
|
489.1
|
|
|
|
(1)
|
Certain immaterial organizational changes were made in the first quarter of 2018 related to
the Company’s
managed transportation business. Managed Transportation previously had been included in the Logistics segment, and as of January 1, 2018, it is reflected in the Transportation segment. Prior period information was recast to conform to the current year presentation.
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3.
Revenue Recognition
Adoption of Topic 606, “Revenue from Contracts with Customers”
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts that were not completed as of the adoption date. The Company recorded an immaterial adjustment to opening Retained earnings as of January 1, 2018 for the cumulative impact of adoption related to the recognition of in-transit revenue in its transportation business. Results for
2018
are presented under Topic 606, while prior periods were not adjusted and are reported under Topic 605 “Revenue Recognition”. The adoption of Topic 606 did not have a material impact on the Condensed Consolidated Financial Statements as of the adoption date or for the
nine
months ended
September 30, 2018
.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The following is a description of the Company’s performance obligations for the transportation and logistics reportable segments.
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Reportable Segment
|
|
Nature, Timing of Satisfaction of Performance Obligations, and Significant Payment Terms
|
Transportation
|
|
The Company’s transportation segment generates revenue from providing truck brokerage and transportation services for its customers. Certain accessorial services may be provided to customers under their transportation contracts, such as unloading and other incidental services. The Company deems the transportation services including related accessorial services as a single performance obligation as the accessorial services are immaterial in the context of the contracts with customers. The transaction price is based on the consideration specified in the contract with the customer.
A performance obligation is created when a customer under a transportation contract submits a bill of lading for the transport of goods from origin to destination. These performance obligations are satisfied as the shipments move from origin to destination. Transportation revenue is recognized proportionally as a shipment moves from origin to destination and related costs are recognized as incurred. Some of the customer contracts contain a promise to stand ready as the Company is obligated to provide transportation services for the customer. For these contracts, the Company recognizes revenue on a straight-line basis over the term of the contract because the pattern of benefit to the customer as well as the Company’s efforts to fulfill the contract are generally distributed evenly throughout the period. Performance obligations are short-term with transit days less than one week. Generally, customers are billed either upon shipment of the freight or monthly and remit payment according to approved payment terms.
The Company recognizes revenue on a net basis when the Company does not control the specific services, is not responsible for providing the transportation service and does not have discretion in establishing the price for the service.
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Logistics
|
|
The Company’s logistics segment generates revenue from providing warehousing services for its customers, including e-fulfillment, reverse logistics, packaging and warehousing and distributing under contracts ranging from a few months to a few years. The Company’s performance obligations are satisfied over time as the customers simultaneously receive and consume the benefits of the Company’s services. The contracts contain a single performance obligation as the distinct services provided are satisfied over time and are substantially the same and possess the same pattern of transfer. The transaction price is based on the consideration specified in the contract with the customer and contains fixed and variable consideration. In general, the fixed consideration component of a contract represents reimbursement for facility and equipment costs incurred to satisfy the performance obligation and is recognized on a straight-line basis over the term of the contract. The variable consideration component is comprised of cost reimbursement, per unit pricing or time and materials pricing and is determined based on the costs, units or hours of services provided, respectively, and is recognized over time based on the level of activity volume.
Generally, the Company’s contracts contain provisions for adjustments to pricing based on achieving agreed-upon performance metrics, changes in volumes, services and other market conditions. Revenue relating to such pricing adjustments is estimated and included in the consideration if it is probable that a significant revenue reversal will not occur in the future. The estimate of variable consideration is determined either by the expected value or most likely amount method and factors in current, past and forecasted experience with the customer. Customers are billed based on the terms specified in the contract with the customer and remit payment according to approved payment terms.
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Disaggregation of Revenues
The Company disaggregates its revenue by geographic area and service offering. The following table presents the Company’s revenue disaggregated by geographical area based on sales office location:
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|
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|
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|
|
|
|
|
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|
|
Three Months Ended September 30, 2018
|
(In millions)
|
|
Transportation
|
|
Logistics
|
|
Eliminations
|
|
Total
|
Revenue
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,042.2
|
|
|
$
|
554.3
|
|
|
$
|
(4.8
|
)
|
|
$
|
2,591.7
|
|
North America (excluding United States)
|
|
71.3
|
|
|
19.7
|
|
|
—
|
|
|
91.0
|
|
France
|
|
359.4
|
|
|
167.0
|
|
|
(5.3
|
)
|
|
521.1
|
|
United Kingdom
|
|
179.2
|
|
|
357.0
|
|
|
(17.1
|
)
|
|
519.1
|
|
Europe (excluding France and United Kingdom)
|
|
193.0
|
|
|
395.8
|
|
|
(4.2
|
)
|
|
584.6
|
|
Other
|
|
5.5
|
|
|
23.0
|
|
|
(0.9
|
)
|
|
27.6
|
|
Total
|
|
$
|
2,850.6
|
|
|
$
|
1,516.8
|
|
|
$
|
(32.3
|
)
|
|
$
|
4,335.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
(In millions)
|
|
Transportation
|
|
Logistics
|
|
Eliminations
|
|
Total
|
Revenue
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,042.3
|
|
|
$
|
1,589.5
|
|
|
$
|
(14.9
|
)
|
|
$
|
7,616.9
|
|
North America (excluding United States)
|
|
200.4
|
|
|
48.7
|
|
|
—
|
|
|
249.1
|
|
France
|
|
1,133.8
|
|
|
522.6
|
|
|
(14.0
|
)
|
|
1,642.4
|
|
United Kingdom
|
|
529.4
|
|
|
1,052.8
|
|
|
(50.6
|
)
|
|
1,531.6
|
|
Europe (excluding France and United Kingdom)
|
|
592.0
|
|
|
1,185.4
|
|
|
(12.8
|
)
|
|
1,764.6
|
|
Other
|
|
14.5
|
|
|
73.7
|
|
|
(2.7
|
)
|
|
85.5
|
|
Total
|
|
$
|
8,512.4
|
|
|
$
|
4,472.7
|
|
|
$
|
(95.0
|
)
|
|
$
|
12,890.1
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Company’s revenue disaggregated by service offering:
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
Transportation:
|
|
|
|
|
Freight brokerage and truckload
|
|
$
|
1,196.0
|
|
|
$
|
3,585.9
|
|
LTL
|
|
1,227.9
|
|
|
3,647.4
|
|
Last mile
(1)
|
|
271.0
|
|
|
777.9
|
|
Managed transportation
|
|
110.1
|
|
|
361.3
|
|
Global forwarding
|
|
83.3
|
|
|
250.6
|
|
Transportation eliminations
|
|
(37.7
|
)
|
|
(110.7
|
)
|
Total Transportation segment revenue
|
|
2,850.6
|
|
|
8,512.4
|
|
Total Logistics segment revenue
|
|
1,516.8
|
|
|
4,472.7
|
|
Intersegment eliminations
|
|
(32.3
|
)
|
|
(95.0
|
)
|
Total revenue
|
|
$
|
4,335.1
|
|
|
$
|
12,890.1
|
|
|
|
(1)
|
Comprised of the Company’s North American last mile operations.
|
Contract Balances and Costs
The Company does not have material contract assets, liabilities or costs associated with arrangements with its customers at
September 30, 2018
or
December 31, 2017
. The Company did not recognize a material amount of revenue during the
nine
months ended
September 30, 2018
that was deferred at
December 31, 2017
. The Company applies the practical expedient in Topic 606 that permits the recognition of incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in
Direct operating expense
.
Transaction Price Allocated to Remaining Performance Obligation
On
September 30, 2018
, the fixed consideration component of the Company’s remaining performance obligation was approximately
$1.7 billion
, of which the Company expects to recognize approximately
75%
over the next three years and the remainder thereafter. Most of the remaining performance obligation relates to the Logistics reportable segment. The Company applies the disclosure exemption in Topic 606 that permits the omission of remaining performance obligations that either (i) have original expected durations of one year or less or (ii) contain variable consideration. The Company’s remaining performance obligations related to variable consideration will be satisfied over the remaining tenure of contracts based on the volume of services provided. Remaining performance obligation are estimates made at a point in time and actual amounts may differ from these estimates due to changes in foreign currency exchange rates and contract revisions and terminations.
4.
Derivative Instruments
In the normal course of business, the Company is exposed to certain risks arising from business operations and economic factors, including fluctuations in interest rates and foreign currencies. To manage the volatility related to these exposures, the Company uses derivative instruments. The objective of these derivative instruments is to reduce fluctuations in the Company’s earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. These financial instruments are not used for trading or other speculative purposes. The Company has not historically incurred, and does not expect to incur in the future, any losses as a result of counterparty default.
The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking cash flow hedges to specific forecasted transactions or variability of cash flow to be paid. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivative instruments that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. When a derivative instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively.
The following table presents the account on the
Condensed Consolidated Balance Sheets
in which the Company’s derivative instruments have been recognized and the related notional amounts and fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
(In millions)
|
|
Notional Amount
|
|
Balance Sheet Caption
|
|
Fair Value
|
|
Balance Sheet Caption
|
|
Fair Value
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swap agreements
|
|
$
|
1,278.5
|
|
|
Other long-term assets
|
|
$
|
—
|
|
|
Other long-term liabilities
|
|
$
|
(113.9
|
)
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency option and forward contracts
|
|
223.2
|
|
|
Other current assets
|
|
0.3
|
|
|
Other current liabilities
|
|
(0.2
|
)
|
Total
|
|
|
|
|
|
$
|
0.3
|
|
|
|
|
$
|
(114.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
(In millions)
|
|
Notional Amount
|
|
Balance Sheet Caption
|
|
Fair Value
|
|
Balance Sheet Caption
|
|
Fair Value
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swap agreements
|
|
$
|
1,303.7
|
|
|
Other long-term assets
|
|
$
|
—
|
|
|
Other long-term liabilities
|
|
$
|
(146.4
|
)
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency option and forward contracts
|
|
1,038.0
|
|
|
Other current assets
|
|
2.2
|
|
|
Other current liabilities
|
|
(15.5
|
)
|
Total
|
|
|
|
|
|
$
|
2.2
|
|
|
|
|
$
|
(161.9
|
)
|
The derivatives are classified as Level 2 within the fair value hierarchy. The derivatives are valued using inputs other than quoted prices, such as foreign exchange rates and yield curves.
The effect of derivative instruments designated as hedges and nonderivatives designated as hedges in the
Condensed Consolidated Statements of Operations
for the three and
nine
months ended
September 30, 2018
and
September 30, 2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative
|
|
Amount of Gain Reclassified from AOCI into Net Income
|
|
Amount of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
|
|
|
Three Months Ended September 30,
|
(In millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2018
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Cross-currency swap agreements
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
0.2
|
|
Interest rate swaps
|
|
0.3
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
Derivatives designated as net investment hedges:
|
|
|
|
|
|
|
|
|
Cross-currency swap agreements
|
|
5.0
|
|
|
(50.4
|
)
|
|
—
|
|
|
2.4
|
|
Nonderivatives designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency denominated notes
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
5.8
|
|
|
$
|
(48.4
|
)
|
|
$
|
1.0
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative
|
|
Amount of Gain Reclassified from AOCI into Net Income
|
|
Amount of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
|
|
|
Nine Months Ended September 30,
|
(In millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2018
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Cross-currency swap agreements
|
|
$
|
6.5
|
|
|
$
|
—
|
|
|
$
|
14.0
|
|
|
$
|
0.5
|
|
Interest rate swaps
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
Derivatives designated as net investment hedges:
|
|
|
|
|
|
|
|
|
Cross-currency swap agreements
|
|
24.6
|
|
|
(112.7
|
)
|
|
—
|
|
|
1.7
|
|
Nonderivatives designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency denominated notes
|
|
—
|
|
|
6.9
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
31.1
|
|
|
$
|
(104.0
|
)
|
|
$
|
14.0
|
|
|
$
|
2.2
|
|
As of
September 30, 2018
, the amounts excluded from effectiveness testing for the cross-currency swap agreements were
$2.5 million
for derivatives designated as cash flow hedges and
$34.9 million
for derivatives designated as net investment hedges. There were
no
gains (losses) reclassified out of
AOCI
into
Net income
for the three and
nine
months ended
September 30, 2017
.
The pre-tax (loss) gain recognized in earnings for
foreign currency option and forward contracts
not designated as hedging instruments was
$(3.1) million
and
$(14.2) million
for the three months ended
September 30, 2018
and
2017
, respectively, and
$1.1 million
and
$(52.7) million
for the
nine
months ended
September 30, 2018
and
2017
, respectively. These amounts are recorded in
Foreign currency loss
in the
Condensed Consolidated Statements of Operations
.
Cross-Currency Swap Agreements
In May 2017, the Company entered into certain cross-currency swap agreements to manage the foreign currency exchange risk related to the Company’s international operations by effectively converting the fixed-rate U.S. dollar (“USD”)-denominated
6.125%
senior notes due 2023
(“
Senior Notes due 2023”) (see
Note 5
—Debt
), including the associated semi-annual interest payments, to fixed-rate, Euro (“EUR”)-denominated debt. The risk management objective of these transactions is to manage foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies and reduce the variability in the functional currency equivalent cash flows of the Senior Notes due 2023.
During the term of the swap contracts, the Company will receive quarterly interest payments in March, June, September and December of each year from the counterparties based on USD fixed interest rates, and the Company will make quarterly interest payments in March, June, September and December of each year to the counterparties based on EUR fixed interest rates. At maturity, the Company will repay the original principal amount in EUR and receive the principal amount in USD.
In 2015, in connection with the issuance of the
6.50%
senior notes due 2022 (“
Senior Notes due 2022”), the Company entered into certain cross-currency swap agreements to manage the foreign currency exchange risk related to the Company’s international operations by effectively converting a portion of the fixed-rate USD-denominated Senior Notes due 2022, including the associated semi-annual interest payments, to fixed-rate, EUR-denominated debt. The risk management objective of the agreements is to manage the Company’s foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies and reduce the variability in the functional currency equivalent cash flows of a portion of the Senior Notes due 2022. During the term of the swap contracts, the Company will receive semi-annual interest payments in June and December of each year from the counterparties based on USD fixed interest rates, and the Company will make semi-annual interest payments in June and December of each year to the counterparties based on EUR fixed interest rates. At maturity, the Company will repay the original principal amount in EUR and receive the principal amount in USD.
The Company has designated the cross-currency swap agreements as qualifying hedging instruments and is accounting for these as net investment hedges. In the fourth quarter of 2017, and in accordance with the guidance in ASU 2017-12, the Company applied the simplified method of assessing the effectiveness of its net investment hedging relationships. Under this method, for each reporting period, the change in the fair value of the cross-currency swaps is initially recognized in
AOCI
. The change in the fair value due to foreign exchange remains in
AOCI
and the initial component excluded from effectiveness testing will initially remain in
AOCI
and then will be reclassified from
AOCI
to
Interest expense
each period in a systematic manner. Cash flows related to the periodic exchange of interest payments for these net investment hedges are included in
Operating activities
on the
Condensed Consolidated Statements of Cash Flows
.
Additionally, in the fourth quarter of 2017, a portion of the cross-currency swap that hedges the Senior Notes due 2023 was de-designated as a net investment hedge and re-designated with a larger notional amount as a cash flow hedge. This cash flow hedge was entered into to manage the related foreign currency exposure from intercompany loans. The amounts in
AOCI
related to the net investment hedge at the date of de-designation were recognized as cumulative translation adjustments and will remain in
AOCI
until the subsidiary is sold or substantially liquidated. For the cash flow hedge, the Company reclassifies a portion of
AOCI
to
Foreign currency loss
to offset the foreign exchange impact in earnings created by the intercompany loans. The Company also amortizes a portion of
AOCI
to
Interest expense
related to the initial portion of a loss excluded from the assessment of effectiveness of the cash flow hedge. Cash flows related to this cash flow hedge are included in
Financing activities
on the
Condensed Consolidated Statements of Cash Flows
.
Hedge of Net Investments in Foreign Operations
In addition to the cross-currency swaps, the Company periodically uses foreign currency denominated notes as nonderivative hedging instruments of its net investments in foreign operations. Prior to their redemption in 2017, the Company had designated the
5.75%
senior notes due 2021 (“Senior Notes due 2021”) as a net investment hedge and the gains and losses resulting from the exchange rate adjustments to the designated portion of the foreign currency denominated notes were recorded in
AOCI
to the extent that the foreign currency denominated notes are effective in hedging the designated risk. As of
September 30, 2018
and
December 31, 2017
, there is
no
amount of Long-term debt on the
Condensed Consolidated Balance Sheets
that is designated as a net investment hedge of its investments in international subsidiaries that use the EUR as their functional currency. The amount recognized in
AOCI
during the period that the Senior Notes due 2021 were designated as a net investment hedge remains in
AOCI
as of
September 30, 2018
and will remain in
AOCI
until the subsidiary is sold or substantially liquidated. In
2018
, the gains and losses resulting from exchange rate adjustments to the foreign currency denominated notes were recorded in the
Condensed Consolidated Statements of Operations
in
Foreign currency loss
. The Company does not expect amounts that are currently deferred in
AOCI
to be reclassified to income over the next 12 months.
Interest Rate Hedging
In 2018, the Company utilized a short-term interest rate swap to mitigate variability in forecasted interest payments on the Company’s Term loan facility. The interest rate swap converted a floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a qualifying hedging instrument and accounted for this derivative as a cash flow hedge. The interest rate swap matured in August 2018.
In 2017, the Company utilized interest rate swaps to mitigate variability in forecasted interest payments on the Company’s EUR-denominated asset financings that are based on benchmark interest rates (e.g., Euribor). The objective was for the cash flows of the interest rate swaps to offset any changes in cash flows of the forecasted interest payments attributable to changes in the benchmark interest rate. The interest rate swaps converted floating rate interest payments into fixed rate interest payments. The Company designated the interest rate swaps as qualifying hedging instruments and accounted for these as cash flow hedges of the forecasted obligations. The Company hedged its exposure to the variability in future cash flows for forecasted interest payments through the maturity date of the swap in December 2017.
Gains and losses resulting from fair value adjustments to the designated portion of interest rate swaps are recorded in
AOCI
and reclassified to
Interest expense
on the dates that interest payments accrued. Cash flows related to the interest rate swaps are included in
Operating activities
on the
Condensed Consolidated Statements of Cash Flows
.
Foreign Currency Option and Forward Contracts
In order to mitigate the currency translation risk that results from converting the financial statements of the Company’s international operations, which primarily use the EUR and British Pound Sterling as their functional currency, the Company uses foreign currency option and forward contracts. Additionally, the Company may use foreign currency forward contracts to mitigate the foreign currency exposure from intercompany loans. The foreign currency contracts were not designated as qualifying hedging instruments as of
September 30, 2018
. The contracts are not speculative; rather, they are used to manage the Company’s exposure to foreign currency exchange rate fluctuations. The contracts expire in
12 months
or less. Gains or losses on the contracts are recorded in
Foreign currency loss
in the
Condensed Consolidated Statements of Operations
. In the
third quarter
of
2018
, the Company changed its policy related to the cash flow presentation of foreign currency option contracts as the Company believes cash receipts and payments related to economic hedges should be classified based on the nature and purpose for which those derivatives were acquired and, given that the company did not elect to apply hedge accounting to these derivatives, we believe it is preferable to reflect these cash flows as
Investing activities
. Previously, these cash flows were reflected within
Operating activities
.
Net cash used by investing activities
for the
nine
months ended
September 30, 2018
includes a reclassification of
$13 million
of cash usage that had been reflected within
Operating activities
for the six months ended June 30, 2018. Prior years’ impact were not material. With this change in presentation, all cash flows related to the foreign currency contracts are included in
Investing activities
on the
Condensed Consolidated Statements of Cash Flows
.
5.
Debt
The Company’s debt is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
(In millions)
|
|
Principal Balance
|
|
Carrying Value
|
|
Principal Balance
|
|
Carrying Value
|
ABL facility
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100.0
|
|
|
$
|
100.0
|
|
Term loan facility
|
|
1,503.0
|
|
|
1,472.6
|
|
|
1,494.0
|
|
|
1,455.6
|
|
6.125% Senior notes due 2023
|
|
535.0
|
|
|
528.7
|
|
|
535.0
|
|
|
528.0
|
|
6.50% Senior notes due 2022
|
|
1,200.0
|
|
|
1,189.1
|
|
|
1,600.0
|
|
|
1,583.0
|
|
6.70% Senior debentures due 2034
|
|
300.0
|
|
|
204.5
|
|
|
300.0
|
|
|
202.8
|
|
4.00% Euro private placement notes due 2020
|
|
13.9
|
|
|
14.6
|
|
|
14.4
|
|
|
15.3
|
|
Trade Securitization Program
|
|
364.5
|
|
|
361.5
|
|
|
302.6
|
|
|
298.6
|
|
Asset financing
|
|
51.5
|
|
|
51.5
|
|
|
90.0
|
|
|
90.0
|
|
Capital leases for equipment
|
|
266.8
|
|
|
266.8
|
|
|
247.9
|
|
|
247.9
|
|
Total debt
|
|
4,234.7
|
|
|
4,089.3
|
|
|
4,683.9
|
|
|
4,521.2
|
|
Current maturities of long-term debt
|
|
84.0
|
|
|
84.0
|
|
|
103.7
|
|
|
103.7
|
|
Long-term debt
|
|
$
|
4,150.7
|
|
|
$
|
4,005.3
|
|
|
$
|
4,580.2
|
|
|
$
|
4,417.5
|
|
The fair value of the Company’s debt at
September 30, 2018
was
$4,315.2 million
, of which
$2,156.1 million
was classified as
Level 1 and
$2,159.1 million
was classified as Level 2 in the fair value hierarchy. The fair value of the debt at
December 31, 2017
was
$4,816.1 million
, of which
$2,647.4 million
was classified as Level 1 and
$2,168.7 million
was classified as Level 2.
The Level 1 debt was valued using quoted prices in active markets. The Level 2 debt was valued using bid evaluation pricing models or quoted prices of securities with similar characteristics. The fair value of the asset financing arrangements approximates carrying value since the debt is primarily issued at a floating rate, may be prepaid any time at par without penalty, and the remaining life is short-term in nature.
ABL Facility
In October 2015, the Company entered into the Second Amended and Restated Revolving Loan Credit Agreement (the “ABL Facility”) which was amended in March 2018 to allow letters of credit to be issued in currencies other than USD and Canadian dollars.
At
September 30, 2018
, the Company had a borrowing base of
$935.4 million
and availability under the ABL Facility of
$697.2 million
after considering outstanding letters of credit on the ABL Facility of
$238.2 million
. As of
September 30, 2018
, the Company was in compliance with the ABL Facility’s financial covenants.
Refinancing of Existing Term Loans
In February 2018,
the Company
entered into a Refinancing Amendment (Amendment No. 3 to Credit Agreement) (the “
Third 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, 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, and by that certain Refinancing Amendment (Amendment No. 2 to Credit Agreement), dated March 10, 2017, the “
Term Loan Credit Agreement
”).
Pursuant to the
Third Amendment
, the outstanding
$1,494.0 million
principal amount of term loans under the
Term Loan Credit Agreement
(the “
Existing Term Loans
”) were replaced with
$1,503.0 million
in aggregate principal amount of new term loans (the “
New Term Loans
”) having substantially similar terms as the
Existing Term Loans
, except with respect to the interest rate and maturity date applicable to the
New Term Loans
, prepayment premiums in connection with certain voluntary prepayments and certain other amendments to the restrictive covenants. Proceeds from the
New Term Loans
were used to refinance the
Existing Term Loans
and to pay interest, fees and expenses in connection therewith.
The interest rate margin applicable to the
New Term Loans
was reduced from
1.25%
to
1.00%
, in the case of base rate loans, and from
2.25%
to
2.00%
, in the case of London Interbank Offered Rate (“LIBOR”) loans (with the LIBOR floor remaining at
0.0%
). The interest rate on the
New Term Loans
was
4.23%
at
September 30, 2018
. The
New Term Loans
will mature on
February 23, 2025
. The refinancing resulted in a debt extinguishment charge of
$10.3 million
during the first quarter of 2018.
In the first quarter of 2017,
the Company
recorded a debt extinguishment charge of
$9.0 million
in connection with the refinancing of the Term Loan facility (Amendment No. 2 to Credit Agreement).
Redemption of Senior Notes due 2022
In July 2018,
the Company
redeemed
$400 million
of the then
$1.6 billion
outstanding Senior Notes due 2022 that were originally issued in 2015. The redemption price for the Senior Notes due 2022 was
103.25%
of the principal amount of the notes, plus accrued and unpaid interest to, but excluding, the date of redemption. The redemption was primarily funded using proceeds from the forward sale settlement described below. The loss on debt extinguishment was
$16.8 million
during the third quarter of 2018.
Trade Securitization Program
In October 2017, XPO Logistics Europe SA
(“
XPO Logistics Europe
”)
, in which
the Company holds
an
86.25%
controlling interest, entered into a trade receivables securitization program for a term of
three
years co-arranged by Crédit Agricole and HSBC. In the first quarter of 2018, the aggregate maximum amount available under the program was increased to
€350 million
(approximately
$406.3 million
as of
September 30, 2018
). At
September 30, 2018
, the remaining borrowing capacity was
€36.0 million
(approximately
$41.8 million
) and the weighted-average interest rate was
1.11%
.
6.
Stockholders
’
Equity
Forward Sale Agreements
In connection with a common stock offering in July 2017,
the Company
entered into separate forward sale agreements (the “Forward Sale Agreements”) with each of Morgan Stanley & Co. LLC and JPMorgan Chase Bank, National Association, London Branch (the “Forward Counterparties”) pursuant to which
the Company
agreed to sell, and each Forward Counterparty agreed to purchase,
three million
shares of
the Company’s
common stock (or
six million
shares of
the Company’s
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 was
$58.08
per share (which was the public offering price of
the Company’s
common stock for a primary offering of
five million
shares completed at that time, less the underwriting discount) and was subject to certain adjustments pursuant to the terms of the Forward Sale Agreements. Consistent with
the Company’s
strategy to grow
its
business in part through acquisitions,
the Company
entered into the Forward Sale Agreements to provide additional available cash for such acquisitions, among other general corporate purposes. In July 2018,
the Company
physically settled the forwards in full by delivering
six million
shares of common stock to the Forward Counterparties for net cash proceeds to
the Company
of approximately
$349 million
. As a part of
its
ordinary course treasury management activities,
the Company has
applied these net cash proceeds to the repayment of the Senior Notes due 2022 as described above thereby reducing
the Company’s
overall outstanding debt and interest expense.
Dividends
The Series A Convertible Perpetual Preferred Stock pays quarterly cash dividends equal to the greater of (i) the “as-converted” dividends on the underlying Company common stock for the relevant quarter and (ii)
4%
of the then-applicable liquidation preference per annum.
7.
Income Taxes
The Company’s effective income tax rates were
26.2%
and
30.0%
for the
third quarter
of
2018
and
2017
, respectively, and
21.2%
and
24.0%
for the first
nine
months of
2018
and
2017
, respectively. The effective tax rates for both the
third quarter
and
nine
-month periods of
2018
and
2017
were based on forecasted full year effective tax
rates, adjusted for discrete items that occurred within the periods presented. The effective tax rate for both the
third quarter
and
nine
-month periods of
2018
reflects the enactment of the Tax Act, which permanently reduced the U.S. corporate statutory rate from
35%
to
21%
effective January 1, 2018. There was no material net effective tax rate impact related to discrete items in the
third quarter
of
2018
or
2017
.
The effective tax rate for the first
nine
months of
2018
was impacted primarily by discrete tax benefits of
$24.2 million
associated with share-based payment arrangements and
$4.3 million
associated with the deduction of foreign taxes paid in prior years. The effective tax rate for the first
nine
months of
2017
was impacted primarily by discrete tax benefits of
$9.8 million
associated with share-based payment arrangements,
$3.3 million
associated with the release of valuation allowance on state tax matters,
$3.1 million
associated with deferred tax asset revaluations, and
$2.5 million
associated with research and development tax credits.
8.
Noncontrolling Interests
The Company holds a controlling financial interest in entities where it currently holds, directly or indirectly, more than
50%
of the voting rights or where it exercises control through substantive participating rights or as a general partner.
Net income attributable to noncontrolling interests
is deducted from
Net income
to determine
Net income attributable to XPO
. The noncontrolling interests reflected in our Condensed Consolidated Financial Statements primarily relate to the
13.75%
outstanding minority interest in
XPO Logistics Europe
. We acquired an
86.25%
controlling interest in
XPO Logistics Europe
in 2015.
Activity for the equity attributable to noncontrolling interests for the
nine
months ended
September 30, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Total Stockholders' Equity
|
|
Noncontrolling Interests
|
|
Total Equity
|
Balance at December 31, 2017
|
|
$
|
3,604.4
|
|
|
$
|
405.6
|
|
|
$
|
4,010.0
|
|
Net income
|
|
330.6
|
|
|
22.8
|
|
|
353.4
|
|
Other comprehensive loss
|
|
(75.0
|
)
|
|
(15.4
|
)
|
|
(90.4
|
)
|
Issuance of common stock from forward sale settlement
|
|
348.5
|
|
|
—
|
|
|
348.5
|
|
Other
|
|
(27.0
|
)
|
|
(4.7
|
)
|
|
(31.7
|
)
|
Balance at September 30, 2018
|
|
$
|
4,181.5
|
|
|
$
|
408.3
|
|
|
$
|
4,589.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Total Stockholders' Equity
|
|
Noncontrolling Interests
|
|
Total Equity
|
Balance at December 31, 2016
|
|
$
|
2,700.0
|
|
|
$
|
337.6
|
|
|
$
|
3,037.6
|
|
Net income
|
|
135.7
|
|
|
17.4
|
|
|
153.1
|
|
Other comprehensive income
|
|
139.1
|
|
|
38.6
|
|
|
177.7
|
|
Issuance of common stock from offering
|
|
287.6
|
|
|
—
|
|
|
287.6
|
|
Other
|
|
46.4
|
|
|
(4.0
|
)
|
|
42.4
|
|
Balance at September 30, 2017
|
|
$
|
3,308.8
|
|
|
$
|
389.6
|
|
|
$
|
3,698.4
|
|
9.
Earnings Per Share
Basic and diluted earnings per share are computed using the two-class method, which is an earnings allocation method that determines earnings per share for common shares and participating securities. The participating securities consist of the Company’s Series A Convertible Perpetual Preferred Stock. The undistributed earnings are allocated between common shares and participating securities as if all earnings had been distributed during the period. In periods of loss, no allocation is made to the preferred shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In millions, except per share data)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Basic earnings per common share
|
|
|
|
|
|
|
|
|
Net income attributable to XPO
|
|
$
|
109.0
|
|
|
$
|
62.5
|
|
|
$
|
330.6
|
|
|
$
|
135.7
|
|
Cumulative preferred dividends
|
|
(0.7
|
)
|
|
(0.7
|
)
|
|
(2.1
|
)
|
|
(2.2
|
)
|
Non-cash allocation of undistributed earnings
|
|
(7.5
|
)
|
|
(4.3
|
)
|
|
(23.3
|
)
|
|
(9.0
|
)
|
Net income attributable to common shares, basic
|
|
$
|
100.8
|
|
|
$
|
57.5
|
|
|
$
|
305.2
|
|
|
$
|
124.5
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
125.2
|
|
|
117.5
|
|
|
122.1
|
|
|
113.5
|
|
Basic earnings per share
|
|
$
|
0.81
|
|
|
$
|
0.49
|
|
|
$
|
2.50
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
|
|
|
|
|
|
|
Net income attributable to common shares, basic
|
|
$
|
100.8
|
|
|
$
|
57.5
|
|
|
$
|
305.2
|
|
|
$
|
124.5
|
|
Interest from Convertible Senior Notes
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.9
|
|
Net income attributable to common shares, diluted
|
|
$
|
100.8
|
|
|
$
|
57.7
|
|
|
$
|
305.2
|
|
|
$
|
125.4
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
125.2
|
|
|
117.5
|
|
|
122.1
|
|
|
113.5
|
|
Dilutive effect of Convertible Senior Notes
|
|
—
|
|
|
1.9
|
|
|
—
|
|
|
2.6
|
|
Dilutive effect of non-participating stock-based awards and equity forward
|
|
11.4
|
|
|
10.4
|
|
|
12.7
|
|
|
10.1
|
|
Diluted weighted-average common shares
|
|
136.6
|
|
|
129.8
|
|
|
134.8
|
|
|
126.2
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.74
|
|
|
$
|
0.44
|
|
|
$
|
2.26
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
Potential common shares excluded
|
|
10.2
|
|
|
10.2
|
|
|
10.2
|
|
|
10.2
|
|
Certain shares were not included in the computation of diluted earnings per share because the effect was anti-dilutive.
10.
Legal and Regulatory Matters
The Company is involved, and will continue to be involved, in numerous proceedings arising out of the conduct of its business. These proceedings may include, among other matters, claims for property damage or personal injury incurred in connection with the transportation of freight, claims regarding anti-competitive practices, and employment-related claims, including claims involving asserted breaches of employee restrictive covenants and tortious interference with contracts. These matters also include numerous purported class action, multi-plaintiff and individual lawsuits, and administrative proceedings that claim either that the Company’s owner-operators or contract carriers should be treated as employees, rather than independent contractors, or that certain of the Company’s drivers were not paid for all compensable time or were not provided with required meal or rest breaks. These lawsuits and proceedings may seek substantial monetary damages (including claims for unpaid wages, overtime, failure to provide meal and rest periods, unreimbursed business expenses and other items), injunctive relief, or both.
The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount accrued therefor, the Company assesses whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred. If there is a reasonable possibility that a loss, or additional loss, may have been incurred, the Company discloses the estimate of the possible loss or range of loss if it is material and an estimate can be made, or states that such an estimate cannot be made. The determination as to whether a loss can reasonably be considered to be possible or probable is based on the Company’s assessment, in conjunction with legal counsel, regarding the ultimate outcome of the matter.
The Company believes that it has adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. The Company does not believe that the ultimate resolution of any matters to which the Company is presently a party will have a material adverse effect on its results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Legal costs incurred related to these matters are expensed as incurred.
The Company carries liability and excess umbrella insurance policies that it deems sufficient to cover potential legal claims arising in the normal course of conducting its operations as a transportation and logistics company. The liability and excess umbrella insurance policies generally do not cover the misclassification claims described in this note. In the event the Company is required to satisfy a legal claim outside the scope of the coverage provided by insurance, the Company’s financial condition, results of operations or cash flows could be negatively impacted.
Intermodal Drayage Classification Claims
Certain of the Company’s intermodal drayage subsidiaries received notices from the California Labor Commissioner, Division of Labor Standards Enforcement (the “DLSE”), that a total of approximately
150
owner-operators contracted with these subsidiaries filed claims in 2012 with the DLSE in which they assert that they should be classified as employees, rather than independent contractors. These claims seek reimbursement for the owner-operators’ business expenses, including fuel, tractor maintenance and tractor lease payments. After a decision was rendered by a DLSE hearing officer in
seven
of these claims, in 2014, the Company appealed the decision to the California Superior Court, San Diego, where a de novo trial was held on the merits of those claims. On July 17, 2015, the court issued a final statement of decision finding that the
seven
claimants were employees rather than independent contractors and awarding an aggregate of
$2.9 million
plus post-judgment interest and attorneys’ fees to the claimants. The Company exhausted its appeals in this matter and the Superior Court entered final judgment against the Company in January 2018 and that judgment has been paid. Separate decisions were rendered in June 2015 by a DLSE hearing officer in claims involving
five
additional plaintiffs, resulting in an award for the plaintiffs in an aggregate amount of approximately
$0.9 million
, following which the Company appealed the decisions in the U.S. District Court for the Central District of California (“Central Court”). On May 16, 2017, the Central Court issued judgment finding that the
five
claimants were employees rather than independent contractors and awarding an aggregate of approximately
$1.0 million
plus post-judgment interest and attorneys’ fees to the claimants. The Company has appealed this judgment but cannot provide assurance that such appeal will be successful. In addition, separate decisions were rendered in April 2017 by a DLSE hearing officer in claims involving
four
additional plaintiffs, resulting in an award for the plaintiffs in an aggregate amount of approximately
$0.9 million
, which the Company has appealed to the California Superior Court, Long Beach. The remaining DLSE claims (the “Pending DLSE Claims”) have been transferred to California Superior Court in
three
separate actions involving approximately
170
claimants, including the claimants mentioned above who originally filed claims in 2012. In addition, certain of the Company’s intermodal drayage subsidiaries are party to putative class action litigations and other administrative claims in California brought by independent contract carriers who contracted with these subsidiaries. In these litigations, the contract carriers assert that they should be classified as employees, rather than independent contractors. The Company believes that it has adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable relating to the claims referenced above. The Company is unable at this time to estimate the amount of the possible loss or range of loss, if any, in excess of its accrued liability that it may incur as a result of these claims given, among other reasons, that the range of potential loss could be impacted substantially by future rulings by the courts involved, including on the merits of the claims.
Last Mile Logistics Classification Claims
Certain of the Company’s last mile logistics subsidiaries are party to several putative class action litigations brought by independent contract carriers who contracted with these subsidiaries. In these litigations, the contract carriers assert that they should be classified as employees, rather than independent contractors. The particular claims asserted vary from case to case, but the claims generally allege unpaid wages, unpaid overtime, or failure to provide meal and rest periods, and seek reimbursement of the contract carriers’ business expenses. The cases include
four
related matters pending in the Federal District Court, Northern District of California:
Ron Carter, Juan Estrada, Jerry Green, Burl Malmgren, Bill McDonald and Joel Morales v. XPO Logistics, Inc.
, filed in March 2016;
Ramon Garcia v. Macy’s and XPO Logistics Inc.
, filed in July 2016;
Kevin Kramer v. XPO Logistics Inc.
, filed in September 2016; and
Hector Ibanez v. XPO Last Mile, Inc.
, filed in May 2017. The Company believes that it has adequately accrued for the potential impact of loss contingencies relating to the foregoing claims that are probable and reasonably estimable. The Company is unable at this time to estimate the amount of the possible loss or range of loss, if any, in excess of its accrued liability that it may incur as a result of these claims given, among other reasons, that the number and identities of plaintiffs in these lawsuits are uncertain and the range of potential loss could be impacted substantially by future rulings by the courts involved, including on the merits of the claims.
Last Mile TCPA Claims
The Company is a party to a putative class action litigation (
Leung v. XPO Logistics, Inc.
, filed in May 2015 in the U.S. District Court, Illinois (“Illinois Court”)) alleging violations of the Telephone Consumer Protection Act (“TCPA”) related to an automated customer call system used by a last mile logistics business that the Company acquired. The Company has reached an agreement to resolve the
Leung
case, and the Illinois Court has approved the settlement and entered final judgment. The Company has accrued the full amount of the approved settlement, and distribution of the settlement funds began in September 2018.