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XPO > SEC Filings for XPO > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for XPO LOGISTICS, INC.

Form 10-Q for XPO LOGISTICS, INC.


5-Nov-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; our ability to raise debt and equity capital; our ability to attract and retain key employees to execute our growth strategy; 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 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 2 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 September 30, 2013, there were no significant changes to our critical accounting policies.

New Pronouncements

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740):
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update provides guidance pertaining to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists, to resolve diversity in practice. The Update requires that companies present an unrecognized tax benefit as a reduction of a deferred tax asset for a tax loss or credit carryforward on the balance sheet when (a) the tax law requires the company to use the tax loss or credit carryforward to satisfy amounts payable upon disallowance of the tax position; or (b) the tax loss or credit carryforward is available to satisfy amounts payable upon disallowance of the tax position, and the company intends to use the deferred tax asset for that purpose. The guidance in this Update is effective prospectively for fiscal years beginning after December 15, 2013, and interim periods within those fiscal years. Early adoption and retrospective application are permitted. The adoption of the guidance in this Update is not expected to have a material impact on the Company's Consolidated Financial Statements.

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 23,000 ground, sea and air carriers to move freight for over 9,500 customers in the manufacturing, industrial, retail, commercial, life sciences and government sectors. As of September 30, 2013, we operated at 89 locations in the United States and Canada: 69 Company-owned branches and 20 agent-owned offices.

We offer our services through three business segments: Freight Brokerage, Expedited Transportation and Freight Forwarding. Our freight brokerage business arranges delivery of shippers' freight by contracting with qualified third-party-road and, rail 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. Since the beginning of 2012, 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 four companies in the first nine months of 2013, including 3PD, the leading non-asset logistics provider specializing in heavy goods, last-mile delivery logistics, on August 15, 2013. 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 third quarter of 2013, we opened 20 cold-starts: nine in Freight Brokerage, 10 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 or manager. We plan to continue to open cold-start locations where we see the potential for superior returns.


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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 market our services 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.

Common Stock Offerings

On August 13, 2013, we closed a registered underwritten public offering of 9,694,027 shares of common stock, and on August 16, 2013 we closed as part of the same public offering the sale of an additional 1,454,104 shares as a result of the full exercise of the underwriters' overallotment option, in each case at a price of $22.75 per share (together, the "August 2013 Offering"). We received $239.7 million in net proceeds from the August 2013 Offering after underwriting discounts and expenses.

On March 20, 2012, we closed a registered underwritten public offering of 9,200,000 shares of common stock (the "2012 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 2012 Offering after underwriting discounts and estimated expenses.

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.

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                                                       For the Nine Months
                                             Ended September 30,           Percent of Revenue          Change          Ended September 30,           Percent of Revenue          Change
                                             2013            2012          2013           2012            %            2013           2012           2013           2012            %
Revenue                                   $   193,982      $ 70,988          100.0 %       100.0 %        173.3 %    $ 445,071      $ 170,088          100.0 %       100.0 %        161.7 %
Direct expense
Transportation services                       156,446        57,436           80.6 %        80.9 %        172.4 %      366,250        134,670           82.3 %        79.2 %        172.0 %
Station commissions                             1,706         2,428            0.9 %         3.4 %        -29.7 %        5,407          7,201            1.2 %         4.2 %        -24.9 %
Other direct expense                              995         1,200            0.5 %         1.7 %        -17.1 %        2,979          3,054            0.7 %         1.8 %         -2.5 %

Total direct expense                          159,147        61,064           82.0 %        86.0 %        160.6 %      374,636        144,925           84.2 %        85.2 %        158.5 %

Gross margin                                   34,835         9,924           18.0 %        14.0 %        251.0 %       70,435         25,163           15.8 %        14.8 %        179.9 %

SG&A expense
Salaries & benefits                            27,065         8,936           14.0 %        12.6 %        202.9 %       65,607         20,282           14.7 %        11.9 %        223.5 %
Purchased services                              8,311         5,177            4.3 %         7.3 %         60.5 %       18,040          9,783            4.1 %         5.8 %         84.4 %
Other SG&A expense                              9,521         4,421            4.9 %         6.2 %        115.4 %       18,978         10,661            4.3 %         6.3 %         78.0 %
Depreciation and amortization                   8,357           670            4.3 %         0.9 %       1147.3 %       11,611          1,309            2.6 %         0.8 %        787.0 %

Total SG&A expense                             53,254        19,204           27.5 %        27.0 %        177.3 %      114,236         42,035           25.7 %        24.8 %        171.8 %

Operating loss                                (18,419 )      (9,280 )         -9.5 %       -13.0 %         98.5 %      (43,801 )      (16,872 )         -9.9 %       -10.0 %        159.6 %

Other expense                                     235           314            0.1 %         0.4 %        -25.2 %          294            319            0.1 %         0.2 %         -7.8 %
Interest expense                                6,415            15            3.3 %         0.0 %      42666.7 %       12,585             30            2.8 %         0.0 %      41850.0 %

Loss before income tax                        (25,069 )      (9,609 )        -12.9 %       -13.4 %        160.9 %      (56,680 )      (17,221 )        -12.8 %       -10.2 %        229.1 %
Income tax benefit                            (19,044 )      (6,460 )         -9.8 %        -9.1 %        194.8 %      (18,748 )       (6,201 )         -4.2 %        -3.6 %        202.3 %

Net loss                                  $    (6,025 )    $ (3,149 )         -3.1 %        -4.3 %         91.3 %    $ (37,932 )    $ (11,020 )         -8.6 %        -6.6 %        244.2 %

Consolidated Results

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

Our consolidated revenue for the third quarter of 2013 increased 173.3% to $194.0 million from $71.0 million in the third quarter of 2012. This increase was driven largely by the increased revenues in Freight Brokerage due to the acquisitions of 3PD, Turbo, Covered and Interide as well as the revenue attributable to the growth of our Freight Brokerage cold-start locations, and the acquisition of East Coast Air Charter in our Expedited Transportation segment.

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 and contract carriers in Expedited Transportation and our network of independent truck, rail, 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 third quarter of 2013 increased 251.0% to $34.8 million from $9.9 million in the third quarter of 2012. As a percentage of revenue, gross margin was 18.0% in the third quarter of 2013 as compared to 14.0% in the third quarter of 2012. The increase in gross margin as a percentage of revenue is attributable to an increase in gross margin percentage across all of our segments.

Selling, general and administrative ("SG&A") expense as a percentage of revenue remained relatively flat at 27.5% in the third quarter of 2013 as compared to 27.0% in the third quarter of 2012. SG&A expense increased by $34.1 million in the third quarter of 2013 compared to the third quarter of 2012, due to significant growth initiatives, including eight acquisitions, sales force recruitment, costs associated with our new Freight Brokerage offices, and an increase in Corporate SG&A. SG&A expense during the quarter also included the accelerated amortization of $3.1 million in indefinite-lived intangible assets related to the Concert Group Logistics ("CGL") trade name based on the reduction in remaining useful life as a result of the name change of the business to XPO Global Logistics.

Interest expense increased by $6.4 million mainly due to $3.1 million of interest on the convertible senior notes and an undrawn debt commitment fee of $3.0 million in relation to our acquisition of 3PD.

Our effective income tax rates in the third quarter of 2013 and 2012 were (76.0%) and (67.2%), respectively. The tax rate for the third quarter of 2013 is due to the release of the previously recorded valuation allowance against the potential income tax benefit as well as recognition of the income tax benefit on the operating loss of the third quarter. The acquisition of 3PD during the three months ended September 30, 2013 created a deferred tax liability which allowed the Company to remove the valuation allowance and recognize a significant portion of the deferred tax assets. The tax rate for the third quarter of 2012 reflected the release of the valuation allowance previously as a result of the deferred tax liability recorded in conjunction with the issuance of our convertible senior notes during the three months ended September 30, 2012.

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. Additionally, the Company incurred higher interest expense and recorded the accelerated amortization of the CGL trade name indefinite-lived intangible assets.


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Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Our consolidated revenue for the first nine months of 2013 increased 161.7% to $445.1 million from $170.1 million in the first nine months of 2012. This increase was driven largely by the increased revenues in Freight Brokerage due to the acquisitions of Turbo, 3PD, Covered and Interide, 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.

Total gross margin dollars for the first nine months of 2013 increased 179.9% to $70.4 million from $25.2 million in the first nine months of 2012. As a percentage of revenue, gross margin was 15.8% in the first nine months of 2013 as compared to 14.8% in the first nine months of 2012. The increase in gross margin as a percentage of revenue is attributable to the acquisitions in Freight Brokerage as well as improvements in gross margin percentage at our cold starts and Freight Forwarding.

SG&A expense as a percentage of revenue was 25.7% in the first nine months of 2013, as compared to 24.8% in the first nine months of 2012. SG&A expense increased by $72.2 million in the first nine months of 2013 compared to the first nine months of 2012, due to significant growth initiatives, including eight acquisitions, sales force recruitment, costs associated with our new Freight Brokerage offices, and an increase in Corporate SG&A.

Interest expense increased by $12.6 million mainly due to $9.3 million of interest on the convertible senior notes and an undrawn debt commitment fee of $3.0 million in relation to our acquisition of 3PD.

Our effective income tax rates were (33.1%) and (36.0%) for the first nine months of 2013 and 2012, respectively. Both the first nine months of 2013 and 2012 included the recognition of a tax benefit due to the net operating losses incurred. The difference in the income tax rate for 2013 relates to the recording of tax expense in certain state and foreign jurisdictions.

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. Additionally, the Company incurred higher interest expense and recorded the accelerated amortization of the CGL trade name indefinite-lived intangible assets.

                               Freight Brokerage

                            Summary Financial Table

                                  (Unaudited)

                                 (In thousands)



                                             For the Three Months                                                      For the Nine Months
                                              Ended September 30,           Percent of Revenue          Change         Ended September 30,           Percent of Revenue          Change
                                              2013            2012          2013           2012           %             2013           2012          2013           2012           %
Revenue                                    $   152,616      $ 32,169          100.0 %       100.0 %       374.4 %    $  326,206      $ 53,974          100.0 %       100.0 %       504.4 %
Direct expense
Transportation services                        124,804        27,966           81.8 %        86.9 %       346.3 %       275,466        47,128           84.4 %        87.3 %       484.5 %
Other direct expense                               162           152            0.1 %         0.5 %         6.6 %           457           244            0.1 %         0.5 %        87.3 %

Total direct expense                           124,966        28,118           81.9 %        87.4 %       344.4 %       275,923        47,372           84.5 %        87.8 %       482.5 %

Gross margin                                    27,650         4,051           18.1 %        12.6 %       582.5 %        50,283         6,602           15.5 %        12.2 %       661.6 %

SG&A expense
Salaries & benefits                             17,559         3,961           11.5 %        12.3 %       343.3 %        40,089         6,392           12.3 %        11.8 %       527.2 %
Purchased services                               2,269           694            1.5 %         2.2 %       226.9 %         4,062         1,022            1.2 %         1.9 %       297.5 %
Other SG&A expense                               6,626         1,248            4.3 %         3.9 %       430.9 %        11,551         1,857            3.5 %         3.4 %       522.0 %
Depreciation and amortization                    4,611           317            3.0 %         1.0 %      1354.6 %         6,805           413            2.1 %         0.8 %      1547.7 %

Total SG&A expense                              31,065         6,220           20.3 %        19.4 %       399.4 %        62,507         9,684           19.1 %        17.9 %       545.5 %

Operating loss                             $    (3,415 )    $ (2,169 )         -2.2 %        -6.8 %        57.4 %    $  (12,224 )    $ (3,082 )         -3.6 %        -5.7 %       296.6 %
. . .
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