Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
XPO > SEC Filings for XPO > Form 10-K on 12-Mar-2013All Recent SEC Filings

Show all filings for XPO LOGISTICS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for XPO LOGISTICS, INC.


12-Mar-2013

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with Part I, including matters set forth under Item 1A, "Risk Factors", of this Annual Report, and our audited Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report. The following discussion contains forward-looking statements. You should refer to the "Cautionary Statement Regarding Forward-Looking Statements" set forth in Part I, Item 1A of this Annual Report.


Table of Contents

Executive Summary

XPO Logistics, Inc., a Delaware corporation, and its subsidiaries (collectively, the "Company", "we", "our" or "us"), is a non-asset based transportation services provider. We do not own trucks, airplanes or ships. We act as a middleman between shippers and carriers who outsource their transportation logistics to us as a third-party broker. As of December 31, 2012, we operated at 55 locations: 33 Company-owned branches and 22 agent-owned offices.

Our services are offered through three distinct business segments. The first segment, Freight Brokerage, places shippers' freight with qualified carriers. The second segment, Expedited Transportation, provides urgent freight transportation via independent contractors and air carriers. Our third segment, Freight Forwarding, arranges domestic and international shipments using ground, air and ocean transport through a network of agent-owned and Company-owned locations.

In September 2011, following the equity investment in the Company led by Jacobs Private Equity, LLC, we began to implement a three-pronged strategy to leverage our strengths-including management expertise, operational scale and substantial capital resources-with the goal of significant growth and value creation.

Our growth strategy has three main components:

Acquisitions. During 2012, we acquired the following non-asset based transportation logistics providers:

Turbo Logistics-On October 24, 2012, we purchased substantially all of the assets of Turbo Logistics, Inc. and Turbo Dedicated, Inc. (together, "Turbo");

BirdDog Logistics-On October 1, 2012, we purchased certain assets of BirdDog Logistics, Inc. ("BirdDog");

Kelron Logistics-On August 3, 2012, we purchased all of the outstanding capital stock of Kelron Corporate Services Inc. and certain related entities (collectively, "Kelron"); and

Continental Freight-On May 8, 2012, we purchased all of the outstanding capital stock of Continental Freight Services, Inc. ("Continental").

Cold-starts. We opened 15 cold-starts from September 2011 through December 31, 2012, including eight in our Freight Brokerage business segment. We plan to continue to open cold-start locations with a focus on growing our Freight Brokerage business network.

Optimization of operations. In March 2012, we opened a national operations center in Charlotte, NC-a critical component of our infrastructure. The operations center incorporates shared services for back office functions, and provides centralized carrier procurement as a resource for our brokerage branches.

Convertible Debt Offering

On September 26, 2012, we completed a registered underwritten public offering of 4.50% Convertible Senior Notes due October 1, 2017, in an aggregate principal amount of $125.0 million. On October 17, 2012, the underwriters exercised the overallotment option to purchase $18.8 million additional principal amount of the convertible senior notes. We received $138.5 million in net proceeds after underwriting discounts, commissions and expenses were paid. The convertible senior notes were allocated to long-term debt and equity in the amounts of $106.8 million and $31.7 million, respectively. These amounts are net of debt issuance costs of $4.1 million for debt and $1.2 million for equity.


Table of Contents

We are obligated to pay holders of our 4.5% Convertible Senior Notes interest semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2013. The notes will mature on October 1, 2017 unless earlier converted or repurchased. The conversion rate was initially 60.8467 shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $16.43 per share of common stock) and is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.

Common Stock Offering

On March 20, 2012, we closed a registered underwritten public offering of 9,200,000 shares of common stock (the "Offering"), including 1,200,000 shares issued and sold as a result of the full exercise of the underwriters' overallotment option, at a price of $15.75 per share. We received $137.0 million in net proceeds from the Offering after underwriting discounts and estimated expenses.

Equity Investment

In September 2011, pursuant to the Investment Agreement, we issued, for $75.0 million in cash: (i) an aggregate of 75,000 shares of our Series A Convertible Perpetual Preferred Stock (the "Series A Preferred Stock"), which are initially convertible into an aggregate of 10,714,286 shares of our common stock, and
(ii) warrants initially exercisable for an aggregate of 10,714,286 shares of our common stock at an initial exercise price of $7.00 per common share (the "Warrants"). We refer to this investment as the "Equity Investment." See Note 7 to our audited Consolidated Financial Statements in Item 8 of this Annual Report.

The conversion feature of the Series A Preferred Stock was determined to be a beneficial conversion feature ("BCF") based on the effective initial conversion price and the market value of our common stock at the commitment date for the issuance of the Series A Preferred Stock. Generally accepted accounting principles in the United States ("US GAAP") require that we recognize the BCF related to the Series A Preferred Stock as a discount on the Series A Preferred Stock and amortize such amount as a deemed distribution through the earliest conversion date. The calculated value of the BCF was in excess of the relative fair value of net proceeds allocated to the Series A Preferred Stock. Accordingly, during the third quarter of 2011 we recorded a discount on the Series A Preferred Stock of $44.2 million with immediate recognition of this amount as a deemed distribution because the Series A Preferred Stock is convertible at any time.

Other Reporting Disclosures

This discussion and analysis also refers time to time to our Freight Brokerage international operations. These brokered shipments may originate in either the United States or Canada and are largely attributable to our recent acquisition of Kelron. These services are provided to both U.S. and Canadian customers who primarily pay in their home currency.

This discussion and analysis refers from time to time to Expedited Transportation's international operations. These operations involve the transportation of freight shipments that originate in or are delivered to either Canada or Mexico. These freight shipments either originate in or are delivered to the United States, and therefore only a portion of the freight movement actually takes place in Canada or Mexico. This service is provided to domestic customers who pay primarily in U.S. dollars. We discuss this freight separately because our Expedited Transportation segment has developed an expertise in cross-docking freight at the border through the utilization of Canadian and Mexican carriers, and this portion of our business has seen significant growth.

This discussion and analysis also refers from time to time to our Freight Forwarding international operations. These freight movements also originate in or are delivered to the United States and are primarily paid for in U.S. dollars.


Table of Contents

The expedited transportation industry commonly negotiates both fuel surcharges charged to its customers as well as fuel surcharges paid to its carriers. In our Expedited Transportation segment, fuel surcharges are determined on a negotiated customer-by-customer basis and are primarily based on a fuel matrix based on the Department of Energy fuel price index. Fuel surcharge revenue is charged to our customers to provide for variable costs associated with changing fuel prices. Independent contractors and brokered carriers are responsible for the cost of fuel, and therefore are paid a fuel surcharge by us to offset their variable cost of fuel. The fuel surcharge payment is expensed as incurred and included in our cost of transportation. Because fuel surcharge revenue varies based on negotiated customer rates and the overall mix of business, and because our fuel surcharge expense is applied on a consistent basis, gross margin and our gross margin percentage attributable to fuel surcharges will vary from period to period. The impact of fuel surcharge revenue and expense is discussed within management's discussion and analysis of our Expedited Transportation business unit.

Within our other two business units, Freight Forwarding and Freight Brokerage, fuel charges to our customers are not commonly negotiated and identified separately from total revenue and the associated cost of transportation. Although fuel costs are factored into overall pricing of these services, they are not typically separately identified by carriers and therefore we have not included an analysis of fuel surcharges for these two operating segments. We believe this is a common practice within the freight forwarding and freight brokerage business sectors.

                              XPO Logistics, Inc.

                      Consolidated Statement of Operations

                        For the Year Ended December 31,

                                 (In thousands)



                                                                                          Percent of Revenue
                                          2012           2011          2010         2012         2011         2010
Revenue
Operating revenue                       $ 278,591      $ 177,076     $ 157,987       100.0 %      100.0 %      100.0 %
Direct expense
Transportation services                   224,035        133,007       117,625        80.4 %       75.1 %       74.5 %

Station commissions                         9,321         11,098        10,724         3.3 %        6.3 %        6.8 %

Other direct expense                        4,409          3,193         2,238         1.6 %        1.8 %        1.4 %

Total direct expense                      237,765        147,298       130,587        85.3 %       83.2 %       82.7 %

Gross margin                               40,826         29,778        27,400        14.7 %       16.8 %       17.3 %

SG&A expense
Salaries & benefits                        39,278         16,338        12,039        14.1 %        9.2 %        7.6 %
Purchased services                         15,388          6,733         2,519         5.5 %        3.8 %        1.6 %
Other SG&A expense                         11,616          3,937         3,223         4.2 %        2.2 %        2.0 %
Depreciation & amortization                 2,508          1,046         1,173         0.9 %        0.6 %        0.7 %

Total SG&A expense                         68,790         28,054        18,954        24.7 %       15.8 %       12.0 %

Operating (loss) income                   (27,964 )        1,724         8,446       -10.0 %        1.0 %        5.3 %

Other expense                                 363             56           140         0.1 %        0.0 %        0.1 %
Interest expense                            3,207            191           205         1.2 %        0.1 %        0.1 %

(Loss) income before income tax           (31,534 )        1,477         8,101       -11.3 %        0.8 %        5.1 %
Income tax (benefit) provision            (11,195 )          718         3,213        -4.0 %        0.4 %        2.0 %

Net (loss) income                       $ (20,339 )    $     759     $   4,888        -7.3 %        0.4 %        3.1 %


Table of Contents

Consolidated Results

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Our consolidated revenue for 2012 increased 57.3% to $278.6 million from $177.1 million in 2011. This increase was driven largely by the increased revenues in Freight Brokerage due to the acquisitions of Turbo, BirdDog, Kelron and Continental, as well as the revenue attributable to our eight Brokerage cold-start locations opened since December 2011.

Direct expense is primarily attributable to the cost of procuring freight transportation services for our customers and commissions paid to independent station owners in our freight forwarding business. Our non-asset operating model provides transportation capacity through variable cost third-party transportation arrangements, therefore enabling us to be flexible to adapt to changes in economic or industry conditions. Our primary means of providing capacity are through our base of independent owner operators in Expedited Transportation and our network of independent ground, ocean and air carriers in Freight Forwarding and Freight Brokerage. We view this operating model as a strategic advantage due to its flexibility, particularly in uncertain economic conditions.

Total gross margin dollars for 2012 increased 37.1% to $40.8 million from $29.8 million in 2011. As a percentage of revenue, gross margin was 14.7% in 2012 as compared to 16.8% in 2011. The decrease in gross margin as a percentage of revenue is attributable primarily to increased revenues in our Freight Brokerage segment, which typically experiences lower margins than our other operations. Freight Brokerage's gross margins also have been negatively impacted by our eight cold-start sales offices, which are still in the start-up phase.

Selling, general and administrative ("SG&A") expense as a percentage of revenue was 24.7% in 2012, as compared to 15.8% in 2011. SG&A expense increased by $40.6 million in 2012 compared to 2011, due to significant growth initiatives, including four acquisitions, sales force recruitment, costs associated with our new Freight Brokerage offices, and an increase in Corporate SG&A.

Our effective income tax rates in 2012 and 2011 were (35.5%) and 48.6%, respectively. The significant difference between the tax rates is due to prior period tax charges incurred in 2011.

The reduction in net income was due primarily to higher SG&A expenses associated with significant growth initiatives, including sales force recruitment, costs associated with our new Freight Brokerage offices, and an increase in Corporate SG&A.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

In total, our consolidated revenue in 2011 increased 12.1% to $177.1 million from $158.0 million in 2010. This growth was driven primarily by increased international revenues in our Expedited Transportation unit and continued strong growth in our Freight Brokerage unit.

Total gross margin dollars in 2011 increased 8.7% to $29.8 million as compared to $27.4 million in 2010. As a percentage of revenue, gross margin was 16.8% as compared to 17.3% in 2010. The decrease in gross margin can be attributed primarily to the following items:

International shipments in Expedited Transportation tend to be higher revenue transactions than domestic shipments, but historically have generated a lower gross margin percentage. As international business becomes a larger component of our revenue, we expect to experience continuing decreases in gross margin percentage as our business mix shifts.

Freight Brokerage historically has a lower gross margin percentage compared with Expedited Transportation. As our business mix shifts toward Freight Brokerage in the future, we expect to experience continuing decreases in gross margin percentage.


Table of Contents

SG&A expense as a percentage of revenue was 15.8% in 2011, as compared to 12.0% in 2010. Overall, SG&A expense increased by $9.1 million in 2011 compared to 2010, resulting from an increase of $4.2 million in purchased services, of which approximately $1.0 million represented indirect expenses associated with the Equity Investment and $1.9 million represented recruiting and other costs related to new executive team appointments. Salary and benefit costs increased by $3.1 million related primarily to our investment in additional salespeople at Freight Brokerage and Freight Forwarding and the new executive team appointments, of which $850,000 were one-time guarantees recorded during the fourth quarter of 2011. Additionally, other SG&A costs were up $1.9 million mainly due to equity compensation expense of approximately $0.9 million recorded in the fourth quarter of 2011 related to equity grants for the new executive team.

Our effective income tax rate in 2011 and 2010 was 48.6% and 39.7%, respectively. The increase in the rate in 2011 is due to prior period tax charges incurred in 2011.

The Company finished 2011 with $0.8 million in net income, an 84.5% decrease when compared to $4.9 million in 2010. Investment in the new executive team and corporate infrastructure, which includes payroll, equity compensation and professional fees, and indirect transaction costs related to the Equity Investment contributed to the reduction in net income.

                               Freight Brokerage

                          Statement of Operations Data

                        For the Year Ended December 31,

                                 (In thousands)



                                                                                          Percent of Revenue
                                            2012           2011         2010        2012         2011         2010
Revenue
Operating revenue                         $ 125,121      $ 29,186     $ 19,994       100.0 %      100.0 %      100.0 %
Direct expense
Transportation services                     108,507        24,434       16,675        86.7 %       83.7 %       83.4 %
Other direct expense                            489            55           10         0.4 %        0.2 %        0.1 %

Total direct expense                        108,996        24,489       16,685        87.1 %       83.9 %       83.5 %

Gross margin                                 16,125         4,697        3,309        12.9 %       16.1 %       16.5 %

SG&A expense
Salaries & benefits                          15,170         2,484        1,761        12.1 %        8.5 %        8.8 %
Purchased services                            1,694           148           98         1.4 %        0.5 %        0.5 %
Other SG&A expense                            3,590           716          554         2.9 %        2.5 %        2.8 %
Depreciation & amortization                   1,223            44           31         1.0 %        0.2 %        0.2 %

Total SG&A expense                           21,677         3,392        2,444        17.3 %       11.6 %       12.2 %

Operating (loss) income                      (5,552 )       1,305          865        -4.4 %        4.5 %        4.3 %

Freight Brokerage

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenue in our Freight Brokerage segment increased by 328.7% to $125.1 million in 2012 compared to $29.2 million in fiscal year 2011. Revenue growth was primarily due to the acquisitions of Turbo, BirdDog, Kelron and Continental, as well as an increase in volumes at our eight cold-start sales offices during the year ended December 31, 2012. Year-over-year headcount increased by 560 sales and procurement personnel within Freight Brokerage.

Freight Brokerage's gross margin dollars increased 243.3% to $16.1 million in 2012 from $4.7 million in 2011. As a percentage of revenue, Freight Brokerage's gross margin was 12.9% in 2012, compared to 16.1% in 2011. The decrease in gross margin as a percentage of revenue was due primarily to our eight cold-start sales offices, which are still in the start-up phase.


Table of Contents

SG&A expense increased 536.1% to $21.6 million in 2012 from $3.4 million in 2011. The increase in SG&A expense was associated with the addition of Turbo, Kelron, Continental and BirdDog, as well as investments in sales force recruitment and the opening of new offices.

Our Freight Brokerage operations generated an operating loss of $5.6 million in 2012 compared to operating income of $1.3 million in 2011. The reduction in operating income was attributable to the increase in SG&A expense and the lower gross margin percentage associated with our cold-start sales offices.

Management's growth strategy for Freight Brokerage is based on:

Selective acquisitions of non-asset based freight brokerage firms that would benefit from our scale and potential access to capital;

The opening of new freight brokerage sales offices;

Investment in an expanded sales and service workforce;

Technology investments to improve efficiency in sales, freight tracking and carrier procurement; and

The integration of industry best practices, with specific focus on better leveraging our scale and lowering administrative overhead.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue in our Freight Brokerage segment increased by 46.0% to $29.2 million in 2011 compared to $20.0 million in 2010. Revenue growth was primarily due to the expansion of the Freight Brokerage customer base resulting from an increase in salesperson headcount.

Freight Brokerage's gross margin dollars increased 41.9% to $4.7 million in 2011 from $3.3 million in 2010. As a percentage of revenue, Freight Brokerage gross margin was relatively flat at 16.1% in 2011, compared to 16.5% in 2010.

SG&A expense increased 38.8% to $3.4 million in 2011 from $2.4 million in 2010. The increase in SG&A expense was associated with the increase in salaries and benefits of $0.7 million for full year 2011 as compared to 2010, due primarily to our investments in new salespeople and sales commissions related to the volume growth.

Our Freight Brokerage operations generated operating income of $1.3 million in 2011 compared to operating income of $0.9 million in 2010. The increase in operating income was due to the increased gross margin dollars.


Table of Contents

                            Expedited Transportation

                            Summary Financial Table

                        For the Year Ended December 31,

                                 (In thousands)



                                                                                         Percent of Revenue
                                             2012         2011         2010        2012         2011         2010
Revenue
Operating revenue                          $ 94,008     $ 87,558     $ 76,644       100.0 %      100.0 %      100.0 %
Direct expense
Transportation services                      73,376       66,267       57,129        78.1 %       75.7 %       74.5 %
Other direct expense                          3,738        2,998        2,097         4.0 %        3.4 %        2.7 %

Total direct expense                         77,114       69,265       59,226        82.0 %       79.1 %       77.3 %

Gross margin                                 16,894       18,293       17,418        18.0 %       20.9 %       22.7 %

SG&A expense
Salaries & benefits                           6,613        6,854        7,061         7.0 %        7.8 %        9.2 %
Purchased services                            1,015        1,426        1,249         1.1 %        1.6 %        1.6 %
Other SG&A expense                            2,121        1,411        1,008         2.3 %        1.6 %        1.3 %
Depreciation & amortization                     320          403          494         0.3 %        0.5 %        0.6 %

Total SG&A expense                           10,069       10,094        9,812        10.7 %       11.5 %       12.8 %

Operating income                              6,825        8,199        7,606         7.3 %        9.4 %        9.9 %

Note: Total depreciation and amortization for the Expedited Transportation operating segment, included in both direct expense and SG&A, was $0.5 million, $0.6 million and $0.7 million, for the years ended December 31, 2012, 2011 and 2010, respectively.

Expedited Transportation

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenue in our Expedited Transportation segment increased 7.4% to $94.0 million in 2012 from $87.6 million in 2011. This growth was driven by an increase in temperature control and international revenue as well as an increase in air charter revenue related to a customer project completed in the first quarter of 2012.

During 2012, fuel surcharge revenue represented 14.9% of total Expedited Transportation revenue, compared to 16.4% in 2011.

Direct expenses consist primarily of payments to independent contractors for transportation services, insurance and truck leasing expense. Expedited Transportation gross margin dollars decreased 7.6% to $16.9 million in 2012 from $18.3 million in 2011. As a percentage of revenue, Expedited Transportation gross margin was 18.0% in 2012, compared to 20.9% in 2011. The decrease in gross margin as a percentage of revenue primarily reflects higher rates paid to independent fleet owners and owner-operators, effective March 1, 2012, and an increase in costs associated with fleet recruiting initiatives.

SG&A expense remained flat at $10.1 million in 2012 compared to 2011. As a percentage of revenue, SG&A expense decreased to 10.7% in 2012 compared to 11.5% in 2011.

Operating income decreased to $6.8 million in 2012 compared to $8.2 million in 2011. The decrease in operating income was primarily related to the decrease in gross margin as a percent of revenue and an increase in SG&A, as described above.

Management's growth strategy for our Expedited Transportation segment is based on:

Targeted investments to expand the sales and service workforce, in order to capture key opportunities in specialized areas (e.g., cross-border, refrigeration and air charter);


Table of Contents
An increased focus on carrier recruitment and retention, as well as improved utilization of the current carrier fleet;

Technology upgrades to improve efficiency in sales and carrier procurement; and

Selective acquisitions of non-asset based expedited businesses that would benefit from our scale and potential access to capital.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue in our Expedited Transportation segment increased 14.2% to $87.6 million in 2011 from $76.6 million in 2010. As the international component of our . . .

  Add XPO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for XPO - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.