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XPO > SEC Filings for XPO > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for XPO LOGISTICS, INC.

Form 10-Q for XPO LOGISTICS, INC.


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and other written reports and oral statements we make from time to time contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terms such as "anticipate," "estimate," "believe," "continue," "could," "intend," "may," "plan," "potential," "predict," "should," "will," "expect," "objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target" or the negative of these terms or other comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we


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believe are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference include those discussed elsewhere in this Quarterly Report, the risks discussed in our other filings with the SEC and the following: economic conditions generally; competition; our ability to find suitable acquisition candidates and execute our acquisition strategy; our ability to raise capital; our ability to attract and retain key employees to execute our growth strategy; our ability to develop and implement a suitable information technology system; our ability to maintain positive relationships with our network of third-party transportation providers; litigation; and governmental regulation. All forward-looking statements set forth in this Quarterly Report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequence to or effects on us or our business or operations. Forward-looking statements set forth in this Quarterly Report speak only as of the date hereof and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, changes in expectations or the occurrence of unanticipated events.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our most recent Annual Report on Form 10-K.

Critical Accounting Policies

The preparation of condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions. In certain circumstances, those estimates and assumptions can affect amounts reported in the accompanying unaudited condensed consolidated financial statements. We have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts will be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. Note 1 of the "Notes to Consolidated Financial Statements" in the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2012 includes a summary of our critical accounting policies. For the period ended March 31, 2103, there were no significant changes to our critical accounting policies.

New Pronouncements

No applicable new accounting pronouncements were noted during the period ended March 31, 2013.

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 March 31, 2013, we operated at 59 locations: 37 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.


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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 2013, we acquired the following non-asset based transportation logistics providers:

Covered Logistics & Transportation-On February 26, 2013, we purchased substantially all of the assets of Covered Logistics & Transportation LLC ("Covered Logistics");

East Coast Air Charter-On February 8, 2013, we purchased substantially all of the assets of East Coast Air Charter, Inc. ("XPO Air Charter");

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

Cold-starts. We opened 17 cold-starts from September 2011 through March 31, 2013, 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.

We are obligated to pay holders of our 4.50% 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.


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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.

Other Reporting Disclosures

This discussion and analysis also refers from 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 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.


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                              XPO Logistics, Inc.

                      Consolidated Summary Financial Table

                                  (Unaudited)

                                 (In thousands)



                                           For the Three Months Ended March 31,           Percent of Revenue          Change
                                               2013                     2012              2013           2012            %
Revenue                                  $         113,999         $        44,560          100.0 %       100.0 %        155.8 %
Direct expense
Transportation services                             94,880                  34,534           83.2 %        77.5 %        174.7 %
Station commissions                                  1,708                   2,316            1.5 %         5.2 %        -26.3 %
Other direct expense                                 1,151                     937            1.0 %         2.1 %         22.8 %

Total direct expense                                97,739                  37,787           85.7 %        84.8 %        158.7 %

Gross margin                                        16,260                   6,773           14.3 %        15.2 %        140.1 %

SG&A expense
Salaries & benefits                                 18,048                   6,349           15.8 %        14.2 %        184.3 %
Purchased services                                   3,815                   2,736            3.3 %         6.1 %         39.4 %
Other SG&A expense                                   4,262                   1,646            3.7 %         3.7 %        158.9 %
Depreciation & amortization                          1,502                     266            1.3 %         0.6 %        464.7 %

Total SG&A expense                                  27,627                  10,997           24.2 %        24.7 %        151.2 %

Operating loss                                     (11,367 )                (4,224 )        -10.0 %        -9.5 %        169.1 %

Other (income) expense                                (109 )                   (21 )         -0.1 %         0.0 %        419.0 %
Interest expense                                     3,064                      12            2.7 %         0.0 %      25433.3 %

Loss before income tax                             (14,322 )                (4,215 )        -12.6 %        -9.5 %        239.8 %
Income tax expense (benefit)                           222                  (1,521 )          0.2 %        -3.4 %       -114.6 %

Net loss                                 $         (14,544 )       $        (2,694 )        -12.8 %        -6.0 %        439.9 %

Consolidated Results

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Our consolidated revenue for the first quarter of 2013 increased 155.8% to $114.0 million from $44.6 million in the first quarter of 2012. This increase was driven largely by the increased revenues in Freight Brokerage due to the acquisitions of Turbo, Kelron, Continental, and Covered Logistics as well as the revenue attributable to the growth of our eight Brokerage cold-start locations, and the acquisition of XPO Air Charter.

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 the first quarter of 2013 increased 140.1% to $16.3 million from $6.8 million in the first quarter of 2012. As a percentage of revenue, gross margin was 14.3% in the first quarter of 2013 as compared to 15.2% in the first quarter of 2012. 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, and lower margins in our Expedited Transportation segment.

Selling, general and administrative ("SG&A") expense as a percentage of revenue was 24.2% in the first quarter of 2013, as compared to 24.7% in the first quarter of 2012. SG&A expense increased by $16.6 million in the first quarter of 2013 compared to the first quarter of 2012, due to significant growth initiatives, including six acquisitions, sales force recruitment, costs associated with our new Freight Brokerage offices, and an increase in Corporate SG&A.


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Our effective income tax rates in the first quarter of 2013 and 2012 were 1.6% and (36.1%), respectively. The significant difference between the tax rates is due to the effects of recording a tax valuation allowance against the income tax benefit for the first quarter of 2013.

The increase in net loss 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.

                               Freight Brokerage

                            Summary Financial Table

                                  (Unaudited)

                                 (In thousands)



                                             For the Three Months Ended March 31,             Percent of Revenue          Change
                                                2013                        2012              2013           2012            %
Revenue                                  $           78,230           $          7,928          100.0 %       100.0 %        886.8 %
Direct expense
Transportation services                              67,957                      6,905           86.9 %        87.1 %        884.2 %
Other direct expense                                    207                         (6 )          0.3 %        -0.1 %      -3550.0 %

Total direct expense                                 68,164                      6,899           87.1 %        87.0 %        888.0 %

Gross margin                                         10,066                      1,029           12.9 %        13.0 %        878.2 %

SG&A expense
Salaries & benefits                                  10,163                        859           13.0 %        10.8 %       1083.1 %
Purchased services                                      814                         62            1.0 %         0.8 %       1212.9 %
Other SG&A expense                                    1,895                        174            2.4 %         2.2 %        989.1 %
Depreciation & amortization                           1,014                         20            1.3 %         0.3 %       4970.0 %

Total SG&A expense                                   13,886                      1,115           17.8 %        14.1 %       1145.4 %

Operating (loss) income                  $           (3,820 )         $            (86 )         -4.9 %        -1.1 %       4341.9 %

Freight Brokerage

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenue in our Freight Brokerage segment increased by 886.8% to $78.2 million in the first quarter of 2013 compared to $7.9 million in the first quarter of 2012. Revenue growth was primarily due to the acquisitions of Turbo, Kelron, Continental, and Covered Logistics, as well as revenue growth from our eight cold-start sales locations. Headcount in our Freight Brokerage segment increased to 668 from 40 as of March 31, 2013 and 2012, respectively.

Freight Brokerage's gross margin dollars increased 878.2% to $10.1 million in the first quarter of 2013 from $1.0 million in the first quarter of 2012. As a percentage of revenue, Freight Brokerage's gross margin remained relatively flat at 12.9% in the first quarter of 2013, compared to 13.0% in the first quarter of 2012.

SG&A expense increased to $13.9 million in the first quarter of 2013 from $1.1 million in the first quarter of 2012. As a percentage of revenue, SG&A expense increased to 17.8% in the first quarter of 2013 as compared to 14.1% in the first quarter of 2012. The increase in SG&A expense was associated with sales force expansion, technology development and training.

Our Freight Brokerage operations generated an operating loss of $3.8 million in the first quarter of 2013 compared to an operating loss of $0.1 million in the first quarter of 2012. The increase in operating loss was attributable to the increase in SG&A expense as we continue to invest in sales and procurement personnel to support our growth initiatives.

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;


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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.

                            Expedited Transportation

                            Summary Financial Table

                                  (Unaudited)

                                 (In thousands)



                                            For the Three Months Ended March 31,            Percent of Revenue         Change
                                               2013                       2012              2013           2012           %
Revenue                                 $           23,875         $           22,420         100.0 %       100.0 %        6.5 %
Direct expense
Transportation services                             19,152                     17,362          80.2 %        77.4 %       10.3 %
Other direct expense                                   915                        899           3.8 %         4.0 %        1.8 %

Total direct expense                                20,067                     18,261          84.1 %        81.4 %        9.9 %

Gross margin                                         3,808                      4,159          15.9 %        18.6 %       -8.4 %

SG&A expense
Salaries & benefits                                  1,945                      1,660           8.1 %         7.4 %       17.2 %
Purchased services                                     289                        197           1.2 %         0.9 %       46.7 %
Other SG&A expense                                     604                        429           2.5 %         1.9 %       40.8 %
Depreciation & amortization                            217                         85           0.9 %         0.4 %      155.3 %

Total SG&A expense                                   3,055                      2,371          12.8 %        10.6 %       28.8 %

Operating income                        $              753         $            1,788           3.2 %         8.0 %      -57.9 %

Note: Total depreciation and amortization for the Expedited Transportation operating segment included in both direct expense and SG&A, was $268 and $137 for the three-month periods ended March 31, 2013 and 2012

Expedited Transportation

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenue in our Expedited Transportation segment increased 6.5% to $23.9 million in the first quarter of 2013 from $22.4 million in the first quarter of 2012. This growth was driven by the acquisition of East Coast Air Charter on February 12, 2013.

Direct expenses consist primarily of payments to independent contractors for ground transportation and air charter services, insurance and truck leasing expense. Expedited Transportation gross margin dollars decreased 8.4% to $3.8 million in the first quarter of 2013 from $4.2 million in the first quarter of 2012. As a percentage of revenue, Expedited Transportation gross margin was 15.9% in the first quarter of 2013, compared to 18.6% in the first quarter of 2012. The decrease in gross margin as a percentage of revenue primarily reflects a softer expedited freight environment.

SG&A expense increased 28.8% to $3.1 million in the first quarter of 2013 from $2.4 million in the first quarter of 2012. As a percentage of revenue, SG&A expense increased to 12.8% in the first quarter of 2013 compared to 10.6% in the first quarter of 2012. The increase was due to largely to the addition of East Coast Air Charter and an increase in the number of sales and service personnel since the first quarter of 2012.

Operating income decreased to $0.8 million in the first quarter of 2013 compared to $1.8 million in the first quarter of 2012. 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.


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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);

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.

                               Freight Forwarding

                            Summary Financial Table

                                  (Unaudited)

                                 (In thousands)



                                            For the Three Months Ended March 31,            Percent of Revenue         Change
                                               2013                       2012              2013           2012           %
Revenue                                 $           16,233         $           15,457         100.0 %       100.0 %        5.0 %
Direct expense
Transportation services                             12,110                     11,513          74.6 %        74.5 %        5.2 %
Station commissions                                  1,708                      2,316          10.5 %        15.0 %      -26.3 %
Other direct expense                                    29                         43           0.2 %         0.3 %      -32.6 %

Total direct expense                                13,847                     13,872          85.3 %        89.7 %       -0.2 %

Gross margin                                         2,386                      1,585          14.7 %        10.3 %       50.5 %

SG&A expense
Salaries & benefits                                  1,433                        787           8.8 %         5.1 %       82.1 %
Purchased services                                      90                         41           0.6 %         0.3 %      119.5 %
. . .
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