10-Q 1 xpo2019q110-q.htm XPO 2019 Q1 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
Form 10-Q
___________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________to____________
Commission File Number: 001-32172
_______________________________________________________
xpo_logo2019.jpg
XPO Logistics, Inc.
(Exact name of registrant as specified in its charter)
_______________________________________________________
Delaware
 
03-0450326
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Five American Lane
Greenwich, CT
 
06831
(Address of principal executive offices)
 
(Zip Code)
(855) 976-6951
(Registrant’s telephone number, including area code)
_______________________________________________________
Securities registered or to be registered pursuant to section 12(b) of the Act.
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common stock, par value $0.001 per share
 
XPO
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
Emerging growth company
¨
 
 
 
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of April 30, 2019, there were 91,954,738 shares of the registrant’s common stock, par value $0.001 per share, outstanding.



XPO Logistics, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2019
Table of Contents
 
 
Page No.
 
 
 



Part I—Financial Information
Item 1. Financial Statements.
XPO Logistics, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
March 31,
 
December 31,
(In millions, except per share data)
 
2019
 
2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
376

 
$
502

Accounts receivable, net of allowances of $55 and $52, respectively
 
2,753

 
2,596

Other current assets
 
554

 
590

Total current assets
 
3,683

 
3,688

Property and equipment, net of $1,709 and $1,585 in accumulated depreciation, respectively
 
2,559

 
2,605

Operating lease assets
 
2,047

 

Goodwill
 
4,443

 
4,467

Identifiable intangible assets, net of $736 and $706 in accumulated amortization, respectively
 
1,204

 
1,253

Other long-term assets
 
260

 
257

Total long-term assets
 
10,513

 
8,582

Total assets
 
$
14,196

 
$
12,270

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
1,188

 
$
1,258

Accrued expenses
 
1,507

 
1,480

Short-term borrowings and current maturities of long-term debt
 
114

 
367

Short-term operating lease liabilities
 
448

 

Other current liabilities
 
184

 
208

Total current liabilities
 
3,441

 
3,313

Long-term debt
 
5,362

 
3,902

Deferred tax liability
 
442

 
444

Employee benefit obligations
 
145

 
153

Operating lease liabilities
 
1,586

 

Other long-term liabilities
 
387

 
488

Total long-term liabilities
 
7,922

 
4,987

Stockholders’ equity:
 
 
 
 
Convertible perpetual preferred stock, $0.001 par value; 10 shares authorized; 0.07 of Series A shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
 
41

 
41

Common stock, $0.001 par value; 300 shares authorized; 93 and 116 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
 

 

Additional paid-in capital
 
2,122

 
3,311

Retained earnings
 
428

 
377

Accumulated other comprehensive loss
 
(153
)
 
(154
)
Total stockholders’ equity before noncontrolling interests
 
2,438

 
3,575

Noncontrolling interests
 
395

 
395

Total equity
 
2,833

 
3,970

Total liabilities and equity
 
$
14,196

 
$
12,270

See accompanying notes to condensed consolidated financial statements.


1


XPO Logistics, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended March 31,
(In millions, except per share data)
 
2019
 
2018
Revenue
 
$
4,120

 
$
4,192

Operating expenses
 
 
 
 
Cost of transportation and services
 
2,096

 
2,225

Direct operating expense
 
1,406

 
1,376

Sales, general and administrative expense
 
486

 
450

Total operating expenses
 
3,988

 
4,051

Operating income
 
132

 
141

Other expense (income)
 
(17
)
 
(19
)
Foreign currency loss
 
2

 
12

Debt extinguishment loss
 
5

 
10

Interest expense
 
71

 
59

Income before income tax provision
 
71

 
79

Income tax provision
 
19

 

Net income
 
52

 
79

Net income attributable to noncontrolling interests
 
(5
)
 
(6
)
Net income attributable to XPO
 
$
47

 
$
73

 
 
 
 
 
Earnings per share data:
 
 
 
 
Net income attributable to common shareholders
 
$
43

 
$
67

 
 
 
 
 
Basic earnings per share
 
$
0.40

 
$
0.56

Diluted earnings per share
 
$
0.37

 
$
0.50

 
 
 
 
 
Weighted-average common shares outstanding
 
 
 
 
Basic weighted-average common shares outstanding
 
107

 
120

Diluted weighted-average common shares outstanding
 
117

 
133

See accompanying notes to condensed consolidated financial statements.


2


XPO Logistics, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended March 31,
(In millions)
 
2019
 
2018
Net income
 
$
52

 
$
79

 
 
 
 
 
Other comprehensive (loss) income, net of tax
 
 
 
 
Foreign currency translation (loss) gain, net of tax effect of $(6) and $18
 
$
(1
)
 
$
45

Unrealized loss on financial assets/liabilities designated as hedging instruments, net of tax effect of $1 and $(4)
 
(3
)
 

Other comprehensive (loss) income
 
(4
)
 
45

Comprehensive income
 
$
48

 
$
124

Less: Comprehensive income attributable to noncontrolling interests
 

 
18

Comprehensive income attributable to XPO
 
$
48

 
$
106

See accompanying notes to condensed consolidated financial statements.


3


XPO Logistics, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended March 31,
(In millions)
 
2019
 
2018
Operating activities
 
 
 
 
Net income
 
$
52

 
$
79

Adjustments to reconcile net income to net cash from operating activities
 
 
 
 
Depreciation and amortization
 
180

 
171

Stock compensation expense
 
13

 
22

Accretion of debt
 
5

 
4

Deferred tax (benefit) expense
 
(5
)
 
7

Debt extinguishment loss
 
5

 
10

Unrealized loss on foreign currency option and forward contracts
 
2

 
4

Gains on sale of property and equipment
 
(21
)
 

Other
 
13

 
(28
)
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(246
)
 
(100
)
Other assets
 
(30
)
 
(90
)
Accounts payable
 
(57
)
 
(55
)
Accrued expenses and other liabilities
 
(7
)
 
(43
)
Net cash used in operating activities
 
(96
)
 
(19
)
Investing activities
 
 
 
 
Payment for purchases of property and equipment
 
(118
)
 
(142
)
Proceeds from sale of property and equipment
 
47

 
10

Cash collected on deferred purchase price receivable
 
71

 

Net cash used in investing activities
 

 
(132
)
Financing activities
 
 
 
 
Proceeds from issuance of debt
 
1,751

 
905

Repurchase of debt
 

 
(812
)
Proceeds from borrowings on ABL facility
 
1,075

 
390

Repayment of borrowings on ABL facility
 
(1,075
)
 
(330
)
Repayment of long-term debt and capital leases
 
(534
)
 
(37
)
Payment for debt issuance costs
 
(24
)
 
(6
)
Repurchase of common stock
 
(1,227
)
 

Change in bank overdrafts
 
6

 
56

Payment for tax withholdings for restricted shares
 
(2
)
 
(40
)
Dividends paid
 
(1
)
 
(1
)
Other
 
2

 
1

Net cash (used in) provided by financing activities
 
(29
)
 
126

Effect of exchange rates on cash, cash equivalents and restricted cash
 

 
8

Net decrease in cash, cash equivalents and restricted cash
 
(125
)
 
(17
)
Cash, cash equivalents and restricted cash, beginning of period
 
514

 
449

Cash, cash equivalents and restricted cash, end of period
 
$
389

 
$
432

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid for interest
 
$
49

 
$
43

Cash paid for income taxes
 
$
8

 
$
3

See accompanying notes to condensed consolidated financial statements.

4


XPO Logistics, Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
 
 
Series A Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
(Shares in thousands, dollars in millions)
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total XPO Stockholders' Equity
 
Non-controlling Interests
 
Total Equity
Balance as of December 31, 2018
 
72

 
$
41

 
115,683

 
$

 
$
3,311

 
$
377

 
$
(154
)
 
$
3,575

 
$
395

 
$
3,970

Net income
 

 

 

 

 

 
47

 

 
47

 
5

 
52

Other comprehensive income (loss)
 

 

 

 

 

 

 
1

 
1

 
(5
)
 
(4
)
Exercise and vesting of stock compensation awards
 

 

 
94

 

 

 

 

 

 

 

Tax withholdings related to vesting of stock compensation awards
 

 

 

 

 
(2
)
 

 

 
(2
)
 

 
(2
)
Retirement of common stock
 

 

 
(22,570
)
 

 
(1,195
)
 

 

 
(1,195
)
 

 
(1,195
)
Dividend declared ($10.00 per share)
 

 

 

 

 

 
(1
)
 

 
(1
)
 

 
(1
)
Stock compensation expense
 

 

 

 

 
8

 

 

 
8

 

 
8

Adoption of new accounting standard
 

 

 

 

 

 
6

 

 
6

 

 
6

Other
 

 

 

 

 

 
(1
)
 

 
(1
)
 

 
(1
)
Balance as of March 31, 2019
 
72

 
$
41

 
93,207

 
$

 
$
2,122

 
$
428

 
$
(153
)
 
$
2,438

 
$
395

 
$
2,833

 
 
Series A Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
(Shares in thousands, dollars in millions)
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-In Capital
 
(Accumulated Deficit)/Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total XPO Stockholders' Equity
 
Non-controlling Interests
 
Total Equity
Balance as of December 31, 2017
 
72

 
$
41

 
119,920

 
$

 
$
3,590

 
$
(43
)
 
$
16

 
$
3,604

 
$
406

 
$
4,010

Net income
 

 

 

 

 

 
73

 

 
73

 
6

 
79

Other comprehensive income
 

 

 

 

 

 

 
33

 
33

 
12

 
45

Exercise and vesting of stock compensation awards
 

 

 
678

 

 
1

 

 

 
1

 

 
1

Tax withholdings related to vesting of stock compensation awards
 

 

 

 

 
(40
)
 

 

 
(40
)
 

 
(40
)
Dividend declared ($10.00 per share)
 

 

 

 

 

 
(1
)
 

 
(1
)
 

 
(1
)
Stock compensation expense
 

 

 

 

 
7

 

 

 
7

 

 
7

Other
 

 

 

 

 

 
4

 

 
4

 

 
4

Balance as of March 31, 2018
 
72

 
$
41

 
120,598

 
$

 
$
3,558

 
$
33

 
$
49

 
$
3,681

 
$
424

 
$
4,105

See accompanying notes to condensed consolidated financial statements.

5


XPO Logistics, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization, Description of Business and Basis of Presentation
XPO Logistics, Inc., together with its subsidiaries (“XPO,” “XPO Logistics” or the “Company”), is a top ten global provider of cutting-edge supply chain solutions to the most successful companies in the world. XPO uses its integrated network of people, technology and physical assets to help customers manage their goods most efficiently throughout their supply chains.
The Company has two reportable segments: Transportation and Logistics. Within each segment, the Company has robust service offerings that are positioned to capitalize on fast-growing areas of customer demand. See Note 2—Segment Reporting for further information on the Company’s operations.
The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in its annual report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”), except as described herein, and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the 2018 Form 10-K.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of financial condition, operating results and cash flows for the interim periods presented, have been made. Interim results of operations are not necessarily indicative of full year results.
Restricted Cash
At March 31, 2019 and December 31, 2018, the total amount of restricted cash included in Other long-term assets on the Condensed Consolidated Balance Sheets was $13 million and $12 million, respectively.
Receivables Securitization and Factoring
The Company uses trade accounts receivables securitization and factoring programs in the normal course of business to help manage its cash flows. The following table provides information related to our receivables securitization and factoring programs for the quarters ended:
 
 
March 31,
 
March 31,
(In millions)
 
2019
 
2018
Securitization program
 
 
 
 
Receivables sold
 
$
323

 
$

Cash consideration
 
260

 

Deferred purchase price
 
63

 

 
 
 
 
 
Factoring programs
 
 
 
 
Receivables sold
 
184

 
141

Cash consideration
 
183

 
141

In addition to the cash consideration referenced above, the Company received $71 million in the first quarter of 2019 related to the realization of cash on a deferred purchase price receivable. This amount is reflected as cash collected on deferred purchase price receivable within Net cash used in investing activities. See Note 7—Debt for additional information related to the Company’s receivables securitization borrowing program.


6


Fair Value Measurements
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and classifies the inputs used to measure fair value into the following hierarchy:
Level 1—Quoted prices for identical instruments in active markets;
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and
Level 3—Valuations based on inputs that are unobservable, generally utilizing pricing models or other valuation techniques that reflect management’s judgment and estimates.
The fair value estimates are based upon certain market assumptions and information available to management. The carrying values of cash and cash equivalents, accounts receivable, deferred purchase price related to accounts receivable sold, accounts payable, accrued expenses and current maturities of long-term debt approximated their fair values at March 31, 2019 and December 31, 2018 due to their short-term nature or because they were receivable or payable on demand. The Level 1 cash equivalents include money market funds valued using quoted prices in active markets. The Level 2 cash equivalents include short-term investments valued using published interest rates for instruments with similar terms and maturities. For information regarding the fair value hierarchy of the Company’s derivative instruments and financial liabilities, refer to Note 6—Derivative Instruments and Note 7—Debt, respectively.
The following table summarizes the fair value hierarchy of cash equivalents:
(In millions)
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
March 31, 2019
 
$
171

 
$
171

 
$
168

 
$
3

December 31, 2018
 
237

 
237

 
236

 
1

Adoption of New Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize on its Condensed Consolidated Balance Sheets the assets and liabilities that arise from leases, including operating leases. Under the new requirements, a lessee recognizes in the balance sheet the right-of-use asset, representing the right to use the underlying asset, and the lease liability, representing the present value of future lease payments.
The Company utilized a comprehensive approach to assess the impact of Topic 842 on its financial statements and related disclosures. In particular, the Company completed a comprehensive review of its lease portfolio and enhanced its internal controls, including those related to the identification, measurement and disclosure of its lease portfolio. In addition, the Company implemented a new software solution to facilitate compliance with the new guidance. For further information on the Company’s leases, refer to Note 5—Leases.
Accounting Pronouncements Issued but Not Yet Effective
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU amends the current incurred losses impairment method with a method that reflects expected credit losses on certain types of financial instruments, including trade receivables. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period; however, early adoption is permitted. While the Company is currently evaluating the impact of this standard on its consolidated financial statements, it believes it may impact the allowance for doubtful accounts on trade accounts receivable as credit losses may be recognized earlier under the expected loss model.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a


7


Service Contract.” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Under the guidance, any capitalized implementation costs would be included in prepaid expenses, amortized over the term of the hosting arrangement on a straight-line basis and presented in the same line items in the Consolidated Statement of Income as the expense for fees of the associated hosting arrangements. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period, however, early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
2. Segment Reporting
The Company is organized into two reportable segments: Transportation and Logistics.
In the Transportation segment, the Company provides multiple services to facilitate movements of raw materials, parts and finished goods. The Company accomplishes this by using its proprietary technology, third-party independent carriers and Company-owned transportation assets and service centers. XPO’s transportation services include: freight brokerage, last mile, less-than-truckload (“LTL”), full truckload, global forwarding and managed transportation. Freight brokerage, last mile, global forwarding and managed transportation are all non-asset or asset-light operations; LTL and full truckload are primarily asset-based operations.
In the Logistics segment, which we also refer to as supply chain, the Company provides differentiated and data-intensive contract logistics services for customers, including value-added warehousing, distribution and inventory management, e-commerce fulfillment, cold chain solutions, reverse logistics, packaging and labeling, factory support, aftermarket support and order personalization services. In addition, the Logistics segment provides highly engineered, customized solutions and supply chain optimization services, such as volume flow management, predictive analytics and advanced automation.
Certain of the Company’s operating units provide services to other Company operating units outside of their reportable segment. Billings for such services are based on negotiated rates and are reflected as revenue of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenues and expenses are eliminated in the Company’s consolidated results.
Corporate includes corporate headquarters costs for executive officers and certain legal and financial functions, as well as certain other costs and credits not attributed to the Company’s core business. These costs and credits are not allocated to the business segments.
The Company’s chief operating decision maker (“CODM”) regularly reviews financial information at the reporting segment level in order to make decisions about resources to be allocated to the segments and to assess their performance. Segment results that are reported to the CODM include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis. Asset information by segment is not provided to the Company’s CODM, as the majority of the Company’s assets are managed at the corporate level.
The Company evaluates performance based on the various financial measures of its two reporting segments. The following table shows selected financial data for the three months ended March 31, 2019 and 2018:
(In millions)
 
Transportation
 
Logistics
 
Corporate
 
Eliminations
 
Total
Three months ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
2,659

 
$
1,494

 
$

 
$
(33
)
 
$
4,120

Operating income (loss)
 
128

 
46

 
(42
)
 

 
132

Depreciation and amortization
 
116

 
61

 
3

 

 
180

 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
2,774

 
$
1,448

 
$

 
$
(30
)
 
$
4,192

Operating income (loss)
 
139

 
48

 
(46
)
 

 
141

Depreciation and amortization
 
114

 
55

 
2

 

 
171



8


3. Revenue Recognition
Disaggregation of Revenues
The Company disaggregates its revenue by geographic area and service offering. The following tables present the Company’s revenue disaggregated by geographic area based on sales office location:
 
 
Three Months Ended March 31, 2019
(In millions)
 
Transportation
 
Logistics
 
Eliminations
 
Total
Revenue
 
 
 
 
 
 
 
 
United States
 
$
1,836

 
$
557

 
$
(5
)
 
$
2,388

North America (excluding United States)
 
67

 
18

 

 
85

France
 
364

 
169

 
(5
)
 
528

United Kingdom
 
188

 
335

 
(18
)
 
505

Europe (excluding France and United Kingdom)
 
201

 
392

 
(4
)
 
589

Other
 
3

 
23

 
(1
)
 
25

Total
 
$
2,659

 
$
1,494

 
$
(33
)
 
$
4,120

 
 
Three Months Ended March 31, 2018
(In millions)
 
Transportation
 
Logistics
 
Eliminations
 
Total
Revenue
 
 
 
 
 
 
 
 
United States
 
$
1,954

 
$
502

 
$
(5
)
 
$
2,451

North America (excluding United States)
 
62

 
13

 

 
75

France
 
389

 
179

 
(4
)
 
564

United Kingdom
 
170

 
339

 
(16
)
 
493

Europe (excluding France and United Kingdom)
 
196

 
390

 
(4
)
 
582

Other
 
3

 
25

 
(1
)
 
27

Total
 
$
2,774

 
$
1,448

 
$
(30
)
 
$
4,192

The following table presents the Company’s revenue disaggregated by service offering:
 
 
Three Months Ended March 31,
(In millions)
 
2019
 
2018
Transportation:
 
 
 
 
Freight brokerage and truckload
 
$
1,092

 
$
1,179

LTL
 
1,179

 
1,173

Last mile (1)
 
224

 
238

Managed transportation
 
124

 
137

Global forwarding
 
77

 
82

Transportation eliminations
 
(37
)
 
(35
)
Total Transportation segment revenue
 
2,659

 
2,774

Total Logistics segment revenue
 
1,494

 
1,448

Intersegment eliminations
 
(33
)
 
(30
)
Total revenue
 
$
4,120

 
$
4,192

(1)
Comprised of the Company’s North American last mile operations.


9


Transaction Price Allocated to Remaining Performance Obligation
The Company’s remaining performance obligation represents the aggregate amount of transaction price yet to be recognized as of the end of the reporting period. As permitted in determining the remaining performance obligation, the Company omits obligations that either: (i) have original expected durations of one year or less, or (ii) contain variable consideration. On March 31, 2019, the fixed consideration component of the Company’s remaining performance obligation was approximately $1.6 billion, of which the Company expects to recognize approximately 80% over the next three years and the remainder thereafter. Most of the remaining performance obligation relates to the Logistics reportable segment. The Company’s remaining performance obligations relate to variable consideration and will be satisfied over the remaining term of the contracts based on the volume of services provided. Remaining performance obligations are based on estimates made at a point in time and actual amounts may differ from these estimates due to changes in foreign currency exchange rates, contract revisions or terminations.
4. Restructuring Charges
The Company engages in restructuring actions as part of its ongoing efforts to best utilize its resources and infrastructure. In the first quarter of 2019, management approved restructuring plans that included severance and facility-related costs. A portion of the first quarter charge related to the Company’s largest customer downsizing its business. The following table sets forth the restructuring-related activity:
 
 
 
 
Three Months Ended March 31, 2019
 
 
(In millions)
 
Reserve Balance as of December 31, 2018
 
Charges Incurred
 
Payments
 
Foreign Exchange and Other
 
Reserve Balance as of March 31, 2019
Severance:
 
 
 
 
 
 
 
 
 
 
Transportation
 
$
9

 
$
9

 
$
(7
)
 
$
1

 
$
12

Logistics
 
5

 
1

 
(1
)
 
(1
)
 
4

Corporate
 
2

 

 
(1
)
 
1

 
2

Total severance
 
16

 
10

 
(9
)
 
1

 
18

Facilities:
 
 
 
 
 
 
 
 
 
 
Transportation
 

 
3

 

 

 
3

Total
 
$
16

 
$
13

 
$
(9
)
 
$
1

 
$
21

With respect to the $13 million charge taken in the first quarter of 2019, $3 million was recorded in Cost of transportation and services and $10 million was recorded in Sales, general and administrative expense in the Condensed Consolidated Statements of Income. The Company expects that the majority of the cash payments related to this charge will be made within twelve months.
5. Leases
Adoption of Topic 842, “Leases”
On January 1, 2019, the Company adopted Topic 842 prospectively through a cumulative-effect adjustment with no restatement of prior period financial statements. Upon adoption, the Company elected the package of practical expedients to retain the lease identification, classification and initial direct costs for existing leases. Additionally, the Company elected to not recognize on the Consolidated Balance Sheets any lease with an initial term of 12 months or less and to not separate lease and non-lease components within a contract. Adoption of the new standard as of January 1, 2019 resulted in the recognition of $2.1 billion of Operating lease assets and liabilities on the Condensed Consolidated Balance Sheets, as well as an increase to Retained earnings of $6 million related to a deferred gain from a prior sale-leaseback transaction. The adoption of Topic 842 did not have a material impact on the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows.
Nature of Leases
Most of the Company’s leases are comprised of real estate leases. In addition, the Company leases trucks, trailers, containers and material handling equipment. Operating lease right-of-use assets and liabilities are recognized at the


10


lease commencement date based on the estimated present value of the lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, incremental borrowing rates were used based on the Company’s outstanding debt to determine the present value of future lease payments. The Company includes options to extend or terminate the lease in the lease term when the Company is reasonably certain to exercise such options. The Company excludes variable lease payments (such as payments based on an index or reimbursements of lessor costs) from its initial measurement of the lease liability.
The components of lease expense and gain realized on sale-leaseback transactions were as follows:
(In millions)
 
Three Months Ended March 31, 2019
Operating lease cost
 
$
175

Short-term lease cost
 
46

Variable lease cost
 
18

Total operating lease cost
 
$
239

Finance lease cost:
 
 
Amortization of leased assets
 
$
11

Interest on lease liabilities
 
2

Total finance lease cost
 
$
13

Total lease cost
 
$
252

Gain recognized on sale-leaseback transactions
 
$
19

Supplemental balance sheet information related to leases was as follows:
(In millions)
 
March 31, 2019
Operating leases:
 
 
Operating lease assets
 
$
2,047

Short-term operating lease liabilities
 
448

Operating lease liabilities
 
1,586

Total operating lease liabilities
 
$
2,034

Finance leases:
 
 
Property and equipment, gross
 
$
390

Accumulated depreciation
 
(90
)
Property and equipment, net
 
$
300

Short-term borrowings and current maturities of long-term debt
 
53

Long-term debt
 
231

Total finance lease liabilities
 
$
284

Weighted-average remaining lease term
 
 
Operating leases
 
6 years

Finance leases
 
5 years

Weighted-average discount rate
 
 
Operating leases
 
5.12
%
Finance leases
 
2.55
%


11


Supplemental cash flow information related to leases was as follows:
(In millions)
 
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
265

Operating cash flows from finance leases
 
2

Financing cash flows from finance leases
 
15

Leased assets obtained in exchange for new lease obligations:
 
 
Operating leases
 
175

Finance leases
 
13

Maturities of lease liabilities as of March 31, 2019 were as follows:
(In millions)
 
Finance Leases
 
Operating Leases
Remainder of 2019
 
$
46

 
$
395

2020
 
58

 
521

2021
 
55

 
396

2022
 
51

 
304

2023
 
52

 
227

Thereafter
 
40

 
561

Total lease payments
 
$
302

 
$
2,404

Less: interest
 
(18
)
 
(370
)
Present value of lease liabilities
 
$
284

 
$
2,034

Disclosures Related to Topic 840
Future minimum lease payments with initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2018 were as follows:
(In millions)
 
Capital Leases
 
Operating Leases
Year ending December 31:
 
 
 
 
2019
 
$
61

 
$
577

2020
 
60

 
460

2021
 
55

 
367

2022
 
52

 
288

2023
 
43

 
221

Thereafter
 
39

 
523

Total minimum lease payments
 
$
310

 
$
2,436

Amount representing interest
 
(21
)
 
 
Present value of minimum lease payments
 
$
289

 
 
6. Derivative Instruments
In the normal course of business, the Company is exposed to certain risks arising from business operations and economic factors, including fluctuations in interest rates and foreign currencies. To manage the volatility related to these exposures, the Company uses derivative instruments. The objective of these derivative instruments is to reduce fluctuations in the Company’s earnings and cash flows associated with changes in foreign currency exchange rates


12


and interest rates. These financial instruments are not used for trading or other speculative purposes. Historically, the Company has not incurred, and does not expect to incur in the future, any losses as a result of counterparty default.
The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking cash flow hedges to specific forecasted transactions or variability of cash flow to be paid. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivative instruments that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. When a derivative instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively.
The following table presents the account on the Condensed Consolidated Balance Sheets in which the Company’s derivative instruments have been recognized and the related notional amounts and fair values:
 
 
March 31, 2019
 
 
 
 
Derivative Assets
 
Derivative Liabilities
(In millions)
 
Notional Amount
 
Balance Sheet Caption
 
Fair Value
 
Balance Sheet Caption
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swap agreements
 
$
1,261

 
Other long-term assets
 
$

 
Other long-term liabilities
 
$
(42
)
Interest rate swap
 
3,506

 
Other current assets
 

 
Other current liabilities
 
(6
)
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency option contracts
 
673

 
Other current assets
 
5

 
Other current liabilities
 
(1
)
Total
 
 
 
 
 
$
5

 
 
 
$
(49
)
 
 
December 31, 2018
 
 
 
 
Derivative Assets
 
Derivative Liabilities
(In millions)
 
Notional Amount
 
Balance Sheet Caption
 
Fair Value
 
Balance Sheet Caption
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swap agreements
 
$
1,270

 
Other long-term assets
 
$

 
Other long-term liabilities
 
$
(81
)
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency option contracts
 
473

 
Other current assets
 
7

 
Other current liabilities
 

Total
 
 
 
 
 
$
7

 
 
 
$
(81
)
The derivatives are classified as Level 2 within the fair value hierarchy. The derivatives are valued using inputs other than quoted prices, such as foreign exchange rates and yield curves.


13


The effect of derivative instruments designated as hedges in the Condensed Consolidated Statements of Income for the three months ended March 31, 2019 and 2018, are as follows:
 
 
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives
 
Amount of Gain (Loss) Reclassified from AOCI into Net Income
 
Amount of Gain (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
 
 
Three Months Ended March 31,
(In millions)
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Cross-currency swap agreements
 
$
6

 
$
(11
)
 
$
5

 
$
(2
)
 
$

 
$

Interest rate swaps
 
(6
)
 

 

 

 

 

Derivatives designated as net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Cross-currency swap agreements
 
35

 
(47
)
 

 

 
2

 
(3
)
Total
 
$
35

 
$
(58
)
 
$
5

 
$
(2
)
 
$
2

 
$
(3
)
The amounts excluded from effectiveness testing for the cross-currency swap agreements were $2 million and $3 million of loss in Accumulated other comprehensive loss (“AOCI”) for derivatives designated as cash flow hedges as of March 31, 2019 and 2018, respectively, and $30 million and $40 million of loss in AOCI for derivatives designated as net investment hedges as of March 31, 2019 and 2018, respectively.
The pre-tax loss recognized in earnings for foreign currency option and forward contracts not designated as hedging instruments was $2 million and $12 million for the three months ended March 31, 2019 and 2018, respectively. These amounts are recorded in Foreign currency loss in the Condensed Consolidated Statements of Income.
Cross-Currency Swap Agreements
In May 2017, the Company entered into certain cross-currency swap agreements to manage the foreign currency exchange risk related to the Company’s international operations by effectively converting the fixed-rate U.S. Dollar (“USD”)-denominated 6.125% senior notes due 2023 (“Senior Notes due 2023”) (see Note 7—Debt), including the associated semi-annual interest payments, to fixed-rate, euro (“EUR”)-denominated debt. The risk management objective of these transactions is to manage foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies and reduce the variability in the functional currency equivalent cash flows of the Senior Notes due 2023.
During the term of the swap contracts, the Company will receive quarterly interest payments from the counterparties in March, June, September and December of each year based on USD fixed interest rates, and the Company will make quarterly interest payments to the counterparties in March, June, September and December of each year based on EUR fixed interest rates. At maturity, the Company will repay the original principal amount in EUR and receive the principal amount in USD.
In 2015, in connection with the issuance of the 6.50% senior notes due 2022 (“Senior Notes due 2022”), the Company entered into certain cross-currency swap agreements to manage the foreign currency exchange risk related to the Company’s international operations by effectively converting a portion of the fixed-rate USD-denominated Senior Notes due 2022, including the associated semi-annual interest payments, to fixed-rate, EUR-denominated debt. The risk management objective of the agreements is to manage the Company’s foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies and reduce the variability in the functional currency equivalent cash flows for a portion of the Senior Notes due 2022. During the term of the swap contracts, the Company will receive semi-annual interest payments from the counterparties in June and December of each year based on USD fixed interest rates, and the Company will make semi-annual interest payments to the counterparties in June and December of each year based on EUR fixed interest rates. At maturity, the Company will repay the original principal amount in EUR and receive the principal amount in USD.
The Company has designated the cross-currency swap agreements as qualifying hedging instruments and is accounting for these as net investment hedges. The Company applies the simplified method of assessing the effectiveness of its net investment hedging relationships. Under this method, for each reporting period, the change in the fair value of the cross-currency swaps is initially recognized in AOCI. The change in the fair value due to foreign


14


exchange remains in AOCI and the initial component excluded from effectiveness testing will initially remain in AOCI and then will be reclassified from AOCI to Interest expense each period in a systematic manner. Cash flows related to the periodic exchange of interest payments for these net investment hedges are included in Operating activities on the Condensed Consolidated Statements of Cash Flows.
Additionally, in 2017, a portion of the cross-currency swap that hedges the Senior Notes due 2023 was de-designated as a net investment hedge and re-designated with a larger notional amount as a cash flow hedge. This cash flow hedge was entered into to manage the related foreign currency exposure from intercompany loans. The amounts in AOCI related to the net investment hedge at the date of de-designation were recognized as cumulative translation adjustments and will remain in AOCI until the subsidiary is sold or substantially liquidated. For the cash flow hedge, the Company reclassifies a portion of AOCI to Foreign currency loss to offset the foreign exchange impact in earnings created by the intercompany loans. The Company also amortizes a portion of AOCI to Interest expense related to the initial portion of a loss excluded from the assessment of effectiveness of the cash flow hedge. Cash flows related to this cash flow hedge are included in Financing activities on the Condensed Consolidated Statements of Cash Flows.
Interest Rate Hedging
In March 2019, the Company executed short-term interest rate swaps to mitigate variability in forecasted interest payments on the Company’s senior secured term loan credit agreement, as amended (the “Term Loan Facility”). The interest rate swaps convert floating rate interest payments into fixed rate interest payments. The company designated the interest rate swaps as qualifying hedging instruments and accounted for these derivatives as cash flow hedges. The interest rate swaps mature on various dates within 2019.
Gains and losses resulting from fair value adjustments to the designated portion of interest rate swaps are recorded in AOCI and reclassified to Interest expense on the dates that interest payments accrue. Cash flows related to the interest rate swaps are included in Operating activities on the Condensed Consolidated Statements of Cash Flows.
Foreign Currency Option and Forward Contracts
In order to mitigate the risk of a reduction in the value of earnings from the Company’s operations that use the EUR or the British pound sterling as their functional currency, the Company uses foreign currency option contracts. Additionally, the Company uses foreign currency forward contracts to mitigate the exposure we experience from intercompany loans which are not designated as permanent and thus create volatility in earnings. These foreign currency contracts (both the option and forward contracts) were not designated as qualifying hedging instruments as of March 31, 2019. The contracts are not speculative; rather, they are used to economically hedge the Company’s exposure to exchange rate fluctuations. The contracts expire in 12 months or less. Gains or losses on the contracts are recorded in Foreign currency loss in the Condensed Consolidated Statements of Income.
In the third quarter of 2018, the Company changed its policy related to the cash flow presentation of foreign currency option contracts, as the Company believes cash receipts and payments related to economic hedges should be classified based on the nature and purpose for which those derivatives were acquired and, given that the Company did not elect to apply hedge accounting to these derivatives, the Company believes it is preferable to reflect these cash flows as Investing activities. Prior to this change, these cash flows were reflected within Operating activities. Net cash used in operating activities for the first quarter ended March 31, 2018 included $8 million of cash usage related to these foreign currency option contracts.


15


7. Debt
The following table summarizes the Company’s debt:
 
 
March 31, 2019
 
December 31, 2018
(In millions)
 
Principal Balance
 
Carrying Value
 
Principal Balance
 
Carrying Value
ABL facility
 
$

 
$

 
$

 
$

Term loan facility
 
2,003

 
1,965

 
1,503

 
1,474

6.125% Senior notes due 2023
 
535

 
529

 
535

 
529

6.50% Senior notes due 2022
 
1,200

 
1,190

 
1,200

 
1,190

6.70% Senior debentures due 2034
 
300

 
206

 
300

 
205

6.75% Senior notes due 2024
 
1,000

 
985

 

 

Trade securitization program
 
272

 
270

 
283

 
281

Unsecured credit facility
 

 

 
250

 
246

Finance leases
 
284

 
284

 
289

 
289

Asset financing and other
 
46

 
47

 
55

 
55

Total debt
 
5,640

 
5,476

 
4,415

 
4,269

Short-term borrowings and current maturities of long-term debt
 
114

 
114

 
371

 
367

Long-term debt
 
$
5,526

 
$
5,362

 
$
4,044

 
$
3,902

The following table summarizes the fair value of the Company’s debt:
(In millions)
 
Fair Value
 
Level 1
 
Level 2
March 31, 2019
 
$
5,635

 
$
3,075

 
$
2,560

December 31, 2018
 
4,305

 
2,020

 
2,285

The Level 1 debt was valued using quoted prices in active markets. The Level 2 debt was valued using bid evaluation pricing models or quoted prices of securities with similar characteristics. The fair value of the asset financing arrangements approximates carrying value since the debt is primarily issued at a floating rate, may be prepaid any time at par without penalty, and the remaining life is short-term in nature.
ABL Facility
In October 2015, the Company entered into the Second Amended and Restated Revolving Loan Credit Agreement (the “ABL Facility”). As of March 31, 2019, the Company had a borrowing base of $953 million and availability under the ABL Facility of $727 million after considering outstanding letters of credit on the ABL Facility of $226 million. As of March 31, 2019, the Company was in compliance with the ABL Facility’s financial covenants.
On April 30, 2019, the Company amended the ABL Facility. See Note 11—Subsequent Events, for further information.
Term Loan Facility
2019 Amendments
In March 2019, the Company entered into Amendment No. 4 to Credit Agreement (the “Fourth Amendment”), which permits the Company to incur up to $500 million of incremental term loans under the existing credit agreement on or prior to June 5, 2019 without adjusting the interest rate margin applicable to existing loans outstanding as long as the yield on the incremental term loan does not exceed the yield on the existing loans by 0.75%. Also in March 2019, the Company entered into an Incremental Amendment (Amendment No. 5 to Credit Agreement) (the “Fifth Amendment”), by and among the Company, its subsidiaries signatory thereto, as guarantors, the lenders party thereto and Morgan Stanley Senior Funding, Inc., in its capacity as administrative agent, amending


16


the Senior Secured Term Loan Credit Agreement dated as of October 30, 2015 (as previously amended, amended and restated, supplemented or otherwise modified, the “Term Loan Credit Agreement”).
Pursuant to the Fifth Amendment, the Company borrowed an additional $500 million of incremental loans under a new tranche of term loans (the “Incremental Term Loan Facility”). The terms of the loans under the Incremental Term Loan Facility are substantially similar to those relating to the loans outstanding under the Term Loan Credit Agreement prior to giving effect to the amendment, except with respect to issue price, the interest rate applicable to the Company’s borrowings under the Incremental Term Loan Facility, prepayment premiums in connection with certain voluntary prepayments thereof, and certain other provisions.
The interest rate margin applicable to the Incremental Term Loan Facility is 1.50%, in the case of base rate loans, and 2.50%, in the case of London Interbank Offered Rate (“LIBOR”) loans. Proceeds from borrowings under the Incremental Term Loan Facility will be used: (i) for general corporate purposes, including to fund purchases of equity interests of the Company as described in Note 8—Stockholders’ Equity, and (ii) to pay fees and expenses relating to, or in connection with the transactions contemplated by, the amendment. The incremental loans under the Incremental Term Loan Facility were issued at a price of 99.50% of par.
The interest rate on the Term Loan Facility and the Incremental Term Loan Facility was 4.50% and 4.98%, respectively as of March 31, 2019.
2018 Amendments
In February 2018, the Company amended the Term Loan Facility, which reduced the interest rate under the facility and extended the maturity date to February 23, 2025. The refinancing resulted in a debt extinguishment charge of $10 million during the first quarter of 2018.
Senior Notes due 2024
In February 2019, the Company completed its private placement of $1.0 billion aggregate principal amount of senior notes (“Senior Notes due 2024”). The Senior Notes due 2024 bear interest at a rate of 6.75% per annum, payable semiannually in cash in arrears, commencing August 15, 2019. The Senior Notes due 2024 will mature on August 15, 2024. The Senior Notes due 2024 are guaranteed by each of the Company’s direct and indirect wholly owned restricted subsidiaries (other than certain excluded subsidiaries) that guarantees or is or becomes a borrower under the Company’s ABL Facility or existing secured term loan facility (or certain replacements thereof) or that guarantees certain capital markets indebtedness of the Company or any guarantor of the Senior Notes due 2024. The Senior Notes due 2024 and the guarantees thereof are unsecured, unsubordinated indebtedness of the Company and the guarantors. Proceeds from the Senior Notes due 2024 were used to repay the Company’s outstanding obligation under the Unsecured Credit Facility described below and to finance a portion of its share repurchases as described in Note 8—Stockholders’ Equity.
Trade Securitization Program
In October 2017, XPO Logistics Europe SA (“XPO Logistics Europe”), in which the Company holds an 86.25% controlling interest, entered into a trade receivables securitization program for a term of three years co-arranged by Crédit Agricole and HSBC. The aggregate maximum amount available under the program is €350 million (approximately $393 million as of March 31, 2019). As of March 31, 2019, the remaining borrowing capacity, which considers receivables that are collateral as well as receivables which have been sold, was less than €1 million (less than $1 million) and the weighted-average interest rate was 1.12%. Charges for administrative fees and commitment fees, the latter of which is based on a percentage of the unused amounts available, were not material to the Company’s results of operations for the three months ended March 31, 2019 and 2018.
Unsecured Credit Facility
In December 2018, the Company entered into a $500 million unsecured credit agreement (“Unsecured Credit Agreement”) with Citibank, N.A., with a maturity date of December 23, 2019. As of December 31, 2018, the Company had borrowed $250 million under the Unsecured Credit Agreement. The Company made a second borrowing of $250 million in January 2019. The Company used the proceeds of both borrowings to finance a portion of its share repurchases as described in Note 8—Stockholders’ Equity. In connection with the issuance of the Senior


17


Notes due 2024 offering described above, the Company repaid its outstanding obligations under the Unsecured Credit Agreement and terminated the facility in February 2019.
8. Stockholders Equity
Share Repurchases
On December 14, 2018, the Company’s Board of Directors authorized the repurchase of up to $1 billion of the Company’s common stock (the “2018 Repurchase Program”). Through December 31, 2018, based on the settlement date, the Company purchased and retired 10 million shares of its common stock having an aggregate value of $536 million at an average price of $53.46 per share. In the first quarter of 2019, based on the settlement date, the Company purchased and retired 8 million shares of its common stock having an aggregate value of $464 million at an average price of $59.47 per share, which completed the authorization under the 2018 Repurchase Program. The share repurchases were funded by the Unsecured Credit Facility and available cash.
On February 13, 2019, the Company’s Board of Directors authorized additional repurchases of up to $1.5 billion of the Company’s common stock (the “2019 Repurchase Program”). The repurchase authorization permits the Company to repurchase shares in both open market and private repurchase transactions, with the timing and number of shares repurchased dependent on a variety of factors, including price, general business and market conditions, alternative investment opportunities and funding considerations. In the first quarter of 2019, based on the settlement date, the Company purchased and retired 15 million shares of its common stock having an aggregate value of $763 million at an average price of $49.86 per share under the 2019 Repurchase Program. Additionally, through April 30, 2019, based on the settlement date, the Company purchased and retired 2 million shares of its common stock having an aggregate value of $119 million at an average price of $56.74 per share. The share repurchases were funded by available cash and proceeds from new debt offerings. The Company is not obligated to repurchase any specific number of shares and may suspend or discontinue the program at any time.
Dividends
The Series A Convertible Perpetual Preferred Stock pays quarterly cash dividends equal to the greater of: (i) the “as-converted” dividends on the underlying Company common stock for the relevant quarter, and (ii) 4% of the then-applicable liquidation preference per annum.
9. Earnings per Share
Basic and diluted earnings per share are computed using the two-class method, which is an earnings allocation method that determines earnings per share for common shares and participating securities. The participating securities consist of the Company’s Series A Convertible Perpetual Preferred Stock. The undistributed earnings are allocated between common shares and participating securities as if all earnings had been distributed during the period. In periods of loss, no allocation is made to the preferred shares.


18


The computations of basic and diluted earnings per share are as follows:
 
 
Three Months Ended March 31,
(In millions, except per share data)
 
2019
 
2018
Basic earnings per common share
 
 
 
 
Net income attributable to XPO
 
$
47

 
$
73

Series A preferred stock dividends
 
(1
)
 
(1
)
Non-cash allocation of undistributed earnings
 
(3
)
 
(5
)
Net income attributable to common shares, basic
 
$
43

 
$
67

 
 
 
 
 
Basic weighted-average common shares
 
107

 
120

Basic earnings per share
 
$
0.40

 
$
0.56

 
 
 
 
 
Diluted earnings per common share
 
 
 
 
Net income attributable to common shares, diluted
 
$
43

 
$
67

 
 
 
 
 
Basic weighted-average common shares
 
107

 
120

Dilutive effect of non-participating stock-based awards and equity forward
 
10

 
13

Diluted weighted-average common shares
 
117

 
133

 
 
 
 
 
Diluted earnings per share
 
$
0.37

 
$
0.50

 
 
 
 
 
Potential common shares excluded
 
10

 
10

Certain shares were not included in the computation of diluted earnings per share because the effect was anti-dilutive.
10. Legal and Regulatory Matters
The Company is involved, and will continue to be involved, in numerous proceedings arising out of the conduct of its business. These proceedings may include, among other matters, claims for property damage or personal injury incurred in connection with the transportation of freight, claims regarding anti-competitive practices, and employment-related claims, including claims involving asserted breaches of employee restrictive covenants and tortious interference with contracts. These matters also include numerous purported class action, multi-plaintiff and individual lawsuits, and administrative proceedings that claim either that the Company’s owner-operators or contract carriers should be treated as employees, rather than independent contractors, or that certain of the Company’s drivers were not paid for all compensable time or were not provided with required meal or rest breaks. These lawsuits and proceedings may seek substantial monetary damages (including claims for unpaid wages, overtime, failure to provide meal and rest periods, unreimbursed business expenses and other items), injunctive relief, or both.
The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount accrued therefor, the Company assesses whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred. If there is a reasonable possibility that a loss, or additional loss, may have been incurred, the Company discloses the estimate of the possible loss or range of loss if it is material and an estimate can be made, or states that such an estimate cannot be made. The determination as to whether a loss can reasonably be considered to be possible or probable is based on the Company’s assessment, in conjunction with legal counsel, regarding the ultimate outcome of the matter.
The Company believes that it has adequately accrued for the potential impact of loss contingencies that are probable


19


and reasonably estimable. The Company does not believe that the ultimate resolution of any matters to which the Company is presently a party will have a material adverse effect on its results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Legal costs incurred related to these matters are expensed as incurred.
The Company carries liability and excess umbrella insurance policies that it deems sufficient to cover potential legal claims arising in the normal course of conducting its operations as a transportation and logistics company. The liability and excess umbrella insurance policies generally do not cover the misclassification claims described in this note. In the event the Company is required to satisfy a legal claim outside the scope of the coverage provided by insurance, the Company’s financial condition, results of operations or cash flows could be negatively impacted.
Intermodal Drayage Classification Claims
Certain of the Company’s intermodal drayage subsidiaries received notices from the California Labor Commissioner, Division of Labor Standards Enforcement (the “DLSE”), that a total of approximately 150 owner-operators contracted with these subsidiaries filed claims in 2012 with the DLSE in which they assert that they should be classified as employees, rather than independent contractors. These claims seek reimbursement for the owner-operators’ business expenses, including fuel, tractor maintenance and tractor lease payments. Decisions were rendered in June 2015 by a DLSE hearing officer with respect to claims of five plaintiffs, resulting in awards in an aggregate amount of approximately $1 million, following which the Company appealed the decisions in the U.S. District Court for the Central District of California (“Central District Court”). On May 16, 2017, the Central District Court issued judgment finding that the five claimants were employees rather than independent contractors and awarding an aggregate of approximately $1 million plus post-judgment interest and attorneys’ fees to the claimants. The Company appealed this judgment, but on February 20, 2019, the United States Court of Appeals for the Ninth Circuit declined to consider the appeal on technical grounds. In addition, separate decisions were rendered in April 2017 by a DLSE hearing officer in claims involving four additional plaintiffs, resulting in an award for the plaintiffs in an aggregate amount of approximately $1 million, which the Company has appealed to the California Superior Court, Long Beach. The remaining DLSE claims (the “Pending DLSE Claims”) were transferred to California Superior Court in three separate actions involving approximately 170 claimants, including the claimants mentioned above who originally filed claims in 2012. The Company has reached an agreement to settle the majority of the Pending DLSE Claims, the settlement payment has been made, and dismissals are pending. In addition, certain of the Company’s intermodal drayage subsidiaries are party to putative class action litigations and other administrative claims in California brought by independent contract carriers who contracted with these subsidiaries. In these litigations, the contract carriers assert that they should be classified as employees, rather than independent contractors. The Company believes that it has adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable relating to the claims referenced above. The Company is unable at this time to estimate the amount of the possible loss or range of loss, if any, in excess of its accrued liability that it may incur as a result of these claims given, among other reasons, that the range of potential loss could be impacted substantially by future rulings by the courts involved, including on the merits of the claims.
Last Mile Logistics Classification Claims
Certain of the Company’s last mile logistics subsidiaries are party to several putative class action litigations brought by independent contract carriers who contracted with these subsidiaries. In these litigations, the contract carriers, and in some cases the contract carriers’ employees, assert that they should be classified as employees, rather than independent contractors. The particular claims asserted vary from case to case, but the claims generally allege unpaid wages, unpaid overtime, or failure to provide meal and rest periods, and seek reimbursement of the contract carriers’ business expenses. The cases include four related matters pending in the Federal District Court, Northern District of California: Ron Carter, Juan Estrada, Jerry Green, Burl Malmgren, Bill McDonald and Joel Morales v. XPO Logistics, Inc. (“Carter”), filed in March 2016; Ramon Garcia v. Macy’s and XPO Logistics Inc. (“Garcia”), filed in July 2016; Kevin Kramer v. XPO Logistics Inc. (“Kramer”), filed in September 2016; and Hector Ibanez v. XPO Last Mile, Inc. (“Ibanez”), filed in May 2017. The Company has reached agreements to settle the Carter, Garcia, Kramer and Ibanez matters and has accrued the full amount of the settlements. The settlements will require court approval. With respect to other pending claims, the Company believes that it has adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. The Company is unable at this


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time to estimate the amount of the possible loss or range of loss, if any, in excess of its accrued liability that it may incur as a result of these claims given, among other reasons, that the number and identities of plaintiffs in these lawsuits are uncertain and the range of potential loss could be impacted substantially by future rulings by the courts involved, including on the merits of the claims.
Shareholder Litigation
On December 14, 2018, two putative class actions were filed in the U.S. District Court for the District of Connecticut and the U.S. District Court for the Southern District of New York against the Company and certain of its current and former executives, alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, as well as Section 20(a) of the Exchange Act, based on alleged material misstatements and omissions in the Company’s public filings with the U.S. Securities and Exchange Commission. On January 7, 2019, the plaintiff in one of the actions, Leeman v. XPO Logistics, Inc. et al., No. 1:18-cv-11741 (S.D.N.Y.), voluntarily dismissed the action without prejudice. The other action, Labul v. XPO Logistics, Inc. et al., No. 3:18-cv-02062 (D. Conn.), is pending and in the early stages of litigation. The Company intends to defend itself vigorously against the allegations. The Company is unable at this time to determine the amount of the possible loss or range of loss, if any, that it may incur as a result of these matters.
11. Subsequent Events
On April 30, 2019, the Company entered into Amendment No. 3 to the ABL Facility (the “Amendment”), by and among the Company, certain subsidiaries signatory thereto, the lenders party thereto and Morgan Stanley Senior Funding, Inc., in its capacity as agent, amending the ABL Facility, as amended by the Amendment, (the “Amended ABL Facility”).
The Amendment amends the ABL Facility to, among other things: (i) extend the maturity date thereof to April 30, 2024 (subject, in certain circumstances, to a springing maturity if more than $200 million of the Company’s Senior Notes due 2022, Senior Notes due 2022 or certain refinancings thereof remain outstanding 91 days prior to their respective maturity); (ii) increase the aggregate principal amount of the commitments thereunder to $1.1 billion; (iii) reduce the interest rate margin and commitment fees thereunder; and (iv) make certain other changes to the covenants and other provisions therein.
Loans under the Amended ABL Facility are secured on a first lien basis by the assets of the credit parties which constitute ABL Priority Collateral (as defined therein), and on a second lien basis by certain other assets.
Loans under the Amended ABL Facility will bear interest at a rate equal to LIBOR or base rate plus an applicable margin of 1.25% to 1.50%, in the case of LIBOR loans, and 0.25% to 0.50%, in the case of base rate loans.


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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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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,” “trajectory” 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 the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes 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 below and the risks discussed in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). 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 the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The following discussion should be read in conjunction with the Company’s unaudited Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this Quarterly Report. 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.
Reference should be made to the audited Consolidated Financial Statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2018 Annual Report on Form 10-K.
Executive Summary
XPO Logistics, Inc., a Delaware corporation, together with its subsidiaries (“XPO,” “XPO Logistics,” the “Company,” “we” or “our”), is a top ten global provider of cutting-edge supply chain solutions to the most successful companies in the world. We use our highly integrated network of people, technology and physical assets to help our customers manage their goods most efficiently throughout their supply chains. Our revenue derives from a mix of key verticals, such as retail and e-commerce, food and beverage, consumer packaged goods and industrial and our customers are multinational, national, mid-size and small enterprises.
We run our business on a global basis with two reporting segments: Transportation and Logistics. In 2018, approximately 65% of our revenue came from Transportation; the other 35% came from Logistics. Within each segment, we have robust service offerings that are positioned to capitalize on fast-growing areas of customer demand. Substantially all of our services operate under the single brand of XPO Logistics.
Our markets are highly diversified. Based on where orders originated, approximately 59% of our 2018 revenue was generated in the United States, 13% in France and 12% in the United Kingdom. The more than 50,000 customers we serve are in every major industry and touch every part of the economy. As of March 31, 2019, we operated in 32 countries with 1,540 locations and approximately 100,000 employees.
Transportation Segment
We offer customers an unmatched transportation network of multiple modes, flexible capacity and route density to transport freight quickly and cost effectively from origin to destination. Our scale and service range are significant advantages — both for XPO, as competitive differentiators, and for our customers, who depend on us to provide reliable capacity under all market conditions.


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Globally, we are the second largest freight brokerage provider, and a top five provider of managed transportation based on the value of freight under management. Many of our transportation services hold market-leading positions in North America and Europe. In North America, we are the largest provider of last mile logistics for heavy goods; the largest manager of expedited shipments; a top three provider of less-than-truckload (“LTL”) transportation; and a top three provider of intermodal services, with a national drayage network. We are also a freight forwarder with a global network of ocean, air, ground and cross-border services.
In Europe, we provide full truckload transportation as dedicated and non-dedicated services using our fleet, which is the largest owned road fleet in Europe, and as a brokered service using independent carriers. Our other transportation offerings in Europe are LTL transportation, which we provide through one of the largest LTL networks in Western Europe, and last mile logistics. Our total lane density in Europe covers the regions that produce approximately 90% of the eurozone’s gross domestic product.
We use a blended model of owned, contracted and brokered capacity for truck transportation. This gives us extensive flexibility to provide solutions that best serve the interests of our customers and the Company. The non-asset portion of our model is predominately variable cost and includes our brokerage operations, as well as contracted capacity with independent providers. As of March 31, 2019, globally, we had approximately 12,000 independent carriers and owner-operators under contract to provide drayage, expedite, last mile and LTL services to our customers, and more than 50,000 independent brokered carriers representing over 1,000,000 trucks on the road.
We employ professional drivers who transport goods for customers using our fleet of owned and leased trucks and trailers. Globally, our road fleet encompasses approximately 16,000 tractors and approximately 39,000 trailers, primarily related to our LTL operations in North America and our full truckload operations in Europe. These assets also provide supplemental capacity for our freight brokerage operations as needed. Overall, our operations are asset-light; with the revenue generated by activities directly associated with our owned assets accounting for less than a third of our revenue in 2018.
Logistics Segment
In our Logistics segment, which we sometimes refer to as supply chain or contract logistics, we have deep expertise in key verticals, and strong positions in fast-growing sectors, such as e-fulfillment, returns management and temperature-controlled warehousing. We provide a range of contract logistics services for customers, including value-added warehousing, distribution and inventory management, omnichannel and e-commerce fulfillment, cold chain solutions, reverse logistics and surge management. In addition, our Logistics segment provides highly engineered, customized solutions and supply chain optimization services, such as volume flow management. Once we secure a logistics contract, the average tenure is approximately five years and the relationship can lead to a wider use of our services, such as inbound and outbound logistics.
XPO is the second largest contract logistics provider worldwide, with an expansive footprint of shared and dedicated facilities. This makes us particularly attractive to large customers with multinational operations. Our logistics customers include many of the preeminent names in retail and e-commerce, food and beverage, technology, aerospace, wireless, industrial and manufacturing, chemical, agribusiness, life sciences and healthcare.
We also benefit from a strong position in the high-growth e-commerce sector. E-commerce is predicted to continue to grow globally at a double-digit rate through at least 2020, making it difficult for many companies to handle fulfillment in-house while providing a high level of service. Demand in the e-commerce sector is characterized by strong seasonal surges in activity; the fourth quarter peak is typically the most dramatic, when holiday orders are placed online.
We are the largest outsourced e-fulfillment provider in Europe, and we have a major platform for e-fulfillment in North America, where we provide highly customized solutions that include reverse logistics and omnichannel services. Our experience with fast-growing e-commerce categories makes us a valuable partner to customers who want to outsource order fulfillment, product returns, testing, refurbishment, warranty management, refunding, order personalization and other value-added services. Together with our last mile expertise with heavy goods, our logistics capabilities provide omnichannel retailers with superior control, flexible warehousing options and labor, advanced automation and a national network of home delivery hubs.


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Operating Philosophy
One of our Company’s most compelling competitive advantages is our combination of technology, density and scale. This allows us to solve complex supply chain problems for customers by providing them with integrated, end-to-end solutions. Many customers, particularly large companies, prefer to use large, multimodal service providers to manage more than one aspect of the supply chain. Additionally, we are positioned to capitalize on secular trends in demand, such as outsourcing and just-in-time inventory practices.
Two hallmarks of our operations are technology and sustainability.
We prioritize innovation because we believe that advanced technology is critical to continuously improving customer service, controlling costs and leveraging our scale. Our 2018 investment in technology was approximately $500 million, among the highest in our industry.
We concentrate our efforts in four areas of innovation: automation and intelligent machines, dynamic data science, the digital freight marketplace, and visibility and customer service. Our global team of approximately 1,700 technology professionals can deploy proprietary software very rapidly on our cloud-based platform. Our focus is on developing innovations that differentiate our services, create benefits for our customers and value for our shareholders. For example, we have the ability to share data with our customers in real time, including visibility of orders moving through fulfillment and shipments in transit. Our technology gives us a birds-eye view of real-time market conditions and pricing for truckload, intermodal and LTL, and facilitates load assignments with our independent contractors, all of which greatly enhances customer service.
In addition, we have a strong commitment to sustainability. We own the largest natural gas truck fleet in Europe and we launched government-approved mega-trucks in Spain as two of numerous initiatives to reduce our carbon footprint. In 2018, we made substantial investments in fuel-efficient Freightliner Cascadia tractors in North America; these use EPA 2013-compliant and GHG14-compliant Selective Catalytic Reduction (“SCR”) technology. In Europe, our tractors are approximately 98% compliant with Euro V, EEV and Euro VI standards, making our fleet one of the most modern in the industry. We have been awarded the label “Objectif CO2” for outstanding environmental performance of transport operations in Europe by the French Ministry of the Environment and the French Environment and Energy Agency.
A number of our logistics facilities are ISO 14001-certified, which ensures environmental and other regulatory compliances. We monitor fuel emissions from forklifts, with protocols in place to take immediate corrective action if needed. Our packaging engineers ensure that the optimal carton size is used for each product slated for distribution and, as a byproduct of reverse logistics, we recycle millions of electronic components and batteries each year. We are committed to operating in a progressive and environmentally sound manner, with the greatest efficiency and the least waste possible.


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Consolidated Summary Financial Table
 
 
Three Months Ended March 31,
 
Percent of Revenue
 
Change
(Dollars in millions)
 
2019
 
2018
 
2019
 
2018
 
2019 vs. 2018
Revenue
 
$
4,120

 
$
4,192

 
100.0
 %
 
100.0
 %
 
(1.7
)%
Cost of transportation and services
 
2,096

 
2,225

 
50.9
 %
 
53.1
 %
 
(5.8
)%
Direct operating expense
 
1,406

 
1,376

 
34.1
 %
 
32.8
 %
 
2.2
 %
SG&A expense
 
486

 
450

 
11.8
 %
 
10.7
 %
 
8.0
 %
Operating income
 
132

 
141

 
3.2
 %
 
3.4
 %
 
(6.4
)%
Other expense (income)
 
(17
)
 
(19
)
 
(0.4
)%
 
(0.5
)%
 
(10.5
)%
Foreign currency loss
 
2

 
12

 
 %
 
0.3
 %
 
(83.3
)%
Debt extinguishment loss
 
5

 
10

 
0.1
 %
 
0.2
 %
 
(50.0
)%
Interest expense
 
71

 
59

 
1.7
 %
 
1.4
 %
 
20.3
 %
Income before income tax provision
 
71

 
79

 
1.7
 %
 
1.9
 %
 
(10.1
)%
Income tax provision
 
19

 

 
0.5
 %
 
 %
 
100.0
 %
Net income
 
$
52

 
$
79

 
1.3
 %
 
1.9
 %
 
(34.2
)%
Three Months Ended March 31, 2019 Compared with Three Months Ended March 31, 2018
Revenue for the first quarter of 2019 decreased 1.7% to $4.1 billion, compared with the same quarter in 2018. The decrease primarily reflects the impact of an approximate $90 million reduction in transportation revenue from our largest customer, partially offset by growth in North American contract logistics. Foreign currency movement contributed to the decrease in revenue by approximately 3.2 percentage points in the first quarter of 2019.
Cost of transportation and services includes the cost of providing or procuring freight transportation for XPO customers and salaries paid to employee drivers in our truckload and LTL operations.
Cost of transportation and services for the first quarter of 2019 was $2.1 billion, or 50.9% of revenue, compared with $2.2 billion, or 53.1% of revenue, for the first quarter of 2018. The decrease as a percentage of revenue was primarily driven by higher contract logistics revenue and lower third-party transportation costs in freight brokerage, partially offset by higher payroll expenses in North America LTL.
Direct operating expenses are both fixed and variable expenses and consist of operating costs related to our contract logistics facilities, last mile warehousing facilities, LTL service centers and European LTL network. Direct operating expenses consist mainly of personnel costs, facility and equipment expenses such as rent, utilities, equipment maintenance and repair, costs of materials and supplies, information technology expenses, depreciation expense and gains and losses on sales of property and equipment.
Direct operating expense for the first quarter of 2019 was $1.4 billion, or 34.1% of revenue, compared with $1.4 billion, or 32.8% of revenue, for the first quarter of 2018. The increase as a percentage of revenue was primarily driven by higher costs for payroll and benefits to support growth in our North American contract logistics business, partially offset by lower temporary labor costs. Additionally, the first quarter of 2019 included $21 million of gains on the sales of property and equipment.
Sales, general and administrative expense (“SG&A”) primarily consists of the cost of salaries and benefits for executive and certain administration functions, depreciation and amortization expense, professional fees, facility costs, bad debt expense and legal costs.
SG&A for the first quarter of 2019 was $486 million, or 11.8% of revenue, compared with $450 million, or 10.7% of revenue, for the first quarter of 2018. The increase in SG&A as a percentage of revenue primarily reflects higher payroll expenses, including in our European transportation business, and depreciation expenses, partially offset by lower share-based compensation.
Other expense (income) for the first quarter of 2019 was $17 million of income as compared with $19 million of income for the first quarter of 2018. The primary driver of the decrease was lower net periodic pension income of $14 million in the first quarter of 2019, compared with $18 million in the first quarter of 2018.


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Foreign currency loss was $2 million for the first quarter of 2019, compared with $12 million for the first quarter of 2018. The reduction was primarily driven by lower realized losses incurred on foreign currency option and forward contracts in 2019. For additional information on our foreign currency option and forward contracts, see Note 6—Derivative Instruments to our Condensed Consolidated Financial Statements.
Debt extinguishment losses were <