The transportation industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns in business cycles of our customers, interest rate fluctuations and other economic factors beyond our control. Deterioration in the economic environment subjects our business to various risks that may have a material impact on our operating results and cause us to not reach our long-term growth goals, and which may include the following:
A reduction in overall freight volumes in the marketplace reduces our opportunities for growth. In addition, if a downturn in our customers’ business cycles causes a reduction in the volume of operationsfreight shipped by those customers, our operating results could be adversely affected.
Some of our customers may face economic difficulties and financial condition. Furthermore,may not be able to pay us, and some may go out of business. In addition, some customers may not pay us as quickly as they have in the past, causing our working capital needs to increase.
A significant number of our transportation providers may go out of business and we may experience an increase in operating costs, such as costs forbe unable to secure sufficient equipment or other transportation insurance and security as a result of these activities and potential activities. services to meet our commitments to our customers.
We may also face interruptionnot be able to appropriately adjust our expenses to changing market demands. In order to maintain high variability in our business model, it is necessary to adjust staffing levels to changing market demands. In periods of services duerapid change, it is more difficult to increased security measuresmatch our staffing level to our business needs. In addition, we have other primarily variable expenses that are fixed for a period of time, and we may not be able to adequately adjust them in responsea period of rapid change in market demand.
We operate in a highly competitive industry and, if we are unable to terrorism. The U.S. economy in general can be adversely affected by terrorist activities and potential activities. Any economic downturn could adversely impact our results of operations or otherwise adversely affect our ability to grow our business.
Competition in the transportation services industry is intense. Increased competition may lead to revenue reductions, reduced profit margins, or a loss of market share, any one of which could harm our business. There are many factors that could impair our profitability, including the following:
competition with other transportation services companies, some of which have a broader coverage network, a wider range of services, more fully developed information technology systems and incomegreater capital resources than we do;
reduction by our competitors of their rates to gain business, especially during times of declining growth rates in the economy, which reductions may limit our ability to maintain or increase rates, maintain our operating margins or maintain significant growth in our business;
shift in the business of shippers to asset-based trucking companies that also offer brokerage services in order to secure access to those companies’ trucking capacity, particularly in times of tight industry-wide capacity;
solicitation by shippers of bids from operationsmultiple transportation providers for their shipping needs and the resulting depression of freight rates or loss of business to competitors; and
establishment by our competitors of cooperative relationships to increase their ability to address shipper needs.
REGULATION; WE ARE SUBJECT TO REGULATION BEYOND OUR CONTROL, WHICH COULD NEGATIVELY IMPACT THE WAY IN WHICH WE OPERATE
We intend to fuel emissions, drivers’ hours-of-service, ergonomics, or other matters affecting safety or operating methods. Future lawsexpand substantially through acquisitions to take advantage of market opportunities we perceive in both our current markets (expedited transportation, freight brokerage and regulations may be more stringentfreight forwarding) and require changes in our operating practices, influence the demand for transportation services, or require us to incur significant additional costs. Higher costs incurred by us or by our suppliers who pass the costs onto us through higher prices could adversely affect our results of operations.
13
The timing and number of acquisitions we pursue may cause volatility in our financial results.
We are unable to predict the cultivationsize, timing and number of organic growth opportunities. acquisitions we may complete. In addition, we may incur expenses associated with sourcing, evaluating and negotiating acquisitions (including those that are not completed), and we also may pay fees and expenses associated with obtaining financing for acquisitions and with
investment banks and others finding acquisitions for us. Any of these amounts may be substantial, and together with the size, timing and number of acquisitions we pursue, may negatively impact and cause significant volatility in our financial results and stock price.
We lookmay not successfully manage our growth.
We intend to expandgrow rapidly and substantially, including by expanding our independent station network through keyinternal resources, making acquisitions and entering into new markets. We may experience difficulties and higher than expected expenses in executing our businessthis strategy as a result of expansion. We cannot be assured that any adjustment orunfamiliarity with new markets, change in therevenue and business models and revenue models will prove to be successful.
Our inability to manage anticipated future growth could hurt the results of operations. Expansion of operations will be required to address anticipated growth of our customer base and market opportunities. Expansion will place a significant strain on our management, operational and financial resources. Currently, we have a limited number of employees. We will need to continually improve existing procedures and controls as well as implement new transaction processing, operational and financial systems, and procedures and controls to expand, train and manage our employee base. Our working capital needs will increase substantially as our operations grow. Failure to manage growth effectively, or obtain necessary working capital, could have a damagingmaterial adverse effect on our business, results of operations, cash flows, stock price and financial condition.
DEPENDENCE ON DRIVERS SUBJECTS US TO WORKFORCE INTERUPTIONS BEYOND OUR CONTROLAny acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our results of operations.
Acquisitions involve numerous risks, including the following:
failure of the acquired company to achieve anticipated revenues, earnings or cash flows;
assumption of liabilities that were not disclosed to us or that exceed our estimates;
problems integrating the purchased operations with our own, which could result in substantial costs and delays or other operational, technical or financial problems;
potential compliance issues with regard to acquired companies that did not have adequate internal controls;
diversion of management’s attention or other resources from our existing business;
risks associated with entering markets, such as rail intermodal, air freight forwarding and ocean cargo, in which we have limited prior experience;
increases in working capital borrowing to fund the growth of acquired operations;
potential loss of key employees and customers of the acquired company; and
future write-offs of intangible and other assets if the acquired operations fail to generate sufficient cash flows.
In connection with future acquisitions, we may issue shares of capital stock that dilute other stockholders’ holdings, incur debt, assume significant liabilities or create additional expenses related to intangible assets, any of which might reduce our profitability and cause our stock price to decline.
Our driver forcebusiness will be seriously harmed if we fail to develop, implement, maintain, upgrade, enhance, protect and integrate information technology systems.
We rely heavily on our information technology system to efficiently run our business and it is primarily made upa key component of our growth strategy. To keep pace with changing technologies and customer demands, we must correctly interpret and address market trends and enhance the features and functionality of our proprietary technology platform in response to these trends, which may lead to significant ongoing software development costs. We may be unable to accurately determine the needs of our customers and the trends in the transportation services
industry or to design and implement the appropriate features and functionality of our technology platform in a timely and cost-effective manner, which could result in decreased demand for our services and a corresponding decrease in our revenues. Despite testing, external and internal risks, such as malware, insecure coding, “Acts of God,” attempts to penetrate our network, data leakage and human error, pose a direct threat to our information technology systems and operations. Any failure to identify and address such defects or errors could result in loss of revenues or market share, liability to customers or others, diversion of resources, injury to our reputation and increased service and maintenance costs. Correction of such errors could prove to be impossible or very costly and responding to resulting claims or liability could similarly involve substantial cost.
We must maintain and enhance the reliability and speed of our information technology systems to remain competitive and effectively handle higher volumes of freight through our network. If our information technology systems are unable to manage additional volume for our operations as our business grows, our service levels and operating efficiency could decline. We expect customers to continue to demand more sophisticated, fully integrated information systems from their transportation providers. If we fail to hire and retain qualified personnel to implement, protect and maintain our information technology systems or if we fail to upgrade our systems to meet our customers’ demands, our business and results of operations could be seriously harmed. This could result in a loss of customers and a decline in the volume of freight we receive from customers.
We recently have licensed an operating system that we are developing into an integrated information technology system for all of our business units. This new system may not be successful or may not achieve the desired results. We may require additional training or different personnel to successfully implement this system, all of which may result in additional expense, delays in obtaining results or disruptions to our operations. In addition, acquired companies will need to be on-boarded, which may cause additional training or licensing cost and disruption. In such event, our revenue, financial results and ability to operate profitably could be negatively impacted.
Our ability to raise capital in the future may be limited, and our failure to raise substantial additional capital when needed could prevent us from achieving our growth objectives.
We may in the future be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Debt financing, if available, may involve restrictive covenants and could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.
Sales or issuances of a substantial number of shares of our common stock may adversely affect the market price of our common stock.
We anticipate that we will fund future acquisitions or our capital requirements from time to time, in whole or part, through sales or issuances of our common stock or equity-based securities, subject to prevailing market conditions and our financing needs. Future equity financing may dilute the interests of our stockholders, and future sales or issuances of a substantial number of shares of our common stock or other equity-related securities may adversely affect the market price of our common stock. There are securities outstanding presently that are convertible into or exercisable for a substantial number of shares of our common stock. As of February 20, 2012, there were (i) 8,369,249 million shares of our common stock outstanding, (ii) 75,000 shares of Series A Convertible Perpetual Preferred Stock outstanding, which are initially convertible into an aggregate of 10,714,286 shares of our common stock (subject to customary anti-dilution adjustments), (iii) warrants exercisable at any time until September 2, 2021, for an aggregate of 10,714,286 shares of our common stock, at an initial exercise price of $7.00 per share of common stock (subject to customary anti-dilution adjustments), and (iv) 2,506,811 shares of our common stock reserved for future issuance under our various stock compensation plans.
If we are unable to expand the number of our sales representatives and brokerage agents, or if a significant number of our existing sales representatives and brokerage agents leaves us, our ability to increase our revenue could be negatively impacted.
Our ability to expand our business will depend, in part, on our ability to attract and retain sales representatives and brokerage agents. Competition for qualified sales representatives and brokerage agents can be intense. We may be unable to attract such persons or retain those that are already associated with us. Any difficulties we experience in expanding or retaining our sales representatives and brokerage agents could have a negative impact on our ability to expand our customer base, increase our revenue and continue our growth. Further, a significant increase in the turnover rate among our current sales representatives and brokerage agents could also increase our recruiting costs and decrease our operating efficiency.
We have a new senior management team that has little experience working together and that is essential to the management of our business and operations.
Our success depends on the continuing services of our Chief Executive Officer, Mr. Bradley S. Jacobs. We believe that Mr. Jacobs possesses valuable knowledge and skills that are crucial to our success and would be very difficult to replicate.
We recently assembled a new senior management team under the guidance of Mr. Jacobs. The team was assembled with a view towards substantial growth, and the size and aggregate compensation of the team increased substantially. The associated significant increase in overhead expense could decrease our margins if we fail to grow substantially.
Our senior management team is new and has little experience working together. In addition, not all of our senior management team resides near or works at our headquarters. The newness and geographic distance of the members of our senior management team may impede the team’s ability to work together effectively. Our success will depend, in part, on the efforts and abilities of our senior management and their ability to work together. We cannot assure you that they will be able to do so.
Over time, our success will depend on attracting and retaining qualified personnel. Competition for senior management is intense, and we may not be able to retain our management team or attract additional qualified personnel. The loss of a member of senior management would require our remaining senior officers to divert immediate and substantial attention to fulfilling the duties of the departing executive and to seeking a replacement. The inability to adequately fill vacancies in our senior executive positions on a timely basis could negatively affect our ability to implement our business strategy, which could adversely impact our results of operations and prospects.
Our Chairman and Chief Executive Officer controls a large portion of our stock and has substantial control over us, which could limit other stockholders’ ability to influence the outcome of key transactions, including changes of control.
Our Chairman and Chief Executive Officer, Mr. Bradley S. Jacobs, controls, as the managing member of JPE, (i) 67,500 shares of our Series A Convertible Perpetual Preferred Stock, which are initially convertible into an aggregate of 9,642,857 shares of our common stock, and (ii) 9,642,857 warrants initially exercisable for an aggregate of 9,642,857 shares of our common stock at an exercise price of $7.00 per share, which, upon conversion and exercise, represents approximately 70% of our outstanding common stock. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in companies with controlling stockholders. Our preferred stock votes together with our common stock on an “as-converted” basis on all matters, except as otherwise required by law, and separately as a class with respect to certain matters implicating the rights of holders of shares of the preferred stock. In addition, pursuant to the Investment Agreement, Mr. Jacobs, as the managing member of JPE, will have the right to designate for nomination by our board of directors a majority of the members of our board of directors so long as JPE owns securities (including preferred stock convertible into, or warrants exercisable
for, securities) representing at least 33% of the voting power of our capital stock on a fully-diluted basis, and will have the right to designate for nomination by our board of directors 25% of the members of our board of directors so long as JPE owns securities (including preferred stock convertible into, or warrants exercisable for, securities) representing at least 20% of the voting power of our capital stock on a fully-diluted basis. Accordingly, Mr. Jacobs can exert significant influence over our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership and the related contractual rights may have the effect of delaying or preventing a change of control, including a merger, consolidation, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit our other stockholders.
Because Mr. Jacobs controls a majority of the voting power of our stock, we qualify as a “controlled company” as defined in the NYSE Amex LLC Company Guide, and, as such, we may elect not to comply with certain corporate governance requirements of such stock exchange. We do not currently intend to utilize these exemptions.
We depend on third parties in the operation of our business.
In our freight forwarding and freight brokerage operations, we do not own or control the transportation assets that deliver our customers’ freight, and we do not employ the people directly involved in delivering the freight. In our expedited ground transportation operations, we engage independent contractors who own and operate their own equipment. Accordingly, we are dependent on third parties to provide truck, rail, ocean, air, and other transportation services and to report certain events to us, including delivery information and cargo claims. This reliance could cause delays in reporting certain events, including recognizing revenue and claims. Our inability to maintain positive relationships with independent transportation providers could significantly limit our ability to serve our customers on competitive terms. If we are unable to secure sufficient equipment or other transportation services to meet our commitments to our customers or provide our services on competitive terms, our operating results could be materially and adversely affected and our customers could switch to our competitors temporarily or permanently. Many of these risks are beyond our control, including the following:
equipment shortages in the transportation industry, particularly among contracted truckload carriers;
interruptions in service or stoppages in transportation as a result of labor disputes;
changes in regulations impacting transportation; and
changes in transportation rates.
In our freight forwarding operations, we rely upon both independent station owners and company employees to develop and manage customer relationships and to service the customers.
Our freight forwarding services are provided by our Concert Group Logistics subsidiary through a network of independent contractstations that are owned and operated by independent contractors and through stations managed by company employees. These independent station owners and company employees develop and manage customer relationships, have discretion in establishing pricing, and service the customers through the various modes of transportation made available through our network of third-party transportation providers. We cannot assure you that we will be able to maintain our relationships with these independent station owners or develop in the future relationships with additional independent station owners. Similarly, we cannot assure you that we will be able to retain or effectively motivate the key company employees who manage our most significant customer relationships. Since these independent station owners and company employees maintain the relationships with the customers, some customers may decide to terminate their relationship with us if their independent station owner or company contact leaves our network. Accordingly, our inability to maintain relationships with these independent station owners and company employees could have a materially adverse effect on our results of operations.
In addition, since these independent station owners are independent contractors, we have limited control over their operations and the quality of service that they provide to customers. To the extent that an independent station owner provides poor customer service or otherwise does not meet a customer’s expectations, or we encounter a similar situation with our company employees, this will reflect poorly on us, and the customer may not use us in the future, which may adversely affect our results of operations.
Higher purchased transportation expenses may result in decreased net revenue margin.
Transportation providers can be expected to charge higher prices if market conditions warrant, or to cover higher operating expenses. Factors such as increases in freight demand, decreases in trucking capacity, higher driver wages, increased regulation, and increases in the prices of fuel, insurance, tractors, trailers, and other operating expenses can result in higher purchased transportation expenses to us. Our profitability may decrease if we are unable to increase our pricing to our customers to cover higher expenses, or we may be forced to refuse certain business, which could affect our customer relationships.
Increases in independent contractor driver compensation or other difficulties attracting and retaining qualified independent contractor drivers with onlycould adversely affect our profitability and ability to maintain or grow our independent contractor driver fleet.
Our expedited ground transportation services are provided by our Express-1 subsidiary through a handfulfleet of companyexclusive-use vehicles that are owned and operated by independent contractors. These independent contractor drivers are responsible for maintaining their own equipment and paying their own fuel, insurance, licenses and other operating costs. Independent contractor drivers make up a relatively small portion of the pool of all professional drivers in the United States. Turnover and bankruptcy among independent contractor drivers often limit the pool of qualified independent contractor drivers and increase competition for their services. In addition, new regulations such as CSA 2010 may further reduce the pool of qualified independent contractor drivers. Thus, our Express-1 operations. At timescontinued reliance on independent contractor drivers could limit our ability to grow our ground transportation fleet.
From time to time we have experienced substantialexperience, and we are currently experiencing, difficulty in attracting and retaining sufficient numbers of qualified drivers. In addition, becauseindependent contractor drivers, and such shortages may recur in the future. Additionally, our agreements with independent contractor drivers are terminable by either party upon short notice and without penalty. Consequently, we regularly need to recruit qualified independent contractor drivers to replace those who have left our fleet. If we are unable to retain our existing independent contractor drivers or recruit new independent contractor drivers, our business and results of the higher cost of fuel, insurance,operations could be adversely affected.
The compensation we offer our independent contractor drivers is subject to market conditions and equipment, the available pool of independent contract drivers fluctuates. This is especially apparent within the fleet of straight trucks, which serve many of the critical needs of the expedite industry. Because of the shortage of qualified drivers, the availability of alternative jobs and intense recruiting competition from other trucking companies, we expectmay find it necessary to continue to face difficulty increasingincrease independent contractor drivers’ compensation in future periods, which may be more likely to the number of drivers, who are our principal source of planned fleet expansion and resulting growth. In addition, our industry as a whole suffers from high rates of driver turnover, which requires usextent economic conditions continue to continually recruit a substantial number of drivers in order to maintain our existing fleet.improve. If we are unable to continue to attract and retain a sufficient number of independent contractor drivers, we could be required to adjust our compensation packagesmileage rates and accessorial pay or operate with fewer pieces of equipmenttrucks and face difficulty meeting shipper demands, all of which would adversely affect our growthprofitability and profitability. Anyability to maintain our size or grow.
A determination by regulators or courts that our independent contractor drivers are employees could expose us to various liabilities and additional costs and our business and results of operations could be adversely affected.
Legislative and other regulatory authorities have in the past sought to assert that independent contractor drivers in the trucking industry are employees rather than independent contractors. Many states have initiated enforcement programs to increase their revenues from items such as unemployment, workers’ compensation and income taxes and a reclassification of independent contractor drivers as employees would help states with these initiatives. Further, class actions and other lawsuits have arisen in our operating costs could adversely affectindustry seeking to reclassify independent contractor drivers as employees for a variety of purposes, including workers’ compensation, wage-and-hour, and health care
coverage. Proposed legislation would make it easier for tax and other authorities to reclassify independent contractor drivers as employees. If our growthindependent contractor drivers are determined to be our employees, we would incur additional exposure under federal, state and profitability.
We maintain general liability, auto liability, cargo, physical damage, trailer interchange, inland marine, contents, workers’ compensation, excess auto, general liability, errorsmay be subject to various claims and omissions and director’s and officer’s insurance policies for certain types of risks. Some of these policies are written with deductibles currently up to $25,000 per occurrence. We reserve for anticipated losses and expenses and regularly evaluate and adjust our claims reserves to
14
The nature of our deductibles, webusiness exposes us to the potential for various claims and litigation related to labor and employment (including wage-and-hour litigation relating to independent contractor drivers, sales representatives, brokerage agents and other individuals), personal injury, property damage, business practices, environmental liability and other matters. Any material litigation could have significant exposure to fluctuationsa material adverse effect on our business, results of operations, financial condition or cash flows.
Fluctuations in the numberprice or availability of fuel may change our operations structure and severity of claims. Our operating results could be adversely affected if we experience an increase in the frequency and severity of claims for which we maintain higher deductible policies, accruals of significant amounts within a given period, or claims proving to be more severe than originally assessed.
Fuel expense within a year. We have no assurance that the levels of specific stop-loss purchased or the annual aggregate loss coverage purchased will provide a manageable means to control our health care insurance costs.
NEED FOR SUBSTANTIAL, ADDITIONAL FINANCING MAY NOT BE AVAILABLE, IF NEEDED, AND OUR RESULTS COULD BE NEGATIVELY IMPACTEDWe are subject to regulation beyond our control, which could negatively impact our business.
Our operations are regulated and licensed by various United States and international agencies. Our Expedited Transportation unit is no guarantee that we will be ablelicensed as a motor carrier and property broker, and our Freight Brokerage unit is licensed as a property broker, in each case by the Federal Motor Carrier Safety Administration (“FMCSA”), an agency of the U.S. Department of Transportation (the “DOT”), and by various state agencies. Our Freight Forwarding unit is licensed as an ocean transportation intermediary by the U.S. Federal Maritime Commission as a non-vessel-operating common carrier and as an ocean freight forwarder. We must comply with various insurance and surety bond requirements to obtain financing ifact in these capacities. Our air transportation activities in the United States are subject to regulation by the DOT as an indirect air carrier.
We also are subject to regulations and requirements relating to safety and security promulgated by, among others, the U.S. Department of Homeland Security through the Bureau of U.S. Customs and Border Protection and the Transportation Security Administration, the Canada Border Services Agency and various state and local agencies and port authorities. Our failure to maintain our required licenses, or to expandcomply with applicable regulations, could have a materially adverse impact on our business and results of operations.
Future laws and regulations may be more stringent and require changes in our operating practices, influence the demand for transportation services or that the present funding sources will continuerequire us to extend terms under which we can operate efficiently. If weincur significant additional costs. We are unable to secure financing under favorable terms,predict the impact that recently enacted and future regulations may have on our Company may be negatively affected. There is no assurancebusinesses. Higher costs that we incur as a result of new regulations without a corresponding increase in price to our customers could adversely affect our results of operations.
We derive a significant portion of our revenue from our largest customers, some of which are involved in the highly cyclical automotive industry; our relationships with our customers generally are terminable on short notice and generally do not provide minimum shipping commitments.
While individual customer rankings within our top customers change from time to time, we rely upon our relationship with these large accounts in the aggregate for a significant portion of our revenues. Any interruption or decrease in the business volume awarded by these customers could have a materially adverse impact on our revenues and resulting profitability.
Our most significant customers include certain of the large automotive manufacturers, as well as various automotive industry suppliers. These companies have been, and will continue to be, ableimpacted by the changing landscape in the U.S. automotive market, which is highly competitive and historically has been subject to maintain financingsubstantial cyclical variation characterized by periods of oversupply and weak demand. Negative trends in the U.S. automotive market or a worsening in the financial condition of automotive manufacturers, or within the associated supplier base, could have a materially adverse impact on acceptable terms.
Our contractual relationships with our customers generally are terminable by our customers or us on short notice for any reason or no reason. Moreover, our customers generally are not required to provide any minimum shipping commitments. Our failure to retain our existing customers or enter into relationships with new customers could have a materially adverse impact on our revenues and resulting profitability.
VOLATILITY OF THE MARKET PRICE OF THE COMPANY’S STOCK CAN IMPACT OUR ABILITY TO RAISE ADDITIONAL CAPITAL, IF NEEDED, AND IMPACTS OUR COMPENSATION EXPENSEOur operations are subject to varying liability standards that may result in claims being asserted against us.
With respect to our expedited transportation and freight forwarding operations, we have primary liability to the shipper for cargo loss and damage for certain liabilities caused by our independent contractor drivers. From time to time, our independent contractor drivers, and the drivers engaged by the transportation providers we contract with, are involved in accidents that may result in serious personal injuries or property damage. The market priceresulting types and/or amounts of damages may be excluded by or exceed the amount of insurance coverage maintained by the contracted transportation provider. With respect to our brokerage operations, claims of secondary liability may be asserted against us for the actions of transportation providers to which we broker freight and their employees or independent contractor drivers, or for our actions in retaining them. Claims against us may exceed the amount of our common stockinsurance coverage, or may not be volatile,covered by insurance at all. A material increase in the frequency or severity of accidents, liability claims, or workers’ compensation claims, or unfavorable resolutions of claims, could materially and adversely affect our operating results. In addition, significant increases in insurance costs or the inability to purchase insurance as a result of these claims could reduce our profitability.
Seasonality affects our operations and profitability.
The transportation industry experiences seasonal fluctuations. Our results of operations are typically lower for the first quarter of the calendar year relative to our other quarters. We believe this is due in part to the post-holiday reduction in demand experienced by many of our customers, which leads to more capacity in the non-expedited and service-critical markets and, in turn, less demand for expedited and premium shipping services. In addition, the productivity of our independent contractors and transportation providers generally decreases during the winter season because inclement weather impedes operations.
Terrorist attacks, anti-terrorism measures and war could have broad detrimental effects on our business operations.
As a result of the potential for terrorist attacks, federal, state and municipal authorities have implemented and continue to follow various security measures, including checkpoints and travel restrictions on large trucks. Such measures may reduce the productivity of our independent contractors and transportation providers or increase the costs associated with their operations, which we could be forced to bear. For example, security measures imposed at bridges, tunnels, border crossings and other points on key trucking routes may cause delays and increase the non-driving time of our independent contractors and transportation providers, which could causehave an adverse effect on our results of operations. Congress has mandated 100% security screening of air cargo traveling on passenger airlines effective July 31, 2010, and for ocean freight by July of 2012, which may increase costs associated with our air and freight forwarding operations. War, risk of war, or a terrorist attack also may have an adverse effect on the value of your investment to decline. Any of the following factors could affect the market price of our common stock:
Our outstanding preferred stock price. The stock markets have experienced price and volume volatility that have affected many companies’ stock prices.credit agreement limit our operating and financial flexibility.
We are obligated to pay holders of our Series A Convertible Perpetual Preferred Stock
15
Our current credit agreement contains certain operating performance of those companies. These types of fluctuationsand financial covenants and we expect that any future credit agreement we enter into will contain similarly restrictive covenants. Such covenants limit management’s discretion in operating our business and may affect our ability, among other things, to: incur additional debt; pay dividends and make other distributions; prepay subordinated debt; make investments, acquisitions and other restricted payments; create liens; sell assets; and enter into transactions with affiliates. Failure to comply with the market pricecovenants under our current or future credit agreements may have a materially adverse impact on our operations. In addition, if we fail to comply with the covenants under our current or any future credit agreement, and are unable to obtain a waiver or amendment, an event of default would result under the applicable credit agreement. We cannot assure you that we would have sufficient liquidity to repay or refinance borrowings if such borrowings were accelerated upon an event of default.
We currently do not intend to pay dividends on our common stock.
We adopted SFAS 123R for periods beginning January 1, 2006have never paid, and accordingly recorded compensation expense based in part upon the relative and historic volatility of our Company’s common stock in the statement of income for periods beginning thereafter.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
| ITEM 2. | PROPERTIES |
Our executive offices are located within in an 880 square-foot leased office suite located at 3399 South Lakeshore Drive, Suite 225, Saint Joseph,429 Post Road, Buchanan, Michigan 49085. Within this same office building are common areas to which we have access, including; board and meeting rooms, multimedia facilities and a lounge for visitors. In addition, the49107. The table below identifies otherdescribes the properties that we maintain. We believe each of our properties is appropriately specified and sized for the portion of our operations it houses.
Company | Location | Purpose | Square Feet | Owned or Leased | ||||||||||||
Express-1 Operations and Recruiting Center | 429 Post Road Buchanan, MI | Express-1 headquarters, center & recruiting | 23,000 | Owned | ||||||||||||
XPO Logistics, Inc. | Operations and general office | 4,000 | Leased | |||||||||||||
Express-1/Metro Detroit | 2399 Avon Industrial Drive Rochester Hills, MI 48309 | Metro Detroit Regional expedite call center | 10,500 | Leased | ||||||||||||
Concert Group Logistics | 1430 Branding Ave. Suite 150, Downers Grove, IL 60515 | CGL headquarters and general office | 7,400 | Leased | ||||||||||||
Concert Group Logistics International | 5845 Barry Road Tampa, FL 33634 | International operations station | 6,200 | Leased | ||||||||||||
Concert Group Logistics International | 7855 NW 12th Street Suite 210 Miami, FL 33126 | International operations station | 1,300 | Leased | ||||||||||||
Concert Group Logistics | 1859 Lindberg Street Unit 500 Charlotte, NC 28208 | Operation station | 11,000 | Leased | ||||||||||||
Bounce Logistics | 5838 W. Brick Road South Bend, IN 46628 | Bounce headquarters general office | ||||||||||||||
| Leased | ||||||||||||||||
XPO Logistics, LLC | Hayden Corporate Center 8283 North Hayden Road Suite 220 Scottsdale, AZ 85258 | Brokerage operations | 5,100 | |||||||||||||
16
We carry liability and excess umbrella insurance policies that we deem sufficient to cover potential legal claims will not bearising in the normal course of conducting our operations as a transportation company. In the event we are required to satisfy a legal claim in excess of the reserves established. Additionally, we maintain liabilitycoverage provided by this insurance, our cash flows and umbrella liability insurance policies that provide protection against claims up to various limits of liability. These limits are intended toearnings could be sufficient to reasonably protect the Company against claims. In the opinion of our management, the ultimate disposition of all known matters will not have a materially adverse effect on our consolidated financial position, results of operations or liquidity.
| ITEM 4. |
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Price Range of Common Stock
The Company’s common stock is traded on the NYSE AMEX Equities ExchangeAmex under the symbol “XPO.” The table below sets forth the high and low closing sales prices (adjusted for the 4-for-1 reverse stock split effected September 2, 2011) for the Company’s common stock for the quarters included within 20082010 and 20072011 and for the first few months of 2009. Quotations reflect inter-dealer prices, without retailmark-up, mark-down commission, and may not represent actual transactions.
| High | Low | |||||||
2007 | ||||||||
| 1st quarter | $ | 1.58 | $ | 1.24 | ||||
| 2nd quarter | 1.47 | 1.26 | ||||||
| 3rd quarter | 1.39 | 1.21 | ||||||
| 4th quarter | 1.36 | 1.09 | ||||||
2008 | ||||||||
| 1st quarter | $ | 1.26 | $ | 0.98 | ||||
| 2nd quarter | 1.36 | 1.10 | ||||||
| 3rd quarter | 1.42 | 1.20 | ||||||
| 4th quarter | 1.21 | 0.85 | ||||||
2009 | ||||||||
| 1st quarter (through March 12, 2009) | $ | 1.10 | $ | 0.67 | ||||
| High | Low | |||||||
2010 | ||||||||
1st quarter | $ | 6.60 | $ | 4.88 | ||||
2nd quarter | 6.24 | 5.04 | ||||||
3rd quarter | 7.52 | 4.96 | ||||||
4th quarter | 11.28 | 7.96 | ||||||
2011 | ||||||||
1st quarter | $ | 12.12 | $ | 8.48 | ||||
2nd quarter | 13.28 | 8.28 | ||||||
3rd quarter | 17.00 | 7.67 | ||||||
4th quarter | 12.66 | 6.98 | ||||||
2012 | ||||||||
1st quarter (through February 20, 2012) | $ | 14.90 | $ | 11.35 | ||||
As of March 11, 2009,February 20, 2012, there were over 3000approximately 7,700 holders of record of the Company’sour common stock, based upon data available to us from our proxy solicitor, transfer agent and market maker for our common stock. The Company hasWe have never paid, and have no immediate plans to pay, cash dividends on itsour common stock and intendsstock. We currently plan to keepretain future earnings ifand cash flows for use in the development of our business and to enhance stockholder value through growth and continued focus on increasing profitability rather than pay dividends on our common stock. In addition, our current credit agreement imposes, and we expect that any future credit agreement we enter into will impose, restrictions on our ability to retire debt and finance the expansion of its business.pay cash dividends on our common stock. Accordingly, the Company doeswe do not anticipate thatpaying any cash dividends will be paidon our common stock in the near future. Future payment of dividends on our common stock would depend on the Company’sour earnings, capital requirements, expansion plans, financial condition and other relevant factors.
17
Equity Compensation Plan
| (c) | ||||||||||||
| Number of Securities | ||||||||||||
| (b) | Remaining Available for | |||||||||||
| (a) | Weighted-Average | Future Issuance under | ||||||||||
| Number of Securities to | Exercise Price of | Equity Compensation | ||||||||||
| be Issued upon Exercise | Outstanding | Plan (Excluding | ||||||||||
| of Outstanding Options, | Options, Warrants | Securities Reflected in | ||||||||||
Plan Category | Warrants and Rights | and Rights | Column (a)) | |||||||||
| Equity compensation plans approved by security holders | 3,609,000 | $ | 1.18 | 1,991,000 | ||||||||
| Warrants issued to raise capital | 2,252,000 | $ | 2.05 | N/A | ||||||||
18
| Item 6. | |
| SELECTED FINANCIAL DATA |
This table includes selected consolidated financial data presented below for and as of the end of, each of the years in the five-year period ended December 31, 2008 is derived from our Consolidated Financial Statements. The Consolidated Financial Statements as of December 31, 2008 and 2007, and for each of the years in the three-year period ended December 31, 2008 and the independent registered public accountants’ reports thereon, are included in Item 8 of thisForm 10-K.last five years. This financial data should be read in conjunctiontogether with theour audited Consolidated Financial Statements and Notes thereto includedrelated notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other financial data appearing elsewhere in Item 8this Annual Report.
XPO Logistics, Inc.
Consolidated Statements of thisForm 10-K.Operations
| Fiscal Year Ended | ||||||||||||||||||||
| December 31, 2011 | December 31, 2010 | December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||||||||
Consolidated Statements of Operations Data: | ||||||||||||||||||||
Operating revenue | $ | 177,076,000 | $ | 157,987,000 | $ | 100,136,000 | $ | 109,462,000 | $ | 47,713,000 | ||||||||||
Income from continuing operations | 759,000 | 4,888,000 | 1,690,000 | 2,817,000 | 1,813,000 | |||||||||||||||
Income from discontinued operations | — | — | 15,000 | 339,000 | 358,000 | |||||||||||||||
Preferred stock beneficial conversion charge and preferred dividends | (45,336,000 | ) | — | — | — | — | ||||||||||||||
Net (loss) income available to common stockholders | $ | (44,577,000 | ) | $ | 4,888,000 | $ | 1,705,000 | $ | 3,156,000 | $ | 2,171,000 | |||||||||
Earnings Per Share | ||||||||||||||||||||
Basic | $ | (5.41 | ) | $ | 0.61 | $ | 0.21 | $ | 0.40 | $ | 0.33 | |||||||||
Diluted | (5.41 | ) | 0.59 | 0.21 | 0.40 | 0.32 | ||||||||||||||
Weighted average common shares outstanding | ||||||||||||||||||||
Basic | 8,246,577 | 8,060,346 | 8,008,805 | 7,863,439 | 6,672,596 | |||||||||||||||
Diluted | 8,246,577 | 8,278,995 | 8,041,862 | 7,939,291 | 6,831,682 | |||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Working capital | $ | 83,070,000 | $ | 12,314,000 | $ | 970,000 | $ | 4,428,000 | $ | 3,781,000 | ||||||||||
Total assets | $ | 127,641,000 | $ | 56,672,000 | $ | 49,039,000 | $ | 41,682,000 | $ | 23,724,000 | ||||||||||
Total long-term debt and capital leases | $ | 2,129,000 | $ | 6,512,000 | $ | 1,428,000 | $ | 4,955,000 | $ | 84,000 | ||||||||||
Preferred Stock | $ | 42,794,000 | $ | — | $ | — | $ | — | $ | — | ||||||||||
Stockholder’s equity | $ | 108,360,000 | $ | 34,013,000 | $ | 28,404,000 | $ | 26,527,000 | $ | 18,202,000 | ||||||||||
The Company effected a 4-for-1 reverse stock split on September 2, 2011. All data expressed in the table is expressed in thousands except for earningsshare and per share data.
| Year Ended December 31, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Consolidated Statements of Earnings Data: | ||||||||||||||||||||
| Operating revenue from continuing operations | $ | 109,462 | $ | 47,713 | $ | 37,327 | $ | 35,383 | $ | 37,842 | ||||||||||
| Net income (loss) from continuing operations | 2,817 | 1,813 | 3,583 | (5,672 | ) | (2,686 | ) | |||||||||||||
| Net income (loss) from continuing operations per common share | $ | 0.09 | $ | 0.07 | $ | 0.14 | $ | (0.21 | ) | $ | (0.11 | ) | ||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
| Cash | $ | 1,107 | $ | 800 | $ | 79 | $ | 386 | $ | 854 | ||||||||||
| Working capital | 4,708 | 3,781 | 2,248 | 1,342 | 3,714 | |||||||||||||||
| Total assets | 41,682 | 23,724 | 21,609 | 18,454 | 25,065 | |||||||||||||||
| Long-term obligations | 4,759 | 650 | 1,401 | 2,787 | 575 | |||||||||||||||
| Item 7. | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion in conjunction with Part I, including matters set forth under Item 1A, “Risk Factors”, of this Annual Report, and our audited Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report. The following discussion contains forward-looking statements. You should refer to the “Cautionary Statement Regarding Forward-Looking Statements” set forth in Part I of this Annual Report.
Executive Summary
XPO Logistics, Inc., a Delaware corporation (the “Company”, “we”, “our” or “us”), is a third party logistics provider of freight transportation services through three non-asset based or asset-light business units: Expedited Transportation, Freight Forwarding and Freight Brokerage. These business units provide services complementary to each other, effectively giving us a platform for expansion in three distinct areas of the transportation industry.
Business Unit | Subsidiary(ies) | Primary Office Location(s) | Date Initiated or Acquired | |||
Expedited Transportation | Express-1 | Buchanan, Michigan | August 2004 | |||
Freight Forwarding | Concert Group Logistics | Downers Grove, Illinois | January 2008 | |||
Freight Brokerage | Bounce Logistics and XPO Logistics | South Bend, Indiana and Phoenix, Arizona | March 2008 | |||
Expedited Transportation—Express-1, Inc. (“Express-1”) was founded in 1989 and acquired in 2004. Express-1 provides time-critical expedited transportation to its customers, most typically through carrier arrangements that assign one truck to a load, with a specified delivery time requirement. Most of the services provided by Express-1 are completed via a fleet of exclusive-use vehicles that are owned and operated by independent contract drivers.
Freight Forwarding—Concert Group Logistics, Inc. (“CGL”) was founded in 2001 and acquired in 2008. CGL provides freight forwarding services through a network of independently owned stations and Company-owned branches located throughout the United States. These stations and branches are responsible for selling and operating freight forwarding transportation services within their geographic area under the authority of CGL. In October 2009, certain assets and liabilities of LRG International Inc. (now known as CGL International) were purchased to complement the operations of CGL through two Florida branches that primarily provide international freight forwarding services. The financial reporting of this operation has been included within CGL.
Freight Brokerage—Through our Freight Brokerage unit, we arrange freight transportation and provide related logistics and supply chain services to customers in North America, ranging from commitments on specific individual shipments to more comprehensive and integrated relationships. From January 2008 until the fourth quarter of 2011, we provided these services solely through our Bounce Logistics, Inc. subsidiary (“Bounce Logistics”). During the fourth quarter of 2011, we opened a sales office in Phoenix, Arizona, which provides freight brokerage services under the name XPO Logistics. The Phoenix office is the first of several cold-start sales offices we plan to open during the next two years.
The Company generally does not own its own trucks, ships or planes; instead we use a network of relationships with ground, ocean and air carriers to find the best transportation solutions for our customers. This allows capital to be invested primarily in expanding our workforce of talented people who are adept in the critical areas of competitive selling, price negotiation, carrier relations and customer service.
GROWTH STRATEGY
Following a significant equity investment by Jacobs Private Equity, LLC (“JPE”) in the Company in September 2011 (as described below under “Recent Developments”), we began to implement a growth strategy
that will leverage our strengths—including management expertise, substantial liquidity and potential access to additional capital—in pursuit of profitable growth. Our strategy anticipates that this will be facilitated by a highly experienced executive team recently put in place, and by new technology that will integrate our operations on a shared platform for cross-company benchmarking and analysis.
Our growth strategy focuses on the following three key areas:
| • | Targeted acquisitions—We intend to make selective acquisitions of non-asset based logistics freight brokerage businesses that would benefit from our greater scale and potential access to capital, and we may make similar acquisitions of freight forwarding, expedited and intermodal service businesses, among others. We believe that we are in a position to make the first phase of acquisitions by using existing cash and expanding our credit facilities. |
| • | Organic growth—We plan to establish new freight brokerage offices in locations across North America, and we are actively recruiting managers with a proven track record of building successful brokerage operations. We expect the new brokerage offices to generate revenue growth by developing customer and carrier relationships in new territories. |
| • | Optimized operations—We intend to optimize our existing operations, acquired companies and greenfield locations by investing in an expanded sales and service workforce, implementing an advanced information technology infrastructure, incorporating industry best practices, and leveraging scale to share capacity more efficiently and increase buying power. |
Recent Developments
Equity Investment
In September 2011, pursuant to the Investment Agreement, dated as of June 13, 2011 (the “Investment Agreement”), by and among JPE, the other investors party thereto (collectively with JPE, the “Investors”) and the Company, we issued to the Investors, for $75.0 million in cash: (i) an aggregate of 75,000 shares of our Series A Convertible Perpetual Preferred Stock (the “Series A Preferred Stock”), which are initially convertible into an aggregate of 10,714,286 shares of our common stock, and (ii) warrants initially exercisable for an aggregate of 10,714,286 shares of our common stock at an initial exercise price of $7.00 per common share (the “Warrants”). Our stockholders approved the issuance of the Series A Preferred Stock and the Warrants at the special meeting of our stockholders on September 1, 2011. We refer to this investment as the “Equity Investment.” See Note 10 to our audited Consolidated Financial Statements in Item 8 of this Annual Report.
The conversion feature of the Series A Preferred Stock was determined to be a beneficial conversion feature (“BCF”) based on the effective initial conversion price and the market value of our common stock at the commitment date for the issuance of the Series A Preferred Stock. Generally accepted accounting principles in the United States (“US GAAP”) require that we recognize the BCF related to the Series A Preferred Stock as a discount on the Series A Preferred Stock and amortize such amount as a deemed distribution through the earliest conversion date. The calculated value of the BCF was in excess of the relative fair value of net proceeds allocated to the Series A Preferred Stock. Accordingly, during the third quarter of 2011 we recorded a discount on the Series A Preferred Stock of $44.2 million with immediate recognition of this amount as a deemed distribution because the Series A Preferred Stock is convertible at any time.
Change of Company Name
In connection with the closing of the Equity Investment, our name was changed from “Express-1 Expedited Solutions, Inc.” to “XPO Logistics, Inc.” on September 2, 2011. Our stockholders approved the amendment to our certificate of incorporation effecting the name change at the special meeting of our stockholders on September 1, 2011.
Reverse Stock Split
In connection with the closing of the Equity Investment, we effected a 4-for-1 reverse stock split on September 2, 2011. Our stockholders approved the amendment to our certificate of incorporation effecting the reverse stock split at the special meeting of our stockholders on September 1, 2011. Unless otherwise noted, all share-related amounts in this Annual Report and our audited Consolidated Financial Statements and the related Notes thereto reflect the reverse stock split.
In connection with the reverse stock split, our stockholders received one new share of our common stock for every four shares of common stock held at the effective time. The reverse stock split reduced the number of shares of outstanding common stock from 33,011,561 to 8,252,891. Proportional adjustments were made to the number of shares issuable upon the exercise of outstanding options to purchase shares of common stock and the per share exercise price of those options.
Increase in Authorized Shares of Common Stock
In connection with the closing of the Equity Investment, the number of authorized shares of our common stock was increased from 100,000,000 shares to 150,000,000 shares on September 2, 2011. Our stockholders approved the amendment to our certificate of incorporation effecting the increase in the number of authorized shares of common stock at the special meeting of the Company’s stockholders on September 1, 2011.
Other Reporting Disclosures
Throughout our reports, we refer to the impact of fuel on our business. For purposes of these references, we have considered the impact of fuel surcharge revenues and the related fuel surcharge expenses only as they relate to our Expedited Transportation business unit. The expedited transportation industry commonly negotiates both fuel surcharges charged to its customers as well as fuel surcharges paid to its carriers. Therefore, we feel that this approach most readily conveys the impact of fuel revenues, costs and the resulting gross margin within this business unit. Our fuel surcharges are determined on a negotiated customer-by-customer basis and are primarily based on a fuel matrix driven by the Department of Energy fuel price index. Fuel surcharge revenues are charged to our customers to provide for variable costs associated with changing fuel prices. Independent contractors and brokered carriers are responsible for the cost of fuel, and therefore are paid a fuel surcharge by the Company to offset their variable cost of fuel. The fuel surcharge payment is expensed as paid and included in the Company’s cost of transportation. Fuel surcharge payments are consistently applied based on the Department of Energy fuel price index and the type of truck utilized. Because fuel surcharge revenues vary based on negotiated customer rates and the overall mix of business, and because our fuel surcharge expense is applied on a consistent basis, gross margin and our gross margin percentage attributable to fuel surcharges will vary from period to period. The impact of fuel surcharge revenue and expense is discussed within management’s discussion and analysis of our Expedited Transportation business unit.
Within our other two business units, Freight Forwarding and Freight Brokerage, fuel charges to our customers are not commonly negotiated and identified separately from total revenue and the associated cost of transportation. Although fuel costs are factored into overall pricing of these services, they are not typically separately identified between carriers and therefore we have not included an analysis of fuel surcharges for these two operating segments. We believe this is a common practice within the freight forwarding and freight brokerage business sectors.
This discussion and analysis refers from time to time to Expedited Transportation’s international operations. These operations consist 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 freight is intended to furthercarried for domestic customers who pay in U.S. dollars. We discuss this freight separately because our Expedited Transportation business unit has developed an expertise in cross-docking freight at the reader’s understandingborder 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. We discuss this freight separately because of Freight Forwarding’s more recent focus on international freight through its purchase of LRG International, Inc. (now known as CGL International), and because we believe that international freight could be a significant source of growth for us in the future.
We often refer to the costs of our board of directors, our executive team and certain operating costs associated with operating as a public company as “corporate” charges. In addition to the aforementioned items, we also record items such as our income tax provision and other charges that are reported on a consolidated basis within the corporate line items of the following tables.
The following tables are provided to allow readers to review results within our major operating segments.
XPO Logistics, Inc.
Summary Financial Table
For the Twelve Months Ended December 31,
| Percent of Revenue | Percentage Change | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011-2010 | 2010-2009 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Operating revenue | $ | 177,076,000 | $ | 157,987,000 | $ | 100,136,000 | 100.0 | % | 100.0 | % | 100.0 | % | 12.1 | % | 57.8 | % | ||||||||||||||||
Direct expense | ||||||||||||||||||||||||||||||||
Transportation services | 133,007,000 | 117,625,000 | 72,284,000 | 75.1 | % | 74.5 | % | 72.2 | % | 13.1 | % | 62.7 | % | |||||||||||||||||||
Station commissions | 11,098,000 | 10,724,000 | 8,798,000 | 6.3 | % | 6.8 | % | 8.8 | % | 3.5 | % | 21.9 | % | |||||||||||||||||||
Insurance | 1,597,000 | 1,161,000 | 1,568,000 | 0.9 | % | 0.7 | % | 1.6 | % | 37.6 | % | -26.0 | % | |||||||||||||||||||
Other | 1,596,000 | 1,077,000 | 746,000 | 0.9 | % | 0.7 | % | 0.7 | % | 48.2 | % | 44.4 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Direct expense | 147,298,000 | 130,587,000 | 83,396,000 | 83.2 | % | 82.7 | % | 83.3 | % | 12.8 | % | 56.6 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Gross margin | 29,778,000 | 27,400,000 | 16,740,000 | 16.8 | % | 17.3 | % | 16.7 | % | 8.7 | % | 63.7 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
SG&A expenses | ||||||||||||||||||||||||||||||||
Salaries & benefits | 15,158,000 | 12,039,000 | 7,971,000 | 8.6 | % | 7.6 | % | 8.0 | % | 25.9 | % | 51.0 | % | |||||||||||||||||||
Purchased services | 6,733,000 | 2,519,000 | 1,917,000 | 3.8 | % | 1.6 | % | 1.9 | % | 167.3 | % | 31.4 | % | |||||||||||||||||||
Depreciation & amortization | 1,046,000 | 1,173,000 | 1,123,000 | 0.6 | % | 0.7 | % | 1.1 | % | -10.8 | % | 4.5 | % | |||||||||||||||||||
Other | 5,117,000 | 3,223,000 | 2,558,000 | 2.9 | % | 2.0 | % | 2.6 | % | 58.8 | % | 26.0 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total SG&A expenses | 28,054,000 | 18,954,000 | 13,569,000 | 15.8 | % | 12.0 | % | 13.6 | % | 48.0 | % | 39.7 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating income | 1,724,000 | 8,446,000 | 3,171,000 | 1.0 | % | 5.3 | % | 3.2 | % | -79.6 | % | 166.4 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Other expense | 56,000 | 140,000 | 51,000 | 0.0 | % | 0.1 | % | 0.1 | % | -60.0 | % | 174.5 | % | |||||||||||||||||||
Interest expense | 191,000 | 205,000 | 105,000 | 0.1 | % | 0.1 | % | 0.1 | % | -6.8 | % | 95.2 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Income before income tax | 1,477,000 | 8,101,000 | 3,015,000 | 0.8 | % | 5.1 | % | 3.0 | % | -81.8 | % | 168.7 | % | |||||||||||||||||||
Income tax provision (benefit) | 718,000 | 3,213,000 | 1,325,000 | 0.4 | % | 2.0 | % | 1.3 | % | -77.7 | % | 142.5 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Income from Continuing Operations | 759,000 | 4,888,000 | 1,690,000 | 0.4 | % | 3.1 | % | 1.7 | % | -84.5 | % | 189.2 | % | |||||||||||||||||||
Income from Discontinued Operations, Net of Tax | — | — | 15,000 | 0.0 | % | 0.0 | % | 0.0 | % | — | -100.0 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net Income | $ | 759,000 | $ | 4,888,000 | $ | 1,705,000 | 0.4 | % | 3.1 | % | 1.7 | % | -84.5 | % | 186.7 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Consolidated Results
2011 vs. 2010
In total, the Company’s financial conditionconsolidated revenues for fiscal year 2011 were 12.1% greater than fiscal year 2010. This growth was driven primarily by increased international revenues at Express-1 and continued strong growth in our Freight Brokerage unit.
Direct expenses represent expenses attributable to freight transportation. Our “asset-light” operating model arranges transportation capacity through variable cost transportation alternatives, and therefore enables us to control certain of our operating costs as our volumes fluctuate. Our primary means of arranging transportation capacity are through our fleet of independent contractors in Expedited Transportation and our network of independent ground, ocean and air carriers in Freight Forwarding and Freight Brokerage. We believe this operating model gives us a strategic advantage as compared to transportation providers who directly own assets, particularly in uncertain economic conditions. Our overall gross margin for fiscal year 2011 was 16.8%, a decrease when compared to 17.3% in fiscal year 2010. The decrease in gross margin can be attributed primarily to the following items:
International shipments in Expedited Transportation tend to be higher revenue transactions than domestic shipments, but historically have generated a lower gross margin percentage. As international business becomes a larger component of our revenue, we expect to experience continuing decreases in gross margin percentage as our business mix shifts.
Freight Brokerage continues to grow at a higher rate than Expedited Transportation and Freight Forwarding, which we expect to continue in the future. Freight Brokerage historically has a lower gross margin percentage compared with Expedited Transportation. As our business mix shifts toward Freight Brokerage in the future, we expect to experience continuing decreases in gross margin percentage.
Selling, general and administrative (“SG&A”) expenses as a percentage of revenue were 15.8% for fiscal year 2011, an increase from 12.0% in 2010. Overall, SG&A expenses increased by $9.1 million for full year 2011 compared to 2010, resulting from an increase of $4.2 million in purchased services, of which approximately $1.0 million represented indirect expenses associated with the Equity Investment and $1.9 million represented recruiting and other costs related to new executive team appointments. Salary and benefit costs increased by $3.1 million related primarily to our investment in additional salespeople at Freight Brokerage and Freight Forwarding and the new executive team appointments, of which $850,000 were one-time guarantees recorded during the fourth quarter of 2011. Additionally, other SG&A costs were up $1.9 million mainly due to equity compensation expense of approximately $900,000 recorded in the fourth quarter of 2011 related to equity grants for the new executive team.
As of December 31, 2011, we had approximately $4.0 million of unrecognized compensation cost related to non-vested stock option-based compensation that we expect to recognize over a weighted average period of approximately 4.3 years. Also as of December 31, 2011, we had approximately $6.9 million of unrecognized compensation cost related to non-vested restricted stock-based compensation that we expect to recognize over a weighted average period of approximately 4.5 years.
Our effective income tax rate for the fiscal year ended December 31, 2011 was 46% as compared to 40% for the fiscal year ended December 31, 2010 associated with out of period tax charges incurred in 2011.
The Company finished fiscal year 2011 with $759,000 in net income, which is a 84.5% decrease when compared to $4.9 million for fiscal year 2010. Investment in the new executive team and corporate infrastructure, which includes payroll, equity compensation and professional fees, and indirect transaction costs related to the Equity Investment contributed to the reduction in net income.
2010 vs. 2009
The actions we took in 2009 to minimize the negative impact of the economic downturn significantly helped improve results of operations during 2010. We experienced solid financial improvements across our business units, including improvements in: gross revenues, gross margin percentage, SG&A-to-revenue ratios and should be readnet income. Our gross margin percentage and SG&A-to-revenue ratios returned to more historic levels during 2010 as the economy improved.
Overall consolidated revenues of $158.0 million for fiscal year 2010 represented an increase of 57.8% over fiscal year 2009. LRG International, acquired in conjunctionOctober of 2009, contributed $12.1 million of the revenue growth for 2010, with remaining growth being achieved organically.
In 2010, the consolidated gross margin percentage improved to 17.3% from 16.7% in 2009 as the result of significant margin improvements at our Expedited Transportation unit and an overall improvement in our mix of business.
SG&A expenses as a percentage of revenue declined steadily throughout the year as revenues increased more quickly than SG&A costs.
Accordingly, net income improved to $4.9 million in 2010, which represented a 187% increase over net income of $1.7 million in full year 2009.
Our Express-1 Dedicated business unit was discontinued during the fourth quarter of 2008 due to the loss of the contract with its key customer. All operations were ceased effective February 28, 2009, and all assets have either been sold or transferred to our other operations.
Expedited Transportation
(Express -1)
Summary Financial Table
For the Twelve Months Ended December 31,
| Percent of Revenue | Percentage Change | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011-2010 | 2010-2009 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Operating revenue | $ | 87,558,000 | $ | 76,644,000 | $ | 50,642,000 | 100.0 | % | 100.0 | % | 100.0 | % | 14.2 | % | 51.3 | % | ||||||||||||||||
Direct expense | ||||||||||||||||||||||||||||||||
Transportation services | 66,267,000 | 57,129,000 | 37,728,000 | 75.7 | % | 74.5 | % | 74.5 | % | 16.0 | % | 51.4 | % | |||||||||||||||||||
Insurance | 1,404,000 | 1,020,000 | 1,437,000 | 1.6 | % | 1.3 | % | 2.8 | % | 37.6 | % | -29.0 | % | |||||||||||||||||||
Other | 1,594,000 | 1,077,000 | 709,000 | 1.8 | % | 1.4 | % | 1.4 | % | 48.0 | % | 51.9 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Direct expense | 69,265,000 | 59,226,000 | 39,874,000 | 79.1 | % | 77.3 | % | 78.7 | % | 17.0 | % | 48.5 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Gross margin | 18,293,000 | 17,418,000 | 10,768,000 | 20.9 | % | 22.7 | % | 21.3 | % | 5.0 | % | 61.8 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
SG&A expenses | ||||||||||||||||||||||||||||||||
Salaries & benefits | 6,854,000 | 7,061,000 | 5,062,000 | 7.8 | % | 9.2 | % | 10.0 | % | -2.9 | % | 39.5 | % | |||||||||||||||||||
Purchased services | 1,426,000 | 1,249,000 | 782,000 | 1.6 | % | 1.6 | % | 1.5 | % | 14.2 | % | 59.7 | % | |||||||||||||||||||
Depreciation & amortization | 403,000 | 494,000 | 521,000 | 0.5 | % | 0.6 | % | 1.0 | % | -18.4 | % | -5.2 | % | |||||||||||||||||||
Other | 1,411,000 | 1,008,000 | 957,000 | 1.6 | % | 1.3 | % | 1.9 | % | 40.0 | % | 5.3 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total SG&A expenses | 10,094,000 | 9,812,000 | 7,322,000 | 11.5 | % | 12.8 | % | 14.5 | % | 2.9 | % | 34.0 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating income | $ | 8,199,000 | $ | 7,606,000 | $ | 3,446,000 | 9.4 | % | 9.9 | % | 6.8 | % | 7.8 | % | 120.7 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Expedited Transportation
2011 vs. 2010
Our Expedited Transportation segment generated fiscal year 2011 revenue of $87.6 million, reflecting growth of 14.2% compared to 2010. As the international component of our Expedited Transportation unit increased during 2011, Mexican and Canadian cross-border freight represented 24.2% of segment revenue for 2011, compared to 20.1% of segment revenue for 2010.
For the year ended December 31, 2011, rising fuel prices positively impacted our revenue as fuel charge revenues represented 16.4% of our revenue as compared to 12.3% for 2010.
Expedited Transportation’s gross margin percentage was 20.9% for fiscal year 2011, compared to 22.7% for 2010. Reasons for the decrease in gross margin percentage include:
The increase in international transactions, which are typically higher revenue shipments at a lower gross margin percentage than our domestic transactions;
A higher percentage of shipments placed through brokered carriers, associated mainly with the growth in international business. All cross-border moves are handled by brokered carriers; and
Expedited Transportation results in the third quarter of 2010 were positively impacted by floods in Mexico that generated significantly higher margins than normal.
Historically, the utilization of brokered carriers has enabled our Expedited Transportation unit to handle peak volume periods for its customers while building its fleet of independent contractor drivers. Brokered carriers also are utilized to more efficiently handle freight that crosses into Canada or Mexico. This component of Expedited Transportation’s purchased transportation costs is critical to our ongoing success; however, gross margin percentages relating to this business are typically lower than margins associated with our consolidated financial statementsown fleet of independent contractor drivers. During fiscal year 2011, 32.5% of our Expedited Transportation unit’s revenue was carried by brokered carriers as compared to 29.6% for 2010. The increase was due primarily to the growth of our international business.
SG&A expenses as a percentage of revenue decreased to 11.5% for full year 2011 from 12.8% for 2010. This decrease in SG&A as a percentage of revenues was driven by improved leverage as our 2011 Expedited Transportation revenues increased $10.9 million as compared to 2010, with a 2.9% increase during 2011 of $282,000 in SG&A expenses as compared to 2010.
Operating income increased by 7.8% or $593,000 for fiscal year 2011 compared to 2010, driven primarily by the factors described above.
Management’s growth strategy for our Expedited Transportation unit is based on:
| • | Targeted investments to expand the sales and service workforce, in order to capture key opportunities in specialized areas (e.g., refrigeration and defense); |
An increased focus on carrier recruitment and retention, as well as improved utilization of the current carrier fleet;
Technology upgrades to improve efficiency in sales and carrier procurement; and
Selective acquisitions of non-asset based expedited businesses that would benefit from our scale and potential access to capital.
2010 vs. 2009
During 2010, Expedited Transportation generated annual revenue of $76.6 million. Expedited Transportation’s 2010 revenue increased 51% when compared to 2009. For the year ended December 31, 2010, Expedited Transportation’s continued investment in sales diversification paid off as it expanded its presence into other markets. Also, the results of the Company’s investment in its Mexican operations continued to exceed management’s expectations. Mexican operations generated 16% of the Company’s total revenue for full year 2010 as compared to 13% during 2009. This growth has contributed to our overall improvement in diversifying our customer base, which historically has been heavily dependent on the automotive sector. In general, overall pricing remained stable in 2010 as compared to 2009. Expedited Transportation historically has rebounded quickly from recessions as the expediting industry in general is typically one of the first benefactors of a recovering economy. This proved to be true during 2010 as Expedited Transportation experienced significant quarter-over-quarter growth during 2010 as compared to 2009.
Fuel prices increased throughout the year resulting in a corresponding increase in fuel surcharge as a percentage of revenue. For the year ended December 31, 2010, fuel surcharge revenues represented 12.3% of our revenue as compared to 9.5% in the same period in 2009. Rising fuel prices tend to have a negative impact on our gross margin percentage since these revenues are substantially passed through to our independent contractor drivers and do not tend to add any additional gross margin dollars to the Company.
Expedited Transportation’s direct expenses represent both fleet costs associated with their fleet of independent contractor drivers along with brokerage costs related notesto runs that are brokered to other carriers. Expedited Transportation’s gross margin percentage increased to 22.7% for the year ended December 31, 2010 compared to 21.3% for 2009. The primary factor resulting in the increased gross margin percentage was a favorable mix shift for business at our Expedited Transportation unit. Variables that impacted the mix of business included elsewhere herein. This discussion also contains forward-looking statements. the vehicle type utilized and our customer utilization mix.
As a percentage of total revenue, our SG&A costs dropped for the year ended December 31, 2010 to 12.8% as compared to 14.5% for 2009. Overall, SG&A expenses increased by $2.5 million for full year 2010 as compared to 2009. Increased salaries and benefits accounted for $2.0 million of the increase in SG&A at Expedited Transportation. Approximately $815,000 of the salary and benefits increases resulted from the reestablishment of incentive compensation and the Company match under the XPO Logistics, Inc. 401(k) Plan. An additional $270,000 of the increase resulted from increased expenses relating to the Company’s health insurance plan. The remaining $1.1 million of increased SG&A expenses resulted from the addition of new employees and raises received by existing employees.
Freight Forwarding
(Concert Group Logistics)
Summary Financial Table
For the Twelve Months Ended December 31,
| Percent of Revenue | Percentage Change | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011-2010 | 2010-2009 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Operating revenue | $ | 65,148,000 | $ | 65,222,000 | $ | 41,162,000 | 100.0 | % | 100.0 | % | 100.0 | % | -0.1 | % | 58.5 | % | ||||||||||||||||
Direct expense | ||||||||||||||||||||||||||||||||
Transportation services | 47,122,000 | 47,694,000 | 28,067,000 | 72.3 | % | 73.1 | % | 68.2 | % | -1.2 | % | 69.9 | % | |||||||||||||||||||
Station commissions | 11,098,000 | 10,724,000 | 8,798,000 | 17.0 | % | 16.4 | % | 21.4 | % | 3.5 | % | 21.9 | % | |||||||||||||||||||
Insurance | 140,000 | 131,000 | 114,000 | 0.2 | % | 0.2 | % | 0.3 | % | 6.9 | % | 14.9 | % | |||||||||||||||||||
Other | — | — | — | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Direct expense | 58,360,000 | 58,549,000 | 36,979,000 | 89.6 | % | 89.8 | % | 89.8 | % | -0.3 | % | 58.3 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Gross margin | 6,788,000 | 6,673,000 | 4,183,000 | 10.4 | % | 10.2 | % | 10.2 | % | 1.7 | % | 59.5 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
SG&A expenses | ||||||||||||||||||||||||||||||||
Salaries & benefits | 2,897,000 | 2,670,000 | 1,615,000 | 4.4 | % | 4.1 | % | 3.9 | % | 8.5 | % | 65.3 | % | |||||||||||||||||||
Purchased services | 432,000 | 228,000 | 129,000 | 0.7 | % | 0.3 | % | 0.3 | % | 89.5 | % | 76.7 | % | |||||||||||||||||||
Depreciation & amortization | 575,000 | 629,000 | 575,000 | 0.9 | % | 1.0 | % | 1.4 | % | -8.6 | % | 9.4 | % | |||||||||||||||||||
Other | 1,339,000 | 1,264,000 | 743,000 | 2.1 | % | 1.9 | % | 1.8 | % | 5.9 | % | 70.1 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total SG&A expenses | 5,243,000 | 4,791,000 | 3,062,000 | 8.0 | % | 7.3 | % | 7.4 | % | 9.4 | % | 56.5 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating income | $ | 1,545,000 | $ | 1,882,000 | $ | 1,121,000 | 2.4 | % | 2.9 | % | 2.7 | % | -17.9 | % | 67.9 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Freight Forwarding
2011 vs. 2010
Our actual results could differ materiallyFreight Forwarding unit’s revenues for the fiscal year ended December 31, 2011 were $65.1 million, which was essentially flat with 2010. The gains in the first six months of 2011 were offset in the last six months of 2011 by certain lost revenue from those anticipatedlarger customers and specific project work from 2010.
Direct expenses consisted primarily of payments for purchased transportation and payments to Freight Forwarding’s independent offices that control the overall operation of our customers’ shipments. As a percentage of revenue, direct expenses of 89.6% for the full year ended 2011 were flat as compared to 89.8% for 2010. The gross margin percentage for full year 2011 of 10.4% was flat as compared to 10.2% for 2010.
SG&A expenses as a percentage of revenue increased to 8.0% of revenues for full year 2011 compared to 7.3% for 2010. Overall, SG&A expenses for full year 2011 increased by approximately $450,000 compared to 2010 due to an increase in these forward-looking statementspurchased services and our investments in additional salespeople.
Primarily as a result of the risksSG&A increase discussed above, Freight Forwarding’s full-year 2011 operating income of $1.5 million decreased 17.9% as compared to 2010.
As of December 31, 2011 and uncertainties set forth elsewhereDecember 31, 2010, the Company maintained a network of 23 independent offices and two Company-owned branches.
Management’s growth strategy for Freight Forwarding is based on:
Plans to open new offices in this Annual Reportkey U.S. markets, which will consist of both Company-owned and in our other SEC filings. Readers are cautioned not to place undue
19independently owned stations;
Increased international growth, with a focus on Asia and Latin America;
Technology upgrades to improve efficiency in sales and carrier procurement; and
Selective acquisitions of complementary, non-asset based freight forwarding businesses that would benefit from our scale and potential access to capital.
2010 vs. 2009
Freight Forwarding’s year-end revenue in 2010 reflected a rebound from 2009. Revenues of $65.2 million compared favorably to revenues of $41.2 million in 2009, representing a 58.5% increase. The purchase of certain assets and liabilities of LRG International (CGL International) in October 2009 contributed to the revenue increases during 2010 and 2009 of $12.1 million and $1.6 million, respectively.
Direct expenses consist primarily of payments for purchased transportation in addition to payments to Freight Forwarding’s independent offices that control the overall operation of our customers’ shipments. As a percentage of Freight Forwarding revenue, direct expenses represented 89.8% for the years ended December 31, 2010 and 2009. Management expected direct expenses to decrease as a percentage of Freight Forwarding revenue for 2010 because of the acquisition of CGL International with its higher margins. However, because of increasing fuel costs, most notably in the fourth quarter, direct expenses as a percentage of revenue in 2010 stayed unchanged as compared to 2009. The result left gross margin at a comparable percentage of revenue of 10.2% for the years ended December 31, 2010 and 2009. For 2010, CGL International’s direct expense represented $10.4 million or 21.5% of the total direct expense of Freight Forwarding.
SG&A expenses increased for full year 2010 by $1.7 million as compared to 2009, due in part to running CGL International as a Company-owned station. For the years ended December 31, 2010 and 2009, CGL International added approximately $1.3 million and $221,000, respectively, to SG&A expenses. Increased salaries and benefits were responsible for $1.1 million of the increase in SG&A for full year 2010. $673,000 of this increase for full year 2010 as compared to 2009 related to a full year of CGL International payroll and benefits being absorbed by Freight Forwarding. The remaining $427,000 of increased SG&A expense for 2010 as compared to 2009 reflected the addition of six new employees and incentive and other pay increases for all employees. Other costs also increased by $521,000 for 2010 as compared to 2009, of which approximately $196,000 was related to CGL International’s full year of costs and approximately $280,000 was related to bad debt and impairment charges in connection with a former independent station owner whose contract was terminated. As a percentage of revenue, SG&A costs decreased to 7.3% for the year ended December 31, 2010 compared to 7.4% for the year ended December 31, 2009.
For the year ended December 31, 2010, Freight Forwarding generated income from operations before tax of $1.9 million, representing an increase of 67.9% as compared to full year 2009. Approximately $488,000 or 25.7% of Freight Forwarding’s operating income was generated at CGL International.
As of December 31, 2009, the Company maintained a network of 24 independent stations and two Company-owned branches.
Freight Brokerage
(Bounce Logistics and XPO Logistics)
Summary Financial Table
For the Twelve Months Ended December 31,
| Percent of Revenue | Percentage Change | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011-2010 | 2010-2009 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Operating revenue | $ | 29,186,000 | $ | 19,994,000 | $ | 10,425,000 | 100.0 | % | 100.0 | % | 100.0 | % | 46.0 | % | 91.8 | % | ||||||||||||||||
Direct expense | ||||||||||||||||||||||||||||||||
Transportation services | 24,434,000 | 16,675,000 | 8,582,000 | 83.7 | % | 83.4 | % | 82.3 | % | 46.5 | % | 94.3 | % | |||||||||||||||||||
Insurance | 53,000 | 10,000 | 17,000 | 0.2 | % | 0.1 | % | 0.2 | % | 430.0 | % | -41.2 | % | |||||||||||||||||||
Other | 2,000 | — | 37,000 | 0.0 | % | 0.0 | % | 0.4 | % | — | -100.0 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Direct expense | 24,489,000 | 16,685,000 | 8,636,000 | 83.9 | % | 83.5 | % | 82.8 | % | 46.8 | % | 93.2 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Gross margin | 4,697,000 | 3,309,000 | 1,789,000 | 16.1 | % | 16.5 | % | 17.2 | % | 41.9 | % | 85.0 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
SG&A expenses | ||||||||||||||||||||||||||||||||
Salaries & benefits | 2,484,000 | 1,761,000 | 857,000 | 8.5 | % | 8.8 | % | 8.2 | % | 41.1 | % | 105.5 | % | |||||||||||||||||||
Purchased services | 148,000 | 98,000 | 64,000 | 0.5 | % | 0.5 | % | 0.6 | % | 51.0 | % | 53.1 | % | |||||||||||||||||||
Depreciation & amortization | 44,000 | 31,000 | 27,000 | 0.2 | % | 0.2 | % | 0.3 | % | 41.9 | % | 14.8 | % | |||||||||||||||||||
Other | 716,000 | 554,000 | 383,000 | 2.5 | % | 2.8 | % | 3.7 | % | 29.2 | % | 44.6 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total SG&A expenses | 3,392,000 | 2,444,000 | 1,331,000 | 11.6 | % | 12.2 | % | 12.8 | % | 38.8 | % | 83.6 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating income | $ | 1,305,000 | $ | 865,000 | $ | 458,000 | 4.5 | % | 4.3 | % | 4.4 | % | 50.9 | % | 88.9 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Freight Brokerage
2011 vs. 2010
Our Freight Brokerage unit continues to see significant growth, with revenue for the fiscal year ended December 31, 2011 increasing by 46.0% to $29.2 million, compared to revenue of $20.0 million for the fiscal year ended 2010. Revenue growth was largely driven by expansion of the Freight Brokerage customer base resulting from a year-over-year headcount increase of 8 salespeople over the year.
For full year 2011, Freight Brokerage’s direct transportation expenses of 83.9% as a percentage of revenue were flat as compared to 83.5% for 2010. The additional volume coupled with gross margin of 16.1% added an additional $1.4 million of gross margin for full year 2011 as compared to 2010.
As a percentage of revenue, SG&A costs decreased to 11.6% for full year 2011, compared to 12.2% for 2010. Overall, SG&A expenses increased by $948,000 for full year 2011 compared to 2010. Salaries and benefits increased by $723,000 for full year 2011 as compared to 2010, due primarily to our investments in new salespeople and sales commissions related to the volume growth.
The above items resulted in operating income of $1.3 million for full year 2011, an increase of 50.9% from $865,000 for 2010.
Management’s growth strategy for our Freight Brokerage unit is based on:
Selective acquisitions of non-asset based freight brokerage firms that would benefit from our scale and potential access to capital; and
The opening of new freight brokerage offices in the U.S.;
Investment in an expanded sales and service workforce;
Technology upgrades to improve efficiency in sales, freight tracking and carrier procurement; and
The integration of industry best practices, with specific focus on any forward-looking statements,better leveraging our scale and lowering administrative overhead.
2010 vs. 2009
Freight Brokerage saw significant growth as its revenue for the year ended December 31, 2010 increased by 91.8% to $20.0 million compared to 2009 annual revenues of $10.4 million. We believe this was reflective of an improving freight environment and an aggressive growth strategy.
For the year ended December 31, 2010, our Freight Brokerage unit’s direct transportation expenses increased to 83.5% as a percentage of revenue as compared to 82.8% for 2009. We believe this cost increase reflects a tightening of truck capacity in the marketplace. This decrease in margin was more than offset by additional business that generated an additional $1.5 million in gross margin for the year ended December 31, 2010 as compared to 2009.
SG&A expenses increased by $1.1 million for the year ended December 31, 2010 as compared to 2009. Increased salaries and benefits were responsible for $904,000 of the increase during 2010 and resulted from 12 additional employees, increased volumes and the reestablishment of benefits that were eliminated in 2009 due to the economic recession. Overall, leverage of scale improved as the percentage of SG&A costs to revenue decreased from 12.8% in 2009 to 12.2% in 2010.
The above items resulted in Freight Brokerage generating operating income of $865,000 in the year ended December 31, 2010 compared to $458,000 for full year 2009.
XPO Corporate
Summary of Selling, General and Administrative Expenses
For the Twelve Months Ended December 31,
| Percent of Revenue | Percentage Change | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011-2010 | 2010-2009 | |||||||||||||||||||||||||
SG&A expenses | ||||||||||||||||||||||||||||||||
Salaries & benefits | $ | 2,923,000 | $ | 547,000 | $ | 437,000 | 1.7 | % | 0.3 | % | 0.4 | % | 434.4 | % | 25.2 | % | ||||||||||||||||
Purchased services | 4,727,000 | 944,000 | 942,000 | 2.7 | % | 0.6 | % | 0.9 | % | 400.7 | % | 0.2 | % | |||||||||||||||||||
Depreciation & amortization | 24,000 | 19,000 | — | 0.0 | % | 0.0 | % | 0.0 | % | 26.3 | % | — | ||||||||||||||||||||
Other | 1,651,000 | 397,000 | 475,000 | 0.9 | % | 0.3 | % | 0.5 | % | 315.9 | % | -16.4 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total SG&A expenses | 9,325,000 | 1,907,000 | 1,854,000 | 5.3 | % | 1.2 | % | 1.9 | % | 389.0 | % | 2.9 | % | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Corporate
2011 vs. 2010
Corporate costs for the full year ended December 31, 2011 increased by $7.4 million as compared to 2010. As a percentage of revenue, Corporate costs increased to 5.3% for full year 2011, compared with 1.2% for 2010. Approximately $3.7 million of the full-year 2011 increase related to the Equity Investment and executive team appointments described above, of which speak onlyapproximately $1.2 million was recorded in the quarter ended December 31, 2011. For the fourth quarter 2011, Corporate costs were $4.8 million. We expect our Corporate costs in 2012 to run at a slightly higher rate than we experienced in the quarter ended December 31, 2011.
2010 vs. 2009
Corporate costs for the year ended December 31, 2010 increased by $53,000 as compared to 2009. Increased salaries and benefits were responsible for $110,000 of the 2010 increase and resulted from increased volumes and the reestablishment of benefits that were eliminated in 2009 due to the economic recession. As a percentage of revenue, corporate costs decreased from 1.9% for the year ended December 31, 2009 to 1.2% for 2010.
LIQUIDITY AND CAPITAL RESOURCES
General
As of December 31, 2011, we had $83.1 million of working capital with associated cash of $74.0 million, as compared to working capital of $12.3 million and cash of $561,000 as of December 31, 2010. This represents an increase of $70.8 million in working capital during the date hereof.twelve-month period. The increase was primarily due to the net proceeds of cash received relating to the Equity Investment, which closed on September 2, 2011. We are not a party to any transactions that would be considered “off balance sheet” pursuant to disclosure requirements under ITEM 303(c).
We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs and our planned growth initiatives. In addition to investing our existing cash balances and net cash provided by operating activities, in certain circumstances we may also use debt financings (including, without limitation, credit facilities supported by our accounts receivable balances) and issuances of equity or equity-related securities to fund our operating needs and growth initiatives.
We believe that our existing cash balances, funds we expect to generate from our operations and funds available under our current revolving credit facility will be sufficient for the consolidated financial statements.
Revenue RecognitionCash Flow
During the Company’s Express-1year ended December 31, 2011, $6.6 million was generated in cash from operations compared to $2.3 million for the prior year. The primary source of cash for the year ended December 31, 2011 was our transportation services revenue, while the primary use of cash for the period was payment for transportation services.
Cash generated from revenue equaled $178.7 million for the year ended December 31, 2011 as compared to $151.4 million for 2010 and Bounce Logistics business units,correlates directly with revenue is recognized primarily atincreases between the pointtwo years. Cash inflows increased because of a decrease in time delivery is completed onaccounts receivable of $1.6 million. Our average days outstanding in accounts receivable have decreased by nine days between the freight shipments it handles; with related costs12-month periods ended December 31, 2011 and December 31, 2010, respectively.
Cash used for payment of delivery being accruedtransportation services for the year ended December 31, 2011 equaled $148.3 million as incurred and expensed withincompared to $128.2 million for the same period in 2010. The increase in cash outflows between the two years also directly correlates to the increase in business between the two years. Days outstanding in accounts payable and accrued expenses decreased by five days between 2011 and 2010 due in large part to the timing of cash disbursements at year end.
Other operating uses of cash included SG&A items which equaled $23.4 million and $18.2 million for fiscal years 2011 and 2010, respectively. Significant expenditures in SG&A include payroll and purchased services. For the associated revenueyear ended December 31, 2011, payroll expenses were $15.2 million compared to $12.0 million for the same period in 2010. Included in the $15.2 million in payroll expenses is recognized. For$1.1 million of increased payroll incentives accrued during the period (but to be paid in future periods) relating to the new executive team hired during the fourth quarter of 2011.
Investing activities used approximately $1.2 million during the year ended December 31, 2011 compared to our use of $1.3 million on these business units,activities during the Company usesprior year. During 2011, cash was used to purchase $754,000 in fixed assets. In addition, an acquisition earn-out payment of $450,000 was made to the following supporting criteriaformer owners of LRG International during 2011. During 2010, we used $811,000 to determine revenue has been earnedpurchase fixed assets and should be recognized: i) persuasive evidencepaid $500,000 to the former owners of LRG International in connection with that an arrangement exists, ii) services have been rendered, iii)acquisition.
Financing activities provided approximately $68.0 million for the sales price is fixedyear ended December 31, 2011 compared to the use of $882,000 in 2010. Sources of cash from financing activities during the year ended December 31,
2011, included $71.6 million of net proceeds from the issuance of the Series A Convertible Perpetual Preferred Stock and determinablethe Warrants and iv) collectability is reasonably assured.
Line of Credit and Term Loan
On March 31, 2010, we renewed a $15.0 million credit facility that provided for a receivables-based revolving line of credit of up to $10.0 million and a term loan of $5.0 million. Commencing April 30, 2010, the term loan is payable in 36 consecutive monthly installments consisting of $139,000 in monthly principal payments plus the unpaid interest accrued on the loan. Interest is payable at the one-month LIBOR plus 225 basis points (2.51% as of December 31, 2011).
On March 31, 2011, we amended the credit agreement governing our revolving credit facility and the term loan described above to extend the maturity date of the freight is picked up fromrevolving credit facility to March 31, 2013 and to eliminate the shipper. This alternative method of revenue recognition is not the preferred method of revenue recognition as prescribed within Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force IssueNo. 91-9Revenue and Expense Recognition for Freight Services in Progress(“EITF N.91-9”). This alternative method recognizes revenue and associated expenses priorreceivables borrowing base limitation previously applicable to the point in time that all services are completed.revolving credit facility. The userevolving credit facility continues to provide for a line of credit of up to $10.0 million. We may draw upon this method does not result in a material difference from oneline of credit up to $10.0 million, less amounts outstanding under letters of credit. The proceeds of the more preferred methodsline of credit are to be used exclusively for working capital purposes.
Substantially all of our assets are pledged as identifiedcollateral securing our performance under the revolving credit facility and term loan. The revolving credit facility bears interest at the one-month LIBOR plus a current increment of 175 basis points (2.01% as of December 31, 2011).
The credit agreement governing the revolving credit facility and the term loan contains certain operating covenants and certain covenants related to our financial performance. Included among the covenants are a fixed charge coverage ratio and a total funded debt to earnings before interest, taxes, depreciation and amortization ratio. We are currently in EITFcompliance with all terms under the credit agreement and no events of default exist under the terms of such agreement.
We had outstanding standby letters of credit of $410,000 at each of December 31, 2011 and December 31, 2010 related to insurance policies either continuing in force or recently cancelled. Amounts outstanding for letters of credit reduce the amount available under the revolving credit facility on a dollar-for-dollar basis.
Available capacity in excess of outstanding borrowings under the line of credit was approximately $9.6 million and $6.8 million as of December 31, 2011 and December 31, 2010, respectively. As of December 31, 2011 and December 31, 2010, the line of credit balance was $0 and $2.7 million, respectively.
No. 91-9.Disclosures About Contractual Obligations and Commercial Contingencies
The following table aggregates all contractual commitments and commercial obligations, due by period, that affect our financial condition and liquidity position as of December 31, 2011:
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | |||||||||||||||
Capital lease obligations | $ | 45,000 | $ | 8,000 | $ | 20,000 | $ | 17,000 | $ | — | ||||||||||
Notes payable | 2,084,000 | 1,667,000 | 417,000 | — | — | |||||||||||||||
Line of credit | — | — | — | — | — | |||||||||||||||
Operating leases | 6,151,000 | 584,000 | 1,486,000 | 999,000 | 3,082,000 | |||||||||||||||
Earn out obligation—LRG | 450,000 | 450,000 | — | — | — | |||||||||||||||
Employment contracts | 16,849,000 | 4,154,000 | 7,200,000 | 5,495,000 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total contractual obligations | $ | 25,579,000 | $ | 6,863,000 | $ | 9,123,000 | $ | 6,511,000 | $ | 3,082,000 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
CRITICAL ACCOUNTING POLICIES
The Company has evaluated the impact of this alternative method onprepares its consolidated financial statements and concluded that the impact is immaterial to the financial statements.
20