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XPO > SEC Filings for XPO > Form 10-Q on 1-Aug-2013All Recent SEC Filings

Show all filings for XPO LOGISTICS, INC.

Form 10-Q for XPO LOGISTICS, INC.


1-Aug-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 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; the projected satisfaction of closing conditions for the 3PD Transaction and related financing; the expected closing date for the 3PD Transaction; the expected impact of the 3PD Transaction and related financing, including the expected impact on the Company's results of operations; our ability to raise debt and equity capital; our ability to attract and retain key employees to execute our growth strategy, including retention of 3PD's management team; litigation, including litigation related to misclassification of independent contractors; 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; our ability to retain our and 3PD's largest customers; our ability to successfully integrate 3PD and other acquired businesses; 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 consequences 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, except to the extent required by law.

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.


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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 June 30, 2013, there were no significant changes to our critical accounting policies.

New Pronouncements

No applicable new accounting pronouncements were noted during the period ended June 30, 2013.

Executive Summary

XPO Logistics, Inc., a Delaware corporation, and its subsidiaries (collectively, the "Company", "we", "our" or "us"), is one of the fastest growing providers of non-asset transportation logistics services in North America. We use our relationships with more than 22,000 ground, sea and air carriers to move freight for over 8,500 customers in the manufacturing, industrial, retail, commercial, life sciences and government sectors. As of June 30, 2013, we operated at 62 locations in the United States and Canada: 41 Company-owned branches and 21 agent-owned offices.

We offer our services through three distinct business segments: Freight Brokerage, Expedited Transportation and Freight Forwarding. Our freight brokerage business places shippers' freight with qualified over-the-road carriers. In 2012, XPO Logistics was ranked the 17th largest U.S. freight brokerage firm by Transport Topics. Our expedited transportation business, which is a top five provider of its kind in the U.S., facilitates urgent freight movements by using its network of independent contractors and air carriers. Our freight forwarding business arranges domestic and international shipments using ground, air and ocean transport through a network of Company-owned and agent-owned locations.

In September of 2011, following the equity investment in the Company led by Jacobs Private Equity, LLC, we began to implement a strategy designed to leverage our strengths with the goal of significant long-term growth and value creation.

Our growth strategy has three main components:

Acquisitions. We take a disciplined approach to acquisitions: we look for companies that are highly scalable and are a good strategic fit with our core competency. When we acquire a company, we integrate it with our operations and scale it up by adding salespeople. We put the acquired operations on our technology platform, which connects them to our broader organization, and we give them access to our shared carrier pool. We gain more carriers, customers, lane histories and pricing histories with each acquisition, and in some cases an acquisition adds complementary services. We use these resources Company-wide to buy transportation more efficiently and to cross-sell a more complete supply chain solution to customers. In the past 19 months, we have developed an active pipeline of targets. In 2012, we completed the acquisition of four non-asset based third party logistics companies; we acquired another three companies in the first half of 2013; and on July 12, 2013, we agreed to acquire 3PD Holding, Inc. ("3PD"), a non-asset logistics provider specializing in heavy goods, last-mile logistics. We plan to continue to acquire quality companies that fit our strategy for growth.

Cold-starts. We believe that cold-starts can generate high returns on invested capital because of the relatively low investment required and the large component of variable-based incentive compensation. From December of 2011 through the first quarter of 2013, we opened 18 cold-starts: eight in Freight Brokerage, nine in Freight Forwarding and one in Expedited Transportation. Each of our Freight Brokerage cold-starts is located in a prime area for sales recruitment and is led by a highly experienced branch president. We plan to continue to open cold-start locations where we see the potential for superior returns.

Optimization of operations. We are continuing to optimize our existing operations by growing the sales force at each location, implementing advanced information technology, cross-selling our services and leveraging our shared carrier capacity. We have a disciplined framework of processes in place for the recruiting, training and mentoring of newly hired employees. Once established in our branches, our salespeople reach out to hundreds of thousands of small and medium-sized prospects. In addition, we have a strategic and national accounts team focused on developing business relationships with the largest shippers in North America. Our network is supported by our national operations center in Charlotte, North Carolina, which we opened in March of 2012, and by our information technology. We have a scalable platform in place across the Company, with sales, service, carrier and track-and-trace capabilities, as well as benchmarking and analysis. Most important to our growth strategy, we are developing a culture of passionate, world-class service for customers.


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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.

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 in August 2012. 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              Percent of                             For the Six Months              Percent of
                                                Ended June 30,                  Revenue               Change            Ended June 30,                 Revenue              Change
                                              2013            2012         2013         2012            %             2013           2012         2013         2012            %

Revenue                                    $   137,091      $ 54,540        100.0 %      100.0 %         151.4 %    $ 251,090      $ 99,100        100.0 %      100.0 %        153.4 %
Direct expense
Transportation services                        114,924        42,700         83.8 %       78.3 %         169.1 %      209,804        77,234         83.6 %       77.9 %        171.6 %
Station commissions                              1,992         2,457          1.5 %        4.5 %         -18.9 %        3,700         4,773          1.5 %        4.8 %        -22.5 %
Other direct expense                               835           917          0.6 %        1.7 %          -8.9 %        1,986         1,854          0.8 %        1.9 %          7.1 %

Total direct expense                           117,751        46,074         85.9 %       84.5 %         155.6 %      215,490        83,861         85.8 %       84.6 %        157.0 %

Gross margin                                    19,340         8,466         14.1 %       15.5 %         128.4 %       35,600        15,239         14.2 %       15.4 %        133.6 %

SG&A expense
Salaries & benefits                             20,491         7,263         14.9 %       13.3 %         182.1 %       38,539        13,612         15.3 %       13.7 %        183.1 %
Purchased services                               5,914         1,870          4.3 %        3.4 %         216.3 %        9,729         4,606          3.9 %        4.6 %        111.2 %
Other SG&A expense                               5,198         2,328          3.8 %        4.3 %         123.3 %        9,459         3,974          3.8 %        4.0 %        138.0 %
Depreciation & amortization                      1,752           373          1.3 %        0.7 %         369.7 %        3,255           639          1.3 %        0.6 %        409.4 %

Total SG&A expense                              33,355        11,834         24.3 %       21.7 %         181.9 %       60,982        22,831         24.3 %       23.0 %        167.1 %

Operating loss                                 (14,015 )      (3,368 )      -10.2 %       -6.2 %         316.1 %      (25,382 )      (7,592 )      -10.1 %       -7.7 %        234.3 %

Other (income) expense                             167            26          0.1 %        0.0 %         542.3 %           58             5          0.0 %        0.0 %       1060.0 %
Interest expense                                 3,106             3          2.3 %        0.0 %      103433.3 %        6,170            15          2.5 %        0.0 %      41033.3 %

Loss before income tax                         (17,288 )      (3,397 )      -12.6 %       -6.2 %         408.9 %      (31,610 )      (7,612 )      -12.6 %       -7.7 %        315.3 %
Income tax expense (benefit)                        74         1,780          0.1 %        3.3 %         -95.8 %          296           259          0.1 %        0.3 %         14.3 %

Net loss                                   $   (17,362 )    $ (5,177 )      -12.7 %       -9.5 %         235.4 %    $ (31,906 )    $ (7,871 )      -12.7 %       -7.9 %        305.4 %

Consolidated Results

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Our consolidated revenue for the second quarter of 2013 increased 151.4% to $137.1 million from $54.5 million in the second quarter of 2012. This increase was driven largely by the increased revenues in Freight Brokerage due to the acquisitions of Turbo, Kelron, Continental, Covered Logistics, and Interide Logistics as well as the revenue attributable to the growth of our eight Freight Brokerage cold-start locations, and the acquisition of East Coast 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 Brokerage and Freight Forwarding. We view this operating model as a strategic advantage due to its flexibility, particularly in uncertain economic conditions.

Total gross margin dollars for the second quarter of 2013 increased 128.4% to $19.3 million from $8.5 million in the second quarter of 2012. As a percentage of revenue, gross margin was 14.1% in the second quarter of 2013 as compared to 15.5% in the second quarter of 2012. The decrease in gross margin as a percentage of revenue is attributable primarily to lower margins in our Expedited Transportation segment and increased revenues in our Freight Brokerage segment, which typically experiences lower margins than our other operations.

Selling, general and administrative ("SG&A") expense as a percentage of revenue was 24.3% in the second quarter of 2013, as compared to 21.7% in the second quarter of 2012. SG&A expense increased by $21.5 million in the second quarter of 2013 compared to the second quarter of 2012, due to significant growth initiatives, including seven acquisitions, sales force recruitment, cost associated with our new Freight Brokerage offices, and an increase in Corporate SG&A.

Our effective income tax rates in the second quarter of 2013 and 2012 were 0.4% and 52.4%, respectively. The tax rate for the second quarter of 2013 is due to the effects of recording a tax valuation allowance against the potential income tax benefit. The second quarter of 2012 had additional tax expense due to the initial recording of the valuation allowance to remove previously recorded tax benefits.

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 costs.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Our consolidated revenue for the first six months of 2013 increased 153.4% to $251.1 million from $99.1 million in the first six months of 2012. This increase was driven largely by the increased revenues in Freight Brokerage due to the acquisitions of Turbo, Kelron, Continental, Covered Logistics, and Interide Logistics as well as the revenue attributable to the growth of our eight Freight Brokerage cold-start locations, and the acquisition of East Coast Air Charter.


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Total gross margin dollars for the first six months of 2013 increased 133.6% to $35.6 million from $15.2 million in the first six months of 2012. As a percentage of revenue, gross margin was 14.2% in the first six months of 2013 as compared to 15.4% in the first six months of 2012. The decrease in gross margin as a percentage of revenue is attributable to lower margins in our Expedited Transportation segment and increased revenues in our Freight Brokerage segment, which typically experiences lower margins than our other operations.

SG&A expense as a percentage of revenue was 24.3% in the first six months of 2013, as compared to 23.0% in the first six months of 2012. SG&A expense increased by $38.2 million in the first six months of 2013 compared to the first six months of 2012, due to significant growth initiatives, including seven acquisitions, sales force recruitment, costs associated with our new Freight Brokerage offices, and an increase in Corporate SG&A.

Our effective income tax rates were relatively flat at 0.9% and 3.4% for the first six months of 2013 and 2012 , respectively.

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 costs.

                               Freight Brokerage

                            Summary Financial Table

                                  (Unaudited)

                                 (In thousands)



                                             For the Three Months              Percent of                           For the Six Months              Percent of
                                                Ended June 30,                  Revenue              Change           Ended June 30,                 Revenue              Change
                                              2013            2012         2013         2012           %            2013           2012         2013         2012           %

Revenue                                    $    95,360      $ 13,877        100.0 %      100.0 %       587.2 %    $ 173,590      $ 21,805        100.0 %      100.0 %       696.1 %
Direct expense
Transportation services                         82,705        12,255         86.7 %       88.3 %       574.9 %      150,662        19,160         86.8 %       87.9 %       686.3 %
Other direct expense                                88           101          0.1 %        0.7 %       -12.9 %          295            95          0.2 %        0.4 %       210.5 %

Total direct expense                            82,793        12,356         86.8 %       89.0 %       570.1 %      150,957        19,255         87.0 %       88.3 %       684.0 %

Gross margin                                    12,567         1,521         13.2 %       11.0 %       726.2 %       22,633         2,550         13.0 %       11.7 %       787.6 %

SG&A expense
Salaries & benefits                             12,367         1,572         13.0 %       11.3 %       686.7 %       22,530         2,431         13.0 %       11.1 %       826.8 %
Purchased services                                 979           266          1.0 %        1.9 %       268.0 %        1,793           328          1.0 %        1.5 %       446.6 %
Other SG&A expense                               3,031           432          3.2 %        3.1 %       601.6 %        4,926           606          2.8 %        2.8 %       712.9 %
Depreciation & amortization                      1,180            76          1.2 %        0.5 %      1452.6 %        2,194            96          1.3 %        0.4 %      2185.4 %

Total SG&A expense                              17,557         2,346         18.4 %       16.9 %       648.4 %       31,443         3,461         18.1 %       15.9 %       808.5 %

Operating (loss) income                    $    (4,990 )    $   (825 )       -5.2 %       -5.9 %       504.8 %    $  (8,810 )    $   (911 )       -5.1 %       -4.2 %       867.1 %

Freight Brokerage

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Revenue in our Freight Brokerage segment increased by 587.2% to $95.4 million in the second quarter of 2013 compared to $13.9 million in the second quarter of 2012. Revenue growth was primarily due to the acquisitions of Turbo, Kelron, Covered Logistics, and Interide Logistics, as well as revenue growth from our eight Freight Brokerage cold-start sales locations. Headcount in our Freight Brokerage segment increased to 788 from 92 as of June 30, 2013 and 2012, respectively.

Direct expenses consist primarily of transportation costs paid to the carrier. Freight Brokerage's gross margin dollars increased 726.2% to $12.6 million in the second quarter of 2013 from $1.5 million in the second quarter of 2012. As a percentage of revenue, Freight Brokerage's gross margin was 13.2% in the second quarter of 2013, compared to 11.0% in the second quarter of 2012. The margin improvement is due to the acquisitions in Freight Brokerage as well as improvements in gross margin percentage of our cold starts. SG&A expense increased to $17.6 million in the second quarter of 2013 from $2.3 million in the second quarter of 2012. The increase in SG&A expense was associated with acquisitions, sales force expansion, technology and training. As a percentage of revenue, SG&A expense decreased to 18.4% in the second quarter of 2013 as compared to 16.9% in the second quarter of 2012.

Our Freight Brokerage operations generated an operating loss of $5.0 million in the second quarter of 2013 compared to an operating loss of $0.8 million in the second 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;

Investment in an expanded sales and service workforce;


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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.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Revenue in our Freight Brokerage segment increased by 696.1% to $173.6 million in the first six months of 2013 compared to $21.8 million in the first six months of 2012. Revenue growth was primarily due to the acquisitions of Turbo, Kelron, Continental, Covered Logistics, and Interide Logistics, as well as . . .

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