UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2013
OR
¨ | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission File Number: 001-32172
XPO Logistics, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 03-0450326 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Five Greenwich Office Park
Greenwich, Connecticut 06831
(Address of principal executive offices)
(855) 976-4636
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class: | Name of Each Exchange on Which Registered: | |
Common Stock, par value $.001 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £x No R¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes £¨ No Rx
Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Rx No £¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive DateData File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section (§232.405 of thethis chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £x No 0¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-212b-2 of the act)Act): Yes £¨ No Rx
The aggregate market value of the votingregistrant’s common stock, par value $0.001 per share, held by non-affiliates of the Registrantregistrant was approximately $35.6$329.2 million as of June 30, 201028, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing price of $1.26$18.09 per share on the NYSE AMEX Equities Exchange.
As of March 25, 2011,February 21, 2014, there were 33,008,98048,747,390 shares of the Registrant’s $0.001registrant’s common stock, par value common stock$0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant’s proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s 20112014 Annual Meeting of Stockholders (the “Proxy Statement”), are incorporated by reference into Part III of this Report.Annual Report on Form 10-K. Except with respect to information specifically incorporated by reference in this Annual Report, the Proxy Statement is not deemed to be filed as part hereof.
XPO LOGISTICS, INC.
FORM 10-K — 10-K—FOR THE YEAR ENDED DECEMBER 31, 2010
TABLE OF CONTENTS
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Item | ||||||
2 | ||||||
Item 1A | 12 | |||||
Item 1B | 26 | |||||
Item 2 | 26 | |||||
Item 3 | 26 | |||||
Item 4 | 27 | |||||
PART II | ||||||
Item 5 | 28 | |||||
Item 6 | 30 | |||||
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 | ||||
Item 7A | Quantitative and Qualitative | 49 | ||||
Item 8 | 49 | |||||
Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |||||
50 | ||||||
Item 9A | 50 | |||||
Item 9B | 51 | |||||
PART III | ||||||
Item 10 | 52 | |||||
Item 11 | 52 | |||||
Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 52 | ||||
Item 13 | Certain Relationships and Related Transactions, and Director Independence | 53 | ||||
Item 14 | ||||||
53 | ||||||
PART IV | ||||||
Item 15 | 54 | |||||
55 |
Exhibit Index
This annual reportAnnual Report on Form 10-K is for the year ended December 31, 2010.2013. The Securities and Exchange Commission (“SEC”(the “Commission”) allows us to “incorporateincorporate by reference”reference information that we file with the SEC,Commission, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this annual report.Annual Report. In addition, information that we file with the SECCommission in the future will automatically update and supersede information contained in this Annual Report.
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PART I
ITEM 1. | BUSINESS |
General
XPO Logistics, Inc. (“XPO” or the “Company”), a Delaware corporation, together with its subsidiaries, is a leading non-asset provider of transportation logistics services. We act as a middleman between shippers and carriers who outsource their transportation logistics to us as a third-party provider. As of December 31, 2013, we operated at 94 locations: 73 Company-owned branches and 21 agent-owned offices.
We offer our services through three business units. Our freight brokerage unit places shippers’ freight with qualified carriers, primarily trucking companies. Our expedited transportation unit facilitates urgent shipments via independent over-the-road contractors and air charter carriers. Our freight forwarding unit arranges domestic and international shipments using ground, air and ocean transport through a network of agent-owned and Company-owned locations.
In September of 2011, following the equity investment in the Company led by Jacobs Private Equity, LLC, we began to implement a strategy to leverage our strengths—including management expertise, operational scale and capital resources—with the goals of significant growth and value creation.
By executing our strategy, we have built leading positions in some of the fastest-growing sectors of transportation logistics. In North America, we are the fourth largest provider of freight brokerage service—a $50 billion sector which, driven by an outsourcing trend, is growing at two to three times the rate of Gross Domestic Product (“GDP”). Our acquisitions of 3PD Holding, Inc. (“3PD”) and Optima Service Solutions, LLC (“Optima”) in 2013 (further described below) made us the largest provider of heavy goods, last-mile logistics in North America—a $13 billion sector which, driven by outsourcing by big-box retailers and a rise in e-commerce, is growing at five to six times the rate of GDP. Our acquisition of National Logistics Management (“NLM”) in December of 2013 (further described below) gave us a foothold in managed transportation, and together with our other expedited logistics operations, makes us the largest manager of expedited shipments in North America—a sector where growth is being driven by a trend toward just-in-time inventories in manufacturing. Upon completion of the pending acquisition of Pacer International, Inc. (further described below), we will be the third largest provider of intermodal services in North America and the largest provider of cross-border Mexico intermodal services—a sector that, driven by the efficiencies of long-haul rail and a trend toward near-shoring of manufacturing in Mexico, is growing at three to five times the rate of GDP. We believe our broad service offering gives us a competitive advantage as many customers, particularly large shippers, focus their relationships on fewer, larger third party logistics providers with deep capacity across a wide range of services.
Our strategy has three main components:
• | Optimization of operations. We are continuing to optimize our existing operations by growing our sales force, implementing advanced information technology, cross-selling our services and leveraging our shared carrier capacity. We have a disciplined framework of processes in place for the recruiting, training and mentoring of newly hired employees. Our salespeople market our services to hundreds of thousands of small and medium-sized prospective customers. In addition, we have a strategic and national accounts team focused on developing business relationships with the largest shippers in North America. Our network is supported by our national operations centers in Charlotte, NC, Chicago, IL, and Atlanta, GA.; and by our information technology. We have a scalable IT platform in place across the Company, with sales, service, carrier and track-and-trace capabilities, as well as benchmarking and analysis. Most important to our growth strategy, we are developing a culture of passionate, world-class service for customers. |
• | Acquisitions. We take a disciplined approach to acquisitions: we develop and maintain an active pipeline of targets by looking for companies that are highly scalable and are a good strategic fit |
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with our core competency. When we acquire a company, we seek to integrate it with our operations and scale it up by adding salespeople. We integrate the acquired operations with our technology platform, which connects them to our broader organization, and we give them access to our shared carrier pool. We gain more carriers, customers, lane histories and pricing histories with each acquisition, and in some cases an acquisition adds complementary services. We capitalize on these resources Company-wide to buy transportation more efficiently and to cross-sell a more complete supply chain solution to customers. In 2012, we completed the acquisition of four non-asset third party logistics companies. We acquired another six companies in 2013, including 3PD, the largest non-asset, third party provider of heavy goods, last-mile logistics in North America, and NLM, the largest provider of web-based expedited transportation management in North America. On January 5, 2014, we agreed to acquire Pacer International, Inc., a Tennessee corporation (“Pacer”), the third largest provider of intermodal transportation services in North America. We plan to continue to acquire quality companies that fit our strategy for growth. |
• | Cold-starts. We believe that cold-starts can generate high returns on invested capital because of the relatively low investment required and the large component of variable-based incentive compensation. We are currently ramping up 23 cold-starts: 10 in Freight Brokerage, 12 in Freight Forwarding and one in Expedited Transportation. We seek to locate our Freight Brokerage cold-starts in prime areas for sales recruitment. We plan to continue to open cold-start locations where we see the potential for strong returns. |
Our Business Units
We are a non-asset based transportation service provider, meaning that we do not own the trucks or other equipment used to transport freight. Instead, we utilize our relationships with subcontracted transportation providers—typically independent contract motor carriers, railroads and aircraft owners. We make a profit on the difference between what we charge our customers for the services we provide and what we pay to the transportation providers to transport our customers’ freight. Our success depends in large part on our ability to hire and train talented salespeople and deploy them under exceptional leaders, develop sophisticated information technology, and build relationships with the carriers in our network so that we can purchase the optimal transportation solutions for our customers.
As of December 31, 2013, our operations consisted of three business units: Freight Brokerage, Expedited Transportation and Freight Forwarding. Each of these business units is described more fully below. We provide financial information for our business units in Note 13 to our audited Consolidated Financial Statements.
Freight Brokerage
Through our Freight Brokerage business unit we arrange truckload, less-than-truckload (“LTL”), and intermodal brokerage, last-mile delivery logistics services for the delivery of heavy goods and related logistics and supply-chain services.
Our truckload, LTL and intermodal services typically are provided on a shipment-by-shipment basis. Customers offer loads to us via telephone, fax, email, electronic data interchange (EDI) and the Internet on a daily basis. Our employees utilize a proprietary operating system that helps our sales representatives price loads efficiently to initiate the transaction, and our carrier representatives select a suitable carrier based on equipment availability, service capability, rates and other relevant information. The prices for the majority of our services are determined on a transactional, or spot market, basis for both customers and carriers. We are responsible for collecting payment from the customer and paying the carrier. In some cases, we contractually agree to handle a significant portion of a customers’ freight at pre-determined rates for specific origin and destination parameters.
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As is usual in the transportation industry, these volume contracts typically have a term of one year or less and no minimum volume commitment.
From January 2008 until the fourth quarter of 2011, we provided freight brokerage services solely through our Bounce Logistics, Inc. subsidiary. During the fourth quarter of 2011, we began to open sales offices to provide freight brokerage services under the name XPO Logistics. We have established and are currently ramping up 10 cold-start locations in Freight Brokerage. As of December 31, 2013, our Freight Brokerage business unit employed 1,753 full-time employees in the United States and Canada, compared with 594 full-time employees 12 months earlier.
On August 15, 2013, we acquired 3PD, the largest non-asset, third party provider of last-mile logistics for heavy goods in North America. Our 3PD operations serve a fast-growing sector of transportation logistics that includes blue chip retailers, e-commerce companies and smaller retailers. On November 15, 2013, we acquired Optima, a leading non-asset provider of last-mile logistics services for major retailers and manufacturers in the United States, which specializes in complex installations. Our acquisition of Optima enhanced our Company’s leadership position in the heavy goods, last-mile logistics space.
Expedited Transportation
Our Expedited Transportation unit, which operates as Express-1, is one of the largest ground expedited freight carriers in North America. Express-1 provides services to thousands of customers from its locations in Buchanan and Detroit, MI, and Birmingham, AL. On February 8, 2013, we acquired the operations of East Coast Air Charter, Inc. (“East Coast Air Charter”), a non-asset, third-party logistics business specializing in expedited air charter, which we now operate as XPO Air Charter. On December 28, 2013, we acquired NLM, the largest web-based manager of expedited shipments in North America, which we now operate as XPO NLM.
Expedited transportation services can be characterized as time-critical, time-sensitive or high priority freight shipments, many of which have special handling needs. These urgent needs typically arise due to tight supply chain tolerances, interruptions or changes in the supply chain, or the failure of another mode of transportation within the supply chain. Expedited shipments are predominantly direct transit movements offering door-to-door service within tightly prescribed time parameters. Vehicles used to transport expedited shipments range from cargo vans to semi-tractor trailer units. The dimensions for each shipment dictate the size of vehicle used to move the freight and the related revenue per mile. Customers request our services via telephone, fax, email, EDI or the Internet, typically on a per-load transaction basis, with only a small percentage of loads being scheduled for future delivery dates. We operate an ISO 9001:2008 certified 24-hour, seven-day-a-week call center that gives our customers on-demand communications and status updates relating to their shipments.
Our Expedited Transportation business is predominantly a non-asset based service provider, meaning that substantially all of the transportation equipment used in its operations is provided by third parties. These third-party vehicles are primarily provided by independent owner-operators who own one piece of equipment, or by independent owners of multiple pieces of equipment who employ multiple drivers, commonly referred to as fleet owners. We use these third party providers to move our customers’ urgent freight within the United States. We are focused on developing strong, long-term relationships with these fleet owners and incentivizing them to maintain their fleets on an exclusive basis with Express-1. In addition, we arrange transportation services for cross-border expedited shipments to and from Canada and Mexico, primarily for customers located in the United States. Cross-border Mexico expedited freight is an attractive vertical market for us, as are temperature-controlled freight and air charter. We are working to increase our presence in these verticals, as well as gain share in the broader expedited transportation market. As of December 31, 2013, we employed 268 full-time employees to support our Expedited Transportation operations.
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Freight Forwarding
Our Freight Forwarding business unit, which operates as XPO Global Logistics (“XGL”; formerly Concert Group Logistics or “CGL”), is a non-asset based logistics provider for domestic and international shipments. XPO Global Logistics provides these services by using its relationships with ground, air and ocean carriers through a network of agent-owned and Company-owned locations. As of December 31, 2013, our Freight Forwarding business supported 18 independently-owned stations and 11 Company-owned branches with 78 full-time employees. We have established and are currently ramping up 12 cold-start branches in Freight Forwarding. Our freight forwarding capabilities are not restricted by size, weight, mode or location, and therefore are potentially attractive to a wide market base.
We provide three types of services through our Freight Forwarding business: Domestic—time-critical services, including just-in-time, air charter and expedited transportation; time-sensitive services, including next-day, second-day and third-day deliveries; and cost-sensitive services including deferred delivery, LTL and full truckload.International—time-critical services, including on-board courier and air charter; time-sensitive services, including direct transit and consolidation; and cost-sensitive services, including less-than-container loads, full-container loads and vessel charters.Other—value-added services, including documentation on international shipments and customs clearances; and customized services, including trade show shipment management, time-definite and customized product distributions, reverse logistics, on-site asset recovery projects, installation coordination, freight optimization and diversity compliance support.
Information Systems
Companies within the transportation logistics industry increasingly rely on information technology to find optimal solutions to shipper needs and provide visibility into the movement of freight.
In our Freight Brokerage business, we have developed proprietary software applications that are integrated with a packaged base software platform that we license from a third party. This proprietary IT solution provides our customers with cost effective, timely and reliable access to carrier capacity, which we believe gives us an advantage versus our competitors. By continuing to develop our technology solutions, we plan to improve our productivity through automation and process optimization, and to be in position to effectively integrate our anticipated acquisitions and leverage our scale across XPO. We launched the first phase of our scalable technology platform in March of 2012, with subsequent major enhancements. In 2012, the enhancements included new pricing tools and truck-finding capabilities and the introduction of our proprietary freight optimizer software. In 2013, the enhancements included advanced pricing algorithms, additional carrier ranking tools, LTL functionality, and new customer and carrier portals. In 2013, our acquisition of 3PD included proprietary technology that manages the customer experience for superior satisfaction ratings. This technology, while currently utilized by our last-mile operations, has potential applications throughout our Company.
In our Expedited Transportation business, we utilize satellite tracking and communication units on our independently-contracted vehicles to continually update the position of shipments we place. We have the ability to communicate to individual vehicles or to a broader fleet, based upon our needs. Information received through this satellite tracking and communication system automatically updates our internal software and provides our customers with real-time electronic updates.
In our Freight Forwarding business, we utilize an operating system software package purchased from a third party and customized for our network. Our capabilities include online shipment entry, quoting and track-and-trace for domestic and international shipments, and EDI messaging.
Technology represents one of our Company’s largest categories of investment within our annual report.capital expenditure budget, reflecting our belief that the continual enhancement of our technology platforms is critical to our success.
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Customers, Sales and Marketing
Our Company provides services to a variety of customers ranging in size from small, entrepreneurial organizations toFortune 500 companies. During 2013, our business units served more than 9,500 different customers, with no single customer accounting for more than 6% of our consolidated gross revenue.
Our customers are engaged in a wide range of industries, including manufacturing, industrial, retail, commercial, life sciences and government sectors. In addition, we serve third-party logistics providers, who themselves serve a multitude of customers and industries. Our third party logistics provider customers vary in size from small, independent, single-facility organizations to global logistics companies. Within our Expedited Transportation and Freight Brokerage business units, our services are marketed to the United States, Canada and Mexico. Our Freight Forwarding unit serves these same North American markets, as well as global markets.
To serve our customers, we maintain a significant staff of sales representatives and related support personnel within our Freight Brokerage, Expedited Transportation and Freight Forwarding business units. Within Freight Forwarding, in addition to our own sales staff and locations, our network of independent agents manage sales relationships within their exclusive markets.
Our sales strategy is twofold: we seek to establish long-term relationships with new accounts and to increase the amount of business generated from our existing customer base. These objectives are served by our position as one of the largest third party logistics providers in North America and by our ability to cross-sell a range of services. We believe that these attributes are competitive advantages in the transportation logistics industry. We are focused on raising our profile in front of every prospective customer in this annual report, “Company,sector by deploying a highly experienced, dedicated team that sells to the 1,200 largest shippers, which we have identified as strategic accounts, and the next largest 5,000 shippers, identified as national accounts. Additionally, our branch sales teams pursue the hundreds of thousands of small to medium-sized shippers operating in North America. See Note 13 to the Consolidated Financial Statements for further geographic information.
Competition
The transportation logistics industry is intensely competitive with thousands of transportation companies competing in the domestic and international markets. Our competitors include local, regional, national and international companies with the same services that our business units provide. Due in part to the fragmented nature of the industry, our business units do not operate from a position of dominance, and therefore must strive daily to retain existing business relationships and forge new relationships.
We compete on service, reliability and price. Some competitors have larger customer bases, significantly more resources and more experience than we do. The health of the transportation logistics industry will continue to be a function of domestic and global economic growth. However, we believe we will benefit from a long-term outsourcing trend that should continue to enable certain sectors of transportation logistics, particularly the freight brokerage sector, to grow at rates that outpace growth in the macro-environment.
Regulation
Our operations are regulated and licensed by various governmental agencies in the United States. Such regulations impact us directly, including through our independent contractor fleet, and indirectly through the network of third party transportation providers we use to transport freight for our customers. We and such third parties must comply with the safety and fitness regulations of the U.S. Department of Transportation (“DOT”), including those relating to drug- and alcohol-testing and hours-of-service. Weight and equipment dimensions also are subject to government regulations. We also may become subject to new or more restrictive regulations relating to fuel emissions, independent contractor drivers’ hours-of-service, independent contractor eligibility requirements, on-board reporting of operations, air cargo security and other matters affecting safety or operating methods. Other agencies, such as the U.S. Environmental Protection Agency (“EPA”) and U.S. Department of Homeland Security (“DHS”), also regulate our equipment, operations and independent contractor drivers.
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The DOT, through the Federal Motor Carrier Safety Administration (“FMCSA”), imposes safety and fitness regulations on us, our independent contractor drivers, and our network of third party transportation providers. The FMCSA recently issued a final driver hours-of-service rule that placed additional limits on the amount of time drivers may operate a commercial motor vehicle. The rule preserved the current 11-hour driving limitation and included new provisions that generally (i) require drivers to take 30 minutes off-duty after consecutively driving eight hours; (ii) reduce the total hours a driver may work in one week from 82 to 70 hours; (iii) modified the “off-duty time” definition to exclude time spent resting in a parked commercial motor vehicle; and (iv) redefined which hours-of-service rule violations are considered “egregious” and subject to maximum civil penalties. The new rule also addressed the “34-hour restart,” “we,which generally occurs when a driver’s weekly hours-of-service resets after the driver refrains from working during a 34-hour period. Under the new rule, the 34-hour restart may only occur only once each week and only if the 34-hour period includes two periods between 1:00 a.m. and 5:00 a.m. The 34-hour restart provisions became effective on July 1, 2013. We are unable to predict the impact that the new hours-of-service rules may have, how a court may rule on challenges to such rules, and to what extent the FMCSA could revise the rules in the future. On the whole, however, we believe that the new rules could decrease productivity and cause some loss of efficiency. In the event that productivity and efficiency are adversely affected, drivers and shippers may need to be retrained, computer programming may require modifications, additional independent contractors may need to be recruited and engaged. Our independent contractors and network of other third party transportation providers may also experience a negative impact on their results and productivity and consequently could exit the market, have to pay more for drivers, and pass the additional expense on to us. We also are unable to predict the effect of any new rules that might be proposed if the current final rule is stricken by a court in the future, but we believe any such proposed rules could increase costs in our industry or decrease productivity.
The FMCSA’s Compliance Safety Accountability program (“CSA”) (formerly “Comprehensive Safety Analysis 2010”) introduces a new enforcement and compliance model that implements driver and vehicle safety and fitness standards in addition to the company standards currently in place. CSA ranks both fleets and individual drivers on seven categories of safety-related data, known as Behavioral Analysis and Safety Improvement Categories, or “BASICs,” “us”which include Unsafe Driving, Hours-of-Service Compliance (formerly Fatigued Driving), Driver Fitness, Controlled Substances/Alcohol, Vehicle Maintenance, Hazardous Materials Compliance (formerly Cargo-Related) and “our” referCrash Indicator. Under the current CSA regulations, the methodology for determining a carrier’s DOT safety rating has been expanded to include the on-road safety performance of the carrier’s drivers, including independent contractor drivers. As a result, certain current and potential independent contractors may become ineligible to drive for us, our fleet could be ranked poorly as compared to our competitors, and our safety rating could be adversely impacted. Our network of third party transportation providers may experience a similar result. A reduction in eligible independent contractors or poor fleet safety and fitness ratings may result in difficulty attracting and retaining qualified independent contractors and could cause our customers to direct their business away from us and to carriers with more favorable CSA scores, which would adversely affect our results of operations.
The FMCSA also is considering revisions to the existing Safety Measurement System (“SMS”) under which the CSA scores of individual drivers and motor carriers are measured and evaluated by the DOT. In the past, the subsidiary through which we operate our Expedited Transportation business has exceeded the established intervention threshold in certain of the safety related standards, and we may exceed the threshold for other safety related standards in the future. Depending on our ratings, we may be prioritized for an intervention action or roadside inspection, either of which could adversely affect our results of operations. In addition, customers may be less likely to assign loads to us. Under the revised Safety Fitness Determination (“SFD”) rating system being considered by the FMCSA, the safety rating of our subsidiaries with operating authority would be evaluated more regularly, and our safety rating would reflect a more in-depth assessment of safety-based violations. We cannot predict the extent to which CSA requirements or safety and fitness ratings under SMS or SFD could adversely affect our business, operations or ability to retain compliant drivers, or those of our subsidiaries, independent contractors or third-party transportation providers.
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The FMCSA proposed new rules that would require nearly all carriers, including us, to install and use electronic on-board recorders (“EOBRs,” also known as paperless logs) in their tractors. These rules were vacated by the Seventh Circuit Court of Appeals in August 2011. In July 2012, Congress passed a federal transportation bill that requires the promulgation of rules mandating EOBR use by July 2013, with full adoption for all trucking carriers no later than July 2015. EOBR installation will increase costs for, and may not be well-received by, independent contractors.
At this time, we transport only low-to-medium-risk hazardous materials, representing a very small percentage of our total shipments. The U.S. Transportation Security Administration (“TSA”) has adopted regulations that require a determination by the TSA that each driver who applies for or renews his or her license for carrying hazardous materials is not a security threat. This could reduce the pool of qualified independent contractors, which could require us to increase independent contractor compensation or limit the amount of hazardous materials freight we transport.
The State of California also recently adopted new regulations regarding the fuel emissions and efficiency of tractors and trailers. Diesel tractors operated in California are required to satisfy certain performance requirements by compliance target dates occurring between 2011 and 2023. In December 2008, California also adopted new regulations to improve the fuel efficiency of tractors that pull 53-foot or longer box-type trailers within the state. The tractors and trailers subject to these regulations must either be SmartWay-certified or equipped with low-rolling resistance tires and retrofitted with SmartWay-verified aerodynamic technologies (such as tractor fairings and trailer skirts) that have been shown to meet or exceed fuel savings percentages specified in the regulations. Beginning December 31, 2012, either pre-2011 model year trailers of this type must satisfy the same requirements applicable to 2011 model year and newer trailers or carriers must have submitted a size-based fleet compliance plan in order to phase-in compliance over time. Compliance with California’s regulations has increased new tractor costs, might increase the costs of new trailers operated in California, might require the retrofitting of pre-2011 model year trailers operated in California, and could diminish equipment productivity and increase operating expenses. Federal and state governments have also proposed environmental legislation that could, among other things, potentially limit carbon, exhaust and greenhouse gas emissions. If enacted, such legislation could also result in higher new tractor and trailer costs, reduced productivity and efficiency, and increased operating expenses, all of which could adversely affect our results of operations.
Tax 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. Federal legislators have introduced legislation in the past to make it easier for tax and other authorities to reclassify independent contractors as employees, including legislation to increase the recordkeeping requirements for employers of independent contractors and to heighten the penalties of employers who misclassify their employees and are found to have violated employees’ overtime and/or wage requirements. Additionally, federal legislators have sought to abolish the current safe harbor allowing taxpayers meeting certain criteria to treat individuals as independent contractors if they are following a long-standing, recognized practice. Federal legislators also sought to expand the Fair Labor Standards Act to cover “non-employees” who perform labor or services for businesses, even if the “non-employees” are properly classified as independent contractors; require taxpayers to provide written notice to workers based upon their classification as either an “employee” or a “non-employee”; and impose penalties and fines for violations of the notice requirements or “employee” or “non-employee” misclassifications. Some states have put initiatives in place to increase their revenues from items such as unemployment, workers’ compensation and income taxes, and a reclassification of independent contractors as employees would help states with this initiative. Taxing and other regulatory authorities and courts apply a variety of standards in their determination of independent contractor status. If our independent contractor drivers are determined to be our employees, we would incur additional exposure under federal and state tax, workers’ compensation, unemployment benefits, labor, employment and tort laws, including for prior periods, as well as potential liability for employee benefits and tax withholdings.
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For domestic business, carriers must generally obtain authority to carry general commodities and other types of cargo in intrastate commerce. If any of our independent contractors plans to operate in interstate commerce in a state where such carrier did not previously have intrastate authority, the independent contractor typically must apply for authority in any such state. The FMCSA has also licensed our XGL freight forwarding subsidiary as a property broker and our Express-1 expedited transportation subsidiary as a motor carrier and property broker. XGL and our XPO Air Charter, LLC (“XPO Air Charter”) subsidiary, through which we arrange expedited air charter transportation, are subject to regulation by the DOT regarding air cargo security for all loads, regardless of origin and destination. XGL and XPO Air Charter also are regulated as “indirect air carriers” by the DHS and TSA. These agencies provide requirements, guidance and, in some cases, administer licensing requirements and processes applicable to the freight forwarding industry. We actively monitor our compliance with such agency requirements to ensure that we have satisfactorily completed the security requirements and qualifications, adhered to the economic regulations, and implemented the required policies and procedures. These agencies generally require companies to fulfill these qualifications prior to transacting various types of business. Failure to do so could result in penalties and fines. The air cargo industry is also subject to regulatory and legislative actions that could affect the economic conditions within the industry by requiring changes in operating practices or influencing the demand for and the costs of providing services to clients. We cannot predict the extent to which any such regulatory or legislative actions could adversely affect our business and operations, but we strive to comply with and satisfy agency requirements applicable to our domestic business.
For our international operations, XGL is a member of the International Air Transportation Association (“IATA”), a voluntary association of airlines and forwarders that outlines operating procedures for freight forwarders acting as agents for its members. A substantial portion of our international air freight business is completed with other IATA members. For international oceanic freight forwarding business, we are registered as an Ocean Transportation Intermediary (“OTI”) by the U.S. Federal Maritime Commission (“FMC”), which establishes the qualifications, regulations and bonding requirements to operate as an OTI for businesses originating and terminating in the United States. XGL is also a licensed non-vessel operating common carrier (“NVOCC”) and ocean freight forwarder. Our international operations subject us to regulations of the U.S. Department of State, U.S. Department of Commerce and the U.S. Department of Treasury. Regulations cover matters such as what commodities may be shipped to what destination and to what end-user, unfair international trade practices, and limitations on entities with which we may conduct business.
We and our independent contractors are subject to various environmental laws and regulations dealing with the hauling, handling and disposal of hazardous materials, emissions from vehicles, engine-idling, fuel spillage and seepage, discharge and retention of storm water, and other environmental matters that involve inherent environmental risks. We have instituted programs to monitor and control environmental risks and maintain compliance with applicable environmental laws and regulations. We would be responsible for the cleanup of any spill or other release involving hazardous materials caused by our operations or business. In the past, we have been responsible for the costs of cleanup of diesel fuel spills caused by traffic accidents or other events, and none of these incidents materially affected our business or operations. We generally transport only hazardous materials rated as low-to-medium-risk, and a small percentage of our total shipments contain hazardous materials. We believe that our operations are in substantial compliance with current laws and regulations and do not know of any existing environmental condition that would reasonably be expected to have a material adverse effect on our business or operating results. If we are found to be in violation of applicable laws or regulations, we could be subject to costs and liabilities, including substantial fines or penalties or civil and criminal liability, any of which could have a material adverse effect on our business and operating results.
Risk Management and Insurance
We generally require carriers that we engage to have $1 million of automobile liability insurance and $100,000 of cargo insurance, or up to $250,000 in the case of our last-mile contract carriers. We require motor carriers we engage to enter into a written agreement with us and to meet our safety and performance qualification standards. We also require motor carriers to have workers compensation and other insurance as required by law in connection with the specific tasks they are undertaking.
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In our Freight Brokerage operations, we generally are not liable for damage to our customers’ cargo or in connection with damage arising from the provision of transportation services. However, in some instances, we agree to assume cargo and other liability. While we endeavor to limit this exposure to matters arising due to our negligence or misconduct, or to cap our exposure at a stated maximum dollar amount, we are not always able to do so.
With respect to our Expedited Solutions,Transportation and Freight Forwarding operations and the portion of our Freight Brokerage operations related to last-mile delivery logistics, we have primary liability to our customer for cargo loss and damage for certain liabilities caused by our independent contractors and the carriers to which we broker freight. Accordingly, liability claims 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 insurance coverage or may not be covered by insurance at all.
We maintain a contingent cargo liability insurance policy to protect us against losses that may not be recovered from the responsible contracted carrier. Our last-mile delivery logistics operations may involve installation of appliances in customers’ homes involving water, gas or electric connections. We maintain commercial general liability insurance coverage to protect from claims related to these services. We carry various liability insurance policies, including automobile, general liability and umbrella coverage, at levels we deem appropriate. However, we cannot provide assurance that our insurance coverage will effectively protect us in the event of claims made against us.
Seasonality
Our revenues and profitability have historically been subject to seasonal fluctuations. Our results of operations for the quarter ending in March are on average lower than the quarters ending in June, September and December. Typically, this pattern has been the result of factors such as inclement weather, national holidays, customer demand and economic conditions. It is not possible to predict whether the historical revenue and profitability trends will occur in future periods.
Employees
At December 31, 2013, we had 2,259 full-time employees, none of whom were covered by a collective bargaining agreement. Of this number, 1,753 were employed in Freight Brokerage, 268 were employed in Expedited Transportation, 78 were employed in Freight Forwarding and 160 were employed in our corporate office. We recognize our trained staff of employees as one of our most critical resources and acknowledge the recruitment, training and retention of qualified employees as essential to our ongoing success. We believe that we have good relations with our employees.
Executive Officers of the Registrant
We provide below information regarding each of our executive officers.
Name | Age | Position | ||||
Bradley S. Jacobs | 57 | Chairman of the Board and Chief Executive Officer | ||||
M. Sean Fernandez | 50 | Chief Operating Officer | ||||
John J. Hardig | 49 | Chief Financial Officer | ||||
Troy A. Cooper | 44 | Senior Vice President—Operations and Finance | ||||
Gordon E. Devens | 45 | Senior Vice President and General Counsel | ||||
Mario A. Harik | 33 | Chief Information Officer | ||||
Scott B. Malat | 37 | Chief Strategy Officer |
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Bradley Jacobs has served as our Chief Executive Officer and Chairman of the board of directors since September 2011. Mr. Jacobs is also the managing director of Jacobs Private Equity, LLC, which is our largest stockholder. He has led two public companies: United Rentals, Inc. (NYSE: URI), which he co-founded in 1997, and United Waste Systems, Inc., founded in 1989. Mr. Jacobs served as chairman and chief executive officer of United Rentals for its first six years and as executive chairman for an additional four years. He served eight years as chairman and chief executive officer of United Waste Systems. Previously, Mr. Jacobs founded Hamilton Resources (UK) Ltd. and served as its chairman and chief operating officer. This followed the co-founding of his first venture, Amerex Oil Associates, Inc., where he was chief executive officer. Mr. Jacobs is a member of the board of directors of the Beck Institute for Cognitive Behavior Therapy.
Sean Fernandez has served as our Chief Operating Officer since November 2011. Mr. Fernandez has more than 20 years of leadership experience with global companies in industries that include distribution, consumer goods, manufacturing, trucking and transportation. He most recently served as senior vice president and general manager—consumables for NCR Corporation, and earlier held positions as vice president—new growth platforms with Avery Dennison Corporation; chief operating officer with SIRVA, Inc.; group president with Esselte Corporation; chief operating officer—Asia Pac operations and divisional president with Arrow Electronics, Inc.; and senior engagement manager with McKinsey & Company, Inc. He holds a master of business administration degree from Harvard University and a bachelor’s degree in business administration from Boston College.
John Hardig has served as our Chief Financial Officer since February 2012. Mr. Hardig most recently served as managing director for the Transportation & Logistics investment banking group of Stifel Nicolaus Weisel since 2003. Prior to that, Mr. Hardig was an investment banker in the Transportation and Telecom groups at Alex. Brown & Sons (now Deutsche Bank). Mr. Hardig holds a master of business administration degree from the University of Michigan Business School and a bachelor’s degree from the U.S. Naval Academy.
Troy Cooper has served as our Senior Vice President—Operations and Finance since February 2014. Mr. Cooper joined our company in September 2011 as Vice President—Finance, and has held positions of increasing responsibility since then. Mr. Cooper is responsible for aligning the operational and financial performance of the company’s business units with strategic objectives. Mr. Cooper was most recently with United Rentals, Inc., where he served as vice president—group controller responsible for field finance functions. Previously, he held controller positions with United Waste Systems, Inc. and its subsidiaries.
Gordon Devens has served as our Senior Vice President and General Counsel since November 2011. Mr. Devens was most recently vice president—corporate development with AutoNation, Inc., where he was previously vice president—associate general counsel. Earlier, he was an associate at the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, where he specialized in mergers and acquisitions and securities law. Mr. Devens holds a doctorate of jurisprudence and a bachelor’s degree in business administration from the University of Michigan.
Mario Harik has served as our Chief Information Officer since November 2011. Mr. Harik has built comprehensive IT organizations and overseen the implementation of proprietary platforms for a variety of firms and has consulted to members of theFortune 100. His prior positions include chief information officer and senior vice president—research and development with Oakleaf Waste Management; chief technology officer with Tallan, Inc.; co-founder of G3 Analyst, where he served as chief architect of web and voice applications; and architect and consultant with Adea Solutions. Mr. Harik holds a master of engineering degree in information technology from Massachusetts Institute of Technology, and a degree in engineering, computer and communications from the American University of Beirut, Lebanon.
Scott Malat has served as our Chief Strategy Officer since July 2012. Mr. Malat served as our Senior Vice President—Strategic Planning from the time he joined us in October 2011 until July 2012. Prior to joining XPO
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Logistics, Mr. Malat was with Goldman Sachs Group, Inc., where he served as senior equity research analyst covering the air, rail, trucking and shipping sectors. Earlier, Mr. Malat was an equity research analyst with UBS, and a strategy manager with JPMorgan Chase & Co. He serves on the board of directors of the non-profit PSC Partners Seeking a Cure. He is a CFA® charterholder and has a degree in statistics with a concentration in business management from Cornell University.
Corporate Information and Availability of Reports
XPO Logistics, Inc. was incorporated in Delaware on May 8, 2000. Our executive office is located at Five Greenwich Office Park, Greenwich, Connecticut 06831. Our telephone number is (855) 976-4636. Our stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “XPO”.
Our corporate website iswww.xpologistics.com. We make available on this website, free of charge, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically submit such material to the Commission. We also make available on our website copies of materials regarding our corporate governance policies and practices, including the XPO Logistics, Inc. Corporate Governance Guidelines, our Senior Officer Code of Business Conduct and Ethics and the charters relating to the committees of our board of directors. You also may obtain a printed copy of the foregoing materials by sending a written request to: Investor Relations, XPO Logistics, Inc., Five Greenwich Office Park, Greenwich, Connecticut 06831. The public may read and copy any materials that we file with the Commission at the Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition, the Commission’s website iswww.sec.gov. The Commission makes available on this website, free of charge, reports, proxy and information statements and other information regarding issuers, such as us, that file electronically with the Commission. Information on our website or the Commission’s website is not part of this document. We are currently classified as an “accelerated filer” for purposes of filings with the Commission.
Item 1A. | Risk Factors |
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K includesand other written reports and oral statements we make from time to time contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company has based these forward-lookingAll statements on the Company’s current expectations and projections about future events. These forward-lookingother than statements of historical fact are, subject to known and unknown risks, uncertainties and assumptions about us and the Company’s subsidiaries thator may cause the Company’s actual results, levels of activity, performance or achievementsbe deemed to be, materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In manysome cases, you can identify forward-looking statements can be identified by terminologythe use of forward-looking terms such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” andor the negative of these terms or other similar words.comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference include, but are not limited to, those discussed elsewhere in this Annual Report, including the section entitled “Risk Factors”below and the risks discussed in the Company’s other Securitiesfilings with the Commission. All forward-looking statements set forth in this Annual Report are qualified by these cautionary statements and Exchange Commission filings.there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The following
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discussion should be read in conjunction with the Company’s audited Consolidated Financial Statements and related Notes thereto included elsewhere in this report.
Economic recessions and other factors that reduce freight volumes could have a Delaware corporation, is amaterial adverse impact on our business.
The transportation industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns in business cycles of our customers, increases in prices charged by third-party carriers, interest rate fluctuations and other U.S. and global economic factors beyond our control. The recession beginning in 2008 and continuing throughout 2009 impacted the availability of services from our rail and truck transportation providers and our customer’s demands for our services. Although conditions have improved somewhat since 2009, the future pace of recovery and even the continuation thereof cannot be predicted. During economic downturns, reduced overall demand for transportation services organization focused upon premiumwill likely reduce demand for our services and exert downward pressures on rates and margins. In periods of strong economic growth, demand for limited transportation resources can result in increased rail network congestion and resulting operating inefficiencies. In addition, 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 freight shipped by those customers, our operating results could be adversely affected.
Some of our customers may face economic difficulties and 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 be unable to secure sufficient equipment or other transportation services provided through one of three non-asset based operating units. Each of our operations is a distinct but complementary service led by its own management team. Our services consist of expedited surface transportation provided through Express-1, Inc. (“Express-1”), domestic and international freight forwarding services provided through Concert Group Logistics, Inc. (“Concert Group Logistics” or “CGL”) and premium truckload brokerage services provided through Bounce Logistics, Inc. (“Bounce Logistics”, or “Bounce”).
We may not be able to appropriately adjust our threeexpenses to changing market demands. In order to maintain high variability in our business units. Additional information regarding eachmodel, it is necessary to adjust staffing levels to changing market demands. In periods of our operationsrapid change, it is more fully outlined in the following table.
We operate in a highly competitive industry and, if we are unable to adequately address factors that may adversely affect our revenue and costs, our business could suffer.
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 greater 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;
a 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;
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solicitation by shippers of bids from multiple 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.
We may not be able to successfully execute our acquisition strategy.
We intend to expand substantially through acquisitions, including the acquisition of Pacer, to take advantage of market opportunities we perceive in both our current markets (freight brokerage, expedited transportation and freight forwarding) and in new markets that we may enter. However, we can provide no assurance that the Pacer acquisition or any other future acquisitions will be completed in the time frame we anticipate, if at all. In addition, we may experience delays in making acquisitions or be unable to make the acquisitions we desire for a number of reasons. Suitable acquisition candidates may not be available at purchase prices that are attractive to us or on terms that are acceptable to us. In pursuing acquisition opportunities, we will compete with other companies, some of which have greater financial and other resources than we do. We may not have available funds or Common Stock with a sufficient market price to complete a desired acquisition. If we are unable to secure sufficient funding for potential acquisitions, we may not be able to complete acquisitions that we otherwise find advantageous.
The timing and number of acquisitions we pursue may cause volatility in our financial results.
Other than the Pacer acquisition, we are unable to predict the size, timing and number of 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 the price of our Common Stock.
Any 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;
inability to negotiate effective indemnification protection from the seller, or inability to collect in the event of an indemnity claim;
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, ocean cargo, and last-mile logistics, in which we have limited prior experience;
increases in working capital investment 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.
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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.
We may not successfully manage our growth.
We intend to grow rapidly and substantially, including by expanding our internal resources, making acquisitions (including the Pacer acquisition) and entering into new markets. We may experience difficulties and higher-than-expected expenses in executing this strategy as a result of unfamiliarity with new markets, change in revenue and business models and entering into new geographic areas.
Our growth will place a significant strain on our management, operational and financial resources. 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 material adverse effect on our business, results of operations, cash flows, stock price and financial condition.
We incurred substantial operating losses and net losses in the 2012 and 2013 fiscal years and we may continue to incur losses as we continue to invest in the Company to promote growth.
We incurred substantial losses in the 2012 and 2013 fiscal years and we may continue to incur substantial losses as we invest pursuant to our strategies. Our growth strategy, in part, seeks to grow our business through the opening of cold-start locations in our Freight Brokerage segment. Generally, a newly opened sales office will generate an operating loss, and may have lower margin sales, during its start-up phase. Additionally, our business strategy requires that we develop an information technology platform across the Company, with sales, service, carrier and track-and-trace capabilities, as well as benchmarking and analysis. We are investing in technology systems and corporate infrastructure that are scalable for our intended growth and increasing levelsare designed to support larger operations than we currently have. Acquisitions increase the challenges associated with developing and integrating our information technology platform for purposes of profitability. During this period, substantiallymeeting current and anticipated business needs. As a result of these and other initiatives, our gross margin derived from our operations may not be sufficient to absorb all of our debt was retiredselling, general and administrative expenses until we are able to generate greater revenue. Our ability to generate significant revenues and operate profitably will depend on many factors, including the successful implementation of our acquisition and greenfield growth strategies and our executive teamnew information technology system.
Our business will be seriously harmed if we fail to develop, implement, maintain, upgrade, enhance, protect and Boardintegrate information technology systems.
We rely heavily on our information technology system to efficiently run our business and it is a key component of Directors beganour 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 evaluate potential acquisitionsthese trends, which may lead to complement and diversify the Company’s expedited transportation services. Non-asset based providers of premium transportation services were targeted during this process.
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We must maintain and enhance the reliability and speed of our information technology systems to remain competitive and effectively handle higher volumes of freight forwarders,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 (ii) the abilityoperating 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 or a decline in the volume of freight we receive from customers.
We license an operating system that we are developing into an integrated information technology system for all of our business segments. 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 onto this new integrated information technology system, 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. The challenges associated with integration of our acquisitions may increase these risks.
If we are unable to expand the arraynumber of our sales representatives and independent station agents, or if a significant number of our existing sales representatives and independent station agents leave 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 independent station 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 independent station 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 independent station agents could also increase our recruiting costs and decrease our operating efficiency.
Our success is dependent on our Chief Executive Officer and other key personnel.
Our success depends on the continuing services offeredof our Chief Executive Officer, Mr. Bradley S. Jacobs. We believe that Mr. Jacobs possesses valuable knowledge and skills that are crucial to our existing customer base.
Our senior management team was assembled in 2011 and early 2012 under the leadership of First Class Expediting (currently Express-1 Metro Detroit), an expeditor from Rochester Hills, MI, were purchasedMr. 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 Januaryoverhead expense could decrease our margins if we fail to grow substantially.
Not all of 2009our senior management team resides near or works at our headquarters. The geographic distance of the members of our senior management team may impede the team’s ability to complementwork together effectively. Our success will depend, in part, on the expeditingefforts 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 of Express-1, Inc. This purchase and its related operation is reported within Express-1’s business unit.
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We depend on third parties in the financial statements under Income from Discontinued Operations.
In accordance with US GAAP,our Freight Forwarding and Freight Brokerage operations, we have summarized business unit financialdo 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 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 under Note 18and cargo claims. This reliance could cause delays in the financial statements included in Item 8 of this report. Accounting policies for the reportable operating units are the same as those described in the summary of significant accounting policies in Note 1 to the financial statements contained in Item 8 of this report. The table below contains some basic information relating to our units.
Express-1 Expedited Solutions, Inc. | |||||||||||||
Segment Financial Data | |||||||||||||
Year | Revenues | Operating Income | Total Assets | ||||||||||
Continuing Operations | |||||||||||||
Express-1 | 2010 | $ | 76,644,000 | $ | 7,606,000 | $ | 24,509,000 | ||||||
2009 | 50,642,000 | 3,446,000 | 23,381,000 | ||||||||||
Concert Group Logistics | 2010 | 65,222,000 | 1,882,000 | 25,106,000 | |||||||||
2009 | 41,162,000 | 1,121,000 | 23,509,000 | ||||||||||
Bounce Logistics | 2010 | 19,994,000 | 865,000 | 4,836,000 | |||||||||
2009 | 10,425,000 | 458,000 | 2,150,000 | ||||||||||
Discontinued Operations | |||||||||||||
Express-1 Dedicated | 2010 | - | - | - | |||||||||
2009 | $ | 666,000 | $ | 28,000 | $ | - |
equipment shortages in the transportation industry, typically relate to terms and rates, but not committed business volumes. Customers are free to choose their expediteparticularly among contracted truckload carriers;
interruptions in service or stoppages in transportation providers on an at-will basis, which underscores Express-1’s commitment to total customer satisfaction. Express-1 offers an ISO 9001:2008 certified, twenty-four hour, seven day-a-week call center allowing its customers immediate communication and status updates relating to their shipments. Express-1’s commitment to excellence was again recognized as Express-1 received the Nasstrac “Expedited Carrier of the Year Award” for the second straight year in 2009 in addition to being named as a top 100 carrier by Inbound Logisticsresult of labor disputes;
changes in 2010.regulations impacting transportation; and
changes in transportation equipment used in its operation is almost exclusively provided by third parties, with less than two percent of the vehicles being owned by the company. These third-party owned vehicles are driven by independent contract drivers and by drivers employed directly by independent owners of multiple pieces of equipment, commonly referred to as fleet owners.rates.
Express-1 serves its customers between points within the United States, in addition to Canada and Mexico. Express-1’s Canadian and Mexican transportation services are provided to customers who are located primarily in the Unites States. As of December 31, 2010, we employed 114 full-time associates to supportIn our Express-1 operations.
Our Freight Forwarding operations are provided through a network of independent stations that are owned and operated by independent contractors and through stations managed by our 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 future relationships with additional independent station owners. Similarly, we cannot assure you that we will be able to retain or effectively motivate our key employees who manage our most significant customer relationships. Since these independent station owners and our employees maintain the relationships with the customers, some customers may decide to terminate their relationship with us if their independent station owner or contact leaves our network. Accordingly, our inability to maintain relationships with these independent station owners and our employees could have a material 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 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.
We derive a significant portion of our revenue from our largest customers, some of which are involved in highly cyclical industries; 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 relationships with these large accounts in the aggregate for a significant portion of our revenues. In addition, 3PD, which we acquired during the third quarter of 2013, derived approximately 30% of its revenues in 2012 from its largest customer, a blue chip home improvement retailer, and its top three customers accounted for approximately 65% of its revenues in 2012. Any interruption or decrease in the business volume awarded by these customers could have a material adverse impact on our revenues and resulting profitability.
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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, impacted by the changing landscape in the U.S. automotive market, which is highly competitive and historically has been subject to substantial cyclical variation characterized by periods of oversupply and weak demand. Negative trends in the capabilityU.S. automotive market or a worsening in the financial condition of automotive manufacturers, or within the associated supplier base, could have a material adverse impact on our revenues, profitability and cash flows.
3PD’s most significant customers include many large home improvement retailers and other companies whose businesses are impacted by the residential real estate market in the United States, which is subject to significant volatility. An increase in the volatility of and/or deterioration in the residential real estate market may adversely affect these customers and, in turn, 3PD’s, and therefore our, revenues and results of operations.
Our contractual relationships with our customers generally are terminable at will by the customers (or us) on short notice. Moreover, our customers generally are not required to provide logistics servicesany minimum shipping commitments. Failure to retain our existing customers or enter into relationships with new customers could have a material adverse impact on a global basis. CGL’s services are not restricted by size, weight, mode or location and can be tailored to meet the transportation requirements of its client base. The major domestic and international services provided by CGL are outlined below.
If our customers are able to improve their internal supply chain management systems or reduce their supply chain cost structures, our business and results of taxes, in the line item labeled “Income from discontinued operations” for all years presented in the Consolidated Statements of Operations.
We believe that significant drivers for our customers to use third party logistics providers include the opportunityquality and cost of internal supply chain management and personnel. Third party logistics service providers such as ourselves are generally able to provide high-quality service more efficiently than otherwise could be provided “in-house.” Historically, this has been the case in our target industries. If, however, a customer in any industry we target is able to improve the quality of its internal supply chain management system, renegotiate the terms of its labor contracts or otherwise reduce its total cost structure regarding its employees, we may not be able to provide such a customer with an attractive alternative for organicits logistics needs and our business, results of operations and growth will continue within each of our service offerings – expeditepotential may be harmed.
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 forwarding,demand, decreases in trucking capacity, higher driver wages, increased regulation and premium truckload brokerage over the long term. Management spends significant time and resourcesincreases in the developmentprices of new customers, promotion of existing brands, focus on market penetration,fuel, insurance, tractors, trailers and other activitiesoperating expenses can result in higher purchased transportation expenses to stimulate organic growth. Express-1, Concert Group Logistics and Bounce have experienced historical growth rates exceeding 20%, andus. Our profitability may decrease if we anticipate similar growth rates moving forwardare 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.
Fluctuations in the future.price or availability of fuel may change our operations structure and resulting profitability.
Fuel expense constitutes one of the transportation and logistics industries within the US and international markets will continuegreatest costs to consolidate. Acquisition opportunities continue to exist and we continue to search for appropriate acquisitions to complement our existing business platforms. In 2009, we successfully completed two acquisitions; Express-1 Metro Detroit, and CGL International, both of which have complemented our existing operations and bottom line. Our focus on acquisition candidates continues to include the following characteristics:
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Increases in independent contractor driver compensation or other difficulties attracting and retaining qualified independent contractor drivers could adversely affect our profitability and ability to maintain or grow our independent contractor driver fleet.
Our Expedited Transportation segment operates through a fleet of exclusive-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, regulations such as the FMCSA Compliance Safety Accountability program may further reduce the pool of qualified independent contractor drivers. Thus, our continued reliance on independent contractor drivers could limit our ability to grow our ground transportation fleet.
We are currently experiencing, and expect to continue to experience from time to time in the future, difficulty in attracting and retaining sufficient numbers of qualified independent contractor drivers. 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 operations could be adversely affected.
The compensation we offer our independent contractor drivers is subject to market conditions and we may find it necessary to continue to increase independent contractor drivers’ compensation in future periods, which may be more likely to the extent economic conditions continue to improve. If we are unable to continue to attract and retain a sufficient number of independent contractor drivers, we could be required to increase our mileage rates and accessorial pay or operate with fewer trucks and face difficulty meeting shipper demands, all of which would adversely affect our profitability and ability to maintain our size or to pursue our growth strategy.
3PD’s warehouse lease costs are fixed for a larger groupcertain period of units, based upontime, even if customer demand for shipping services in the areas where these warehouse are located decreases.
3PD is subject to expenses that are fixed for varying lengths of time through a significant number of lease agreements for warehousing facilities. These leases expire at various dates through 2018. The fixed nature of 3PD’s lease expenses may limit our specific needs. Information received throughability to react promptly to a decline in demand by its customers for shipping services in the areas where these warehouses are located. The inability to respond promptly to changes in customer demand may have an adverse effect on our satellite trackingfinancial condition and communication system automatically updatesresults of operations. In addition, we may be unable to terminate these leases or find suitable subleases in the event of a rapid reduction in market demand without a material adverse effect on our internal softwarebusiness, results of operations and providesfinancial condition.
A determination by regulators or courts that our customersindependent 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 real-time electronic updates. Both Express-1these initiatives. Further, class actions and Bounce useother lawsuits have arisen in our industry seeking to reclassify independent contractor drivers as employees for a variety of purposes, including workers’ compensation, wage-and-hour, and healthcare coverage. Proposed legislation would make it easier for tax and other authorities to reclassify independent contractor drivers as employees. If our independent contractor drivers are determined to be our employees in any future determinations by regulators or courts, such a determination could increase the same web based operational software.
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other negligence causes of action, and trackingwe would incur additional exposure under federal, state and tracinglocal tax, workers’ compensation, unemployment benefits, labor and employment laws, including for domestic and international shipments;prior periods, as well as EDI messaging.
Additionally, 3PD has been advised of audits by certain states regarding the classification of 3PD’s contract carriers and non-final reclassifications of 3PD’s contract carriers that 3PD is currently appealing. 3PD is also involved as a defendant in certain class action lawsuits which claim, in part, improper classification of 3PD’s contract carriers. If 3PD’s contract carrier drivers are determined to be its employees by regulators or courts in any of the actions involving 3PD or in any future determinations by regulators or courts, we would incur additional exposure under federal, state and local tax, workers’ compensation, unemployment benefits, labor and employment laws, including for prior periods, as well as potential liability for penalties and interest. Pursuant to the stock purchase agreement related to the acquisition of 3PD, the former stockholders, option holders and warrant holders of 3PD have agreed to indemnify us for certain liabilities, including claims related to 3PD’s relationships with mostits contract carriers, subject to certain limits. However, there can be no assurance that this indemnification will be sufficient to protect us against the full amount of such liabilities.
We may be subject to various claims and lawsuits that could result in significant expenditures.
The nature of our business 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, including with respect to claims asserted under various theories of agency and employer liability notwithstanding our independent contractor relationships with our transportation providers. During 2013, we spent approximately $4.9 million in litigation-related legal costs. Any material litigation could have a material adverse effect on our business, results of operations, financial condition or cash flows. Businesses that we acquire also increase our exposure to litigation.
We are involved in litigation in the Fourth Judicial District Court of Hennepin County, Minnesota relating to our hiring of former employees of C.H. Robinson Worldwide, Inc. (“CHR”). In the litigation, CHR asserts claims for breach of contract, breach of fiduciary duty and duty of loyalty, tortious interference with contractual relationships and prospective contractual relationships, misappropriation of trade secrets, violation of the federal Computer Fraud and Abuse Act, inducing, aiding and abetting breaches and conspiracy. CHR seeks temporary, preliminary and permanent injunctions, as well as direct and consequential damages and attorneys’ fees. CHR has asserted that it may seek punitive damages as well. On January 17, 2013, following a hearing, the Court issued an Order Regarding Motion for Temporary Injunction (the “Order”). The Order (as amended on April 16, 2013) prohibits us from engaging in business with certain CHR customers (the “Restricted Customers”) within a specified radius of Phoenix, AZ, until July 1, 2014. On November 6, 2013, CHR moved to compel compliance with the Order, requesting discovery and expanded enforcement of the Order. On November 18, 2013, we opposed CHR’s motion and cross moved to modify the Order. On February 19, 2014, the Court denied the majority of CHR’s motion, granting only CHR’s request for a report of our remediation efforts under the Order. At the same time, the Court granted our motion and modified the Order to allow XPO to do business with Restricted Customers in the Phoenix area if: (a) XPO obtained that business as the result of a merger or acquisition; or (b) the business is part of a competitive bidding process with an entity seeking nationwide services. The Court also clarified that the business restrictions in the Order do not apply to XPO’s servicing of other independent third party logistics entities who might be working for the ultimate benefit of the Restricted Customers.
On February 7, 2013, CHR filed a First Amended Complaint against us and eight individual defendants who are current or former employees of XPO, including our Chief Operating Officer, Senior Vice President—Strategic Accounts and Vice President—Carrier Procurement and Operations. On April 11, 2013, we moved to dismiss the new claims asserted in that First Amended Complaint and moved to stay discovery pending the Court’s resolution of the motion to dismiss. On August 29, 2013, the Court granted in part and denied in part the
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motion to dismiss and denied as moot the motion to stay discovery. On September 23, 2013, we filed our Answer to the First Amended Complaint and asserted counterclaims against CHR for violations of the Minnesota Antitrust, Unlawful Trade Practices, and Deceptive Trade Practices Act, as well as tortious interference with contractual relations and prospective contractual relations. CHR moved to dismiss our counterclaims on November 12, 2013, and we opposed that motion. A hearing on CHR’s motion to dismiss was held on February 10, 2013. The Court has not yet issued a ruling on CHR’s motion to dismiss. We intend to vigorously defend the action in court. The outcome of this software being providedlitigation is uncertain and could have a material adverse effect on our business and results of operations.
3PD is a defendant in a number of class action and individual lawsuits alleging improper classification of contract carriers as independent contractors rather than employees, among other claims, and seeking damages primarily under varying state laws for alleged improper deductions from wages. Pursuant to the stock purchase agreement by third-party vendors. Our software systemswhich we acquired 3PD, the former owners of 3PD have been designedagreed to support the unique operational characteristics of each industry niche in which it is utilized. We have further customized these systemsindemnify us for costs and liabilities related to more readily facilitate the flow of information from outside sources into our operations centers for use by our personnelsuch class action and customers. Investments in technology, including; satellite communications equipment, computer networks, software customization and related information technology continuesindividual lawsuits, subject to becertain limits. Additionally, we are a strategic focus for each of our Companies. Hardware typically represents one of our largest categories of investment within our annual capital expenditure budget, and we believe the continual enhancement of our technology platforms is critical to our continued success.
Our 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 resulting types and/or amounts of damages may be assured thatexcluded by or exceed the ultimate dispositionamount of insurance coverage maintained by the contracted transportation provider. In our Freight Brokerage operations, we generally are not liable for damage to our customers’ cargo or in connection with damages arising in connection with the provision of transportation services. However, in our customer contracts, we may agree to assume cargo and other liability, such as for negligence and personal injury, including liability 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. While we endeavor to limit this exposure to matters arising due to our negligence or misconduct, or to cap our exposure at a stated maximum dollar amount, we are not always able to do so. Claims against us may exceed the amount of our insurance coverage, or may not be 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.
We are subject to regulation beyond our control, which could negatively impact our business.
Our operations are regulated and licensed by various federal and state transportation agencies in the United States and similar governmental agencies in foreign countries in which we operate. These regulatory agencies have authority and oversight of domestic and international transportation services and related activities, licensure, motor carrier operations, safety and security and other matters. We must comply with various insurance and surety bond requirements to act in the capacities for which we are licensed. Our subsidiaries and independent contractors must also comply with applicable regulations and requirements of such agencies. The “Regulation” section of this Annual Report on Form 10-K under the caption entitled “Business” describes the various licenses obtained by us, Express-1, XGL and XPO Air Charter, as well as proposed, pending and adopted regulations that could significantly affect our business, operations, productivity, independent contractors and capital expenditures.
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Through our subsidiaries and business units, we hold various licenses required to carry out our domestic and international services. These licenses permit us to provide services as a motor carrier, property broker, indirect air carrier, Ocean Transportation Intermediary, non-vessel operating common carrier, freight forwarder and ocean freight forwarder. We also are subject to regulations and requirements promulgated by, among others, the U.S. Department of Transportation and FMCSA, the U.S. Department of Homeland Security through the Bureau of U.S. Customs and Border Protection and the U.S. Transportation Security Administration, the U.S. Federal Maritime Commission, International Air Transportation Association, the Canada Border Services Agency and various other international, domestic, state, and local agencies and port authorities. Our failure to maintain our required licenses, or to comply with applicable regulations, could have a material 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 require us to incur significant additional costs. We are unable to predict the impact that recently enacted and future regulations may have on our businesses. Higher costs incurred by us, or incurred by our independent contractors or third party transportation providers who pass the increased costs on to us, as a result of future new regulations could adversely affect our results of operations to the extent we are unable to obtain a corresponding increase in price from our customers.
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.
Work stoppages, weather related issues, or other disruption beyond our transportation providers control could adversely affect our operating results.
Our transportation services are provided through a network of transportation providers. Hurricanes, flooding, and other severe weather conditions, as well as other calamities such as earthquakes, fires and acts of terrorism, can cause a disruption in service that can affect the flow of traffic over the entire network. In addition, our businesses can be adversely affected by labor disputes between railroads and their union employees, seaport strikes and labor renegotiations, foreign labor market disruptions, or by a work stoppage at railroads or local trucking companies servicing rail terminals, including work disruptions involving owner operators under contract with our local trucking operations. These network disruptions result in terminal embargoes, disruption to equipment and freight flows, depressed volumes and revenues, increased costs and other negative effects on our operations and financial results.
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 have an adverse effect on our results of operations. Congress has mandated 100% security screening of air cargo traveling on passenger airlines. War, risk of war or a terrorist attack also may have an adverse effect on the economy. A decline in economic activity could adversely affect our revenues or restrict our future growth.
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Instability in the financial markets as a result of terrorism or war also could impact our ability to raise capital. In addition, the insurance premiums charged for some or all of the coverage currently maintained by us could increase dramatically or such coverage could be unavailable in the future.
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. Future issuances of our Common Stock will dilute our stockholders’ ownership and our stock price may decline accordingly. 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.
Our outstanding Preferred Stock, Convertible Senior Notes and revolving credit agreement limit our operating and financial flexibility.
We are obligated to pay holders of our Series A Convertible Perpetual Preferred Stock quarterly cash dividends equal to the greater of (i) the “as-converted” dividends on the underlying Common Stock for the relevant quarter, if applicable, and (ii) 4% of the then-applicable liquidation preference per annum. Presently, the aggregate dividends due to holders of our Series A Preferred Stock are $2.9 million each year. Our Series A Preferred Stock has an initial liquidation preference of $1,000 per share, for an aggregate liquidation preference of $73.4 million, subject to adjustment in the event of accrued and unpaid dividends. Accordingly, holders of our Series A Preferred Stock have claim to a substantial portion of our cash flows from operations and liquidity, thereby reducing the availability of our cash flows to fund acquisitions, working capital, capital expenditures, our growth initiatives and other general corporate purposes.
We are obligated to pay holders of our 4.50% Convertible Senior Notes interest semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2013. The Notes will mature on October 1, 2017 unless earlier converted or repurchased. The conversion rate was initially 60.8467 shares of Common Stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $16.43 per share of Common Stock) and is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. We may acquire from time to time our 4.50% Convertible Senior Notes for cash or securities in market transactions, privately negotiated transactions or otherwise, depending on market and other conditions.
Our revolving credit agreement contains, and any future credit agreement would likely contain, certain operating and financial restrictive covenants. Such covenants include limits on 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 covenants under the loan commitment (if drawn) or any future credit agreement may have a material adverse impact on our operations. In addition, if we fail to comply with the covenants under any such 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.
The price of our Common Stock historically has been volatile and this volatility may make it difficult for you to resell shares of Common Stock owned by you at times or may make it difficult for you to sell shares of Common Stock at prices you find attractive.
The trading price of our Common Stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in share prices and trading
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volumes that affect the market prices of the shares of many companies. These broad market fluctuations have adversely affected, and may in the future adversely affect, the market price of our Common Stock. Among the factors that could affect our stock price are:
changes in financial estimates and buy/sell recommendations by securities analysts or our failure to meet analysts’ revenue or earnings estimates;
actual or anticipated variations in our operating results;
our earnings releases and financial performance;
market conditions in our industry and the general state of the securities markets;
fluctuations in the stock price and operating results of our competitors;
actions by institutional shareholders;
investor perception of us and the industry and markets in which we operate;
general economic conditions; and
other factors described in this “Risk Factors” section.
The trading price of our Common Stock has fluctuated widely in the past, and we expect that it will continue to fluctuate in the future.
Delaware law and our charter documents may impede or discourage a takeover, which could cause the market price of our Common Stock to decline.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. In addition, our board of directors or a committee thereof has the power, without stockholder approval, to designate the terms of one or more series of Preferred Stock and issue shares of Preferred Stock. The ability of our board of directors or a committee thereof to create and issue a new series of Preferred Stock, our stockholders rights plan and certain provisions of Delaware law and our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our Common Stock, which, under certain circumstances, could reduce the market price of our Common Stock.
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 (including the Pacer acquisition) 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 will dilute the interests of our then-existing 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.
We have securities outstanding presently that are convertible into or exercisable for a substantial number of shares of our Common Stock. As of February 21, 2014, there were (i) 48,747,390 shares of our Common Stock outstanding, (ii) 73,425 shares of Series A Convertible Perpetual Preferred Stock outstanding, which are convertible into an aggregate of 10,489,286 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 10,678,572 shares of our Common Stock, at an initial exercise price of $7.00 per share of Common Stock (subject to customary anti-dilution adjustments), (iv) 2,469,273 shares of our Common Stock reserved for issuance upon exercise of outstanding stock options or settlement of restricted stock units and (v) 7,341,824 shares reserved for issuance upon conversion of our 4.50% Convertible Senior Notes.
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Our Chairman and Chief Executive Officer controls a large portion of our voting 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, is the managing member of Jacobs Private Equity, LLC (“JPE”), our largest stockholder, and beneficially owns as of February 21, 2014: (i) 67,500 shares of our Series A Convertible Perpetual Preferred Stock held by JPE, which are initially convertible into an aggregate of 9,642,857 shares of our Common Stock, (ii) Warrants held by JPE that are initially exercisable for an aggregate of 9,642,857 shares of our Common Stock at an exercise price of $7.00 per share, (iii) 56,826 shares of our Common Stock that are held directly by Mr. Jacobs and (iv) employee stock options exercisable for 100,000 shares of our Common Stock that have vested or will vest within 60 days. In total, as of February 21, 2014, Mr. Jacobs beneficially owns 19,442,540 shares of our Common Stock, which represents approximately 28.5% of our outstanding Common Stock, assuming conversion and exercise of his Series A Convertible Perpetual Preferred Stock, Warrants and vested stock options and restricted stock units (without reflecting any shares issuable upon conversion of our 4.50% Convertible Senior Notes due October 1, 2017). This significant concentration of beneficial 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 Series A 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 Series A Preferred Stock. In addition, pursuant to the Investment Agreement, dated as of June 13, 2011 (the “Investment Agreement”), by and among JPE, the other investors party thereto and us, 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. Under the terms of the Investment Agreement, Mr. Jacobs currently beneficially owns approximately 25.0% of the voting power of our capital stock on a fully-diluted basis, including his ownership of Series A Convertible Perpetual Preferred Stock and Warrants. Further, as of February 21, 2014, Mr. Jacobs’ beneficial ownership of our Common Stock and Series A Convertible Perpetual Preferred Stock entitled him to cast approximately 16.4% of the votes eligible to be cast on matters to be presented for consideration at a meeting of our stockholders (such as, for example, the election of directors). 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.
Our Common Stock is subordinate to our existing and future indebtedness and Series A Preferred Stock.
Shares of the Common Stock are equity interests in XPO and do not constitute indebtedness. As such, shares of our Common Stock rank junior to all indebtedness and other non-equity claims on XPO with respect to assets available to satisfy claims on XPO, including in a liquidation of XPO. Additionally, we have outstanding shares of Series A Preferred Stock with a liquidation preference of $73.4 million and an annual cash dividend of 4% of such liquidation preference. Holders of our Common Stock are subject to the prior dividend and liquidation rights of the holders of our Series A Preferred Stock.
We currently do not intend to pay dividends on our Common Stock.
We have never paid, and have no immediate plans to pay, cash dividends on our Common Stock. We currently plan to retain future earnings and 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. Accordingly, we do not anticipate paying any cash dividends on our Common Stock in the near future.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
ITEM 2. | PROPERTIES |
We lease our current executive offices at Five Greenwich Office Park, Greenwich, Connecticut, as well as our national operations center in Charlotte, North Carolina. We own the facility at which we conduct a portion of our Expedited Transportation operations in Buchanan, Michigan. As of February 2014, we also lease numerous other facilities relating to our operations under each of our operating segments, generally ranging from 1,000 to approximately 100,000 square feet of space. These facilities are located in all 50 states, District of Columbia and three Canadian provinces: British Columbia, Ontario and Quebec. We believe that our facilities are sufficient for our current needs and are in good condition in all material respects.
ITEM 3. | LEGAL PROCEEDINGS |
We are involved in litigation in the Fourth Judicial District Court of Hennepin County, Minnesota relating to our hiring of former employees of C.H. Robinson Worldwide, Inc. (“CHR”). In the litigation, CHR asserts claims for breach of contract, breach of fiduciary duty and duty of loyalty, tortious interference with contractual relationships and prospective contractual relationships, misappropriation of trade secrets, violation of the federal Computer Fraud and Abuse Act, inducing, aiding and abetting breaches and conspiracy. CHR seeks temporary, preliminary and permanent injunctions, as well as direct and consequential damages and attorneys’ fees. CHR has asserted that it may seek punitive damages as well. On January 17, 2013, following a hearing, the Court issued an Order Regarding Motion for Temporary Injunction (the “Order”). The Order (as amended on April 16, 2013) prohibits us from engaging in business with certain CHR customers (the “Restricted Customers”) within a specified radius of Phoenix, AZ, until July 1, 2014. On November 6, 2013, CHR moved to compel compliance with the Order, requesting discovery and expanded enforcement of the Order. On November 18, 2013, we opposed CHR’s motion and cross moved to modify the Order. On February 19, 2014, the Court denied the majority of CHR’s motion, granting only CHR’s request for a report of our remediation efforts under the Order. At the same time, the Court granted our motion and modified the Order to allow XPO to do business with Restricted Customers in the Phoenix area if: (a) XPO obtained that business as the result of a merger or acquisition; or (b) the business is part of a competitive bidding process with an entity seeking nationwide services. The Court also clarified that the business restrictions in the Order do not apply to XPO’s servicing of other independent third party logistics entities who might be working for the ultimate benefit of the Restricted Customers.
On February 7, 2013, CHR filed a First Amended Complaint against us and eight individual defendants who are current or former employees of XPO, including our Chief Operating Officer, Senior Vice President—Strategic Accounts and Vice President—Carrier Procurement and Operations. On April 11, 2013, we moved to dismiss the new claims asserted in that First Amended Complaint and moved to stay discovery pending the Court’s resolution of the motion to dismiss. On August 29, 2013, the Court granted in part and denied in part the motion to dismiss and denied as moot the motion to stay discovery. On September 23, 2013, we filed our Answer to the First Amended Complaint and asserted counterclaims against CHR for violations of the Minnesota Antitrust, Unlawful Trade Practices, and Deceptive Trade Practices Act, as well as tortious interference with contractual relations and prospective contractual relations. CHR moved to dismiss our counterclaims on November 12, 2013, and we opposed that motion. A hearing on CHR’s motion to dismiss was held on February 10, 2013. The Court has not yet issued a ruling on CHR’s motion to dismiss. We intend to vigorously defend the action in court. The outcome of this litigation is uncertain and could have a material adverse effect on our business and results of operations.
We are a party to a variety of other legal actions, both as a plaintiff and as a defendant that arose in the ordinary course of business, and may in the future become involved in other legal actions. We do not currently expect any of these matters or these matters in the aggregate to have a material adverse effect on our results of
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operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our financial condition, results of operations or cash flows.
We carry liability and excess umbrella insurance policies that we deem sufficient to cover potential legal claims arising 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 liability and umbrella liabilitycoverage provided by this insurance, policies that provide protection against claims up to various limits of liability. These limits are intended to 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,condition, results of operations or liquidity.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5.Price Range of Common Stock MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE AMEX Equities Exchange under the symbol “XPO.” The table below sets forth the high and low closing sales prices for the Company’sour common stock for the quarters included within 20092012 and 20102013 and for the first few months of 2011.
High | Low | |||||||
2009 | ||||||||
1st quarter | $ | 1.10 | $ | .67 | ||||
2nd quarter | 0.95 | .77 | ||||||
3rd quarter | 0.96 | .81 | ||||||
4th quarter | 1.29 | .91 | ||||||
2010 | ||||||||
1st quarter | $ | 1.65 | $ | 1.22 | ||||
2nd quarter | 1.56 | 1.26 | ||||||
3rd quarter | 1.88 | 1.24 | ||||||
4th quarter | 2.82 | 1.99 | ||||||
2011 | ||||||||
1st quarter (through March 18, 2011) | $ | 3.03 | $ | 2.12 |
High | Low | |||||||
2012 | ||||||||
1st quarter | $ | 18.34 | $ | 11.35 | ||||
2nd quarter | 19.02 | 15.25 | ||||||
3rd quarter | 16.50 | 11.93 | ||||||
4th quarter | 17.38 | 11.60 | ||||||
2013 | ||||||||
1st quarter | $ | 18.59 | $ | 16.60 | ||||
2nd quarter | 18.25 | 15.82 | ||||||
3rd quarter | 25.41 | 17.96 | ||||||
4th quarter | 26.45 | 19.50 | ||||||
2014 | ||||||||
1st quarter (through February 21, 2014) | $ | 30.31 | $ | 23.90 |
As of March 18, 2011,February 21, 2014, there were approximately 3,400382 record holders of the Company’sour common stock, based upon data available to us from our proxy solicitor, transfer agentagent. We have never paid, and market maker forhave no immediate plans to pay, cash dividends on our common stock. The Company has never paidWe currently plan to retain future earnings and cash flows for use in the development of our business and to enhance stockholder value through growth and continued focus on improving profitability rather than for paying 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 pay cash dividends on itsour common stock and intends to keep future earnings, if any, to retire debt and finance the expansion of its business.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.
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The graph below compares the reader’s understandingcumulative 5-year total return of holders of our Company’scommon stock with the cumulative total returns of the Russell 2000 Index, and the Dow Jones Transportation Average Index. The graph tracks the performance of a $100 investment in our common stock and in each index from December 31, 2008 to December 31, 2013.
12/08 | 12/09 | 12/10 | 12/11 | 12/12 | 12/13 | |||||||||||||||||||
XPO Logistics, Inc. | $ | 100 | $ | 111 | $ | 223 | $ | 268 | $ | 378 | $ | 572 | ||||||||||||
Russell 2000 | $ | 100 | $ | 125 | $ | 157 | $ | 148 | $ | 170 | $ | 233 | ||||||||||||
Dow Jones Transportation Average | $ | 100 | $ | 116 | $ | 144 | $ | 142 | $ | 150 | $ | 209 |
Equity Compensation Plan
Certain information with respect to our equity compensation plans is set forth in Item 12 of this Annual Report on Form 10-K.
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ITEM 6. | SELECTED FINANCIAL DATA |
This table includes selected financial condition and results of operations anddata for the last five years. This financial data should be read together with our audited Consolidated Financial Statements and related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other financial data appearing elsewhere in this Annual Report.
XPO Logistics, Inc.
(In thousands)
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Consolidated Statements of Operations Data: | ||||||||||||||||||||
Revenue | $ | 702,303 | $ | 278,591 | $ | 177,076 | $ | 157,987 | $ | 100,136 | ||||||||||
Gross margin | 123,507 | 40,826 | 29,778 | 27,400 | 16,740 | |||||||||||||||
(Loss) income from continuing operations | (48,530 | ) | (20,339 | ) | 759 | 4,888 | 1,690 | |||||||||||||
Income from discontinued operations | — | — | — | — | 15 | |||||||||||||||
Preferred stock beneficial conversion charge | — | — | (44,211 | ) | — | — | ||||||||||||||
Cumulative preferred dividends | (2,972 | ) | (2,993 | ) | (1,125 | ) | — | — | ||||||||||||
Net (loss) income available to common stockholders | $ | (51,502 | ) | $ | (23,332 | ) | $ | (44,577 | ) | $ | 4,888 | $ | 1,705 | |||||||
(Loss) Earnings per share | ||||||||||||||||||||
Basic | $ | (2.26 | ) | $ | (1.49 | ) | $ | (5.41 | ) | $ | 0.61 | $ | 0.21 | |||||||
Diluted | (2.26 | ) | (1.49 | ) | (5.41 | ) | 0.59 | 0.21 | ||||||||||||
Weighted average common shares outstanding | ||||||||||||||||||||
Basic | 22,752 | 15,694 | 8,247 | 8,060 | 8,009 | |||||||||||||||
Diluted | 22,752 | 15,694 | 8,247 | 8,279 | 8,042 | |||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Working capital | $ | 72,839 | $ | 271,907 | $ | 83,070 | $ | 12,314 | $ | 970 | ||||||||||
Total assets | $ | 780,241 | $ | 413,208 | $ | 127,641 | $ | 56,672 | $ | 49,039 | ||||||||||
Current maturities of long-term debt | $ | 2,028 | $ | 491 | $ | 1,675 | $ | 1,680 | $ | 7,745 | ||||||||||
Convertible senior notes | $ | 106,268 | $ | 108,280 | $ | — | $ | — | $ | — | ||||||||||
Revolving credit facility and other long-term debt, net of current maturities | $ | 75,373 | $ | 676 | $ | 454 | $ | 4,832 | $ | 213 | ||||||||||
Total long-term debt | $ | 181,641 | $ | 108,956 | $ | 454 | $ | 4,832 | $ | 213 | ||||||||||
Preferred stock | $ | 42,737 | $ | 42,794 | $ | 42,794 | $ | — | $ | — | ||||||||||
Stockholder’s equity | $ | 455,843 | $ | 245,059 | $ | 108,360 | $ | 34,013 | $ | 28,404 |
We effected a 4-for-1 reverse stock split on September 2, 2011. All share and per share amounts have been adjusted to reflect the reverse stock split. Results for the fiscal year ended December 31, 2011 reflect the beneficial conversion feature of $44.2 million on the Series A Preferred Stock that was recorded as a deemed distribution during the third quarter of 2011, as described in Item 7 below.
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 consolidated financial statementsaudited Consolidated Financial Statements and related notesNotes thereto included elsewhere herein. Thisin this Annual Report. The following discussion also contains forward-looking statements. You should refer to the “Cautionary Statement Regarding Forward-Looking Statements” set forth in Part I, Item 1A of this Annual Report.
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Executive Summary
XPO Logistics, Inc., a Delaware corporation, together with its subsidiaries, is a leading non-asset provider of transportation logistics services. We act as a middleman between shippers and carriers who outsource their transportation logistics to us as a third-party provider. As of December 31, 2013, we operated at 94 locations: 73 Company-owned branches and 21 agent-owned offices.
We offer our services through three business segments. Our actual results could differ materiallyfreight brokerage segment places shippers’ freight with qualified carriers, primarily trucking companies. Our expedited transportation segment facilitates urgent shipments via independent over-the-road contractors and air charter carriers. Our freight forwarding segment arranges domestic and international shipments using ground, air and ocean transport through a network of agent-owned and Company-owned locations.
In September of 2011, following the equity investment in the Company led by Jacobs Private Equity, LLC, we began to implement a strategy to leverage our strengths—including management expertise, operational scale and capital resources—with the goals of significant growth and value creation.
By executing our strategy, we have built leading positions in some of the fastest-growing sectors of transportation logistics. In North America, we are the fourth largest provider of freight brokerage services, which, driven by an outsourcing trend, is growing at two to three times the rate of GDP. Our acquisitions of 3PD Holding, Inc. (“3PD”) and Optima Service Solutions, LLC (“Optima”) in 2013 (further described below) made us the largest provider of heavy goods last-mile delivery logistics in North America, a $13 billion sector which, driven by outsourcing by big-box retailers and e-commerce, is growing at five to six times the rate of GDP. In part due to our acquisition of National Logistics Management (“NLM”) in December of 2013 (further described below), we now manage more expedited shipments than any other company in North America and have established a foothold in managed transportation. Expediting is growing due to a trend toward just-in-time inventories in manufacturing. Upon completion of the acquisition of Pacer International, Inc. (further described below), we will be the third largest provider of intermodal services in North America and the largest provider of cross-border Mexico intermodal services, a sector that, driven by the efficiencies of long-haul rail and the growth of near-shoring of manufacturing in Mexico, is growing at three to five times the rate of GDP. We believe our broad service offering gives us a competitive advantage as many customers, particularly large shippers, focus their relationships on fewer, larger third party logistics providers with deep capacity across a wide range of services.
Our strategy has three main components:
• | Optimization of operations. We are continuing to optimize our existing operations by growing our sales force, implementing advanced information technology, cross-selling our services and leveraging our shared carrier capacity. We have a disciplined framework of processes in place for the recruiting, training and mentoring of newly hired employees. Our salespeople market our services to hundreds of thousands of small and medium-sized prospective customers. In addition, we have a strategic and national accounts team focused on developing business relationships with the largest shippers in North America. Our network is supported by our national operations center in Charlotte, North Carolina, which we opened in March of 2012, and by our information technology. We have a scalable platform in place across the Company, with sales, service, carrier and track-and-trace capabilities, as well as benchmarking and analysis. Most important to our growth strategy, we are developing a culture of passionate, world-class service for customers. |
• | Acquisitions. We take a disciplined approach to acquisitions: we look for companies that are highly scalable and are a good strategic fit with our core competency. When we acquire a company, we seek to integrate it with our operations and scale it up by adding salespeople. We integrate the acquired operations with our technology platform, which connects them to our broader organization, and we give them access to our shared carrier pool. We gain more carriers, customers, lane histories and pricing histories with each acquisition, and in some cases an acquisition adds complementary services. |
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We use these resources Company-wide to buy transportation more efficiently and to cross-sell a more complete supply chain solution to customers. Since the beginning of 2012, we have developed an active pipeline of targets. In 2012, we completed the acquisition of four non-asset third party logistics companies. We acquired another six companies in 2013, including 3PD, the largest non-asset, third party provider of heavy goods, last-mile logistics in North America, and NLM, the largest provider of web-based expedited transportation management in North America. On January 5, 2014, we agreed to acquire Pacer International, Inc., a Tennessee corporation (“Pacer”), the third largest provider of intermodal transportation services in North America. We plan to continue to acquire quality companies that fit our strategy for growth. |
• | Cold-starts. We believe that cold-starts can generate high returns on invested capital because of the relatively low investment required and the large component of variable-based incentive compensation. We are currently ramping up 23 cold-starts: 10 in Freight Brokerage, 12 in Freight Forwarding and one in Expedited Transportation. We seek to locate our Freight Brokerage cold-starts in prime areas for sales recruitment. We plan to continue to open cold-start locations where we see the potential for strong returns. |
Pending Acquisition of Pacer International
On January 5, 2014, XPO entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Pacer International, Inc., a Tennessee corporation (“Pacer”), and Acquisition Sub, Inc., a Tennessee corporation and a wholly owned subsidiary of XPO (“Merger Subsidiary”), providing for the acquisition of Pacer by XPO. Pursuant to the terms of Merger Agreement, Merger Subsidiary will be merged with and into Pacer (the “Merger”), with Pacer continuing as the surviving corporation and an indirect wholly owned subsidiary of XPO.
Pursuant to the terms of the Merger Agreement and subject to the conditions thereof, at the effective time of the Merger, each outstanding share of common stock of Pacer, par value $0.01 per share (the “Pacer Common Stock”), other than shares of Pacer Common Stock held by Pacer, XPO, Merger Subsidiary or their respective subsidiaries, will be converted into the right to receive (1) $6.00 in cash and (2) subject to the limitations in the following sentence, a fraction (the “Exchange Ratio”) of a share of XPO common stock, par value $0.001 per share (the “XPO Common Stock”), equal to $3.00 divided by the volume-weighted average price per share of XPO Common Stock for the last 10 trading days prior to the closing date (such average, the “VWAP,” and, such cash and stock consideration together, the “Merger Consideration”). For the purpose of calculating the Exchange Ratio, the VWAP may not be less than $23.12 per share or greater than $32.94 per share. If the VWAP for purposes of the Exchange Ratio calculation is less than or equal to $23.12 per share, then the Exchange Ratio will be fixed at 0.1298 of a share of XPO Common Stock. If the VWAP for purposes of the Exchange Ratio calculation is greater than or equal to $32.94 per share, then the Exchange Ratio will be fixed at 0.0911 of a share of XPO Common Stock.
The completion of the Merger is subject to customary closing conditions, including approval of the Merger by the holders of a majority of the outstanding shares of Pacer Common Stock. XPO’s and Merger Subsidiary’s obligations to consummate the Merger are not subject to any condition related to the availability of financing.
Revolving Loan Credit Agreement
On October 18, 2013, we and certain of our wholly-owned subsidiaries, as borrowers, entered into a $125.0 million multicurrency secured Revolving Loan Credit Agreement (the “Credit Agreement”) with the lender parties thereto and Morgan Stanley Senior Funding, Inc., as administrative agent for such lenders, with a maturity of five years.
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The proceeds of the Credit Agreement may be used by us for ongoing working capital needs and other general corporate purposes, including strategic acquisitions. Borrowings under the Credit Agreement bear interest at a per annum rate equal to, at our option, the one, two, three or six month (or such other period less than one month or greater than six months as the lenders may agree) LIBOR rate plus a margin of 1.75% to 2.25%, or a base rate plus a margin of 0.75% to 1.25%. We are required to pay an undrawn commitment fee equal to 0.25% or 0.375% of the quarterly average undrawn portion of the commitments under the Credit Agreement, as well as customary letter of credit fees. The margin added to LIBOR, or base rate, will depend on the quarterly average availability of the commitments under the Credit Agreement.
All obligations under the Credit Agreement are secured by substantially all of our assets and are unconditionally guaranteed by certain of our subsidiaries, provided that no foreign subsidiary guarantees, and no assets of any foreign subsidiary secures, any obligations of any of our domestic borrower subsidiaries. The Credit Agreement contains representations, warranties and covenants that are customary for agreements of this type. Among other things, the covenants in the Credit Agreement limit our ability to, with certain exceptions: incur indebtedness; grant liens; engage in certain mergers, consolidations, acquisitions and dispositions; make certain investments and restricted payments; and enter into certain transactions with affiliates. In certain circumstances, the Credit Agreement also requires us to maintain certain minimum EBITDA or, at our election, maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.00 to 1.00. If an event of default under the Credit Agreement shall occur and be continuing, the commitments thereunder may be terminated and the principal amount outstanding thereunder, together with all accrued unpaid interest and other amounts owed thereunder, may be declared immediately due and payable. Certain subsidiaries acquired by us in the future may be excluded from those anticipatedthe restrictions contained in these forward-looking statementscertain of the foregoing covenants. We do not believe that the covenants contained in the Credit Agreement will impair our ability to execute our strategy. At December 31, 2013, we had borrowed $75.0 million under the terms of the Credit Agreement. We were in compliance, in all material respects, with all covenants related to the Credit Agreement as of December 31, 2013.
Common Stock Offerings
On February 5, 2014, we closed a registered underwritten public offering of 15,000,000 shares of common stock, and on February 11, 2014 we closed as part of the same public offering the sale of an additional 2,250,000 shares as a result of the risksfull exercise of the underwriters’ overallotment option, in each case at a price of $25.00 per share (together, the “February 2014 Offering”). We received $413.3 million in net proceeds from the February 2014 Offering after underwriting discounts and uncertainties set forth elsewhereexpenses.
On August 13, 2013, we closed a registered underwritten public offering of 9,694,027 shares of common stock, and on August 16, 2013 we closed as part of the same public offering the sale of an additional 1,454,104 shares as a result of the full exercise of the underwriters’ overallotment option, in each case at a price of $22.75 per share (together, the “August 2013 Offering”). We received $239.5 million in net proceeds from the August 2013 Offering after underwriting discounts and expenses.
On March 20, 2012, we closed a registered underwritten public offering of 9,200,000 shares of common stock (the “2012 Offering”), including 1,200,000 shares issued and sold as a result of the full exercise of the underwriters’ overallotment option, at a price of $15.75 per share. We received $137.0 million in net proceeds from the 2012 Offering after underwriting discounts and estimated expenses.
Convertible Debt Offering
On September 26, 2012, we completed a registered underwritten public offering of 4.50% Convertible Senior Notes due October 1, 2017 (the “Notes”), in an aggregate principal amount of $125.0 million. On October 17, 2012, the underwriters exercised the overallotment option to purchase $18.8 million additional principal amount of the Notes. We received $138.5 million in net proceeds after underwriting discounts,
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commissions and expenses were paid. The Notes were allocated to long-term debt and equity in the amounts of $106.8 million and $31.7 million, respectively. These amounts are net of debt issuance costs of $4.1 million for debt and $1.2 million for equity. To date, we have entered into transactions pursuant to which we have issued an aggregate of 1,404,887 shares of our common stock to certain holders of the Notes in connection with the conversion of $23.1 million aggregate principal amount of the Notes. These transactions included induced conversions pursuant to which we paid the holder a market-based premium in cash. The negotiated market-based premiums, in addition to the difference between the current fair value and the book value of the Notes, will be reflected in interest expense. The number of shares of common stock issued in the foregoing transactions equals the number of shares of common stock presently issuable to holders of the Notes upon conversion under the original terms of the Notes.
We are obligated to pay holders of the Notes interest semiannually in arrears on April 1 and October 1 of each year which began on April 1, 2013. The notes will mature on October 1, 2017 unless earlier converted or repurchased. The conversion rate was initially 60.8467 shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $16.43 per share of common stock) and is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.
Equity Investment
In September 2011, pursuant to the Investment Agreement, we issued, 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”). We refer to this investment as the “Equity Investment.” See Note 7 to our audited Consolidated Financial Statements in Item 8 of this Annual Report and in our other SEC filings. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only asReport.
The conversion feature of the date hereof. We are notSeries A Preferred Stock was determined to be a party to any transactions that would be considered “off balance sheet” pursuant to disclosure requirements under ITEM 303(c).
Other Reporting Disclosures
This discussion and analysis also refers from time to time to our Freight Brokerage international operations. These brokered shipments may originate in either the United States or Canada and are largely attributable to our acquisition of Kelron Corporate Services, Inc. and certain related entities (collectively, “Kelron”) in August 2012. These services are provided to both U.S. and Canadian customers who primarily pay in their home currency.
This discussion and analysis refers from time to time to Expedited Transportation’s international operations. These operations involve the transportation of freight shipments that originate in or are delivered to either Canada or Mexico. These freight shipments either originate in or are delivered to the United States, and therefore only a portion of the freight movement actually takes place in Canada or Mexico. This service is provided to domestic customers who pay primarily in U.S. dollars. We discuss this freight separately because our Expedited Transportation segment has developed an expertise in cross-docking freight at the border through the utilization of Canadian and Mexican carriers.
This discussion and analysis also refers from time to time to our Freight Forwarding international operations. These freight movements also originate in or are delivered to the United States and are primarily paid for in U.S. dollars.
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XPO Logistics, Inc.
Consolidated Statement of Operations
For the Year Ended December 31,
(In thousands)
Percent of Revenue | ||||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
Revenue | $ | 702,303 | $ | 278,591 | $ | 177,076 | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Direct expense | ||||||||||||||||||||||||
Transportation services | 567,805 | 224,035 | 133,007 | 80.8 | % | 80.4 | % | 75.1 | % | |||||||||||||||
Station commissions | 7,168 | 9,321 | 11,098 | 1.0 | % | 3.3 | % | 6.3 | % | |||||||||||||||
Other direct expense | 3,823 | 4,409 | 3,193 | 0.5 | % | 1.6 | % | 1.8 | % | |||||||||||||||
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Total direct expense | 578,796 | 237,765 | 147,298 | 82.3 | % | 85.3 | % | 83.2 | % | |||||||||||||||
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Gross margin | 123,507 | 40,826 | 29,778 | 17.7 | % | 14.7 | % | 16.8 | % | |||||||||||||||
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SG&A expense | ||||||||||||||||||||||||
Salaries & benefits | 100,633 | 39,278 | 16,338 | 14.3 | % | 14.1 | % | 9.2 | % | |||||||||||||||
Other SG&A expense | 29,358 | 11,616 | 3,937 | 4.2 | % | 4.2 | % | 2.2 | % | |||||||||||||||
Purchased services | 25,214 | 15,388 | 6,733 | 3.6 | % | 5.5 | % | 3.8 | % | |||||||||||||||
Depreciation and amortization | 20,627 | 2,508 | 1,046 | 2.9 | % | 0.9 | % | 0.6 | % | |||||||||||||||
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Total SG&A expense | 175,832 | 68,790 | 28,054 | 25.0 | % | 24.7 | % | 15.8 | % | |||||||||||||||
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Operating loss | (52,325 | ) | (27,964 | ) | 1,724 | -7.3 | % | -10.0 | % | 1.0 | % | |||||||||||||
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Other expense | 478 | 363 | 56 | 0.1 | % | 0.1 | % | 0.0 | % | |||||||||||||||
Interest expense | 18,169 | 3,207 | 191 | 2.6 | % | 1.2 | % | 0.1 | % | |||||||||||||||
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Loss before income tax | (70,972 | ) | (31,534 | ) | 1,477 | -10.0 | % | -11.3 | % | 0.9 | % | |||||||||||||
Income tax benefit | (22,442 | ) | (11,195 | ) | 718 | -3.2 | % | -4.0 | % | 0.4 | % | |||||||||||||
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Net loss | $ | (48,530 | ) | $ | (20,339 | ) | $ | 759 | -6.8 | % | -7.3 | % | 0.5 | % | ||||||||||
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Consolidated Results
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Our consolidated revenue for 2013 increased 152.1% to $702.3 million from $278.6 million in 2012. This increase was driven largely by the acquisitions of Turbo Logistics, Inc. and Turbo Dedicated, Inc. (collectively, “Turbo”), 3PD, Covered Logistics, Inc. (“Covered”), Interide Logistics, LC (“Interide”), East Coast Air Charter, NLM, and Optima, as well as the revenue attributable to the growth of our Freight Brokerage cold-start locations.
Total gross margin dollars for 2013 increased 202.5% to $123.5 million from $40.8 million in 2012. As a percentage of revenue, gross margin was 17.7% in 2013 as compared to 14.7% in 2012. The increase in gross margin as a percentage of revenue is attributable to higher gross margins in Freight Brokerage and Freight Forwarding as described below.
Sales, general and administrative (“SG&A”) expense as a percentage of revenue was 25.0% in 2013, as compared to 24.7% in 2012. SG&A expense increased by $107.0 million in 2013 compared to 2012, due to significant growth initiatives, including six acquisitions, sales force recruitment, costs associated with our new Freight Brokerage offices, and an increase in Corporate SG&A.
Interest expense for 2013 increased 466.5% to $18.2 million from $3.2 million in 2012. The increase in interest expense is primarily attributable to the year using balancesover year increase in interest on the convertible senior notes and an undrawn debt commitment fee of $3.0 million related to our acquisition of 3PD.
Our effective income tax rates were (31.6%) and (35.5%) for 2013 and 2012, respectively. Both 2013 and 2012 included the recognition of a tax benefit due to the net operating losses incurred. The difference in the income tax rate for 2013 relates to the recording of tax expense in certain state and foreign jurisdictions, the non-deductible loss on convertible debt, and the change in the provision for uncertain tax positions.
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The increase in net loss was due primarily to higher SG&A expenses associated with significant growth initiatives, including sales force recruitment, costs associated with our new Freight Brokerage offices, and an increase in Corporate costs. Additionally, the Company incurred higher interest expense and recorded the accelerated amortization of the CGL trade name indefinite-lived intangible assets.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Our consolidated revenue for 2012 increased 57.3% to $278.6 million from $177.1 million in 2011. This increase was driven largely by the increased revenues in Freight Brokerage due to the acquisitions of Turbo, BirdDog Logistics, Inc. (“BirdDog”), Kelron and Continental Freight Services, Inc. (“Continental”), as well as the revenue attributable to our Freight Brokerage cold-start locations opened since December 2011.
Direct expense is primarily attributable to the cost of procuring freight transportation services for our customers and commissions paid to independent station owners in our freight forwarding business. Our non-asset operating model provides transportation capacity through variable cost third-party transportation arrangements, therefore enabling us to be flexible to adapt to changes in economic or industry conditions. Our primary means of providing capacity are through our base of independent owner operators in Expedited Transportation and our network of independent ground, ocean and air carriers in Freight Forwarding and Freight Brokerage. We view this operating model as a strategic advantage due to its flexibility, particularly in uncertain economic conditions.
Total gross margin dollars for 2012 increased 37.1% to $40.8 million from $29.8 million in 2011. As a percentage of revenue, gross margin was 14.7% in 2012 as compared to 16.8% in 2011. The decrease in gross margin as a percentage of revenue is attributable primarily to increased revenues in our Freight Brokerage segment, which typically experiences lower margins than our other operations. Freight Brokerage’s gross margins also have been negatively impacted by our cold-start sales offices, which are still in the start-up phase.
SG&A expense as a percentage of revenue was 24.7% in 2012, as compared to 15.8% in 2011. SG&A expense increased by $40.7 million in 2012 compared to 2011, due to significant growth initiatives, including four acquisitions, sales force recruitment, costs associated with our new Freight Brokerage offices, and an increase in Corporate SG&A.
Our effective income tax rates in 2012 and 2011 were (35.5%) and 48.6%, respectively. The significant difference between the tax rates is due to prior period tax charges incurred in 2011.
The reduction in net income was due primarily to higher SG&A expenses associated with significant growth initiatives, including sales force recruitment, costs associated with our new Freight Brokerage offices, and an increase in Corporate SG&A.
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Freight Brokerage
Statement of Operations Data
For the Year Ended December 31,
(In thousands)
Percent of Revenue | ||||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
Revenue | $ | 541,389 | $ | 125,121 | $ | 29,186 | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Direct expense | ||||||||||||||||||||||||
Transportation services | 444,719 | 108,507 | 24,434 | 82.1 | % | 86.7 | % | 83.7 | % | |||||||||||||||
Other direct expense | 575 | 489 | 55 | 0.1 | % | 0.4 | % | 0.2 | % | |||||||||||||||
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Total direct expense | 445,294 | 108,996 | 24,489 | 82.2 | % | 87.1 | % | 83.9 | % | |||||||||||||||
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Gross margin | 96,095 | 16,125 | 4,697 | 17.8 | % | 12.9 | % | 16.1 | % | |||||||||||||||
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SG&A expense | ||||||||||||||||||||||||
Salaries & benefits | 64,873 | 15,171 | 2,484 | 12.0 | % | 12.1 | % | 8.5 | % | |||||||||||||||
Other SG&A expense | 20,189 | 3,590 | 716 | 3.7 | % | 2.9 | % | 2.5 | % | |||||||||||||||
Purchased services | 7,563 | 1,695 | 148 | 1.4 | % | 1.4 | % | 0.5 | % | |||||||||||||||
Depreciation and amortization | 14,892 | 1,223 | 44 | 2.8 | % | 1.0 | % | 0.2 | % | |||||||||||||||
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Total SG&A expense | 107,517 | 21,679 | 3,392 | 19.9 | % | 17.4 | % | 11.7 | % | |||||||||||||||
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Operating loss | $ | (11,422 | ) | $ | (5,554 | ) | $ | 1,305 | -2.1 | % | -4.5 | % | 4.4 | % | ||||||||||
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Freight Brokerage
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenue in our Freight Brokerage segment increased by 332.7% to $541.4 million in 2013 compared to $125.1 million in 2012. Revenue growth was primarily due to the acquisitions of Turbo, 3PD, Covered, Interide and Optima, as well as revenue growth from our Freight Brokerage cold-start sales locations.
Freight Brokerage’s gross margin dollars increased by 495.9% to $96.1 million in 2013 from $16.1 million in 2012. As a percentage of revenue, Freight Brokerage’s gross margin increased to 17.8% in 2013, compared to 12.9% in 2012 due to the acquisitions in Freight Brokerage as well as improvements in our existing business. Excluding the acquisitions of 3PD and Optima, which typically generate higher gross margin percentage than truckload brokerage, Freight Brokerage gross margin improved due to prior acquisitions and higher gross margin percentage at our cold starts.
SG&A expense increased by 395.9% to $107.5 million in 2013 from $21.7 million in 2012. As a percentage of revenue, SG&A expense increased to 19.9% in 2013 as compared to 17.4% in 2012. The increase in SG&A expense was due to acquisitions, sales force expansion, technology and training, as well as increased intangible asset amortization relating to the acquisition of 3PD.
Our Freight Brokerage operations generated an operating loss of $11.4 million in 2013 compared to an operating loss of $5.6 million in 2012. The increase in operating loss was attributable to the increase in SG&A expense as we continue to invest in sales and procurement personnel to support our growth initiatives.
Management’s growth strategy for Freight Brokerage is based on:
Selective acquisitions of non-asset based freight brokerage firms that would benefit from our scale and potential access to capital;
The opening of new freight brokerage sales offices;
Investment in an expanded sales and service workforce;
Technology investments to improve efficiency in sales, freight tracking and carrier procurement; and
The integration of industry best practices, with specific focus on better leveraging our scale and lowering administrative overhead.
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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenue in our Freight Brokerage segment increased by 328.7% to $125.1 million in 2012 compared to $29.2 million in fiscal year 2011. Revenue growth was primarily due to the acquisitions of Turbo, BirdDog, Kelron and Continental, as well as an increase in volumes at our cold-start sales offices during the year ended December 31, 2012. Year-over-year headcount increased by 560 sales and procurement personnel within Freight Brokerage.
Freight Brokerage’s gross margin dollars increased 243.3% to $16.1 million in 2012 from $4.7 million in 2011. As a percentage of revenue, Freight Brokerage’s gross margin was 12.9% in 2012, compared to 16.1% in 2011. The decrease in gross margin as a percentage of revenue was due primarily to our cold-start sales offices, which are still in the start-up phase.
SG&A expense increased 539.1% to $21.7 million in 2012 from $3.4 million in 2011. The increase in SG&A expense was associated with the addition of Turbo, Kelron, Continental and BirdDog, as well as investments in sales force recruitment and the opening of new offices.
Our Freight Brokerage operations generated an operating loss of $5.6 million in 2012 compared to operating income of $1.3 million in 2011. The reduction in operating income was attributable to the increase in SG&A expense and the lower gross margin percentage associated with our cold-start sales offices.
Expedited Transportation
Statement of Operations Data
For the Year Ended December 31,
(In thousands)
Percent of Revenue | ||||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
Revenue | $ | 101,817 | $ | 94,008 | $ | 87,558 | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Direct expense | ||||||||||||||||||||||||
Transportation services | 81,532 | 73,376 | 66,267 | 80.1 | % | 78.1 | % | 75.7 | % | |||||||||||||||
Other direct expense | 3,111 | 3,738 | 2,998 | 3.1 | % | 4.0 | % | 3.4 | % | |||||||||||||||
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Total direct expense | 84,643 | 77,114 | 69,265 | 83.2 | % | 82.1 | % | 79.1 | % | |||||||||||||||
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Gross margin | 17,174 | 16,894 | 18,293 | 16.8 | % | 17.9 | % | 20.9 | % | |||||||||||||||
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SG&A expense | ||||||||||||||||||||||||
Salaries & benefits | 7,786 | 6,613 | 6,854 | 7.6 | % | 7.0 | % | 7.8 | % | |||||||||||||||
Other SG&A expense | 2,047 | 2,121 | 1,411 | 2.0 | % | 2.3 | % | 1.6 | % | |||||||||||||||
Purchased services | 955 | 1,015 | 1,426 | 0.9 | % | 1.1 | % | 1.6 | % | |||||||||||||||
Depreciation and amortization | 1,182 | 320 | 403 | 1.2 | % | 0.3 | % | 0.5 | % | |||||||||||||||
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Total SG&A expense | 11,970 | 10,069 | 10,094 | 11.7 | % | 10.7 | % | 11.5 | % | |||||||||||||||
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Operating income | $ | 5,204 | $ | 6,825 | $ | 8,199 | 5.1 | % | 7.2 | % | 9.4 | % | ||||||||||||
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Note: Total depreciation and amortization for the Expedited Transportation operating segment, included in both direct expense and SG&A, was $1.4 million, $0.5 million and $0.6 million, for the years ended December 31, 2013, 2012 and 2011, respectively.
Expedited Transportation
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenue in our Expedited Transportation segment increased 8.3% to $101.8 million in 2013 from $94.0 million in 2012. This growth was driven by the acquisition of East Coast Air Charter on February 8, 2013 partially offset by a decline in the rest of our over-the-road expedited business.
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Direct expenses consist primarily of payments to independent owner operators and contract carriers for ground transportation and air charter services, insurance and truck leasing expense. Expedited Transportation gross margin dollars increased 1.7% to $17.2 million in 2013 from $16.9 million in 2012. As a percentage of revenue, Expedited Transportation gross margin was 16.8% in 2013, compared to 17.9% in 2012. The decrease in gross margin as a percentage of revenue primarily reflects a soft expedited freight environment in the first half of the year as well as the addition of expedited air charter revenue from the 2013 acquisition of East Coast Air Charter; air charter services typically generate higher gross revenue but lower gross margin percentage than our over-the-road expedited business.
SG&A expense increased 18.9% to $12.0 million in 2013 from $10.1 million in 2012. The increase was due to the addition of East Coast Air Charter, particularly intangible amortization associated with the acquisition. As a percentage of revenue, SG&A expense increased to 11.7% in 2013 compared to 10.7% in 2012.
Operating income decreased to $5.2 million in 2013 compared to $6.8 million in 2012. The decrease in operating income was primarily related to the decrease in gross margin as a percent of revenue, as described above.
Management’s growth strategy for our Expedited Transportation segment is based on:
• | Targeted investments to expand the sales and service workforce, in order to capture key opportunities in specialized areas (e.g., cross-border, refrigeration and air charter); |
An increased focus on carrier recruitment and retention, as well as improved utilization of the current carrier fleet;
Technology upgrades to improve efficiency in sales and carrier procurement;
Selective acquisitions of non-asset based expedited businesses that would benefit from our scale and potential access to capital; and
Cross-selling of expedited transportation services to customers of our other business segments.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenue in our Expedited Transportation segment increased 7.4% to $94.0 million in 2012 from $87.6 million in 2011. This growth was driven by an increase in temperature control and international revenue as well as an increase in air charter revenue related to a customer project completed in the first quarter of 2012.
Expedited Transportation gross margin dollars decreased 7.6% to $16.9 million in 2012 from $18.3 million in 2011. As a percentage of revenue, Expedited Transportation gross margin was 17.9% in 2012, compared to 20.9% in 2011. The decrease in gross margin as a percentage of revenue primarily reflects higher rates paid to independent fleet owners and owner-operators, effective March 1, 2012, and an increase in costs associated with fleet recruiting initiatives.
SG&A expense remained flat at $10.1 million in 2012 compared to 2011. As a percentage of revenue, SG&A expense decreased to 10.7% in 2012 compared to 11.5% in 2011.
Operating income decreased to $6.8 million in 2012 compared to $8.2 million in 2011. The decrease in operating income was primarily related to the decrease in gross margin as a percent of revenue and an increase in SG&A, as described above.
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Freight Forwarding
Statement of Operations Data
For the Year Ended December 31,
(In thousands)
Percent of Revenue | ||||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
Revenue | $ | 73,154 | $ | 67,692 | $ | 65,148 | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Direct expense | ||||||||||||||||||||||||
Transportation services | 55,611 | 50,381 | 47,122 | 76.0 | % | 74.4 | % | 72.3 | % | |||||||||||||||
Station commissions | 7,168 | 9,321 | 11,098 | 9.8 | % | 13.8 | % | 17.0 | % | |||||||||||||||
Other direct expense | 137 | 182 | 140 | 0.2 | % | 0.3 | % | 0.2 | % | |||||||||||||||
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Total direct expense | 62,916 | 59,884 | 58,360 | 86.0 | % | 88.5 | % | 89.5 | % | |||||||||||||||
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Gross margin | 10,238 | 7,808 | 6,788 | 14.0 | % | 11.5 | % | 10.5 | % | |||||||||||||||
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SG&A expense | ||||||||||||||||||||||||
Salaries & benefits | 6,026 | 4,050 | 2,897 | 8.2 | % | 6.0 | % | 4.4 | % | |||||||||||||||
Other SG&A expense | 1,386 | 1,479 | 1,339 | 1.9 | % | 2.2 | % | 2.1 | % | |||||||||||||||
Purchased services | 344 | 597 | 432 | 0.5 | % | 0.9 | % | 0.7 | % | |||||||||||||||
Depreciation and amortization | 3,477 | 574 | 575 | 4.8 | % | 0.8 | % | 0.9 | % | |||||||||||||||
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Total SG&A expense | 11,233 | 6,700 | 5,243 | 15.4 | % | 9.9 | % | 8.1 | % | |||||||||||||||
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Operating (loss) income | $ | (995 | ) | $ | 1,108 | $ | 1,545 | -1.4 | % | 1.6 | % | 2.4 | % | |||||||||||
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Freight Forwarding
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenue in our Freight Forwarding segment increased 8.1% to $73.2 million in 2013 from $67.7 million in 2012. The increase was primarily the result of the opening of new freight forwarding locations.
Direct expense consists primarily of payments for purchased transportation and commissions paid to Freight Forwarding’s independently-owned stations. Freight Forwarding’s gross margin dollars increased 31.1% to $10.2 million in 2013 from $7.8 million in 2012. As a percentage of revenue, Freight Forwarding gross margin increased to 14.0% in 2013 as compared to 11.5% in 2012. The increase in gross margin percentage was primarily driven by branch conversions from independent ownership to company ownership.
SG&A expense increased 67.7% to $11.2 million in 2013 from $6.7 million in 2012. As a percentage of revenue, SG&A expense increased to 15.4% in 2013 as compared to 9.9% in 2012. The increase in SG&A expense is mainly due to the accelerated amortization of $3.1 million in indefinite-lived intangible assets related to the CGL trade name based on the reduction in remaining useful life as a result of the name change of the business to XPO Global Logistics during the third quarter of 2013 as well as the investment associated with opening our company-owned branches in Orlando, FL, Montreal, Quebec, and Dallas, TX during the year.
Operating loss was $1.0 million in 2013 compared to income of $1.1 million in 2012. The decrease in operating income was primarily related to the accelerated amortization of the CGL trade name indefinite-lived intangible assets described above offset by an increase in gross margins driven by conversions of independently-owned stations to company-owned branches. Excluding the accelerated amortization of the CGL trade name, operating income increased reflecting a higher gross margin.
Management’s growth strategy for Freight Forwarding is based on:
Plans to open new offices in key U.S. markets, which will consist of both company-owned branches and independently-owned stations;
Growth of international shipments;
Technology upgrades to improve efficiency in sales and carrier procurement;
Selective acquisitions of complementary, non-asset based freight forwarding businesses; and
Cross-selling of freight forwarding services to customers of our other business segments.
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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenue in our Freight Forwarding segment increased 3.9% to $67.7 million in 2012 from $65.1 million in 2011. The increase was the result of higher revenues at our Company-owned branches.
Freight Forwarding’s gross margin dollars increased 15.0% to $7.8 million in 2012 from $6.8 million in 2011. As a percentage of revenue, Freight Forwarding gross margin increased to 11.5% in 2012 as compared to 10.5% in 2011. The increase is due to the increase in revenues at our Company-owned branches, which yield higher margins than our independently-owned stations as commission expense is not incurred as a direct cost for the Company-owned branches.
SG&A expense increased 27.8% to $6.7 million in 2012 from $5.2 million in 2011. As a percentage of revenue, SG&A expense increased to 9.9% in 2012 as compared to 8.1% in 2011. The increase in SG&A expense is mainly due to the investment associated with opening our Company-owned branches in Chicago, IL, Houston, TX, Los Angeles, CA, Minneapolis, MN, Charlotte, NC, and Atlanta, GA.
As of December 31, 2012, Freight Forwarding had 27 locations, consisting of 19 independently-owned stations and eight Company-owned branches. This compares to 25 locations as of June 30.
Operating income decreased to $1.1 million in 2012 compared to $1.5 million in 2011. The reduction in operating income was primarily related to the increase in SG&A expense, as described above.
XPO Corporate
Summary of Selling, General and Administrative Expense
For the Year Ended December 31,
(In thousands)
Percent of Consolidated Revenue | ||||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
SG&A expense | ||||||||||||||||||||||||
Salaries & benefits | 21,947 | 13,445 | 4,103 | 3.1 | % | 4.8 | % | 2.3 | % | |||||||||||||||
Other SG&A expense | 5,737 | 4,425 | 471 | 0.8 | % | 1.6 | % | 0.3 | % | |||||||||||||||
Purchased services | 16,353 | 12,082 | 4,727 | 2.3 | % | 4.3 | % | 2.7 | % | |||||||||||||||
Depreciation and amortization | 1,075 | 391 | 24 | 0.2 | % | 0.1 | % | 0.0 | % | |||||||||||||||
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Total SG&A expense | $ | 45,112 | $ | 30,343 | $ | 9,325 | 6.4 | % | 10.8 | % | 5.3 | % | ||||||||||||
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Corporate
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Corporate SG&A expense in 2013 increased by $14.8 million compared to 2012. As a percentage of consolidated revenue, Corporate SG&A expense was 6.4% in 2013, compared with 10.8% in 2012 due to improved operating leverage as the Company accountsexecuted its acquisition and organic growth strategies. Salaries and benefits increase was driven by a year-over-year increase in headcount in corporate shared services. Purchased services increased in 2013 due largely to $6.5 million of acquisition-related transaction costs. Corporate SG&A for long-lived assets, including intangibles2013 also included $4.9 million of litigation-related legal costs and $4.7 million of non-cash share based compensation.
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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Corporate SG&A expense in 2012 increased by $21.0 million compared to 2011. As a percentage of consolidated revenue, Corporate SG&A expense was 10.8% in fiscal year 2012, compared with 5.3% in 2011. The increase was driven by a higher headcount in corporate shared services as well as higher purchased services and other SG&A expense. Included in the salaries and benefits increase is additional stock compensation expense of $3.2 million over prior year. Purchased services in 2012 included $2.9 million of acquisition-related transaction costs, $2.5 million of litigation-related legal costs, and $2.0 million for compliance costs. Other operating expense increased primarily due to increased travel costs and costs associated with our acquisitions strategy such as due diligence, accounting services and integration cost as well as facility costs that are amortized,due to our increase in accordanceheadcount.
Liquidity and Capital Resources
General
As of December 31, 2013, we had working capital of $72.8 million, including cash of $21.5 million and restricted cash of $2.1 million, compared to working capital of $271.9 million, including cash of $252.3 million, as of December 31, 2012. This decrease of $199.1 million in working capital during the year was mainly due to cash used for the acquisitions of East Coast Air Charter, Covered, Interide, 3PD, Optima and NLM, operations and capital expenditures.
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 our existing cash balances, in certain circumstances we may also use debt financings and issuances of equity or equity-related securities to fund our operating needs and growth initiatives. See discussion below under Common Stock Offering and Debt Facilities regarding our recent common stock offering and multicurrency secured revolving loan credit facility, respectively.
We believe that our existing cash balances and availability under our revolving credit facility will be sufficient for the next twelve months to finance our existing operations and growth initiatives.
Cash Flow
During 2013, $66.3 million was used in cash from operations compared to $24.3 million used for 2012 and $6.6 million generated for 2011. The primary use of cash for the period was payment of transportation services and various SG&A expenses.
Cash generated from revenue equaled $665.3 million for 2013 as compared to $264.8 million for 2012 and $178.7 million for 2011 and correlates directly with US GAAP,the revenue increase between the periods. Cash flow increases are related primarily to volume increases between the periods ended December 31, 2013, 2012 and 2011.
Cash used for payment of transportation services for 2013 equaled $585.1 million as compared to $223.0 million for 2012 and $148.3 million for 2011. The increase in cash outflows between the periods also directly correlates to the increase in revenues between the periods ended December 31, 2013, 2012 and 2011.
Other operating uses of cash included SG&A items, which equaled $134.4 million, $67.2 million and $23.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. Payroll represents the most significant SG&A item. For 2013, cash used for payroll equaled $74.9 million as compared to $31.3 million for 2012 and $13.6 million for 2011.
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Investing activities used approximately $470.3 million for 2013 compared to a use of $64.2 million and $0.7 million from these activities for 2012 and 2011, respectively. During 2013, $458.8 million was used in acquisitions and $11.6 million was used to purchase fixed assets while $0.1 million was provided by other investing activities. During 2012, $57.2 million was used for acquisitions and $7.0 million was used to purchase fixed assets while during 2011 $0.7 million was used to purchase fixed assets.
Financing activities generated approximately $305.8 million for 2013 compared to $266.8 million and $67.6 million generated for 2012 and 2011, respectively. Our main sources of cash from financing activities during 2013 were the $239.5 million of net proceeds from the issuance of stock and the $73.3 million of net proceeds from borrowing on our revolving credit facility while our primary uses of cash were the dividends paid to preferred stockholders of $3.0 million and $4.1 million related to other financing activities. During 2012, our main sources of cash were $138.5 million of net proceeds from the issuance of convertible senior notes and $137.0 million of net proceeds from the issuance of common stock while our primary use of cash was the dividend paid to preferred stockholders of $3.0 million and $5.7 million related to other financing activities. During 2011, our main source of cash from financing activities was the $71.6 million of net proceeds from the issuance of the Preferred Stock and warrants while our primary uses of cash for 2011 were $0.4 million of dividends paid to preferred stockholders and $3.7 million of other financing activities.
Common Stock Offering
On February 5, 2014, we closed a registered underwritten public offering of 15,000,000 shares of common stock, and on February 11, 2014 we closed as part of the same public offering the sale of an additional 2,250,000 shares as a result of the full exercise of the underwriters’ overallotment option, in each case at a price of $25.00 per share (together, the “February 2014 Offering”). We received $413.3 million in net proceeds from the February 2014 Offering after underwriting discounts and expenses.
Debt Facilities
On October 18, 2013, we and certain of our wholly-owned subsidiaries, as borrowers, entered into a $125.0 million multicurrency secured Credit Agreement with the lender parties thereto and Morgan Stanley Senior Funding, Inc., as administrative agent for such lenders, with a maturity of five years.
The proceeds of the Credit Agreement may be used by us for ongoing working capital needs and other general corporate purposes, including strategic acquisitions. Borrowings under the Credit Agreement bear interest at a per annum rate equal to, at our option, the one, two, three or six month (or such other period less than one month or greater than six months as the lenders may agree) LIBOR rate plus a margin of 1.75% to 2.25%, or a base rate plus a margin of 0.75% to 1.25%. We are required to pay an undrawn commitment fee equal to 0.25% or 0.375% of the quarterly average undrawn portion of the commitments under the Credit Agreement, as well as customary letter of credit fees. The margin added to LIBOR, or base rate, will depend on the quarterly average availability of the commitments under the Credit Agreement.
All obligations under the Credit Agreement are secured by substantially all of our assets and are unconditionally guaranteed by certain of our subsidiaries, provided that no foreign subsidiary guarantees, and no assets of any foreign subsidiary secures, any obligations of any of our domestic borrower subsidiaries. The Credit Agreement contains representations, warranties and covenants that are customary for agreements of this type. Among other things, the covenants in the Credit Agreement limit our ability to, with certain exceptions: incur indebtedness; grant liens; engage in certain mergers, consolidations, acquisitions and dispositions; make certain investments and restricted payments; and enter into certain transactions with affiliates. In certain circumstances, the Credit Agreement also requires thatus to maintain minimum EBITDA or, at our election, maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.00 to 1.00. If an event of default under the Credit Agreement shall occur and be continuing, the commitments thereunder may be terminated and the principal amount outstanding thereunder, together with all long-lived assetsaccrued unpaid interest and other amounts owed
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thereunder, may be reviewed for impairment whenever events or circumstances indicatedeclared immediately due and payable. Certain subsidiaries acquired by us in the future may be excluded from the restrictions contained in certain of the foregoing covenants. We do not believe that the carryingcovenants contained in the Credit Agreement will impair our ability to execute our strategy. At December 31, 2013, we had $75.0 million drawn under our Revolving Loan Credit Agreement. We were in compliance, in all material respects, with all covenants related to the Revolving Loan Credit Agreement as of December 31, 2013.
On September 26, 2012, we completed the registered underwritten public offering of 4.50% Convertible Senior Notes due October 1, 2017, in an aggregate principal amount of an asset may not be recoverable. If indicators$125.0 million. The Notes were allocated to long-term debt and equity in the amounts of impairment$92.8 million and $27.5 million, respectively. These amounts are present, reviews are performed to determine whether the carrying valuenet of an asset to be helddebt issuance costs of $3.6 million for debt and used is impaired. Such reviews involve a comparison$1.1 million for equity. On October 17, 2012, as part of the carrying amountunderwritten registered public offering on September 26, 2012 of an assetthe 4.50% convertible senior notes due October 1, 2017, the underwriters exercised the overallotment option to future net undiscounted cash flows expected to be generated by the asset over its remaining useful life. If the comparison indicates that there is impairment, the impaired asset is written down to its fair value. The impairment to be recognized as a non-cash charge to earnings is measured by the amount by which the carryingpurchase $18.8 million additional principal amount of the asset exceedsNotes. We received approximately $18.2 million in net proceeds after underwriting discounts, commissions and expenses were paid. The overallotment option was allocated to long-term debt and equity in the amounts of $14.0 million and $4.2 million, respectively. These amounts are net of debt issuance costs of $0.5 million for debt and $0.1 million for equity. Interest is payable on the notes on April 1 and October 1 of each year, beginning on April 1, 2013.
To date, we have entered into transactions pursuant to which we have issued an aggregate of 1,404,887 shares of our common stock to certain holders of the Notes in connection with the conversion of $23.1 million aggregate principal amount of the Notes. These transactions included induced conversions pursuant to which we paid the holder a market-based premium in cash. The negotiated market-based premiums, in addition to the difference between the current fair value and the book value of the asset. AssetsNotes, will be reflected in interest expense. The number of shares of common stock issued in the foregoing transactions equals the number of shares of common stock presently issuable to holders of the Notes upon conversion under the original terms of the Notes.
Under certain circumstances at the election of the holder, the convertible senior notes may be converted until the close of business on the business day immediately preceding April 1, 2017, into cash, shares of the Company’s common stock, or a combination of cash and shares of common stock, at the Company’s election, at the initial conversion rate of approximately 60.8467 shares of common stock per $1,000 in principal amount, which is equivalent to an initial conversion price of approximately $16.43 per share. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its convertible senior notes in connection with such corporate event in certain circumstances. On or after April 1, 2017, until the close of business on the business day immediately preceding the maturity date, holders may convert their convertible senior notes at any time.
The convertible senior notes may be redeemed by the Company on or after October 1, 2015 if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The Company may redeem the convertible senior notes in whole but not in part, at a redemption price in cash equal to 100% of the principal amount to be disposed are reportedredeemed, plus accrued and unpaid interest, but excluding, the redemption date, plus a make-whole premium payment. The “make whole premium” payment or delivery will be made, as the case may be, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the lowerCompany’s election, equal to the present values of the carrying amountremaining scheduled payments of interest on the convertible senior notes to be redeemed through October 1, 2017 (excluding interest accrued to, but excluding, the redemption date), computed using a discount rate equal to 4.5%. The make-whole premium is paid to holders whether or fair value, less costnot they convert the convertible senior notes following the Company’s issuance of a redemption notice.
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In conjunction with the acquisition of Kelron on August 3, 2012, the Company assumed Kelron’s credit agreements with Royal Bank of Canada (“RBC”) dated April 21, 2011 and amended May 8, 2012 (the “Agreements”), which provided for a $5.0 million revolving demand facility (the “Revolving Demand Facility”) subject to dispose.
Contractual Obligations
The following table reflects our contractual obligations as of December 31, 2013 (in thousands):
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | |||||||||||||||
Capital leases payable | $ | 196 | $ | 48 | $ | 110 | $ | 38 | $ | — | ||||||||||
Notes payable | 2,205 | 1,981 | 224 | — | — | |||||||||||||||
Operating/real estate leases | 43,875 | 8,988 | 16,856 | 10,941 | 7,089 | |||||||||||||||
Purchase commitments | 2,344 | 670 | 1,674 | — | — | |||||||||||||||
Employment contracts | 15,211 | 6,464 | 8,747 | — | — | |||||||||||||||
Revolving credit facility | 75,000 | — | — | 75,000 | — | |||||||||||||||
Convertible senior notes | 156,229 | 6,019 | 12,038 | 138,172 | — | |||||||||||||||
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Total contractual cash obligations | $ | 295,060 | $ | 24,169 | $ | 39,649 | $ | 224,151 | $ | 7,089 | ||||||||||
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The Company’s liability for uncertain tax positions of $0.8 million represents a contractual obligation; however, it is not reasonably possible to predict when the liability may be paid thus it has been excluded from the table above. We do not have any material commitments that have not been disclosed elsewhere.
CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statementsaudited Consolidated Financial Statements in conformity with US GAAP.accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affectimpact the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statementsaudited Consolidated Financial Statements and the reported amounts of revenues and expenses during the periods. Our management reviews thesereporting period. We review our estimates, including but not limited to: accrued revenue, purchased transportation, recoverability of long-lived assets, recoverabilityaccrual of prepaid expenses, valuation of investments,acquisition earn-outs, estimated legal accruals, valuation allowances for deferred taxes, legal costs and settlements, acquisition amounts,reserve for uncertain tax positions, and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made as information is available. Our managementManagement believes that these estimates are reasonable and have beenhas discussed them with the audit committee of our audit committee; however,board of directors. However, actual results could differ from these estimates.
45
Revenue Recognition
We recognize revenue at the point in time when delivery is completed, with related costs of its revenue from customers who operatedelivery being accrued as incurred and expensed within the U.S. domestic automotive industry. Accordingly, our accounts receivable are comprisedsame period in which the associated revenue is recognized. We use the following supporting criteria to determine that revenue has been earned and should be recognized:
Persuasive evidence of an arrangement exists;
Services have been rendered;
The sales price is fixed and determinable; and
Collectability is reasonably assured.
We generally report revenue on a concentration of accounts from within this industry. Although the U.S. automotive industry showed signs of recovery, during 2010, further financial erosion by any of the “Big Three” domestic automotive manufacturers, could have a materially adverse impact on our Company
We are the primary obligor and are responsible for estimated losses on accounts receivable considering a number of factors,providing the service desired by the customer.
The customer holds us responsible for fulfillment, including the overall agingacceptability of account receivables, customers payment historythe service (requirements may include, for example, on-time delivery, handling freight loss and damage claims, establishing pick-up and delivery times, and tracing shipments in transit).
For Expedited Transportation and Freight Brokerage, we have complete discretion to select our drivers, contractors or other transportation providers (collectively, “service providers”). For Freight Forwarding, we enter into agreements with significant service providers that specify the customer’s current abilitycost of services, among other things, and has ultimate authority in providing approval for all service providers that can be used by Freight Forwarding’s independently-owned stations. Independently-owned stations may further negotiate the cost of services with Freight Forwarding-approved service providers for individual customer shipments.
Expedited Transportation and Freight Brokerage have complete discretion to payestablish sales prices. Independently-owned stations within Freight Forwarding have the discretion to establish sales prices.
We bear credit risk for all receivables. In the case of Freight Forwarding, the independently-owned stations reimburse Freight Forwarding for a portion (typically 70-80%) of credit losses. Freight Forwarding retains the risk that the independent station owners will not meet this obligation.
For a subset of Expedited Transportation, revenue is recognized on a net basis in accordance with ASC Topic 605. The Company does not serve as the primary obligor, receives a fixed management fee for its obligation. Based upon our managements’ review of accounts receivableservices and other receivables,does not assume credit risk for these transactions.
Valuations for Accounts Receivable
Our allowance for doubtful accounts is calculated based upon the aging of approximately $136,000our receivables, our historical experience of uncollectible accounts, and $225,000 are considered necessaryany specific customer collection issues that we have identified. The allowance of $3.5 million as of December 31, 20102013 increased compared to the allowance of $0.6 million as of December 31, 2012. We believe that the recorded allowance is sufficient and 2009, respectively. Althoughappropriate based on our customer aging trends, the exposures we believe our account receivables are recorded at their net realizable value, a decline inhave identified and our historical collection rate could have a materially adverse effectloss experience.
Stock-Based Compensation
We account for share-based compensation based on our operationsthe equity instrument’s grant date fair value in accordance with ASC Topic 718,“Compensation—Stock Compensation”. The fair value of each share-based payment award is established on the date of grant. For grants of restricted stock segments, including those subject
46
to service-based vesting conditions and net income. We do not accrue interestthose subject to service and performance-based vesting conditions, the fair value is established based on past due receivables.
The operationsweighted-average fair value of Express-1 Dedicated ceased on February 28, 2009. For comparative purposes all reported financial activity of Express-1 Dedicated has been reflected net of taxeseach stock option recorded in the financial statements under the line item “Income from discontinued operations”.
Income Taxes
Our annual effective tax rate is based on our business. For purposes of these references,income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we have considered the impact of fuel surcharge revenues,operate. Tax laws are complex and the related fuel surcharge expenses only as they relatesubject to our Express-1 business unit. The expediting 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 drivendifferent interpretations by the Department of Energy fuel price index. Fuel surcharge revenues are charged totaxpayer and respective governmental taxing authorities. Significant judgment is required in determining our customers to provide for variable costs associated with changing fuel prices. These revenuestax expense and associated cash flows are substantially paid through toin evaluating our independent contractorstax positions, including evaluating uncertainties. We review our tax positions quarterly and brokered carriers who are responsible for their own fuel costs. Because fuel surcharge revenues are substantially paid through to independent contractors and brokered carriers,adjust the net impactbalances as new information becomes available. Our income tax rate is affected by the tax rate on our gross margin dollars is not material; however, rising fuel costs and the associated rising fuel surcharge will result in a reduction of the gross margin percentage since these rising revenues don’t result in a material increase in gross margin dollars. Alternatively, falling fuel costs and the associated lower fuel surcharge will have a positive impact on the gross margin percentage as lower revenues will not result in material decrease in gross margin dollars.
Goodwill and Intangible Assets with Indefinite Lives
Goodwill consists of the excess of cost over the fair value of net assets acquired in business combinations. Intangible assets with indefinite lives consist of the Express-1 trade name. We follow the provisions of ASC Topic 350, “Intangibles—Goodwill and Other”, which requires an annual impairment test for goodwill and intangible assets with indefinite lives. We perform the annual impairment testing during the third quarter unless events or circumstances indicate impairment of the goodwill may have occurred before that time. We determine fair values for each of the reporting units using an income approach. For purposes of the income approach, fair value is disclosed withindetermined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal reports. Withinforecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for our business. Actual results may
47
differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing public company market data for our industry to estimate the weighted average cost of capital. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our reporting unit valuations approximated 11.0%. Required rates of return, along with uncertainty inherent in the forecasts of future cash flows, are reflected in the selection of the discount rate. For the periods presented, we did not recognize any goodwill impairment as the estimated fair value of our reporting units with goodwill exceeded the book value of these reporting units.
Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. If current conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates described above could change in future periods.
The fair value of purchased intangible assets with indefinite lives, the Express-1 trade name, is estimated and compared to its carrying value. We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates for this category of intellectual property, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The discount rate used in our analysis approximated 11.0%. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value. For the periods presented, we did not recognize any impairment of intangible assets with indefinite lives as the estimated fair value of our intangible assets with indefinite lives exceeded the book value; however, during the third quarter of 2013, we rebranded our freight forwarding business to XPO Global Logistics from Concert Group Logistics,Logistics. As a result of this action, we accelerated the amortization of $3.1 million in indefinite-lived intangible assets related to the CGL trade name based on the reduction in remaining useful life. The $3.1 million of accelerated amortization represented the full value of the CGL trade name intangible assets.
Identifiable Intangible Assets
We follow the provisions of ASC Topic 360, “Property, Plant and Bounce Logistics business units,Equipment”, which establishes accounting standards for the impactimpairment of fuel priceslong-lived assets such as property, plant and equipment and intangible assets subject to amortization. We review long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Fair value is determined based on the present value of estimated future cash flows of the asset, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our revenuesmost recent views of the long-term outlook for our business. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing public company market data for our industry to estimate the weighted average cost of purchased transportation cannot be separately identified. CGLcapital. We use discount rates that are commensurate with the risks and Bounce predominantly rely upon third parties to provide the physical movement of goods transported for our customers. As is common within the freight forwarding and freight brokerage industries, fuel is not separately negotiated with customers or the third-party transportation companies handling shipments. Rates are “all-inclusive” to include everythinguncertainty associated with the transitrecovery of the asset. Required rates of return, along with uncertainty inherent in most cases. We believe this treatment is consistent with other transportation companies engagedthe forecasts of future cash flows, are reflected in businesses similarthe selection of the discount rate. Determining whether an impairment loss has occurred requires comparing the carrying amount to eachthe sum of our business units.
Our intangible assets subject to amortization consist of customer relationships, non-compete agreements, carrier relationships and other intangibles that are amortized either over the period of economic conditions slowly improve creating more demand for products andbenefit or on a straight-line basis over the estimated useful lives of the related transportation services.
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Off-balance Sheet Arrangements
We are not a party to any transactions that would be considered “off-balance sheet arrangements” under Item 303(a)(4) of Regulation S-K.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the transportation industry, our Express-1 operation is somewhat shielded from this issue in that it is customary for expeditersforward-looking statements. We are exposed to charge a fuel surcharge based on a cost matrix that is adjusted on a weekly basis. As mentioned previously, this fuel surcharge revenue is substantially passed onmarket risk related to our independent contractors to pay for their increased fuel costs.
Express-1 Expedited Solutions, Inc. | ||||||||||||||||||||||||
Comparative Financial Table | ||||||||||||||||||||||||
For the Twelve Months Ended December 31, | ||||||||||||||||||||||||
Year to Year Change | Percent of Revenue | |||||||||||||||||||||||
2010 | 2009 | In Dollars | In Percentage | 2010 | 2009 | |||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Express-1 | $ | 76,644,000 | $ | 50,642,000 | $ | 26,002,000 | 51.3 | % | 48.5 | % | 50.6 | % | ||||||||||||
Concert Group Logistics | 65,222,000 | 41,162,000 | 24,060,000 | 58.5 | % | 41.3 | % | 41.1 | % | |||||||||||||||
Bounce Logistics | 19,994,000 | 10,425,000 | 9,569,000 | 91.8 | % | 12.7 | % | 10.4 | % | |||||||||||||||
Intercompany Eliminations | (3,873,000 | ) | (2,093,000 | ) | (1,780,000 | ) | -85.0 | % | -2.5 | % | -2.1 | % | ||||||||||||
Total Revenues | 157,987,000 | 100,136,000 | 57,851,000 | 57.8 | % | 100.0 | % | 100.0 | % | |||||||||||||||
Direct Expenses | ||||||||||||||||||||||||
Express-1 | 59,226,000 | 39,874,000 | 19,352,000 | 48.5 | % | 77.3 | % | 78.7 | % | |||||||||||||||
Concert Group Logistics | 58,549,000 | 36,979,000 | 21,570,000 | 58.3 | % | 89.8 | % | 89.8 | % | |||||||||||||||
Bounce Logistics | 16,685,000 | 8,636,000 | 8,049,000 | 93.2 | % | 83.5 | % | 82.8 | % | |||||||||||||||
Intercompany Eliminations | (3,873,000 | ) | (2,093,000 | ) | (1,780,000 | ) | -85.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Total Direct Expenses | 130,587,000 | 83,396,000 | 47,191,000 | 56.6 | % | 82.7 | % | 83.3 | % | |||||||||||||||
Gross Margin | ||||||||||||||||||||||||
Express-1 | 17,418,000 | 10,768,000 | 6,650,000 | 61.8 | % | 22.7 | % | 21.3 | % | |||||||||||||||
Concert Group Logistics | 6,673,000 | 4,183,000 | 2,490,000 | 59.5 | % | 10.2 | % | 10.2 | % | |||||||||||||||
Bounce Logistics | 3,309,000 | 1,789,000 | 1,520,000 | 85.0 | % | 16.5 | % | 17.2 | % | |||||||||||||||
Total Gross Margin | 27,400,000 | 16,740,000 | 10,660,000 | 63.7 | % | 17.3 | % | 16.7 | % | |||||||||||||||
Selling, General & Administrative | ||||||||||||||||||||||||
Express-1 | 9,812,000 | 7,322,000 | 2,490,000 | 34.0 | % | 12.8 | % | 14.5 | % | |||||||||||||||
Concert Group Logistics | 4,791,000 | 3,062,000 | 1,729,000 | 56.5 | % | 7.3 | % | 7.4 | % | |||||||||||||||
Bounce Logistics | 2,444,000 | 1,331,000 | 1,113,000 | 83.6 | % | 12.2 | % | 12.8 | % | |||||||||||||||
Corporate | 1,907,000 | 1,854,000 | 53,000 | 2.9 | % | 1.2 | % | 1.9 | % | |||||||||||||||
Total Selling, General & Administrative | 18,954,000 | 13,569,000 | 5,385,000 | 39.7 | % | 12.0 | % | 13.6 | % | |||||||||||||||
Express-1 | 7,606,000 | 3,446,000 | 4,160,000 | 120.7 | % | 9.9 | % | 6.8 | % | |||||||||||||||
Concert Group Logistics | 1,882,000 | 1,121,000 | 761,000 | 67.9 | % | 2.9 | % | 2.7 | % | |||||||||||||||
Bounce Logistics | 865,000 | 458,000 | 407,000 | 88.9 | % | 4.3 | % | 4.4 | % | |||||||||||||||
Corporate | (1,907,000 | ) | (1,854,000 | ) | (53,000 | ) | -2.9 | % | -1.2 | % | -1.9 | % | ||||||||||||
Operating Income from Continuing Operations | 8,446,000 | 3,171,000 | 5,275,000 | 166.4 | % | 5.3 | % | 3.2 | % | |||||||||||||||
Interest Expense | 205,000 | 105,000 | 100,000 | 95.2 | % | 0.1 | % | 0.1 | % | |||||||||||||||
Other Expense | 140,000 | 51,000 | 89,000 | 174.5 | % | 0.1 | % | 0.1 | % | |||||||||||||||
Income from Continuing Opertations Before Tax | 8,101,000 | 3,015,000 | 5,086,000 | 168.7 | % | 5.1 | % | 3.0 | % | |||||||||||||||
Tax Provision | 3,213,000 | 1,325,000 | 1,888,000 | 142.5 | % | 2.0 | % | 1.3 | % | |||||||||||||||
Income from Continuing Operations | 4,888,000 | 1,690,000 | 3,198,000 | 189.2 | % | 3.1 | % | 1.7 | % | |||||||||||||||
Income from Discontinued Operations, Net of Tax | - | 15,000 | (15,000 | ) | -100.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||
Net Income | $ | 4,888,000 | $ | 1,705,000 | $ | 3,183,000 | 186.7 | % | 3.1 | % | 1.7 | % |
Express-1 Expedited Solutions, Inc. | ||||||||||||||||
Summary of Selling, General & Administrative Expenses | ||||||||||||||||
For the Twelve Months Ended December 31, | ||||||||||||||||
Year to Date | Year to Year Change | |||||||||||||||
2010 | 2009 | In Dollars | In Percentage | |||||||||||||
Express-1, Inc. | ||||||||||||||||
Salaries & benefits | $ | 7,061,000 | $ | 5,062,000 | $ | 1,999,000 | 39.5 | % | ||||||||
Purchased services | 1,249,000 | 782,000 | 467,000 | 59.7 | % | |||||||||||
Depreciation & amortization | 494,000 | 521,000 | (27,000 | ) | -5.2 | % | ||||||||||
Other | 1,008,000 | 957,000 | 51,000 | 5.3 | % | |||||||||||
Total Express-1 SG&A expense | 9,812,000 | 7,322,000 | 2,490,000 | 34.0 | % | |||||||||||
Concert Group Logistics | ||||||||||||||||
Salaries & benefits | 2,670,000 | 1,615,000 | 1,055,000 | 65.3 | % | |||||||||||
Purchased services | 228,000 | 129,000 | 99,000 | 76.7 | % | |||||||||||
Depreciation & amortization | 629,000 | 575,000 | 54,000 | 9.4 | % | |||||||||||
Other | 1,264,000 | 743,000 | 521,000 | 70.1 | % | |||||||||||
Total CGL SG&A expense | 4,791,000 | 3,062,000 | 1,729,000 | 56.5 | % | |||||||||||
Bounce | ||||||||||||||||
Salaries & benefits | 1,761,000 | 857,000 | 904,000 | 105.5 | % | |||||||||||
Purchased services | 98,000 | 64,000 | 34,000 | 53.1 | % | |||||||||||
Depreciation & amortization | 31,000 | 27,000 | 4,000 | 14.8 | % | |||||||||||
Other | 554,000 | 383,000 | 171,000 | 44.6 | % | |||||||||||
Total Bounce SG&A expense | 2,444,000 | 1,331,000 | 1,113,000 | 83.6 | % | |||||||||||
Corporate | ||||||||||||||||
Salaries & benefits | 547,000 | 437,000 | 110,000 | 25.2 | % | |||||||||||
Purchased services | 944,000 | 942,000 | 2,000 | 0.2 | % | |||||||||||
Depreciation & amortization | 19,000 | - | 19,000 | 100.0 | % | |||||||||||
Other | 397,000 | 475,000 | (78,000 | ) | -16.4 | % | ||||||||||
Total Corporate SG&A expense | 1,907,000 | 1,854,000 | 53,000 | 2.9 | % | |||||||||||
Total SG&A expenses | ||||||||||||||||
Total salaries & benefits | 12,039,000 | 7,971,000 | 4,068,000 | 51.0 | % | |||||||||||
Total purchased services | 2,519,000 | 1,917,000 | 602,000 | 31.4 | % | |||||||||||
Total depreciation & amortization | 1,173,000 | 1,123,000 | 50,000 | 4.5 | % | |||||||||||
Total other | 3,223,000 | 2,558,000 | 665,000 | 26.0 | % | |||||||||||
Total SG&A expenses | $ | 18,954,000 | $ | 13,569,000 | $ | 5,385,000 | 39.7 | % |
Express-1 Expedited Solutions, Inc. | ||||||||||||||||
Summary of Direct Expenses | ||||||||||||||||
For the Twelve Months Ended December 31, | ||||||||||||||||
Year to Date | Year to Year Change | |||||||||||||||
2010 | 2009 | In Dollars | In Percentage | |||||||||||||
Express-1, Inc. | ||||||||||||||||
Transportation services | $ | 57,129,000 | $ | 37,728,000 | $ | 19,401,000 | 51.4 | % | ||||||||
Insurance | 1,020,000 | 1,437,000 | (417,000 | ) | -29.0 | % | ||||||||||
Other | 1,077,000 | 709,000 | 368,000 | 51.9 | % | |||||||||||
Total Express-1 direct expense | 59,226,000 | 39,874,000 | 19,352,000 | 48.5 | % | |||||||||||
Concert Group Logistics | ||||||||||||||||
Transportation dervices | 47,694,000 | 28,067,000 | 19,627,000 | 69.9 | % | |||||||||||
Station commissions | 10,724,000 | 8,798,000 | 1,926,000 | 21.9 | % | |||||||||||
Insurance | 131,000 | 114,000 | 17,000 | 14.9 | % | |||||||||||
Other | - | - | - | 0.0 | % | |||||||||||
Total CGL direct expense | 58,549,000 | 36,979,000 | 21,570,000 | 58.3 | % | |||||||||||
Bounce | ||||||||||||||||
Transportation services | 16,675,000 | 8,582,000 | 8,093,000 | 94.3 | % | |||||||||||
Insurance | 10,000 | 17,000 | (7,000 | ) | -41.2 | % | ||||||||||
Other | - | 37,000 | (37,000 | ) | -100.0 | % | ||||||||||
Total Bounce direct expense | 16,685,000 | 8,636,000 | 8,049,000 | 93.2 | % | |||||||||||
Total Direct expenses | ||||||||||||||||
Transportation services | 121,498,000 | 74,377,000 | 47,121,000 | 63.4 | % | |||||||||||
Station commissions | 10,724,000 | 8,798,000 | 1,926,000 | 21.9 | % | |||||||||||
Insurance | 1,161,000 | 1,568,000 | (407,000 | ) | -26.0 | % | ||||||||||
Other | 1,077,000 | 746,000 | 331,000 | 44.4 | % | |||||||||||
Intercompany eliminations | (3,873,000 | ) | (2,093,000 | ) | (1,780,000 | ) | 85.0 | % | ||||||||
Total direct expenses | $ | 130,587,000 | $ | 83,396,000 | $ | 47,191,000 | 56.6 | % |
Interest Rate Risk. As of December 31, 20102013, we held $21.5 million of cash in cash depository and 2009,money market funds held in depository accounts at ten financial institutions. The primary market risk associated with these investments is liquidity risk. We have exposure to changes in interest rates on our revolving credit facility. The interest rates on our revolving credit facility fluctuate based on LIBOR or a base rate plus an applicable margin. Assuming our $125.0 million revolving credit facility was fully drawn, a hypothetical 100-basis-point change in the Company maintainedinterest rate would increase our annual interest expense by $1.3 million. We do not use derivative financial instruments to manage interest rate risk or to speculate on future changes in interest rates.
Foreign Currency Exchange Risk. As a networkresult of 24 independent stationsour acquisition of the freight brokerage operations of Kelron on August 3, 2012 and 2 Company owned branches.
From time to time, we use foreign currency forward contracts to reduce part of the variability in certain forecasted Canadian dollar denominated cash flows. Generally, these instruments are for maturities of six months or less. We consider several factors when evaluating hedges of our forecasted foreign currency exposures, such as its revenuesignificance of the exposure, offsetting economic exposures and potential costs of hedging. We do not enter into derivative transactions for the year endingpurposes other than hedging economic exposures. At December 31, 2010 increased by 91.8%2013, we had no outstanding forward contracts to $20.0 million comparedreduce the variability in our Canadian dollar denominated revenues and operating expenses.
Convertible Debt Outstanding. The fair market value of our outstanding issue of convertible senior notes is subject to 2009 annual revenues of $10.4 million. We believe this is reflective of an improving freight environmentinterest rate and an aggressive growth strategy. We continue to be optimistic about growth potential during fiscal year 2011.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Consolidated Financial Statements and the reestablishment of benefits that were eliminated in 2009 due to the recession. As a percentage of revenue, corporate costs decreased from 1.9% at year ended December 31, 2009 to 1.2% in the same period in 2010. We anticipate corporate costs as a percentage of revenue to remain below 2% in 2011.
Total | Approximate | ||||||||||||||||||||||||
Exercise pricing | Outstanding | Potential | |||||||||||||||||||||||
.50-.75 | .76-1.00 | 1.01-1.25 | 1.26-1.50 | 1.51> | Options | Proceeds | |||||||||||||||||||
Option Expiration Dates | |||||||||||||||||||||||||
2014 | 50,000 | 500,000 | 550,000 | 769,000 | |||||||||||||||||||||
2015 | 500,000 | 200,000 | 700,000 | 603,000 | |||||||||||||||||||||
2016 | 50,000 | 125,000 | 100,000 | 275,000 | 314,000 | ||||||||||||||||||||
2017 | 50,000 | 320,000 | 370,000 | 514,000 | |||||||||||||||||||||
2018 | 287,500 | 100,000 | 387,500 | 382,000 | |||||||||||||||||||||
2019 | 25,000 | 75,000 | 25,000 | 125,000 | 111,000 | ||||||||||||||||||||
2020 | 75,000 | 235,000 | 287,500 | 597,500 | 839,000 | ||||||||||||||||||||
Total Options | 525,000 | 462,500 | 575,000 | 1,155,000 | 287,500 | 3,005,000 | $ | 3,532,000 |
49
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We carried out an evaluation, as required by paragraph (b) of Rule 13a-15 and 15d-15 of the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2010.2013. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.
Management’s Annual Report on Internal Control over Financial Reporting.
We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal accounting and financial officer), and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of our published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’sour internal control over financial reporting as of December 31, 2010.2013. In making this assessment, management used the criteria set forth in the Internal Control — Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s assessment, we believe that, as of December 31, 2010,2013, our internal control over financial reporting is effective.
We acquired the quarter ended December 31, 2010, there were no changes inassets of East Coast Air Charter, Covered Logistics and Interide Logistics and the capital stock of 3PD, Optima Service Solutions and National Logistics Management (NLM) during 2013. Due to the proximity of certain acquisitions to year-end, we excluded from our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013, 3PD’s, Optima’s and NLM’s internal control over financial reporting associated with
50
total assets of $554,754,147 and total revenues of $140,001,400 included in the Consolidated Financial Statements of XPO Logistics, Inc. and subsidiaries as of and for the year ended December 31, 2013. For additional information on East Coast Air Charter, Covered Logistics, Interide Logistics, 3PD, Optima Service Solutions and NLM acquisitions, see Note 3 to our audited Consolidated Financial Statements.
KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K, has issued a report on our internal control over financial reporting as of December 31, 2013. Such report is included on page 57 of this Form 10-K.
Changes in Internal Control Over Financial Reporting
Except as described below, there have not been any changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, ourits internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
Not Applicable
51
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item, otherItem 10 of Part III of Form 10-K (other than ascertain information required by Item 401 of Regulation S-K with respect to our executive officers, which is set forth below, is incorporated by reference from the information under the captions “Executive Officers and Directors” and “Family Relationships” containedItem 1 of Part I of this Annual Report on Form 10-K) will be set forth in the Company’sour Proxy Statement relating to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company’s 20112014 Annual Meeting of Stockholders (the “Proxy Statement”).
We have adopted a Code of Business Conduct and Ethics for all of its directors, officers and employees. The Company’sSenior Officer Code of Business Conduct and Ethics (the “Code”), which is applicable to our principal executive officer, principal financial officer, principal accounting officer and other senior officers. The Code is available on the Company’sour website at www.express-1.com. To date, there have been no waivers underwww.xpologistics.com. In the Company’sevent that we amend or waive any of the provisions of the Code that relate to any element of Business Conduct and Ethics. The Company willthe code of ethics definition enumerated in Item 406(b) of Regulation S-K, we intend to disclose future amendments to its Code of Business Conduct and Ethics and will post any waivers, if and when granted, under its Code of Business Conduct and Ethicsthe same on the Company’s website at www.express-1.com.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this itemItem 11 of Part III of Form 10-K will be set forth in our Proxy Statement relating to the 2014 Annual Meeting of Stockholders and is incorporated herein by reference fromreference.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 of Part III of Form 10-K (other than certain information required by Item 201(d) of Regulation S-K with respect to equity compensation plans, which is set forth below) will be set forth in our Proxy Statement relating to the information under the captions “Compensation2014 Annual Meeting of Directors,”Stockholders and “Executive Compensation” contained in the Proxy Statement.
Equity Compensation Plan
The following table sets forth information, as of December 31, 2010,2013, with respect to the Company’s compensation plans under which equity securities are authorized for issuance.
Number of Securities | |||||||
Remaining Available for | |||||||
Number of Securities | Weighted-Average | Future Issuance under | |||||
to be Issued Upon | Exercise Price of | Equity Compensation | |||||
Exercise of | Outstanding | Plan (Excluding | |||||
Outstanding Options, | Options, Warrants | Securities Reflected in | |||||
Plan Category | Warrants and Rights | and Rights | Column) | ||||
Equity compensation plan approved by security holders | 3,005,000 | $1.18 | 2,123,000 |
Equity Compensation Plan Information | ||||||||||||
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
Equity compensation plans approved by security holders (1) | 1,371,520 | $ | 10.91 | 2,456,692 | ||||||||
Equity compensation plans not approved by security holders (2) | 50,000 | 14.09 | — | |||||||||
|
|
|
|
|
| |||||||
Total | 1,421,520 | $ | 11.02 | 2,456,692 | ||||||||
|
|
|
|
|
|
(2) | These securities were granted to our Chief Financial Officer in February 2012 outside the security holder-approved plan as an employment inducement grant. These securities include 50,000 stock options. |
52
Additionally, the Company has in place an employee stock ownership plan in which 31,234 shares of the Company’s common stock are held on behalf of qualifying employees. The information contained under the heading “Security Ownership of Certain Beneficial Owners and Management”Company is in the Proxy Statement is incorporated in this Form 10-K by reference.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item 13 of Part III of Form 10-K will be set forth in our Proxy Statement relating to the 2014 Annual Meeting of Stockholders and is incorporated herein by reference to the sections of our Definitive Proxy Statement under the heading “Related Party Transactions” and “Director Independence.”
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by Item 14 of Part III of Form 10-K will be set forth in our Proxy Statement relating to the 2014 Annual Meeting of Stockholders and is incorporated herein by reference.
53
PART IV
Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
Financial Statements and Financial Statement Schedules
The list of Consolidated Financial Statements set forth in the accompanying Index to Consolidated Financial Statements is incorporated herein by reference. Such Consolidated Financial Statements are filed as part of this ItemAnnual Report on Form 10-K. All financial statement schedules are omitted because the required information is not applicable, or because the information required is included in the Consolidated Financial Statements and notes thereto.
Exhibits
The exhibits listed on the accompanying Exhibit Index on page 90 of this Annual Report on Form 10-K are filed or incorporated by reference as part of this Annual Report on Form 10-K and such Exhibit Index is incorporated herein by reference.
Certain of the agreements listed as exhibits to this Annual Report on Form 10-K (including the exhibits to such agreements), which have been filed to provide investors with information regarding their terms, contain various representations, warranties and covenants of XPO Logistics, Inc. and the other parties thereto. They are not intended to provide factual information about any of the parties thereto or any subsidiaries of the parties thereto. The assertions embodied in those representations, warranties and covenants were made for purposes of each of the agreements, solely for the benefit of the parties thereto. In addition, certain representations and warranties were made as of a specific date, may be subject to a contractual standard of materiality different from what a security holder might view as material, or may have been made for purposes of allocating contractual risk among the parties rather than establishing matters as facts. Investors should not view the representations, warranties, and covenants in the agreements (or any description thereof) as disclosures with respect to the sectionsactual state of our Definitive Proxy Statement underfacts concerning the heading “Principal Accountant Feesbusiness, operations, or condition of any of the parties to the agreements (or their subsidiaries) and Services.”
54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report beginningto be signed on Page F-1 as follows:
February 25, 2014
XPO LOGISTICS, INC. | ||
By: | /s/ Bradley S. Jacobs | |
(Chairman of the Board of Directors and Chief Executive Officer) | ||
By: | /s/ John J. Hardig | |
John J. Hardig | ||
(Chief Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated.
Signature | Title | Date | ||
/s/ Bradley S. Jacobs Bradley S. Jacobs | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) | February 25, 2014 | ||
/s/ John J. Hardig John J. Hardig | Chief Financial Officer (Principal Financial Officer) | February 25, 2014 | ||
/s/ Kent R. Renner Kent R. Renner | Senior Vice President—Chief Accounting Officer (Principal Accounting Officer) | February 25, 2014 | ||
/s/ G. Chris Andersen G. Chris Andersen | Director | February 25, 2014 | ||
/s/ Michael G. Jesselson Michael G. Jesselson | Director | February 25, 2014 | ||
/s/ Adrian P. Kingshott Adrian P. Kingshott | Director | February 25, 2014 | ||
/s/ James J. Martell James J. Martell | Director | February 25, 2014 | ||
/s/ Jason D. Papastavrou Jason D. Papastavrou | Director | February 25, 2014 | ||
/s/ Oren G. Shaffer Oren G. Shaffer | Director | February 25, 2014 |
55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No. | ||||
Report of Independent Registered Public Accounting | 57 | |||
Consolidated Balance Sheets As of December 31, | 59 | |||
60 | ||||
Consolidated Statements of Cash Flows For the Years Ended December 31, 2013, 2012 and 2011 | 61 | |||
62 | ||||
63 |
56
ITEM 8. FINANCIAL STATEMENTS
The Board of Directors
XPO Logistics, Inc.
We have audited the accompanying consolidated balance sheets of Express-1 Expedited Solutions,XPO Logistics, Inc. and subsidiaries (the Company) as of December 31, 2010,2013 and 2009;2012, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010 and 2009. These2013. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, are the responsibilityfor maintaining effective internal control over financial reporting, and for its assessment of the managementeffectiveness of Express-1 Expedited Solutions, Inc.internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9a of the Company’s December 31, 2013 annual report on Form 10-K. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration ofmisstatement and whether effective internal control over financial reporting as a basis for designing audit procedures that are appropriatewas maintained in the circumstances, but not for the purpose of expressing an opinion on the effectivenessall material respects. Our audits of the Company’s internal control overconsolidated financial reporting. Accordingly, we express no such opinion. An audit includesstatements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Express-1 Expedited Solutions,XPO Logistics, Inc. and subsidiaries as of December 31, 20102013 and 2009;2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010 and 20092013, in conformity with accounting principlesU.S. generally accepted accounting principles. Also in our opinion, XPO Logistics, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the United StatesCommittee of America.
57
Express-1 Expedited Solutions, Inc. | ||||||||
Consolidated Balance Sheets | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 561,000 | $ | 495,000 | ||||
Accounts receivable, net of allowances of $136,000 and $225,000, respectively | 24,272,000 | 17,569,000 | ||||||
Prepaid expenses | 257,000 | 158,000 | ||||||
Deferred tax asset, current | 314,000 | 353,000 | ||||||
Income tax receivable | 1,348,000 | - | ||||||
Other current assets | 813,000 | 459,000 | ||||||
Total current assets | 27,565,000 | 19,034,000 | ||||||
Property and equipment, net of $3,290,000 and $2,651,000 in accumulated depreciation, respectively | 2,960,000 | 2,797,000 | ||||||
Goodwill | 16,959,000 | 16,959,000 | ||||||
Identified intangible assets, net of $2,827,000 and $2,198,000 in accumulated amortization, respectively | 8,546,000 | 9,175,000 | ||||||
Loans and advances | 126,000 | 30,000 | ||||||
Other long-term assets | 516,000 | 1,044,000 | ||||||
Total long-term assets | 29,107,000 | 30,005,000 | ||||||
Total assets | $ | 56,672,000 | $ | 49,039,000 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 8,756,000 | $ | 6,769,000 | ||||
Accrued salaries and wages | 1,165,000 | 310,000 | ||||||
Accrued expenses, other | 2,877,000 | 2,272,000 | ||||||
Line of credit | - | 6,530,000 | ||||||
Current maturities of long-term debt | 1,680,000 | 1,215,000 | ||||||
Other current liabilities | 773,000 | 968,000 | ||||||
Total current liabilities | 15,251,000 | 18,064,000 | ||||||
Line of credit | 2,749,000 | - | ||||||
Notes payable and capital leases, net of current maturities | 2,083,000 | 213,000 | ||||||
Deferred tax liability, long-term | 2,032,000 | 1,156,000 | ||||||
Other long-term liabilities | 544,000 | 1,202,000 | ||||||
Total long-term liabilities | 7,408,000 | 2,571,000 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.001 par value; 10,000,000 shares, no shares issued or outstanding | - | - | ||||||
Common stock, $.001 par value; 100,000,000 shares authorized; 32,687,522 and 32,215,218 shares issued, respectively; and 32,507,522 and 32,035,218 shares outstanding, respectively | 33,000 | 32,000 | ||||||
Additional paid-in capital | 27,208,000 | 26,488,000 | ||||||
Treasury stock, at cost, 180,000 shares held | (107,000 | ) | (107,000 | ) | ||||
Accumulated earnings | 6,879,000 | 1,991,000 | ||||||
Total stockholders’ equity | 34,013,000 | 28,404,000 | ||||||
Total liabilities and stockholders' equity | $ | 56,672,000 | $ | 49,039,000 |
XPO Logistics, Inc. acquired 3PD, Inc. (3PD), Optima Service Solutions, LLC. (Optima) and National Logistics Management (NLM) during 2013, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, 3PD’s, Optima’s and NLM’s internal control over financial reporting associated with total assets of $554,754,147, and total revenues of $140,001,400, included in the consolidated financial statements.
Express-1 Expedited Solutions, Inc. | ||||||||
Consolidated Statements of Operations | ||||||||
Twelve Months Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Revenues | ||||||||
Operating revenue | $ | 157,987,000 | $ | 100,136,000 | ||||
Expenses | ||||||||
Direct expense | 130,587,000 | 83,396,000 | ||||||
Gross margin | 27,400,000 | 16,740,000 | ||||||
Sales, general and administrative expense | 18,954,000 | 13,569,000 | ||||||
Operating income from continuing operations | 8,446,000 | 3,171,000 | ||||||
Other expense | 140,000 | 51,000 | ||||||
Interest expense | 205,000 | 105,000 | ||||||
Income from continuing operations before income tax | 8,101,000 | 3,015,000 | ||||||
Income tax provision | 3,213,000 | 1,325,000 | ||||||
Income from continuing operations | 4,888,000 | 1,690,000 | ||||||
Income from discontinued operations, net of tax (1) | - | 15,000 | ||||||
Net income | $ | 4,888,000 | $ | 1,705,000 | ||||
Basic income per share | ||||||||
Income from continuing operations | $ | 0.15 | $ | 0.05 | ||||
Income from discontinued operations | - | - | ||||||
Net income | 0.15 | 0.05 | ||||||
Diluted income per share | ||||||||
Income from continuing operations | 0.15 | 0.05 | ||||||
Income from discontinued operations | - | - | ||||||
Net income | $ | 0.15 | $ | 0.05 | ||||
Weighted average common shares outstanding | ||||||||
Basic weighted average common shares outstanding | 32,241,383 | 32,035,218 | ||||||
Diluted weighted average common shares outstanding | 33,115,981 | 32,167,447 |
(signed) KPMG LLP
Chicago, IL
February 25, 2014
58
XPO Logistics, Inc.
(In thousands, except share data)
December 31, 2013 | December 31, 2012 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 21,524 | $ | 252,293 | ||||
Restricted cash | 2,141 | — | ||||||
Accounts receivable, net of allowances of $3,539 and $603, respectively | 134,227 | 61,245 | ||||||
Prepaid expenses | 3,935 | 1,555 | ||||||
Deferred tax asset, current | 3,041 | 1,406 | ||||||
Income tax receivable | 1,504 | 2,569 | ||||||
Other current assets | 5,800 | 1,866 | ||||||
|
|
|
| |||||
Total current assets | 172,172 | 320,934 | ||||||
|
|
|
| |||||
Property and equipment, net of $11,803 and $5,323 in accumulated depreciation, respectively | 56,571 | 13,090 | ||||||
Goodwill | 363,448 | 55,947 | ||||||
Identifiable intangible assets, net of $15,411 and $4,592 in accumulated amortization, respectively | 185,179 | 22,473 | ||||||
Deferred tax asset, long-term | 72 | — | ||||||
Other long-term assets | 2,799 | 764 | ||||||
|
|
|
| |||||
Total long-term assets | 608,069 | 92,274 | ||||||
|
|
|
| |||||
Total assets | $ | 780,241 | $ | 413,208 | ||||
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 43,111 | $ | 22,108 | ||||
Accrued salaries and wages | 11,741 | 3,516 | ||||||
Accrued expenses, other | 37,769 | 21,123 | ||||||
Current maturities of long-term debt | 2,028 | 491 | ||||||
Other current liabilities | 4,684 | 1,789 | ||||||
|
|
|
| |||||
Total current liabilities | 99,333 | 49,027 | ||||||
|
|
|
| |||||
Convertible senior notes | 106,268 | 108,280 | ||||||
Revolving credit facility and other long-term debt, net of current maturities | 75,373 | 676 | ||||||
Deferred tax liability, long term | 15,200 | 6,781 | ||||||
Other long-term liabilities | 28,224 | 3,385 | ||||||
|
|
|
| |||||
Total long-term liabilities | 225,065 | 119,122 | ||||||
|
|
|
| |||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.001 par value; 10,000,000 shares; 74,175 shares issued and outstanding | 42,737 | 42,794 | ||||||
Common stock, $.001 par value; 150,000,000 shares authorized; 30,583,073 and 18,002,985 shares issued, respectively; and 30,538,073 and 17,957,985 shares outstanding, respectively | 30 | 18 | ||||||
Additional paid-in capital | 524,972 | 262,641 | ||||||
Treasury stock, at cost, 45,000 shares held | (107 | ) | (107 | ) | ||||
Accumulated deficit | (111,789 | ) | (60,287 | ) | ||||
|
|
|
| |||||
Total stockholders’ equity | 455,843 | 245,059 | ||||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 780,241 | $ | 413,208 | ||||
|
|
|
|
See accompanying notes are an integral part to the consolidated financial statements.
59
Express-1 Expedited Solutions, Inc. | ||||||||
Consolidated Statements of Cash Flows | ||||||||
Year Ended December 31, | ||||||||
Operating activities | 2010 | 2009 | ||||||
Net income applicable to stockholders | $ | 4,888,000 | $ | 1,705,000 | ||||
Adjustments to reconcile net income to net cash from operating activities | ||||||||
(Recovery) Provision for allowance for doubtful accounts | (84,000 | ) | 92,000 | |||||
Depreciation & amortization expense | 1,290,000 | 1,191,000 | ||||||
Stock compensation expense | 157,000 | 172,000 | ||||||
Loss (gain) on disposal of equipment | 4,000 | (29,000 | ) | |||||
Non-cash impairment of intangible assets | 75,000 | 124,000 | ||||||
Changes in assets and liabilities, net of effect of acquisition: | ||||||||
Account receivable | (6,618,000 | ) | (5,459,000 | ) | ||||
Deferred taxes | 900,000 | 713,000 | ||||||
Income Tax Receivable | (1,348,000 | ) | - | |||||
Other current assets | (355,000 | ) | 104,000 | |||||
Prepaid expenses | (99,000 | ) | 214,000 | |||||
Other long-term assets/advances | 338,000 | (93,000 | ) | |||||
Accounts payable | 1,987,000 | 191,000 | ||||||
Accrued expenses and other current liabilities | 1,280,000 | 1,529,000 | ||||||
Other long term liabilities | (658,000 | ) | (553,000 | ) | ||||
Cash flows provided (used) by operating activities | 1,757,000 | (99,000 | ) | |||||
Investing activities | ||||||||
Acquisition of business, net of cash acquired | - | (2,250,000 | ) | |||||
Payment of acquisition earn-out | - | (1,100,000 | ) | |||||
Payment of purchases of property and equipment | (811,000 | ) | (186,000 | ) | ||||
Proceeds from sale of assets | 2,000 | 62,000 | ||||||
Cash flows used by investing activities | (809,000 | ) | (3,474,000 | ) | ||||
Financing activities | ||||||||
Credit line, net activity | (3,781,000 | ) | 4,210,000 | |||||
Proceeds from credit facility renewal | 5,000,000 | - | ||||||
Payments of debt | (2,665,000 | ) | (1,249,000 | ) | ||||
Proceeds from exercise of options | 564,000 | - | ||||||
Cash flows (used) provided by financing activities | (882,000 | ) | 2,961,000 | |||||
Net increase (decrease) in cash | 66,000 | (612,000 | ) | |||||
Cash, beginning of period | 495,000 | 1,107,000 | ||||||
Cash, end of period | $ | 561,000 | $ | 495,000 | ||||
Supplemental disclosures of noncash activities: | ||||||||
Cash paid during the period for interest | $ | 124,000 | $ | 105,000 | ||||
Cash paid during the period for income taxes | 3,521,000 | 396,000 | ||||||
Increase of goodwill due to accrual of acquisition earnout | - | 687,000 | ||||||
Acquisition activity (First Class & LRG 2009) | ||||||||
Property and equipment | $ | - | $ | 112,000 | ||||
Intangible Assets | - | 2,060,000 | ||||||
Goodwill | - | 1,357,000 | ||||||
Liabilities assumed | - | (42,000 | ) | |||||
Net assets acquired | - | 3,487,000 | ||||||
Installment consideration payable | - | (500,000 | ) | |||||
Fair value of estimated earnouts | - | (737,000 | ) | |||||
Net cash paid | $ | - | $ | 2,250,000 |
XPO Logistics, Inc.
Consolidated Statements of Operations
(In thousands)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenue | $ | 702,303 | $ | 278,591 | $ | 177,076 | ||||||
Expenses | ||||||||||||
Direct expense | 578,796 | 237,765 | 147,298 | |||||||||
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Gross margin | 123,507 | 40,826 | 29,778 | |||||||||
Sales general and administrative expense | 175,832 | 68,790 | 28,054 | |||||||||
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Operating (loss) income | (52,325 | ) | (27,964 | ) | 1,724 | |||||||
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Other expense | 478 | 363 | 56 | |||||||||
Interest expense | 18,169 | 3,207 | 191 | |||||||||
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(Loss) income before income tax provision | (70,972 | ) | (31,534 | ) | 1,477 | |||||||
Income tax (benefit) provision | (22,442 | ) | (11,195 | ) | 718 | |||||||
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Net (loss) income | (48,530 | ) | (20,339 | ) | 759 | |||||||
Preferred stock beneficial conversion charge | — | — | (44,211 | ) | ||||||||
Cumulative preferred dividends | (2,972 | ) | (2,993 | ) | (1,125 | ) | ||||||
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Net loss available to common shareholders | $ | (51,502 | ) | $ | (23,332 | ) | $ | (44,577 | ) | |||
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Basic loss per share | ||||||||||||
Net loss | $ | (2.26 | ) | $ | (1.49 | ) | $ | (5.41 | ) | |||
Diluted loss per share | ||||||||||||
Net loss | $ | (2.26 | ) | $ | (1.49 | ) | $ | (5.41 | ) | |||
Weighted average common shares outstanding | ||||||||||||
Basic weighted average common shares outstanding | 22,752 | 15,694 | 8,247 | |||||||||
Diluted weighted average common shares outstanding | 22,752 | 15,694 | 8,247 |
(Note: All share-related amounts in the financial tables reflect the 4-for-1 reverse stock split that was effected on September 2, 2011.)
See accompanying notes are an integral part of theto consolidated financial statements
60
Express-1 Expedited Solutions, Inc. | ||||||||||||||||||||||||||||
Consolidated Statements of Changes in Stockholders' Equity | ||||||||||||||||||||||||||||
For the Two Years Ended December 31, 2010 and 2009 | ||||||||||||||||||||||||||||
Additional | ||||||||||||||||||||||||||||
Stock Common | Treasury Stock | Paid in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Earnings | Total | ||||||||||||||||||||||
Balance, January 1, 2009 | 32,215,218 | $ | 32,000 | (180,000 | ) | $ | (107,000 | ) | $ | 26,316,000 | $ | 286,000 | $ | 26,527,000 | ||||||||||||||
Issuance of stock for exercise of options | - | |||||||||||||||||||||||||||
Stock option expense | 172,000 | 172,000 | ||||||||||||||||||||||||||
Issuance of common stock | - | |||||||||||||||||||||||||||
AMEX issuance fees | - | |||||||||||||||||||||||||||
Net income | 1,705,000 | 1,705,000 | ||||||||||||||||||||||||||
Balance, December 31, 2009 | 32,215,218 | 32,000 | (180,000 | ) | (107,000 | ) | 26,488,000 | 1,991,000 | 28,404,000 | |||||||||||||||||||
Issuance of stock for exercise of options | 472,304 | 1,000 | 563,000 | 564,000 | ||||||||||||||||||||||||
Stock option expense | 157,000 | 157,000 | ||||||||||||||||||||||||||
Issuance of common stock | - | |||||||||||||||||||||||||||
Net income | 4,888,000 | 4,888,000 | ||||||||||||||||||||||||||
Balance, December 31, 2010 | 32,687,522 | $ | 33,000 | (180,000 | ) | $ | (107,000 | ) | $ | 27,208,000 | $ | 6,879,000 | $ | 34,013,000 |
XPO Logistics, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Operating activities | ||||||||||||
Net (loss) income | $ | (48,530 | ) | $ | (20,339 | ) | $ | 759 | ||||
Adjustments to reconcile net (loss) income to net cash from operating activities | ||||||||||||
Provisions for allowance for doubtful accounts | 2,596 | 916 | 219 | |||||||||
Depreciation and amortization | 20,795 | 2,713 | 1,240 | |||||||||
Stock compensation expense | 4,746 | 4,398 | 1,180 | |||||||||
Accretion of debt | 5,973 | 1,475 | — | |||||||||
Other | 1,307 | 26 | 12 | |||||||||
Changes in assets and liabilities, net of effects of acquisitions: | ||||||||||||
Accounts receivable | (36,975 | ) | (13,755 | ) | 1,627 | |||||||
Deferred tax expense | (22,673 | ) | (8,260 | ) | (327 | ) | ||||||
Income tax receivable | 96 | (1,556 | ) | 239 | ||||||||
Prepaid expense and other current assets | (3,035 | ) | 824 | 425 | ||||||||
Other long-term assets | 18 | (276 | ) | 97 | ||||||||
Accounts payable | (8,283 | ) | (2,585 | ) | (191 | ) | ||||||
Accrued expenses and other liabilities | 17,663 | 12,143 | 1,331 | |||||||||
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Cash flows (used) provided by operating activities | (66,302 | ) | (24,276 | ) | 6,611 | |||||||
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Investing activities | ||||||||||||
Acquisition of businesses, net of cash acquired | (458,794 | ) | (57,236 | ) | — | |||||||
Payment for purchases of property and equipment | (11,585 | ) | (6,981 | ) | (754 | ) | ||||||
Other | 125 | — | 13 | |||||||||
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Cash flows used by investing activities | (470,254 | ) | (64,217 | ) | (741 | ) | ||||||
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Financing activities | ||||||||||||
Proceeds from issuance of preferred stock, net of issuance costs | — | — | 71,628 | |||||||||
Proceeds from issuance of convertible senior notes, net | — | 138,504 | — | |||||||||
Proceeds from borrowing on revolving debt facility, net of issuance costs | 73,349 | — | — | |||||||||
Proceeds from stock offering, net | 239,496 | 136,961 | — | |||||||||
Dividends paid to preferred stockholders | (2,972 | ) | (3,000 | ) | (375 | ) | ||||||
Other | (4,086 | ) | (5,686 | ) | (3,677 | ) | ||||||
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Cash flows provided by financing activities | 305,787 | 266,779 | 67,576 | |||||||||
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Net (decrease)/increase in cash | (230,769 | ) | 178,286 | 73,446 | ||||||||
Cash and cash equivalents, beginning of period | 252,293 | 74,007 | 561 | |||||||||
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Cash and cash equivalents, end of period | $ | 21,524 | $ | 252,293 | $ | 74,007 | ||||||
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Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for interest | $ | 12,387 | $ | 22 | $ | 110 | ||||||
Cash paid for income taxes, net of cash receipts | $ | 243 | $ | 247 | $ | 233 | ||||||
Equity portion of acquisition purchase price | $ | 10,446 | $ | — | $ | — |
See accompanying notes are an integral part of theto consolidated financial statements
61
XPO Logistics, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Years Ended December 31, 2013, 2012 and 2011
(In thousands)
Preferred Stock | Common Stock | Treasury Stock | Paid-In Capital | Accumulated Deficit | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||
Balance, December 31, 2010 | — | — | 8,172 | $ | 8 | (45 | ) | $ | (107 | ) | $ | 27,233 | $ | 6,879 | $ | 34,013 | ||||||||||||||||||||
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Net Income | — | — | — | — | — | — | — | 759 | $ | 759 | ||||||||||||||||||||||||||
Issuance of common stock for option exercise | — | — | 237 | — | — | — | 704 | — | $ | 704 | ||||||||||||||||||||||||||
Issuance of ESOP shares | — | — | 1 | — | — | — | — | — | $ | — | ||||||||||||||||||||||||||
Issuance of preferred stock and warrants, net of issuance costs | 75 | 42,794 | — | — | — | — | 28,834 | — | $ | 71,628 | ||||||||||||||||||||||||||
Deemed distribution for recognition of beneficial conversion feature on preferred stock | — | — | — | — | — | — | 44,211 | (44,211 | ) | $ | — | |||||||||||||||||||||||||
Dividend paid | — | — | — | — | — | — | — | (375 | ) | $ | (375 | ) | ||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | — | 1,180 | — | $ | 1,180 | ||||||||||||||||||||||||||
Excess tax benefit from stock options | — | — | — | — | — | — | 451 | — | $ | 451 | ||||||||||||||||||||||||||
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Balance, December 31, 2011 | 75 | 42,794 | 8,410 | 8 | (45 | ) | (107 | ) | 102,613 | (36,948 | ) | 108,360 | ||||||||||||||||||||||||
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Net loss | — | — | — | — | — | — | — | (20,339 | ) | $ | (20,339 | ) | ||||||||||||||||||||||||
Issuance of common stock for exercises, net of withholdings | (1 | ) | — | 393 | — | — | — | (978 | ) | — | $ | (978 | ) | |||||||||||||||||||||||
Proceeds from common stock offering, net of issuance costs | — | — | 9,200 | 10 | — | — | 136,952 | — | $ | 136,962 | ||||||||||||||||||||||||||
Dividend paid | — | — | — | — | — | — | — | (3,000 | ) | $ | (3,000 | ) | ||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | — | 4,398 | — | $ | 4,398 | ||||||||||||||||||||||||||
Equity component of convertible debt offering, net of issuance costs and deferred taxes | — | — | — | — | — | — | 19,656 | — | $ | 19,656 | ||||||||||||||||||||||||||
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Balance, December 31, 2012 | 74 | 42,794 | 18,003 | 18 | (45 | ) | (107 | ) | 262,641 | (60,287 | ) | 245,059 | ||||||||||||||||||||||||
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Net loss | — | — | — | — | — | — | — | (48,530 | ) | $ | (48,530 | ) | ||||||||||||||||||||||||
Tax withholdings on restricted shares and other issuances of common stock | — | — | 192 | — | — | — | (1,751 | ) | — | $ | (1,751 | ) | ||||||||||||||||||||||||
Conversion of preferred stock to common stock | — | (57 | ) | 14 | — | — | — | 57 | — | $ | — | |||||||||||||||||||||||||
Proceeds from common stock offering, net of issuance costs | — | — | 11,148 | 11 | — | — | 239,485 | — | $ | 239,496 | ||||||||||||||||||||||||||
Issuance of common stock for acquisitions | — | — | 617 | 1 | — | — | 10,445 | — | $ | 10,446 | ||||||||||||||||||||||||||
Issuance of common stock upon conversion of senior notes, net of tax | — | — | 609 | — | — | — | 9,373 | — | $ | 9,373 | ||||||||||||||||||||||||||
Sale of business interest | — | — | — | — | — | — | (24 | ) | — | $ | (24 | ) | ||||||||||||||||||||||||
Dividend paid | — | — | — | — | — | — | — | (2,972 | ) | $ | (2,972 | ) | ||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | — | 4,746 | — | $ | 4,746 | ||||||||||||||||||||||||||
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Balance, December 31, 2013 | 74 | $ | 42,737 | 30,583 | $ | 30 | (45 | ) | $ | (107 | ) | $ | 524,972 | $ | (111,789 | ) | $ | 455,843 | ||||||||||||||||||
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See accompanying notes to consolidated financial statements.
62
XPO Logistics, Inc.
Years ended December 31, 20102013, 2012 and 2009
1. Significant Accounting Principles
Nature of Business
Express-1 Expedited Solutions,XPO Logistics, Inc. (“XPO” or the Company”“Company”)– —provides premium transportation and logistics services to thousands of customers through our three business units:
Freight Brokerage—provides services primarily through its three wholly owned subsidiaries:
Expedited Transportation—provides services under the brands Express-1, XPO NLM and XPO Air Charter to customers in North America. These services include the management of non-owned resourcestime-critical, urgent shipments, transacted through direct selling and through our web-based technology. Expedited ground services are provided through a fleet of exclusive-use vehicles that are owned and operated by independent contract drivers, referred to provideas owner operators, and through contracted third-party motor carriers. For shipments requiring air charter, service is arranged using our relationships with third-party air carriers.
Freight Forwarding—provides services minimizesunder the amount of capital investment required and is often described with the terms “non-asset” or “asset-light.” In January of 2009, certain assets and liabilities of First Class Expediting were purchased to complement the operations of Express-1. The financial reporting of this operation has been included with Express-1.
For specific financial information relating to the above subsidiariessegments, refer toFootnote 18 – Operating SegmentsNote 13—Segment Reporting and Geographic Information.
During 2008,2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements of the Company discontinued its Express-1 Dedicated business unit, in anticipationhave been prepared pursuant to the rules and regulations of the cessationSecurities and Exchange Commission (“SEC”) and in accordance with the instructions to Form 10-K. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading.
These Consolidated Financial Statements reflect, in the Company’s opinion, all material adjustments (which include only normal recurring adjustments) necessary to fairly present the Company’s financial position as of theseDecember 31, 2013 and 2012, and results of operations in February 2009. All revenuesfor the years ended December 31, 2013, 2012 and costs associated with this operation2011. The preparation of the Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenue and expense during the reporting period. Estimates have been accounted for, net of taxes, in the line item labeled “Income from discontinued operations” for all years presented in the Consolidated Statements of Operations. More informationprepared on the discontinuancebasis of the Express-1 Dedicated operations can be found in Footnote 3 – Discontinued Operations.
Use of Estimates
The Company prepares its consolidated financial statementsConsolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that impact the reported amounts of assets and liabilities and disclosure of contingent assets and
63
liabilities at the date of the consolidated financial statementsConsolidated Financial Statements and the reported amounts of revenuesrevenue and expensesexpense during the reporting period. The Company reviews its estimates including but not limitedon a regular basis and makes adjustments based on historical experience and existing and expected future conditions. Estimates are made with respect to, among other matters, accrued revenue, purchased transportation, recoverability of long-lived assets, accrual of acquisition earn-outs, recoverability of prepaid expenses, estimated legal accruals, valuation allowances for deferred taxes, valuation of investmentsreserve for uncertain tax positions, and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions.accounts. These evaluations are performed and adjustments are made as information is available. Management believes that these estimates, are reasonable andwhich have been discussed with the audit committee;committee of the Company’s board of directors, are reasonable; however, actual results could differ from these estimates.
Reclassification
Certain prior year amounts shown in the accompanying consolidated financial statementsreclassifications have been reclassifiedmade to the December 31, 2012 consolidated balance sheet and 2012 and 2011 consolidated statements of cash flows in order to conform to the 20102013 presentation. These reclassifications did not have any effecthad no impact on total assets, total liabilities, total stockholders’ equity or net income.
Significant Accounting Policies
Revenue Recognition
The Company hasn’t experienced any losses related to these balances. All of the non-interest bearing cash balances were fully insured at December 31, 2010 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and the non-interest bearing cash balances may again exceed federally insured limits. At December 31, 2010, there were no amounts held in interest bearing accounts.
Persuasive evidence of an alternative point in time to recognize revenue. Concert Group Logistics revenuearrangement exists;
Services have been rendered;
The sales price is fixed and associated operating expenses are recognized on the date the freightdeterminable; and
Collectability is picked up from the shipper. This alternative method of revenue recognition is not the preferred method of revenue recognition as prescribed within US GAAP. This method recognizes revenue and associated expenses prior to the point in time that all services are completed; however, the use of this method does not result in a material difference from US GAAP. The Company has evaluated the impact of this alternative method on its consolidated financial statements and concluded that the impact is not material to the financial statements.reasonably assured.
The Company reports revenue on a gross basis in accordance with US GAAP.the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) Topic 605, “Reporting Revenue Gross as Principal Versus Net as an Agent”. The following facts justify the Company’s position of reporting revenueCompany believes presentation on a gross basis:
The Company is the primary obligor and is responsible for providing the service desired by the customer.
The customer holds the Company responsible for fulfillment, including the acceptability of the service. (Requirementsservice (requirements may include, for example, on-time delivery, handling freight loss and damage claims, establishing pick-up and delivery times, and tracing shipments in transit.)transit).
For Expedited Transportation and Freight Brokerage, the Company has discretion in setting sales prices and as a result, its earnings vary.
Expedited Transportation and Freight Brokerage have complete discretion to establish sales prices. Independently-owned stations within Freight Forwarding have the discretion to establish sales prices.
The Company bears credit risk for all receivables. In the case of Freight Forwarding, the independently-owned stations reimburse Freight Forwarding for a portion (typically 70-80%) of credit losses. Freight Forwarding retains the risk that the independent station owners will not meet this obligation.
64
For a subset of Expedited Transportation, revenue is recognized on a net basis in accordance with ASC Topic 605. The Company does not serve as the primary obligor, receives a fixed management fee for its services and does not assume credit risk for these transactions.
The Company’s Freight Forwarding segment collects certain taxes and duties on behalf of their customers as part of the services offered and arranged for international shipments. The Company’s accounting policy is to present these collections on a gross basis with the revenue recognized of $3.7 million, $2.4 million and $2.0 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less as of the date of purchase to be cash equivalents unless the investments are legally or contractually restricted for more than three months. With the acquisition of 3PD in August 2013, the Company acquired restricted cash held as security under 3PD’s captive insurance contracts. At December 31, 2013, the Company had $2.1 million of restricted cash, which primarily related to 3PD’s captive insurance contracts.
Allowance for Doubtful Accounts
The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers, any specific customer collection issues that have been identified, current economic conditions, and other factors that may affect customers’ ability to pay.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include such items as prepaid rent, software maintenance costs, insurance premiums, other prepaid operating expenses, certain inventories at 3PD, receivables related to certain working capital adjustments from acquisitions, and other miscellaneous receivables.
Income Taxes
Taxes on income are provided in accordance with US GAAP.ASC Topic 740, “Income Taxes”. Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the consolidated financial statements.Consolidated Financial Statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax basis of particular assets and liabilities, in addition toand the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date. A valuation allowance is provided to offset the net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. ForManagement periodically assesses the likelihood that the Company will utilize its existing deferred tax assets and records a valuation allowance for deferred tax assets when it is more complete analysis of this item refer to Footnote 13 – Income Taxes.likely than not that such deferred tax assets will not be realized.
Accounting for Uncertaintyuncertainty in Income Taxesincome taxes is determined based on US GAAP,ASC Topic 740, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. US GAAPASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. For additional information refer toNote 10—Income Taxes.
65
Goodwill and Intangible Assets with Indefinite Lives
Goodwill consists of the excess of cost over the fair value of net assets acquired in business combinations. Intangible assets with indefinite lives consist of the Express-1, Inc. trade name. The Company follows the provisions of ASC Topic 350, “Intangibles—Goodwill and Other”, which requires an annual impairment test for goodwill and intangible assets with indefinite lives. The Company may first choose to perform a qualitative evaluation of the likelihood of goodwill and intangible assets impairment. For the goodwill that was the result of current year acquisitions that are considered to be separate reporting units, the Company chose to perform a qualitative evaluation. If the Company determined a quantitative evaluation was necessary, the goodwill at the reporting unit was subject to a two-step impairment test. The first step compares the book value of a reporting unit, including goodwill, with its fair value. If the book value of a reporting unit exceeds its fair value, the Company completes the second step in order to determine the amount of goodwill impairment loss that should be recorded. In the second step, the Company determines an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill. The amount of impairment is equal to the excess of the book value of goodwill over the implied fair value of that goodwill. The Company performs the annual impairment testing during the third quarter unless events or circumstances indicate impairment of the goodwill may have occurred before that time. For the periods presented, the Company did not recognize any goodwill impairment as the estimated fair value of its reporting units with goodwill exceeded the book value of these reporting units. For additional information refer toNote 6—Goodwill.
The fair value of purchased intangible assets with indefinite lives, primarily a trade name, is estimated and compared to their carrying value. The Company estimates the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates for this category of intellectual property, discount rates and other variables. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The Company recognizes an impairment loss when the estimated fair value of the intangible asset is less than the carrying value. The Company performs the annual impairment testing during the third quarter unless events or circumstances indicate impairment of the intangible assets with indefinite lives may have occurred before that time. For the periods presented, the Company did not recognize any impairment of intangible assets with indefinite lives as the estimated fair value of its intangible assets with indefinite lives exceeded the book value of these reporting units; however, during the quarter ended September 30, 2013, the Company rebranded its freight forwarding business to XPO Global Logistics from Concert Group Logistics, Inc. As a result of this action, the Company accelerated the amortization of $3.1 million in indefinite-lived intangible assets related to the CGL trade name based on the reduction in remaining useful life. The $3.1 million of accelerated amortization represented the full value of the CGL trade name intangible assets.
Identifiable Intangible Assets
The Company follows the provisions of ASC Topic 360, “Property, Plant and Equipment”, which establishes accounting standards for the impairment of long-lived assets such as property, plant and equipment and intangible assets subject to amortization. The Company reviews long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. The Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. During the periods ended December 31, 2013, 2012 and 2011, there was no impairment of the identified intangible assets.
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The Company’s intangible assets subject to amortization consist of customer relationships, non-compete agreements, carrier relationships and other intangibles that are amortized either over the period of economic benefit or on a straight-line basis over the estimated useful lives of the related intangible asset. The estimated useful lives of the respective intangible assets range from four months to 14 years.
The following table sets forth the Company’s identifiable intangible assets as of December 31, 2013 and 2012 (in thousands):
December 31, 2013 | December 31, 2012 | |||||||
Indefinite Lived Intangibles: | ||||||||
Trade name | $ | 3,346 | $ | 6,416 | ||||
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Definite Lived Intangibles: | ||||||||
Customer lists and relationships | 168,666 | 14,281 | ||||||
Carrier relationships | 12,100 | — | ||||||
Trade name | 8,041 | 1,246 | ||||||
Non-compete agreeements | 6,265 | 3,050 | ||||||
Other intangible assets | 2,172 | 2,072 | ||||||
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197,244 | 20,649 | |||||||
Less: acccumulated amortization | (15,411 | ) | (4,592 | ) | ||||
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Intangible assets, net | $ | 181,833 | $ | 16,057 | ||||
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Total Identifiable Intangibles | $ | 185,179 | $ | 22,473 | ||||
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Estimated amortization expense for amortizable intangible assets for the next five years is as follows:
2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||
Estimated amortization expense | $ | 27,333 | $ | 25,452 | $ | 21,956 | $ | 19,057 | $ | 17,206 |
Actual amounts of amortization expense may differ from estimated amounts due to changes in foreign currency exchange rates, additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets and other events.
Intangible asset amortization expense was $14.1 million, $1.3 million and $0.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Property and Equipment
Property and equipment are generally recorded at cost or in the case of internally developed acquired technology at fair value at the date of acquisition. Maintenance and repair expenditures are charged to expense as incurred. When assets are sold, the applicable costs and accumulated depreciation are removed from the accounts, and any gain or loss is included in income. For internal use software, the Company has adopted the provisions of ASC Topic 350, “Intangibles—Goodwill and Other”. Accordingly, certain costs incurred in the planning and evaluation stage of internal use computer software are expensed as incurred. Costs incurred during the application development stage are capitalized and included in property and equipment. Capitalized internal use software also includes the fair value of acquired internally developed technology. Capitalized internal use software totaled $31.7 million and $1.2 million as of December 31, 2013 and 2012, respectively.
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Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:
Classification | Estimated Useful Life | |
Leasehold improvements | Shorter of term of lease or 15 years | |
Buildings | 39 years | |
Vehicles | 5 years | |
Office equipment | 5 to 7 years | |
Computer equipment | 5 years | |
Computer software | 3 to 5 years | |
Satellite equipment | 3 to 5 years | |
Warehouse equipment | 7 to 10 years |
The following table sets forth the Company’s property and equipment as of December 31, 2013 and 2012 (in thousands):
December 31, 2013 | December 31, 2012 | |||||||
Property and Equipment, at cost | ||||||||
Leasehold improvements | 7,969 | 3,971 | ||||||
Buildings | 1,115 | 1,115 | ||||||
Vehicles | 2,723 | 991 | ||||||
Office equipment | 6,636 | 3,265 | ||||||
Computer equipment | 8,218 | 4,479 | ||||||
Computer software | 39,709 | 3,035 | ||||||
Satellite equipment | 1,496 | 1,450 | ||||||
Warehouse equipment | 508 | 107 | ||||||
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68,374 | 18,413 | |||||||
Less: acccumulated depreciation | (11,803 | ) | (5,323 | ) | ||||
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Property and Equipment, net | $ | 56,571 | $ | 13,090 | ||||
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Depreciation of property and equipment was $6.7 million, $1.4 million and $0.7 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Other Long-Term Assets
Other long-term assets consist primarily of balances representing various deposits and notes receivable from various XPO Global Logistics independent station owners, incentive payments to independent station owners within the XPO Global Logistics network, and debt issuance costs related to the Company’s revolving credit facility. The incentive payments are made by XPO Global Logistics to certain station owners as an incentive to establish an independently-owned station and are amortized over the life of each independent station contract and the unamortized portion generally is recoverable in the event of default under the terms of the agreements. The debt issue costs are amortized on a straight-line basis over the term of the Credit Agreement.
Other Long Term Liabilities
Other long-term liabilities consist primarily of the holdback of a portion of the purchase price for resolution of certain indemnifiable matters related to the acquisition of 3PD and deferred rent liabilities. The holdback will be used to fund the cost of litigation, including settlements and judgments, for certain lawsuits pending against 3PD regarding the alleged misclassification of independent contractors, with the remainder to be paid to the former owners following satisfaction of all claims. Upon the final resolution of certain of those lawsuits, designated amounts of the holdback either will be paid to the former owners of 3PD or retained by the Company,
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depending on the nature of the resolution. For additional information, refer to the Litigation subsection ofNote 4—Commitments and Contingencies. The following table outlines the Company’s other long term liabilities as of December 31, 2013 and December 31, 2012 (in thousands):
As of December 31, 2013 | As of December 31, 2012 | |||||||
Holdback for resolution of certain indemnifiable matters | $ | 22,500 | $ | — | ||||
Long term portion of deferred rent liability | 4,387 | 2,292 | ||||||
Liability for uncertain tax positions | 916 | 462 | ||||||
Acquisition lease liability | 233 | 280 | ||||||
Long term portion of vacant rent liability | 143 | 164 | ||||||
Other | 45 | 187 | ||||||
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Total Other Long Term Liabilities | $ | 28,224 | $ | 3,385 | ||||
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Foreign Currency Translation
Exchange gains or losses incurred on transactions conducted by business units in a currency other than the business units’ functional currency are normally reflected in direct expense in the consolidated statements of operations. Assets and liabilities of XPO Logistics Canada, which has the U.S. dollar as its functional currency (but which maintains its accounting records in Canadian currency), have their values remeasured into U.S. dollars at period-end exchange rates, except for non-monetary items for which historical rates are used. Exchange gains or losses are not material to the consolidated statements of operations for the periods presented. 3P Delivery Canada (3PD’s Canadian operations), which has the Canadian dollar as its functional currency, has its revenues and expenses translated into U.S. dollars using weighted average exchange rates while assets and liabilities are translated into U.S. dollars using exchange rates at the balance sheet date. The effects of foreign currency translation adjustments are included in stockholders’ equity for 3P Delivery Canada.
Foreign Currency Hedging and Derivative Financial Instruments
The Company enters into derivative contracts to protect against fluctuations in currency exchange rates from time to time. These contracts are for expected future cash flows and not for speculative purposes. The Company reflects changes in fair value of these contracts in the consolidated statements of operations. In accordance with FASB ASC Topic 815 “Derivatives and Hedging”, the Company does not apply hedge accounting to its derivative contracts.
Fair Value Measurements
FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and classifies the inputs used to measure fair value into the following hierarchy:
• | Level 1—Quoted prices for identical instruments in active markets; |
• | Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and |
• | Level 3—Valuations based on inputs that are unobservable, generally utilizing pricing models or other valuation techniques that reflect management’s judgment and estimates. |
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The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2013 and 2012 (in thousands):
Fair Value Measurements as of December 31, 2013 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Money market funds | $ | 1,577 | $ | 1,577 | $ | — | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Contingent consideration obligations | $ | — | $ | — | $ | — | $ | — | ||||||||
Fair Value Measurements as of December 31, 2012 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Money market funds | $ | 239,443 | $ | 239,443 | $ | — | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Contingent consideration obligations | $ | 392 | $ | — | $ | — | $ | 392 |
See discussion below for fair value of the convertible senior notes and the borrowings on the revolving credit agreement as of December 31, 2013.
Estimated Fair Value of Financial Instruments
The aggregate net fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain financial instruments approximated their fair values as of the years ended December 31, 2013 and 2012. These financial instruments include cash, accounts receivable, notes receivable, accounts payable, accrued expense, notes payable and current maturities of long-term debt. Fair values approximate carrying values for these financial instruments since they are short-term in nature and they are receivable or payable on demand. The fair value of the Freight Forwarding notes receivable from the owners of the independently-owned stations approximated their respective carrying values based on the interest rates associated with these instruments.
On September 26, 2012, the Company completed a registered underwritten public offering of 4.50% Convertible Senior Notes due October 1, 2017 (the “Notes”), in an aggregate principal amount of $125.0 million. On October 17, 2012, the underwriters exercised the overallotment option to purchase $18.8 million additional principal amount of the Notes. The Company received $138.5 million in net proceeds after underwriting discounts, commissions and expenses were paid. The Notes were allocated to long-term debt and equity in the amounts of $106.8 million and $31.7 million, respectively. These amounts are net of debt issuance costs of $4.1 million for debt and $1.2 million for equity. On October 10, 2013, the Company entered into an agreement pursuant to which it issued an aggregate of 608,467 shares of its common stock to certain holders of the Notes in connection with the conversion of $10.0 million aggregate principal amount of the Notes. The conversion was allocated to long-term debt and equity in the amounts of $7.9 million and $3.3 million, respectively. This transaction included an induced conversion pursuant to which we paid the holder a market-based premium in cash. The negotiated market-based premium, in addition to the difference between the current fair value and the book value of the Notes, was reflected in interest expense in the fourth quarter of 2013.
As of December 31, 2010,2013, the Company had outstanding $133.7 million of 4.50% Convertible Senior Notes due October 1, 2017, which the Company is obligated to repay at face value unless the holder agrees to a lesser amount or elects to convert all or a portion of such notes into the Company’s common stock. Holders of the convertible senior notes are due interest semiannually in arrears on April 1 and October 1 of each year. Payments
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began on April 1, 2013. The conversion rate was initially 60.8467 shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $16.43 per share of common stock) and is subject to adjustment in some events but will not be adjusted for any accrued approximately $135,000 for certain potential state income taxes.and unpaid interest. The fair value of the convertible senior notes was $225.8 million as of December 31, 2013. For a more complete analysis of this itemadditional information refer toNote 5—Debt.
Footnote 13 – Income Taxes.Stock-Based Compensation
The Company accounts for share-based compensation based on the equity instrument’s grant date fair value in accordance with US GAAP.ASC Topic 718,“Compensation—Stock Compensation”. The Company has recorded compensation expense related to stock optionsfair value of $157,000 and $172,000 for the years ended December 31, 2010 and 2009, respectively.
The weighted-average fair value of each stock option recorded in expense for the years ended December 31, 20102013, 2012 and 2009, were2011 was estimated on the date of grant using the Black-Scholes option pricing model and wereis amortized over the requisite service period of the underlying options.option. The Company has used one grouping for the assumptions, as its option grants have similar characteristics. The expected term of options granted has been derived based upon the Company’s history of actual exercise behavior and represents the period of time that options granted are expected to be outstanding. Historical data was also used to estimate option exercises and employee terminations. Estimated volatility is based upon the Company’s historical market price at consistent points in a period equal to the expected life of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and the expected dividend yield is zero. The assumptions outlined in the table below were utilized in the calculations of compensation expense from option grants in the reporting periods reflected.
Twelve Months Ended December 31, | ||||
2010 | 2009 | |||
Risk-free interest rate | 2.5% | 2.8% | ||
Expected life | 5.8 years | 5.1 years | ||
Expected volatility | 35% | 35% | ||
Expected dividend yield | none | none | ||
Grant date fair value | $0.53 | $0.31 |
Footnote 11 - Equity.
Earnings per common share are computed in accordance with US GAAPASC Topic 260, “Earnings per Share”, which requires companies to present basic earnings per share and diluted earnings per share. Basic earningsFor additional information refer toNote 9—Earnings per shareShare.
3. Acquisitions
2013 Acquisitions
NLM
On December 11, 2013, the Company entered into a Stock Purchase Agreement with Landstar Supply Chain Solutions, Inc. and Landstar System Holdings, Inc. (the “NLM Stock Purchase Agreement”) to acquire all of the outstanding capital stock of National Logistics Management (“NLM”) (the “NLM Transaction”). NLM is the largest provider of web-based expedited transportation management in North America. The closing of the transaction occurred on December 28, 2013. The fair value of the total consideration paid under the NLM Stock Purchase Agreement was $87.0 million, paid in cash, excluding any working capital adjustments.
The NLM acquisition was accounted for as a purchase business combination in accordance with ASC Topic 805 “Business Combinations”. Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of December 28, 2013 with the remaining unallocated
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purchase price recorded as goodwill. As a result of the acquisition, the Company recorded goodwill of $46.8 million and intangible assets of $26.1 million. In addition, the Company recorded an acquired technology asset of $12.6 million as property, plant and equipment in the consolidated balance sheet. As of December 31, 2013, the purchase price allocation is considered final except for the settlement of any working capital adjustments and the fair value of working capital, intangible assets and other assumed liabilities. The working capital adjustments in connection with this acquisition are computed by dividing income bybeing finalized, although the weighted average numberCompany does not expect there to be a material change in the purchase price as a result.
Optima Service Solutions
On November 13, 2013, the Company entered into a Membership Interest Purchase Agreement with A-1 Home Services, Inc., Mr. Steve Gordon and Mr. Glenn Lebowitz to acquire all of the outstanding equity interests of Optima Service Solutions, LLC (“Optima”) for $26.6 million in cash consideration and deferred payments, excluding any working capital adjustments. Optima is a non-asset, third-party logistics service provider focusing on arranging in-home complex installation and residential delivery services for major retailers.
The Optima acquisition was accounted for as a purchase business combination in accordance with ASC Topic 805 “Business Combinations”. Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of November 13, 2013 with the remaining unallocated purchase price recorded as goodwill. As a result of the acquisition, the Company recorded goodwill of $13.9 million and intangible assets of $11.3 million. In addition, the Company recorded an acquired technology asset of $0.9 million as property, plant and equipment in the consolidated balance sheet. As of December 31, 2013, the purchase price allocation is considered final except for the settlement of any working capital adjustments and the fair value of intangible assets and assumed liabilities. The working capital adjustments in connection with this acquisition are being finalized, although the Company does not expect there to be a material change in the purchase price as a result.
3PD
On July 12, 2013, the Company entered into a Stock Purchase Agreement with 3PD Holding, Inc., Logistics Holding Company Limited, Mr. Karl Meyer, Karl Frederick Meyer 2008 Irrevocable Trust II, Mr. Randall Meyer, Mr. Daron Pair and Mr. James J. Martell (the “3PD Stock Purchase Agreement”) to acquire all of the outstanding capital stock of 3PD (the “3PD Transaction”). 3PD is a non-asset, third party provider of heavy goods, last-mile logistics in North America. The closing of the transaction occurred on August 15, 2013. The fair value of the total consideration paid under the 3PD Stock Purchase Agreement was approximately $364.3 million, paid in cash, deferred payments (including an escrow), and $7.4 million of restricted shares of the Company’s common stock. The final working capital adjustment in connection with this acquisition has been finalized, and as a result, the cash consideration increased by $1.2 million.
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The 3PD acquisition was accounted for as a purchase business combination in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of August 15, 2013, with the remaining unallocated purchase price recorded as goodwill. The following table outlines the Company’s consideration transferred and the identifiable net assets acquired at their estimated fair value as of August 15, 2013 (in thousands).
Consideration | $ | 364,329 | ||
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Less: Net Assets Acquired | 21,899 | |||
Intangibles Acquired: | ||||
Less: Fair value of Trademarks/Tradenames | 5,900 | |||
Less: Fair value of Non-Compete Agreements | 1,550 | |||
Less: Fair value of Customer Relationships | 110,600 | |||
Less: Fair value of Carrier Relationships | 12,100 | |||
Less: Fair value of Acquired Technology | 18,000 | |||
Plus: Net deferred tax liability on fair value adjustments | (38,040 | ) | ||
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Goodwill | $ | 232,320 | ||
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As of December 31, 2013, the purchase price allocation is considered final except for any fair value adjustments for acquired tax assets and liabilities. All goodwill recorded related to the acquisition relates to the Freight Brokerage segment. The carryover of the tax basis in goodwill is deductible for income tax purposes while the step-up in goodwill as a result of the acquisition is non-deductible for income tax purposes.
In connection with the 3PD Transaction, each member of the 3PD senior management team signed an employment agreement with the Company that became effective upon completion of the acquisition. Additionally, in order to incentivize 3PD’s management, the Company granted the 3PD management team time- and performance-based restricted stock unit (“RSU”) awards under the XPO Logistics, Inc. Amended and Restated 2011 Omnibus Incentive Compensation Plan. Pursuant to the RSU award agreements, members of the 3PD management team are eligible to earn up to 600,000 RSUs in the aggregate, of which 150,000 will vest based on the passage of time and 450,000 will vest based on the achievement of certain goals with respect to 3PD’s financial performance during 2016 and 2017 as part of the combined company. The vesting of all such RSUs also are subject to the price of the Company’s common stock outstanding during the year. Diluted earnings per common share are computed by dividing income by the weighted average number of shares of common stock outstanding and dilutive options outstanding during the year. The table below identifies the weighted average number of shares outstanding and the associated earningsexceeding $32.50 per share for a designated period of time and continued employment at the periods represented.
For the Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
Income from continuing operations | $ | 4,888,000 | $ | 1,690,000 | ||||
Income from discontinued operations | - | 15,000 | ||||||
Net income | $ | 4,888,000 | $ | 1,705,000 | ||||
Basic shares outstanding | 32,241,383 | 32,035,218 | ||||||
Diluted shares outstanding | 33,115,981 | 32,167,447 | ||||||
Basic earnings per share | ||||||||
Income from continuing operations | $ | 0.15 | $ | 0.05 | ||||
Income from discontinued operations | $ | - | $ | - | ||||
Net Income | $ | 0.15 | $ | 0.05 | ||||
Diluted earnings per share | ||||||||
Income from continuing operations | $ | 0.15 | $ | 0.05 | ||||
Income from discontinued operations | $ | - | $ | - | ||||
Net Income | $ | 0.15 | $ | 0.05 |
The following unaudited pro forma consolidated results of operations for the years ended December 31, 20102013 and 2009, respectively. For a more complete analysis2012 present consolidated information of this item referthe Company as if the 3PD acquisition had occurred as of January 1, 2012 (in thousands):
Pro Forma Year Ended December 31, 2013 | Pro Forma Year Ended December 31, 2012 | |||||||
Revenue | $ | 916,760 | $ | 743,456 | ||||
Operating Loss | $ | (54,535 | ) | $ | (49,755 | ) | ||
Net Loss | $ | (55,940 | ) | $ | (38,606 | ) | ||
Loss per common share | ||||||||
Basic | $ | (1.87 | ) | $ | (1.42 | ) | ||
Diluted | $ | (1.87 | ) | $ | (1.42 | ) |
The unaudited pro forma consolidated results for the twelve-month periods were prepared using the acquisition method of accounting and are based on the historical financial information of 3PD, Turbo (as defined below), Kelron (as defined below) and the Company. The unaudited pro forma consolidated results incorporate historical financial information for all significant acquisitions pursuant to Footnote 15 – Employee Benefit Plans.
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The Company’s management does not believehistorical financial information has been adjusted to give effect to pro forma adjustments that any recent codified pronouncements byare: (i) directly attributable to the FASB willacquisition, (ii) factually supportable and (iii) expected to have a materialcontinuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s current or future consolidated financial statements.
Interide Logistics
On May 6, 2013, pursuant to the consolidated financial statements.
The Interide acquisition was accounted for as a purchase business combination in accordance with ASC Topic 805 “Business Combinations”. Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of May 6, 2013 with the remaining unallocated purchase price recorded as goodwill. As a result of the acquisition, the Company recorded goodwill of $3.2 million and intangible assets of $1.7 million. The working capital adjustments in connection with this acquisition are being finalized, although the Company does not expect there to be a material change in the purchase price as a result.
Covered Logistics & Transportation
On February 26, 2013, pursuant to an asset purchase agreement, the Company acquired substantially all of the assets of Covered Logistics & Transportation LLC (“Covered”) for $8.0 million in cash consideration and 173,712 restricted shares of the Company’s common stock with a value of $3.0 million, excluding any working capital adjustments, with no assumption of debt. Covered is a non-asset, third-party transportation logistics service provider focusing on freight brokerage with offices in Lake Forest, IL and Dallas, TX.
The Covered acquisition was accounted for as a purchase business combination in accordance with ASC Topic 805 “Business Combinations”. Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of February 26, 2013 with the remaining unallocated purchase price recorded as goodwill. As a result of the acquisition, the Company recorded goodwill of $7.2 million and intangible assets of $2.8 million. The working capital adjustments in connection with this acquisition are being finalized, although the Company does not expect there to be a material change in the purchase price as a result.
East Coast Air Charter
On February 8, 2013, pursuant to an asset purchase agreement, the Company purchased substantially all of the operating assets of East Coast Air Charter, Inc. and 9-1-1 Air Charter LLC (together, “ECAC” or “East Coast Air Charter”) for total cash consideration of $9.3 million, excluding any working capital adjustments, with no assumption of debt. ECAC is a non-asset, third party logistics service provider specializing in expedited air charter brokerage in Statesville, NC.
The ECAC acquisition was accounted for as a purchase business combination in accordance with ASC Topic 805 “Business Combinations”. Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of February 8, 2013 with the remaining unallocated purchase price recorded as goodwill. As a result of the acquisition, the Company recorded goodwill of $3.8 million and intangible assets of $4.8 million. The working capital adjustments in connection with this acquisition have been finalized and there was no material change in the purchase price as a result.
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2012 Acquisitions
Turbo Logistics
On October 24, 2012, pursuant to an asset purchase agreement, the Company purchased substantially all of the assets of Turbo Logistics, Inc. and Turbo Dedicated, Inc. (collectively, “Turbo”) for total cash consideration of $50.1 million, excluding any working capital adjustments, with no assumption of debt. As a result of the final working capital adjustment, the cash consideration was reduced by $0.2 million.
Kelron Logistics
On August 3, 2012, the Company purchased all of the outstanding capital stock of Kelron Corporate Services Inc. and certain related entities (collectively, “Kelron”), a non-asset, third-party logistics business unitbased in Canada. The purchase price was $8.0 million, including $2.6 million of consideration for 2010the outstanding stock and 2009.
Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
Operating revenue | $ | - | $ | 666,000 | ||||
Operating expense | - | 532,000 | ||||||
Gross margin | - | 134,000 | ||||||
Sales, general and administrative | - | 106,000 | ||||||
Income before tax provision | - | 28,000 | ||||||
Tax provision | - | 13,000 | ||||||
Net income | $ | - | $ | 15,000 |
All goodwill recorded related to the acquisition relates to the Freight Brokerage segment and is not deductible for Canadian income tax purposes.
In conjunction with the acquisition, the Company issued notes payable to the sellers totaling $1.0 million. The notes do not bear any interest. The notes were treated as consideration transferred as part of the acquisition and are payable in equal quarterly installments on November 3, February 3, May 3 and August 3 of each year with the final installment to be due and payable on August 3, 2015. The Company used an imputed interest rate of 4.53% to determine the appropriate discount to apply to the notes. The carrying value of the notes payable at December 31, 2013 was $0.7 million.
Continental Freight Services
On May 8, 2012, the Company purchased all of the outstanding capital stock of Continental Freight Services, Inc. (“Continental”) and all of the membership interests in G & W Tanks, LLC. The cash purchase price was $3.5 million, excluding any working capital adjustments and a potential earn-out of up to $0.3 million. The acquisition of Continental included a contingent consideration arrangement that requires additional consideration to be paid by the Company to Continental’s former owners based on the adjusted gross profit of Continental during the twelve month period commencing June 1, 2012. Continental’s gross profit during the contingent consideration measurement period was sufficient to receive the full earn-out of $0.3 million which was paid in full during August 2013.
4. PropertyCommitments and Equipment
Years Ending December 31, | ||||||||
2010 | 2009 | |||||||
Buildings | $ | 1,115,000 | $ | 1,115,000 | ||||
Leasehold improvement | 345,000 | 241,000 | ||||||
Office equipment | 586,000 | 435,000 | ||||||
Trucks and trailers | 1,786,000 | 1,725,000 | ||||||
Warehouse equipment | 117,000 | 117,000 | ||||||
Computer equipment | 1,390,000 | 1,091,000 | ||||||
Computer software | 911,000 | 724,000 | ||||||
6,250,000 | 5,448,000 | |||||||
Less: accumulated depreciation | (3,290,000 | ) | (2,651,000 | ) | ||||
Total property and equipment | $ | 2,960,000 | $ | 2,797,000 |
Purchase Commitments
As of December 31, 20102013, the Company had approximately $2.3 million in future minimum payments required under a non-cancellable contract for services provided in relation to the Company’s customer relationship management platform. Remaining future minimum payments related to this contract amount to approximately $0.7 million, $0.7 million and 2009, respectively. Accumulated depreciation on these assets was $17,000 and $8,000 as of$0.9 million for the periods ending December 31, 20102014, 2015 and 2009,2016, respectively.
Lease Commitments
As of December 31, 2010 and 2009,2013, the Company had outstanding balances on this note receivable of $45,000 and $73,000 of which approximately $45,000 and $43,000 was classified as short term, respectively.
Balance at January 1, 2009 | $ | 14,915,000 | ||
Contingent contractually earned payments (CGL) | 687,000 | |||
LRG Purchase | 1,357,000 | |||
Balance at December 31, 2009 | 16,959,000 | |||
- | ||||
Balance at December 31, 2010 | $ | 16,959,000 |
Year Ending December 31, | ||||||||
2010 | 2009 | |||||||
Intangible not subject to amortization: | ||||||||
Trade name | $ | 6,420,000 | $ | 6,420,000 | ||||
Intangibles subject to amortization: | ||||||||
Trade Name, net of accumulated amortization of $52,000 and $11,000, respectively | 168,000 | 209,000 | ||||||
Employee Contracts, net of accumulated amortization of $270,000 and $235,000, respectively | - | 35,000 | ||||||
Non-compete Agreements, net of accumulated amortization of $654,000 and $539,000, respectively | 109,000 | 224,000 | ||||||
Independent Participant Network, net of accumulated amortization of $591,000 and $392,000 respectively | 389,000 | 588,000 | ||||||
Customer relationships, net of accumulated amortization of $676,000 and $483,000 | 1,298,000 | 1,491,000 | ||||||
Other intangibles, net of accumulated amortization of $584,000 and $538,000, respectively | 162,000 | 208,000 | ||||||
Total identifiable intangible assets | $ | 8,546,000 | $ | 9,175,000 |
2011 | $ | 491,000 | ||
2012 | 428,000 | |||
2013 | 232,000 | |||
2014 | 203,000 | |||
2015 | 129,000 | |||
Thereafter | 643,000 | |||
Total future expected amortization expense | $ | 2,126,000 |
Year Ending December 31, | ||||||||||||||
Interest rates | Term (months) | 2010 | 2009 | |||||||||||
Capital leases for equipment | 18% | 24 - 60 | $ | 13,000 | $ | 28,000 | ||||||||
Note payable | 2.5% | 36 | 3,750,000 | 1,400,000 | ||||||||||
Total note payable and capital leases | 3,763,000 | 1,428,000 | ||||||||||||
Less: current maturities of long-term debt | 1,680,000 | 1,215,000 | ||||||||||||
Non-current maturities of long term-debt | $ | 2,083,000 | $ | 213,000 |
2011 | $ | 1,680,000 | ||
2012 | 1,667,000 | |||
2013 | 416,000 | |||
Total future principal payments | $ | 3,763,000 |
Current Operations | ||||
For the years ended December 31, | ||||
2011 | $ | 479,000 | ||
2012 | 282,000 | |||
2013 �� | 83,000 | |||
2014 | 56,000 | |||
2015 | 44,000 | |||
Total | $ | 944,000 |
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Rent expense was approximately $6.9 million, $1.9 million and $0.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Litigation
The Company is involved in litigation in the Fourth Judicial District Court of Hennepin County, Minnesota relating to its hiring of former employees of C.H. Robinson Worldwide, Inc. (“CHR”). In the ordinary courselitigation, CHR asserts claims for breach of business,contract, breach of fiduciary duty and duty of loyalty, tortious interference with contractual relationships and prospective contractual relationships, misappropriation of trade secrets, violation of the federal Computer Fraud and Abuse Act, inducing, aiding and abetting breaches and conspiracy. CHR seeks temporary, preliminary and permanent injunctions, as well as direct and consequential damages and attorneys’ fees. CHR has asserted that it may seek punitive damages as well. On January 17, 2013, following a hearing, the Court issued an Order Regarding Motion for Temporary Injunction (the “Order”). The Order (as amended on April 16, 2013) prohibits the Company mayfrom engaging in business with certain CHR customers (the “Restricted Customers”) within a specified radius of Phoenix, AZ, until July 1, 2014. On November 6, 2013, CHR moved to compel compliance with the Order, requesting discovery and expanded enforcement of the Order. On November 18, 2013, the Company opposed CHR’s motion and cross moved to modify the Order. On February 19, 2014, the Court denied the majority of CHR’s motion, granting only CHR’s request for a report of the Company’s remediation efforts under the Order. At the same time, the Court granted the Company’s motion and modified the Order to allow XPO to do business with Restricted Customers in the Phoenix area if: (a) XPO obtained that business as the result of a merger or acquisition; or (b) the business is part of a competitive bidding process with an entity seeking nationwide services. The Court also clarified that the business restrictions in the Order do not apply to XPO’s servicing of other independent third party logistics entities who might be working for the ultimate benefit of the Restricted Customers.
On February 7, 2013, CHR filed a First Amended Complaint against the Company and eight individual defendants who are current or former employees of XPO, including its Chief Operating Officer, Senior Vice President—Strategic Accounts and Vice President—Carrier Procurement and Operations. On April 11, 2013, the Company moved to dismiss the new claims asserted in that First Amended Complaint and moved to stay discovery pending the Court’s resolution of the motion to dismiss. On August 29, 2013, the Court granted in part and denied in part the motion to dismiss and denied as moot the motion to stay discovery. On September 23, 2013, the Company filed its Answer to the First Amended Complaint and asserted counterclaims against CHR for violations of the Minnesota Antitrust, Unlawful Trade Practices, and Deceptive Trade Practices Act, as well as tortious interference with contractual relations and prospective contractual relations. CHR moved to dismiss the Company’s counterclaims on November 12, 2013, and the Company opposed that motion. A hearing on CHR’s motion to dismiss was held on February 10, 2013. The Court has not yet issued a ruling on CHR’s motion to dismiss. The Company intends to vigorously defend the action in court. The outcome of this litigation is uncertain and could have a material adverse effect on the Company’s business and results of operations.
The Company is a party to a variety of other legal actions, both as a plaintiff and as a defendant that affect any business.arose in the ordinary course of business, and may in the future become involved in other legal actions. The Company does not currently anticipateexpect any of these matters or anythese matters in the aggregate to have a materiallymaterial adverse effect on the Company’s business or its financial position or results of operations.
The Company carries liability and excess umbrella insurance policies that it deems sufficient to cover potential legal claims arising in the normal course of conducting its operations as a transportation company. In the event the Company is required to satisfy a legal claim in excess of the coverage provided by this insurance, the Company’s financial condition, results of operations or cash flows and earnings of the Company could be negatively impacted.
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5. Debt
Debt Facilities
The Company uses financing for acquisitions and business start-ups, among other things. The Company also enters into long-term debt and capital leases with various third parties from time to time to finance certain operational equipment and other assets used in its business operations. Generally, these loans and capital leases bear interest at market rates, and are collateralized with accounts receivable, equipment and certain other assets of the Company.
On October 18, 2013, the Company and certain of its wholly-owned subsidiaries, as borrowers, entered into a $125.0 million multicurrency secured Revolving Loan Credit Agreement (the “Credit Agreement”) with the lender parties thereto and Morgan Stanley Senior Funding, Inc., as administrative agent for such lenders, with a maturity of five years. The principal amount of the commitments under the Credit Agreement may be increased by an aggregate amount of up to $75.0 million, subject to certain terms and conditions specified in the Credit Agreement.
The proceeds of the Credit Agreement may be used by the Company for ongoing working capital needs and other general corporate purposes, including strategic acquisitions. Borrowings under the Credit Agreement bear interest at a per annum rate equal to, at the Company’s activitiesoption, the one, two, three or six month (or such other period less than one month or greater than six months as the lenders may agree) LIBOR rate plus a margin of 1.75% to 2.25%, or a base rate plus a margin of 0.75% to 1.25%. The Company is required to pay an undrawn commitment fee equal to 0.25% or 0.375% of the quarterly average undrawn portion of the commitments under the Credit Agreement, as well as customary letter of credit fees. The margin added to LIBOR, or base rate, will depend on the quarterly average availability of the commitments under the Credit Agreement.
All obligations under the Credit Agreement are regulatedsecured by statesubstantially all of the Company’s assets and federal regulatory agenciesare unconditionally guaranteed by certain of its subsidiaries, provided that no foreign subsidiary guarantees, and no assets of any foreign subsidiary secures, any obligations of any of the Company’s domestic borrower subsidiaries. The borrowings under requirementsthe Credit Agreement are guaranteed by substantially all of the Company’s subsidiaries. Within the meaning ofRegulation S-X,Rule 3-10, XPO Logistics, Inc. (the parent company) has no independent assets or operations, the guarantees of its subsidiaries are full and unconditional and joint and several, and any subsidiaries other than the guarantor subsidiaries are minor. The Credit Agreement contains representations, warranties and covenants that are subjectcustomary for agreements of this type. Among other things, the covenants in the Credit Agreement limit the Company’s ability to, broad interpretations.with certain exceptions: incur indebtedness; grant liens; engage in certain mergers, consolidations, acquisitions and dispositions; make certain investments and restricted payments; and enter into certain transactions with affiliates. In certain circumstances, the Credit Agreement also requires the Company to maintain certain minimum EBITDA or, at the Company’s election, maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.00 to 1.00. If an event of default under the Credit Agreement shall occur and be continuing, the commitments thereunder may be terminated and the principal amount outstanding thereunder, together with all accrued unpaid interest and other amounts owed thereunder, may be declared immediately due and payable. Certain subsidiaries acquired by the Company in the future may be excluded from the restrictions contained in certain of the foregoing covenants. The Company cannot predict positionsdoes not believe that may be taken by these third parties that could require changesthe covenants contained in the Credit Agreement will impair its ability to execute its strategy. At December 31, 2013, the Company had $75.0 million drawn under the Credit Agreement. The Company was in compliance, in all material respects, with all covenants related to the manner in which the Company operates.
On September 26, 2012, the Company completed the registered underwritten public offering of 4.50% Convertible Senior Notes due October 1, 2017 (the “Notes”), in an aggregate principal amount of $125.0 million. The Notes were allocated to long-term debt and 2009.equity in the amounts of $92.8 million and $27.5 million, respectively. These amounts are net of debt issuance costs of $3.6 million for debt and $1.1 million for equity. On October 17, 2012, as part of the underwritten registered public offering on September 26, 2012 of the 4.50% convertible senior notes due October 1, 2017, the underwriters exercised the overallotment option to purchase $18.8 million additional principal amount of the Notes. The authorized preferredCompany received approximately $18.2 million in
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net proceeds after underwriting discounts, commissions and expenses were paid. The overallotment option was allocated to long-term debt and equity in the amounts of $14.0 million and $4.2 million, respectively. These amounts are net of debt issuance costs of $0.5 million for debt and $0.1 million for equity. Interest is payable on the Notes on April 1 and October 1 of each year, beginning on April 1, 2013.
On October 10, 2013, the Company entered into an agreement pursuant to which it issued an aggregate of 608,467 shares of the Company’s common stock is comprisedto certain holders of three classes: Series A — Redeemable, Series B — Convertiblethe Notes in connection with the conversion of $10.0 million aggregate principal amount of the Notes. The transactions provided in the agreement closed on October 15, 2013. The conversion was allocated to long-term debt and Series C — Redeemable, each with differing terms, ratesequity in the amounts of $7.9 million and $3.3 million, respectively. This transaction included an induced conversion pursuant to which the Company paid the holder a market-based premium in cash. The negotiated market-based premium, in addition to the difference between the current fair value and the book value of the Notes, was reflected in interest and conversion rights.
Under certain circumstances at the election of the holder, the convertible senior notes may be converted until the close of business on the business day immediately preceding April 1, 2017, into cash, shares of the Company’s common stock, or a combination of cash and dividends are declaredshares of common stock, at the Company’s election, at the initial conversion rate of approximately 60.8467 shares of common stock per $1,000 in principal amount, which is equivalent to an initial conversion price of approximately $16.43 per share. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its convertible senior notes in connection with such corporate event in certain circumstances. On or after April 1, 2017, until the close of business on the business day immediately preceding the maturity date, holders may convert their convertible senior notes at any time.
The convertible senior notes may be redeemed by the BoardCompany on or after October 1, 2015 if the last reported sale price of Directors (the “Board”)the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), subjectincluding the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The Company may redeem the convertible senior notes in whole but not in part, at a redemption price in cash equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest, but excluding, the redemption date, plus a make-whole premium payment. The “make whole premium” payment or delivery will be made, as the case may be, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, equal to the prior rightspresent values of the holdersremaining scheduled payments of all classes of stock outstanding. The Company records stock as issued when the consideration is received or the obligation is incurred.
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The Company has historically issued warrants related to raising capital. Asfollowing table outlines the Company’s debt obligations (in thousands) as of December 31, 2010, all previously2013 and 2012:
Interest rates | Term (months) | As of December 31, 2013 | As of December 31, 2012 | |||||||||||||
Convertible senior notes | 4.50 | % | 60 | $ | 133,742 | $ | 143,750 | |||||||||
Revolving credit facility | 3.63 | % | 60 | 75,000 | — | |||||||||||
Notes payable | N/A | N/A | 2,205 | 863 | ||||||||||||
Capital leases for equipment | 14.02 | % | 59 | 196 | 154 | |||||||||||
Line of credit | 5.00 | % | N/A | — | 150 | |||||||||||
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Total debt | 211,143 | 144,917 | ||||||||||||||
Less: unamortized bond discount and debt issuance costs | 27,474 | 35,470 | ||||||||||||||
Less: current maturities of long-term debt | 2,028 | 491 | �� | |||||||||||||
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Total long-term debt, net of current maturities | $ | 181,641 | $ | 108,956 | ||||||||||||
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6. Goodwill
The following table is a roll-forward of goodwill from December 31, 2012 to December 31, 2013. The current period additions are the result of the goodwill recognized as the excess of the purchase price over identified tangible and intangible assets in the acquisitions of ECAC, Covered, Interide, 3PD, Optima and NLM (in thousands):
Expedited Transportation | Freight Forwarding | Freight Brokerage | Total | |||||||||||||
Goodwill at December 31, 2012 | $ | 7,737 | $ | 9,222 | 38,988 | $ | 55,947 | |||||||||
Acquisitions and other adjustments | 50,675 | — | 256,826 | 307,501 | ||||||||||||
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Goodwill at December 31, 2013 | $ | 58,412 | $ | 9,222 | $ | 295,814 | $ | 363,448 | ||||||||
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7. Stockholder’s Equity
On August 13, 2013, the Company closed a registered underwritten public offering of 9,694,027 shares of common stock, and on August 16, 2013, the Company closed as part of the same public offering the sale of an additional 1,454,104 shares as a result of the full exercise of the underwriters’ overallotment option, in each case at a price of $22.75 per share (together, the “August 2013 Offering”). The Company received $239.5 million in net proceeds from the August 2013 Offering after underwriting discounts and expenses.
On March 20, 2012, the Company closed a registered underwritten public offering of 9,200,000 shares of common stock (the “March 2012 Offering”), including 1,200,000 shares issued and sold as a result of the full exercise of the underwriters’ overallotment option, at a price of $15.75 per share. The Company received $137.0 million in net proceeds from the March 2012 Offering after underwriting discounts and expenses.
On September 2, 2011, pursuant to the Investment Agreement, dated as of June 13, 2011 (the “Investment Agreement”), by and among Jacobs Private Equity, LLC (“JPE”), the other investors party thereto (collectively with JPE, the “Investors”) and the Company, the Company issued to the Investors, for $75.0 million in cash:
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(i) an aggregate of 75,000 shares of the Preferred Stock which are initially convertible into an aggregate of 10,714,286 shares of common stock, and (ii) warrants have either expired or have been exercisedinitially exercisable for an aggregate of 10,714,286 shares of common stock at an initial exercise price of $7.00 per common share (the “Warrants”). The Company’s stockholders approved the issuance of the Preferred Stock and no outstanding warrants existthe Warrants at year end.
8. Stock-Based Compensation
The following table summarizes the Company’s stock option and warrant activity with related information:
Warrants | Exercise | Weighted Average | |||||||
Options | Price Range | Exercise Price | |||||||
Warrants & options outstanding a January 1, 2009 | 5,861,000 | $.57 - 2.75 | $1.52 | ||||||
Warrants cancelled/expiring | (2,252,000 | ) | 1.50 - 2.20 | 2.05 | |||||
Options granted | 175,000 | 0.67 - 1.03 | 0.89 | ||||||
Options expired/cancelled | (641,000 | ) | .079 - 2.75 | 1.29 | |||||
Options outstanding at December 31, 2009 | 3,143,000 | .57 - 1.48 | 1.14 | ||||||
Options granted | 635,000 | 1.25 -1.65 | 1.41 | ||||||
Options exercised | (472,000 | ) | .98 - 1.25 | 1.19 | |||||
Options expired/cancelled | (301,000 | ) | .98 - 1.52 | 1.29 | |||||
Options outstanding at December 31, 2010 | 3,005,000 | $.57 - 1.65 | $1.18 |
Outstanding Options | Exercisable Options | ||||||||||||||||||
Number Outstanding | Weighted Average Remaining Life | Weighted Average Price | Number Exercisable | Weighted Average Remaining Life | Weighted Average Price | ||||||||||||||
Range of Exercise | |||||||||||||||||||
$0.57 - $1.65 | 3,005,000 | 6.2 | $1.18 | 2,330,000 | 5.5 | $1.14 |
Options | Restricted Stock Units | |||||||||||||||||||||||
Options | Weighted Average Exercise Price | Exercise Price Range | Weighted Average Remaining Term | Restricted Units | Weighted Average Grant Date Fair Value | |||||||||||||||||||
Outstanding at December 31, 2012 | 1,383,332 | $ | 10.06 | $2.28 - $18.07 | 8.29 | 883,816 | $ | 11.31 | ||||||||||||||||
Granted | 111,000 | $ | 20.18 | $16.57 - $23.19 | 755,714 | $ | 14.84 | |||||||||||||||||
Exercised | 57,464 | $ | 4.59 | $2.96 - $6.08 | 219,875 | $ | 11.64 | |||||||||||||||||
Forfeited | 15,348 | $ | 14.25 | $6.08 - $16.57 | 68,000 | $ | 10.65 | |||||||||||||||||
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Outstanding at December 31, 2013 | 1,421,520 | $ | 11.02 | $2.28 - $23.19 | 6.93 | 1,351,655 | $ | 13.26 | ||||||||||||||||
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The stock-based compensation expense for outstanding restricted stock units (“RSUs”) was $3.2 million, $3.3 million and $0.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. Of the 1,351,655 outstanding RSUs, 669,155 vest subject to service conditions and 682,500 vest subject to service and a combination of 2009,market and performance-based conditions.
As of December 31, 2013, the Company purchased certain assetshad approximately $9.6 million of unrecognized compensation cost related to non-vested RSU compensation that is anticipated to be recognized over a weighted-average period of approximately 2.26 years. Remaining estimated compensation expense related to outstanding restricted stock-based grants is $4.0 million, $3.2 million, $2.2 million, $0.1 million and liabilities$0.1 million for the years ending December 31, 2014, 2015, 2016, 2017 and 2018, respectively.
As of December 31, 2013, the Company had 703,020 options vested and exercisable and $3.8 million of unrecognized compensation cost related to stock options. The remaining estimated compensation expense related to the existing stock options is $1.1 million, $1.7 million, $0.8 million and $0.2 million for the years ended December 31, 2014, 2015, 2016 and 2017, respectively.
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9. Earnings per Share
Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share are computed by dividing net income available to common shareholders by the combined weighted average number of shares of common stock outstanding and the potential dilution of stock options, warrants, RSUs, convertible senior notes and Company’s Series A Convertible Perpetual Preferred Stock, par value $0.001 per share (“preferred stock”), outstanding during the period, if dilutive. The weighted average of potentially dilutive securities excluded from First Class Expediting Services Inc. (FCES). FCESthe computation of diluted earnings per share for the three years ended December 31, 2013 is shown per the table below.
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Basic common stock outstanding | 22,752,320 | 15,694,430 | 8,246,577 | |||||||||
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Potentially Dilutive Securities: | ||||||||||||
Shares underlying the conversion of preferred stock to common stock | 10,607,309 | 10,695,326 | 3,522,505 | |||||||||
Shares underlying the conversion of the convertible senior notes | 8,623,331 | 2,238,758 | — | |||||||||
Shares underlying warrants to purchase common stock | 6,900,642 | 5,717,284 | 3,618,061 | |||||||||
Shares underlying stock options to purchase common stock | 356,815 | 473,421 | 298,017 | |||||||||
Shares underlying restricted stock units | 367,183 | 249,139 | 6,456 | |||||||||
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26,855,280 | 19,373,928 | 7,445,039 | ||||||||||
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Diluted weighted shares outstanding | 49,607,600 | 35,068,358 | 15,691,616 | |||||||||
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The impact of this dilution was a Rochester Hills; Michigan based company providing regional expedited transportationnot reflected in the Midwest. The Company paid the former owners of FCES $250,000 in cash and received approximately $40,000 of net assets consisting of primarily fixed assets net of related debt. The Company funded the transaction through cash available from working capital.
Fair Value | Useful Lives | ||||
Trademark/name | $ | 220,000 | 5 years | ||
Association memberships | 160,000 | 5 years | |||
Customer list | 1,410,000 | 12 years | |||
Non-compete agreements | 60,000 | 5 years | |||
Total identifiable intangible assets | $ | 1,850,000 |
10. Income Taxes
A summary of income taxes related to U.S. and non U.S. operations are as if the acquisition of LRG International, Inc. had taken place at the beginningfollows (in thousands):
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Operations | ||||||||||||
U.S. domestic | $ | (69,207 | ) | $ | (29,378 | ) | $ | 1,477 | ||||
Foreign | (1,765 | ) | (2,156 | ) | — | |||||||
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Total pre-tax (loss) income | $ | (70,972 | ) | $ | (31,534 | ) | $ | 1,477 | ||||
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The components of the year presented. The 2010 consolidated financial statements include a full year of LRG International, Inc. (CGL International), see page 27 for results. Proforma results presented within the table do not include adjustments for amortization of intangibles and depreciation of fixed assets as a resultincome tax provision consist of the LRG purchase.
Proforma Consolidated Results | ||||
(Unaudited) | ||||
For the year ended | ||||
December 31, 2009 | ||||
Operating revenue | $ | 106,540,000 | ||
Income from continuing operations before tax | 3,409,000 | |||
Income from continuing operations | $ | 1,926,000 | ||
Basic income from continuing operations per share | 0.06 | |||
Diluted income from continuing operations per share | 0.06 |
Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
Current | ||||||||
Federal | $ | 1,968,000 | $ | 172,000 | ||||
State | 330,000 | 453,000 | ||||||
2,298,000 | 625,000 | |||||||
Deferred | ||||||||
Federal | 798,000 | 591,000 | ||||||
State | 117,000 | 122,000 | ||||||
915,000 | 713,000 | |||||||
Total income tax provision | 3,213,000 | 1,338,000 | ||||||
Income tax provision included in discontinued operations | - | 13,000 | ||||||
Income tax provision included in continuing operations | $ | 3,213,000 | $ | 1,325,000 |
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Current | ||||||||||||
Federal | $ | — | $ | (2,254 | ) | $ | 738 | |||||
State | 285 | 56 | 269 | |||||||||
Foreign | (55 | ) | (751 | ) | — | |||||||
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230 | (2,949 | ) | 1,007 | |||||||||
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Deferred | ||||||||||||
Federal | (22,047 | ) | (7,494 | ) | (249 | ) | ||||||
State | (636 | ) | (893 | ) | (40 | ) | ||||||
Foreign | 11 | 141 | — | |||||||||
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Total income tax provision | $ | (22,442 | ) | $ | (11,195 | ) | $ | 718 | ||||
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The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows:
Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
Income tax provision at statutory rate | $ | 2,754,000 | $ | 1,038,000 | ||||
Increase (decrease) in income tax due to: | ||||||||
State tax | 317,000 | 379,000 | ||||||
Uncertain tax postion provision | 135,000 | - | ||||||
All other non-deductible items | 7,000 | (79,000 | ) | |||||
Total provision for income tax | $ | 3,213,000 | $ | 1,338,000 |
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Income tax (benefit)/provision at statutory rate | -34.0 | % | -34.0 | % | 34.0 | % | ||||||
Increase (decrease) in income tax due to: | ||||||||||||
State and local taxes, net | -0.6 | % | -3.6 | % | 9.3 | % | ||||||
Transaction expense | 1.1 | % | 0.7 | % | — | |||||||
Loss on convertible debt | 1.1 | % | — | — | ||||||||
Change in valuation allowance | 0.6 | % | 1.6 | % | — | |||||||
Change in uncertain tax position provision | -0.3 | % | -1.1 | % | 4.4 | % | ||||||
All other non-deductible items | 0.3 | % | 0.4 | % | 0.9 | % | ||||||
Foreign tax rate differences | 0.2 | % | 0.5 | % | — | |||||||
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| |||||||
Total (benefit)/provision for income tax | -31.6 | % | -35.5 | % | 48.6 | % | ||||||
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The Company’s 2013 consolidated effective tax rate was (31.6%), as compared to (35.5%) in 2012 and 48.6% in 2011. The 2013 effective income tax rate varied from the statutory rate of 34% due primarily to state income taxes, the tax treatment of certain transaction related expenses and changes in the valuation allowance.
82
The tax effects of temporary differences that give rise to significant portions of the current deferred tax asset and non-current deferred tax assetliability at December 31, 20102013 and 20092012 are as follows:
Year Ended December 31, | ||||||||
Current deferred tax items | 2010 | 2009 | ||||||
Allowance for doubtful accounts | $ | 53,000 | $ | 90,000 | ||||
Prepaid expenses | (93,000 | ) | (98,000 | ) | ||||
Accrued expenses | 294,000 | 90,000 | ||||||
Accrued insurance claims | 60,000 | 271,000 | ||||||
Total deferred tax asset, current | $ | 314,000 | $ | 353,000 | ||||
Non-current deferred tax items | ||||||||
Property plant & equipment | $ | (396,000 | ) | $ | (138,000 | ) | ||
Amortization expense | (1,984,000 | ) | (1,615,000 | ) | ||||
Accrued expenses | 20,000 | 115,000 | ||||||
Accrued deferred compensation | - | 125,000 | ||||||
Stock option expense | 253,000 | 222,000 | ||||||
Net operating loss | 75,000 | 135,000 | ||||||
Total deferred tax liability, long-term | (2,032,000 | ) | (1,156,000 | ) | ||||
Total deferred tax liability | $ | (1,718,000 | ) | $ | (803,000 | ) |
Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
Deferred tax assets | ||||||||
Net operating loss carryforward | $ | 37,054 | $ | 8,145 | ||||
Accrued expenses | 3,673 | 1,601 | ||||||
Equity based compensation | 2,145 | 1,297 | ||||||
Allowance for doubtful accounts | 1,227 | 177 | ||||||
Deferred rent | 1,248 | — | ||||||
AMT credit | 262 | 133 | ||||||
Accrued insurance claims | 55 | 62 | ||||||
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| |||||
Total deferred tax asset | 45,664 | 11,415 | ||||||
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| |||||
Valuation allowance | (2,628 | ) | (759 | ) | ||||
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| |||||
Total deferred tax asset, net | 43,036 | 10,656 | ||||||
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| |||||
Deferred tax liabilities | ||||||||
Convertible debt discount | (8,734 | ) | (11,354 | ) | ||||
Intangible assets | (39,582 | ) | (3,634 | ) | ||||
Property, plant & equipment | (6,260 | ) | (628 | ) | ||||
Prepaid expenses | (547 | ) | (415 | ) | ||||
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| |||||
(55,123 | ) | (16,031 | ) | |||||
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| |||||
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| |||||
Net deferred tax liability | $ | (12,087 | ) | $ | (5,375 | ) | ||
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At December 31, 2013, the Company had federal and state net operating losses (“NOLs”) of $104.9 million and $111.0 million, respectively. If not utilized, the federal NOLs will expire in 2028, and the state NOLs will expire at various times between 2016 and 2033. Included in the federal and state NOLs to be carried forward are $6.4 million of windfall tax benefits for stock compensation that has not been recognized as a deferred tax asset and will be recorded as an adjustment to additional paid-in-capital when recognized. Although currently not anticipated, the Company’s ability to use its federal and state net operating loss carryforwards may become subject to restrictions attributable to equity transactions in the future resulting from changes in ownership as defined under Internal Revenue Code Section 382. At December 31, 2013, the Company had foreign NOLs of $4.8 million available to offset future income. These foreign loss carryforwards of $4.8 million will expire at various times between 2014 and 2033. During 2013, the Company recognized tax benefits related to NOLs of $14.3 million and filed a U.S. Federal net operating loss carryback refund claim for $2.2 million. The Company anticipates receiving the refund in early 2014. This amount has been recorded as a current receivable.
In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2010,2013, the Company has no remaining federal net operating loss carry forward. The Company’s state net operating loss carry forward at December 31,2010, totaled approximately $1,500,000 and will begin expiringnot made a provision for U.S. or additional foreign withholding taxes for financial reporting over the tax basis of investments in 2021. The Company isforeign subsidiaries that are essentially permanent in duration, if any exists. Generally, such amounts become subject to examination byU.S. taxation upon the IRS forremittance of dividends and under certain other circumstances. It is not practicable to estimate the calendar years 2007 through 2009. The Company is also subject to examination by various state taxing authorities for the calendar years 2006 through 2009. The Company does not anticipate any significant increase or decrease in unrecognized tax benefit within the next 12 months.
Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
Balance at January 1 | $ | - | $ | - | ||||
Additions based on tax positions related to the current year | 70,000 | - | ||||||
Additions for tax positions of prior years | 65,000 | - | ||||||
Reductions for tax positions of prior years | - | - | ||||||
Reductions due to the statute of limitations | - | - | ||||||
Settlements | - | - | ||||||
Balance at December 31 | $ | 135,000 | $ | - |
During the year ended December 31, 2010,2013, the Company reassessed its U.S. and foreign valuation allowance requirements. The Company evaluated all available evidence in its analysis, including reversal of the deferred tax liabilities, carrybacks available and historical and projected pre-tax profits generated by the
83
Company’s U.S. operations. The Company also considered tax planning strategies that are prudent and can be reasonably implemented. The reversal of deferred tax liabilities prior to expiration of the deferred tax assets was the most significant factor in the Company’s determination of the valuation allowance under the “more likely than not” criteria. The Company’s valuation allowance as of December 31, 2013 was $1.6 million for domestic deferred tax assets and $1.0 million for foreign jurisdictions where it is not more likely than not that the deferred tax assets will be utilized. At December 31, 2012, the Company had a valuation allowance of $0.3 million on its domestic deferred tax assets of $0.5 million on its foreign deferred tax assets, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):
Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
Uncertain tax positions, beginning of the year | $ | 600 | $ | 200 | ||||
Additions for tax positions of prior years | 399 | 612 | ||||||
Reductions due to the statute of limitations | (188 | ) | (212 | ) | ||||
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Uncertain tax positions, end of the year | $ | 811 | $ | 600 | ||||
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The Company recognizes interest and penalties accrued related to uncertain tax positions in the provision for income taxes. During the years ended December 31, 2013 and 2012, the Company recognized $0$0.0 million and $0.2 million, respectively, for interest and penalties duepenalties. During the next twelve months, $0.3 million of unrecognized tax benefits net of accrued interest will be reduced as a result of a lapse of the applicable statute of limitation. For the years ended December 31, 2013 and 2012, the unrecognized tax benefits, if resolved favorably, would impact our effective tax rates.
The Company files income tax returns in the U.S. federal jurisdiction and various states. As a matter of course, various taxing authorities, including the IRS, regularly audit the Company. These audits may result in proposed assessments where the ultimate resolution may result in the Company owing additional taxes. Currently, the Company’s 2010 tax year is under examination by the IRS. The remaining tax years from 2010 to 2013 are currently not under examination by U.S. state jurisdictions. The Company believes that its tax positions comply with applicable tax law and that it has adequately provided for these matters.
11. Related Party Transactions
On August 15, 2013, the Company completed its acquisition of 3PD, pursuant to the immaterial nature3PD Stock Purchase Agreement to which Mr. James J. Martell was a party. Mr. Martell is a member of both items.
There were no other related party transactions that included a $1.1 million cash payment in addition to the forgiveness of an $87,000 debt. The settlement included a general release between the Company and the former owners of Concert Group Logistics, LLC. Subsequent to the release, the Company has no future obligations related to the earn-out provisions of the Concert Transaction. As the largest shareholder of Concert Group Logistics, LLC, Mr. Para received, either directly or through his family trusts and partnerships, approximately 85% of the proceeds transferred in the transaction. Immediately after the transaction, Mr. Para became the largest shareholder of the Company, through holdings attributable to himself and Dan Para Investments, LLC.
The Company also maintains a Non-qualified Deferred Compensation Plan12. Quarterly Financial Data (Unaudited)
Our unaudited results of operations for certain employees. This plan allowed participants to defer a portion of their salary on a pretax basis and accumulate tax-deferred earnings plus interest. These deferrals are in addition to those allowed in the Company’s 401(k) plans. The Company provides a discretionary matching contribution of 25 percenteach of the employee contribution, subject to a maximum Company contribution of $2,500 per employee. The Company’s matching contribution expense for such plans was $0 and $0 for the years ended December 31, 2010 and 2009, respectively. During the 4th quarter of 2009, the Company decided to terminate this benefit plan effective in January of 2010. Liabilities totaling $350,000 will be paid out to plan participants during 2011 in conjunction with the termination of the plan.
ESOP Shares | Stock | Expense | |||||||||||
Awarded | Valuation | Issuance Date | Recognized | ||||||||||
Outstanding prior to 2005 | 25,000 | 1.20 | 3/31/2005 | $ | 30,000 | ||||||||
2005 | 50,000 | 0.74 | 10/6/2006 | 124,000 | |||||||||
2006 | 90,000 | 1.38 | 4/10/2007 | 101,000 | |||||||||
2007 | 90,000 | 1.12 | 12/11/2007 | 101,000 | |||||||||
2008 | - | - | 2,000 | ||||||||||
2009 | - | - | 40,000 | ||||||||||
2010 | - | - | - | ||||||||||
Total | 255,000 | $ | 398,000 |
84
XPO Logistics, Inc.
Quarterly Financial Data
March 31, | June 30, | September 30, | December 31, | |||||||||||||
2010 | 2010 | 2010 | 2010 | |||||||||||||
Operating revenues | $ | 31,642,000 | $ | 40,340,000 | $ | 44,448,000 | $ | 41,557,000 | ||||||||
Direct expenses | 26,043,000 | 33,101,000 | 36,309,000 | 35,134,000 | ||||||||||||
Gross margin | 5,599,000 | 7,239,000 | 8,139,000 | 6,423,000 | ||||||||||||
Sales, general and administrative | 4,075,000 | 4,598,000 | 5,219,000 | 5,062,000 | ||||||||||||
Other expense | 20,000 | 34,000 | 48,000 | 38,000 | ||||||||||||
Interest expense | 20,000 | 88,000 | 32,000 | 65,000 | ||||||||||||
Income from continuing operations before tax | 1,484,000 | 2,519,000 | 2,840,000 | 1,258,000 | ||||||||||||
Income tax provision | 650,000 | 1,015,000 | 1,110,000 | 438,000 | ||||||||||||
Income from continuing operations | 834,000 | 1,504,000 | 1,730,000 | 820,000 | ||||||||||||
Income from discontinued operations, net of tax | - | - | - | - | ||||||||||||
Net income | $ | 834,000 | $ | 1,504,000 | $ | 1,730,000 | $ | 820,000 | ||||||||
Basic income per share | ||||||||||||||||
Income from continuing operations | $ | 0.03 | $ | 0.05 | $ | 0.05 | $ | 0.03 | ||||||||
Income from discontinued operations | - | - | - | - | ||||||||||||
Net income | 0.03 | 0.05 | 0.05 | 0.03 | ||||||||||||
Diluted income per share | ||||||||||||||||
Income from continuing operations | 0.03 | 0.05 | 0.05 | 0.02 | ||||||||||||
Income from discontinued operations | - | - | - | - | ||||||||||||
Net income | $ | 0.03 | $ | 0.05 | $ | 0.05 | $ | 0.02 |
March 31, | June 30, | September 30, | December 31, | |||||||||||||
2009 | 2009 | 2009 | 2009 | |||||||||||||
Operating revenues | $ | 20,072,000 | $ | 22,243,000 | $ | 26,211,000 | $ | 31,610,000 | ||||||||
Direct expenses | 16,856,000 | 18,606,000 | 21,482,000 | 26,452,000 | ||||||||||||
Gross margin | 3,216,000 | 3,637,000 | 4,729,000 | 5,158,000 | ||||||||||||
Sales, general and administrative | 3,243,000 | 3,006,000 | 3,284,000 | 4,036,000 | ||||||||||||
Other expense | (10,000 | ) | 19,000 | 19,000 | 23,000 | |||||||||||
Interest expense | 22,000 | 26,000 | 26,000 | 31,000 | ||||||||||||
Income from continuing operations before tax | (39,000 | ) | 586,000 | 1,400,000 | 1,068,000 | |||||||||||
Income tax provision | (14,000 | ) | 273,000 | 599,000 | 467,000 | |||||||||||
Income from continuing operations | (25,000 | ) | 313,000 | 801,000 | 601,000 | |||||||||||
Income from discontinued operations, net of tax | 30,000 | (25,000 | ) | 10,000 | - | |||||||||||
Net income | $ | 5,000 | $ | 288,000 | $ | 811,000 | $ | 601,000 | ||||||||
Basic income per share | ||||||||||||||||
Income from continuing operations | $ | - | $ | 0.01 | $ | 0.03 | $ | 0.02 | ||||||||
Income from discontinued operations | - | - | - | - | ||||||||||||
Net income | - | 0.01 | 0.03 | 0.02 | ||||||||||||
Diluted income per share | ||||||||||||||||
Income from continuing operations | - | 0.01 | 0.02 | 0.02 | ||||||||||||
Income from discontinued operations | - | - | - | - | ||||||||||||
Net income | $ | - | $ | 0.01 | $ | 0.02 | $ | 0.02 |
(In thousands)
March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | |||||||||||||
Revenue | $ | 113,999 | $ | 137,091 | $ | 193,982 | $ | 257,231 | ||||||||
Direct expense | 97,739 | 117,751 | 159,147 | 204,159 | ||||||||||||
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Gross margin | 16,260 | 19,340 | 34,835 | 53,072 | ||||||||||||
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Sales, general and administrative expense | 27,627 | 33,355 | 53,254 | 61,596 | ||||||||||||
Other expense | (109 | ) | 167 | 235 | 185 | |||||||||||
Interest expense | 3,064 | 3,106 | 6,415 | 5,584 | ||||||||||||
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Income before income tax | (14,322 | ) | (17,288 | ) | (25,069 | ) | (14,293 | ) | ||||||||
Income tax provision | 222 | 74 | (19,044 | ) | (3,694 | ) | ||||||||||
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Net loss | $ | (14,544 | ) | $ | (17,362 | ) | $ | (6,025 | ) | $ | (10,599 | ) | ||||
Cumulative preferred dividends | (743 | ) | (743 | ) | (743 | ) | (743 | ) | ||||||||
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Net loss available to common shareholders | $ | (15,287 | ) | $ | (18,105 | ) | $ | (6,768 | ) | $ | (11,342 | ) | ||||
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Basic loss per share | ||||||||||||||||
Net loss | $ | (0.85 | ) | $ | (1.00 | ) | $ | (0.28 | ) | $ | (0.37 | ) | ||||
Diluted loss per share | ||||||||||||||||
Net loss | $ | (0.85 | ) | $ | (1.00 | ) | $ | (0.28 | ) | $ | (0.37 | ) |
March 31, 2012 | June 30, 2012 | September 30, 2012 | December 31, 2012 | |||||||||||||
Revenue | $ | 44,560 | $ | 54,540 | $ | 70,988 | $ | 108,503 | ||||||||
Direct expense | 37,787 | 46,074 | 61,064 | 92,840 | ||||||||||||
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Gross margin | 6,773 | 8,466 | 9,924 | 15,663 | ||||||||||||
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Sales, general and administrative expense | 10,997 | 11,834 | 19,204 | 26,755 | ||||||||||||
Other (income) expense | (21 | ) | 26 | 314 | 44 | |||||||||||
Interest expense | 12 | 3 | 15 | 3,177 | ||||||||||||
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Loss before income tax | (4,215 | ) | (3,397 | ) | (9,609 | ) | (14,313 | ) | ||||||||
Income tax (benefit) provision | (1,521 | ) | 1,780 | (6,460 | ) | (4,994 | ) | |||||||||
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Net loss | (2,694 | ) | (5,177 | ) | (3,149 | ) | (9,319 | ) | ||||||||
Cumulative preferred dividends | (750 | ) | (750 | ) | (750 | ) | (743 | ) | ||||||||
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Net loss available to common shareholders | $ | (3,444 | ) | $ | (5,927 | ) | $ | (3,899 | ) | $ | (10,062 | ) | ||||
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Basic loss per share | ||||||||||||||||
Net loss | $ | (0.36 | ) | $ | (0.34 | ) | $ | (0.22 | ) | $ | (0.57 | ) | ||||
Diluted loss per share | ||||||||||||||||
Net loss | $ | (0.36 | ) | $ | (0.34 | ) | $ | (0.22 | ) | $ | (0.57 | ) |
85
March 31, 2011 | June 30, 2011 | September 30, 2011 | December 31, 2011 | |||||||||||||
Revenue | $ | 41,508 | $ | 44,094 | $ | 47,389 | $ | 44,085 | ||||||||
Direct expense | 34,301 | 36,914 | 39,169 | 36,914 | ||||||||||||
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Gross margin | 7,207 | 7,180 | 8,220 | 7,171 | ||||||||||||
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Sales, general and administrative expense | 5,207 | 5,537 | 7,750 | 9,560 | ||||||||||||
Other expense (income) | 29 | 33 | — | (6 | ) | |||||||||||
Interest expense | 49 | 47 | 49 | 46 | ||||||||||||
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Income (loss) before income tax | 1,922 | 1,563 | 421 | (2,429 | ) | |||||||||||
Income tax provision (benefit) | 805 | 649 | 231 | (967 | ) | |||||||||||
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Net income (loss) | 1,117 | 914 | 190 | (1,462 | ) | |||||||||||
Preferred stock beneficial conversion charge and dividends | — | — | (44,586 | ) | (750 | ) | ||||||||||
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Net income (loss) available to common shareholders | $ | 1,117 | $ | 914 | $ | (44,396 | ) | $ | (2,212 | ) | ||||||
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Basic income (loss) per share | ||||||||||||||||
Net income (loss) | $ | 0.14 | $ | 0.11 | $ | (5.38 | ) | $ | (0.27 | ) | ||||||
Diluted income (loss) per share | ||||||||||||||||
Net income (loss) | $ | 0.13 | $ | 0.11 | $ | (5.38 | ) | $ | (0.27 | ) |
13. Segment Reporting and Geographic Information
The Company has three reportabledetermines its operating segments based on the typeinformation utilized by the chief operating decision maker, the Company’s Chief Executive Officer, to allocate resources and assess performance. Based on this information, the Company has determined that it has five operating segments, which are aggregated into three reportable segments as described in Note 1 of service provided, to its customers:
These reportable segments are strategic business units through which provides expedited transportation services throughout North America.
86
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Substantially all intercompany sales prices are market based. The Company evaluates performance based on operating incomevarious financial measures of the respective business segments.
XPO Logistics, Inc.
Segment Data
Concert | Total | Discontinued | ||||||||||||||||||||||||||
Group | Continuing | Operations | ||||||||||||||||||||||||||
Year Ended December 31, 2010 | Express-1 | Logistics | Bounce | Corporate | Eliminations | Operations | E-1 Dedicated | |||||||||||||||||||||
Revenues | $ | 76,644,000 | $ | 65,222,000 | $ | 19,994,000 | $ | - | $ | (3,873,000 | ) | $ | 157,987,000 | |||||||||||||||
Operating income (loss) from continuing operations | 7,606,000 | 1,882,000 | 865,000 | (1,907,000 | ) | 8,446,000 | ||||||||||||||||||||||
Depreciation and amortization | 686,000 | 629,000 | 31,000 | 19,000 | 1,365,000 | |||||||||||||||||||||||
Interest expense | - | 171,000 | 31,000 | 3,000 | 205,000 | |||||||||||||||||||||||
Tax provision (benefit) | 2,382,000 | 529,000 | 262,000 | 40,000 | 3,213,000 | |||||||||||||||||||||||
Goodwill | 7,737,000 | 9,222,000 | - | - | 16,959,000 | |||||||||||||||||||||||
Total assets | 24,509,000 | 25,106,000 | 4,836,000 | 25,867,000 | (23,646,000 | ) | 56,672,000 | |||||||||||||||||||||
Year Ended December 31, 2009 | ||||||||||||||||||||||||||||
Revenues | $ | 50,642,000 | $ | 41,162,000 | $ | 10,425,000 | $ | - | $ | (2,093,000 | ) | $ | 100,136,000 | $ | 666,000 | |||||||||||||
Operating income (loss) from continuing operations | 3,446,000 | 1,121,000 | 458,000 | (1,854,000 | ) | 3,171,000 | 28,000 | |||||||||||||||||||||
Depreciation and amortization | 711,000 | 452,000 | 27,000 | - | 1,190,000 | 1,000 | ||||||||||||||||||||||
Interest expense | - | 76,000 | 24,000 | 5,000 | 105,000 | |||||||||||||||||||||||
Tax provision | - | - | - | 1,325,000 | 1,325,000 | 13,000 | ||||||||||||||||||||||
Goodwill | 7,737,000 | 9,222,000 | - | - | 16,959,000 | |||||||||||||||||||||||
Total assets | 23,381,000 | 23,509,000 | 2,150,000 | 16,858,000 | (16,859,000 | ) | 49,039,000 |
(In thousands)
Freight Brokerage | Expedited Transportation | Freight Forwarding | Corporate | Eliminations | Total | |||||||||||||||||||
Year Ended December 31, 2013 | ||||||||||||||||||||||||
Revenue | $ | 541,389 | $ | 101,817 | $ | 73,154 | $ | — | $ | (14,057 | ) | $ | 702,303 | |||||||||||
Operating (loss) income from operations | (11,422 | ) | 5,204 | (995 | ) | (45,112 | ) | — | (52,325 | ) | ||||||||||||||
Depreciation and amortization | 14,892 | 1,351 | 3,477 | 1,075 | — | 20,795 | ||||||||||||||||||
Interest expense | 11 | 8 | — | 18,150 | — | 18,169 | ||||||||||||||||||
Tax provision (benefit) | (2,376 | ) | — | — | (20,066 | ) | — | (22,442 | ) | |||||||||||||||
Goodwill | 295,814 | 58,412 | 9,222 | — | — | 363,448 | ||||||||||||||||||
Total assets | 870,598 | 192,778 | 60,045 | 1,009,427 | (1,352,607 | ) | 780,241 | |||||||||||||||||
Year Ended December 31, 2012 | ||||||||||||||||||||||||
Revenue | $ | 125,121 | $ | 94,008 | $ | 67,692 | $ | — | $ | (8,230 | ) | $ | 278,591 | |||||||||||
Operating (loss) income from operations | (5,554 | ) | 6,825 | 1,108 | (30,343 | ) | — | (27,964 | ) | |||||||||||||||
Depreciation and amortization | 1,223 | 525 | 574 | 391 | — | 2,713 | ||||||||||||||||||
Interest expense | 4 | 5 | 1 | 3,197 | — | 3,207 | ||||||||||||||||||
Tax benefit | (610 | ) | — | — | (10,585 | ) | — | (11,195 | ) | |||||||||||||||
Goodwill | 38,988 | 7,737 | 9,222 | — | — | 55,947 | ||||||||||||||||||
Total assets | 109,601 | 35,480 | 23,324 | 371,939 | (127,136 | ) | 413,208 | |||||||||||||||||
Year Ended December 31, 2011 | ||||||||||||||||||||||||
Revenue | $ | 29,186 | $ | 87,558 | $ | 65,148 | $ | — | $ | (4,816 | ) | $ | 177,076 | |||||||||||
Operating (loss) income from operations | 1,305 | 8,199 | 1,545 | (9,325 | ) | — | 1,724 | |||||||||||||||||
Depreciation and amortization | 44 | 596 | 576 | 24 | — | 1,240 | ||||||||||||||||||
Interest expense | 33 | 4 | 150 | 4 | — | 191 | ||||||||||||||||||
Tax provision (benefit) | 42 | 356 | — | 320 | — | 718 | ||||||||||||||||||
Goodwill | — | 7,737 | 9,222 | — | — | 16,959 | ||||||||||||||||||
Total assets | 4,854 | 22,448 | 23,394 | 97,667 | (20,722 | ) | 127,641 |
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For segment reporting purposes by geographic region, revenues are attributed to the sales office location. The following table presents revenues generated by geographical area for the years ended December 31, 2013, 2012 and 2011, respectively (in thousands):
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Total revenues | ||||||||||||
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United States | $ | 627,969 | $ | 247,869 | $ | 177,076 | ||||||
Canada | 74,334 | 30,722 | — | |||||||||
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Total | $ | 702,303 | $ | 278,591 | $ | 177,076 | ||||||
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All material assets are located in the United States of America.
14. Subsequent Events
Preferred Stock Dividend
On December 12, 2013, the Company’s board of directors approved the declaration of a dividend payable to holders of the preferred stock. The declared dividend equaled $10 per share of preferred stock as specified in the Certificate of Designation of the preferred stock. The total declared dividend equaled $0.7 million and was paid on January 15, 2014.
Pending Acquisition of Pacer International
On January 5, 2014, XPO entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Pacer International, Inc. (“Pacer”), a Tennessee corporation, and Acquisition Sub, Inc., a Tennessee corporation and a wholly owned subsidiary of XPO (the “Merger Subsidiary”), providing for the acquisition of Pacer by XPO. Pursuant to the terms of Merger Agreement, Merger Subsidiary will be merged with and into Pacer (the “Merger”), with Pacer continuing as the surviving corporation and an indirect wholly owned subsidiary of XPO.
Pursuant to the terms of the Merger Agreement and subject to the conditions thereof, at the effective time of the Merger, each outstanding share of common stock of Pacer, par value $0.01 per share (the “Pacer Common Stock”), other than shares of Pacer Common Stock held by Pacer, XPO, Merger Subsidiary or their respective subsidiaries, will be converted into the right to receive (1) $6.00 in cash and (2) subject to the limitations in the following sentence, a fraction (the “Exchange Ratio”) of a share of XPO common stock, par value $0.001 per share (the “XPO Common Stock”), equal to $3.00 divided by the volume-weighted average price per share of XPO Common Stock for the last 10 trading days prior to the closing date (such average, the “VWAP,” and, such cash and stock consideration together, the “Merger Consideration”). For the purpose of calculating the Exchange Ratio, the VWAP may not be less than $23.12 per share or greater than $32.94 per share. If the VWAP for purposes of the Exchange Ratio calculation is less than or equal to $23.12 per share, then the Exchange Ratio will be fixed at 0.1298 of a share of XPO Common Stock. If the VWAP for purposes of the Exchange Ratio calculation is greater than or equal to $32.94 per share, then the Exchange Ratio will be fixed at 0.0911 of a share of XPO Common Stock.
The completion of the Merger is subject to customary closing conditions, including approval of the Merger by the holders of a majority of the outstanding shares of Pacer common stock. XPO’s and Merger Subsidiary’s obligations to consummate the Merger are not subject to any condition related to the availability of financing.
Conversions of Convertible Senior Notes
On January 21, 2014 and February 18, 2014, the Company issued an aggregate of 795,814 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), to certain holders of the
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Company’s 4.50% Convertible Senior Notes due 2017 (the “Notes”) in connection with the conversion of $13.1 million aggregate principal amount of the Notes. These transactions represented induced conversions pursuant to which the Company paid the holder a market-based premium in cash. The negotiated market-based premiums, in addition to the difference between the current fair value and the book value of the Notes, will be reflected in interest expense in the first quarter of 2014. The number of shares of common stock issued in the foregoing transactions equals the number of shares of common stock presently issuable to holders of the Notes upon conversion under the original terms of the Notes.
Common Stock Offering
On February 5, 2014, the Company closed a registered underwritten public offering of 15,000,000 shares of common stock, and on February 11, 2014 we closed as part of the same public offering the sale of an additional 2,250,000 shares as a result of the full exercise of the underwriters’ overallotment option, in each case at a price of $25.00 per share (together, the “February 2014 Offering”). The Company received $413.3 million in net proceeds from the February 2014 Offering after underwriting discounts and expenses.
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EXHIBIT INDEX
Exhibit | Description | |
2.1 *‡ | Investment Agreement, dated as of June 13, 2011, by and among Jacobs Private Equity, LLC (“JPE”), each of the |
2.2 *‡ | Share Purchase Agreement dated August 3, 2012 among XPO Logistics Canada Inc., 1272387 Ontario Inc. and 1272393 Ontario Inc., and Keith Matthews and Geoff Bennett (incorporated herein by reference to Exhibit 2.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012). | |
2.3 *‡ | Asset Purchase Agreement dated August 3, 2012 among XPO Logistics, LLC, Kelron Distribution Systems (Cleveland) LLC, and Keith Matthews and Geoff Bennett (incorporated herein by reference to Exhibit 2.2 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012). | |
2.4 * | Asset Purchase Agreement, dated October 24, 2012, by and among XPO Logistics, Inc., XPO Logistics, LLC, Turbo Logistics, Inc., Turbo Dedicated, Inc., Ozburn-Hessey Logistics, LLC, and OHH Acquisition Corporation (incorporated herein by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K dated October 24, 2012). | |
2.5 * | Stock Purchase Agreement, dated July 12, 2013, by and among 3PD Holding, Inc., Logistics Holding Company Limited, Mr. Karl Meyer, Karl Frederick Meyer 2008 Irrevocable Trust II, Mr. Randall Meyer, Mr. Daron Pair, Mr. James J. Martell and XPO Logistics, Inc. (incorporated herein by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K dated July 12, 2013). | |
2.6 * | Amendment No. 1 dated August 14, 2013 to Stock Purchase Agreement dated July 12, 2013 by and among the Company, 3PD, Logistics Holding Company Limited, Mr. Karl Meyer, Karl Frederick Meyer 2008 Irrevocable Trust II, Mr. Randall Meyer, Mr. Daron Pair and Mr. James J. Martell (incorporated herein by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K dated August 15, 2013). | |
3.1 * | Amended and Restated Certificate of Incorporation of | |
3.2 * | ||
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of | ||
3.3 * | ||
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of | ||
3.4 * | ||
Certificate of Amendment to the Amended and Restated | ||
3.5 * | ||
2nd Amended and Restated Bylaws of | ||
4.1 * | Certificate of Designation of Series A Convertible Perpetual Preferred Stock of the registrant (incorporated herein by |
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Exhibit | Description | |
4.2 * | Form of Warrant Certificate (incorporated herein by reference to Exhibit 4.2 of the September 2011 Form 8-K). | |
4.3 * | Registration Rights Agreement, dated as of September 2, 2011, by and among JPE, each of the other holders and designated secured lenders party thereto and the registrant (incorporated herein by reference to Exhibit 4.3 of the September 2011 Form 8-K). | |
4.4 * | Senior Indenture dated as of September 26, 2012 between XPO Logistics, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 of the registrant’s Current Report on Form 8-K dated September 26, 2012 (the “September 2012Form 8-K”). | |
4.5 * | First Supplemental Indenture dated as of September 26, 2012 between XPO Logistics, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, supplementing the Senior Indenture dated as of September 26, 2012 (incorporated herein by reference to Exhibit 4.2 of the September 2012 Form 8-K). | |
4.6 * | Form of Indenture for Senior Debt Securities between the Company and one or more banking institutions to be qualified as Trustee pursuant to Section 305(b)(2) of the Trust Indenture Act of 1939 (incorporated herein by reference to Exhibit 4.6 to the registrant’s Registration Statement on Form S-3, registration statement no. 333-188848, filed with the Securities and Exchange Commission on May 24, 2013 (the “May 2013 Form S-3”)). | |
4.7 * | Form of Indenture for subordinated Debt Securities between the Company and one or more banking institutions to be qualified as Trustee pursuant to Section 305(b)(2) of the Trust Indenture Act of 1939 (incorporated herein by reference to Exhibit 4.8 to the registrant’s May 2013 Form S-3). | |
10.1 +* | Amended and Restated 2011 Omnibus Incentive Compensation Plan (incorporated by reference to Exhibit A to XPO Logistics, Inc.’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on April 27, 2012). | |
10.2 +* | 2001 Amended and Restated Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-8 dated May 20, 2010). | |
10.3 +* | Employment Agreement between the | |
10.4 +* | Employment Agreement between the registrant and M. Sean Fernandez, dated October 13, 2011 (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated November 7, 2011). | |
10.5 +* | Employment Agreement between the registrant and John D. Welch, | |
10.6 +* | Amendment No. 1 to Employment Agreement between the registrant and John D. Welch, dated July 18, 2011 | |
10.7 +* | Employment Agreement between the registrant and Scott B. Malat, dated September 20, 2011 (incorporated herein by reference to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (the “September 2011 Form 10-Q”)). | |
10.8 +* | Employment Agreement between the registrant and Gregory W. Ritter, dated October 5, 2011 (incorporated herein by reference to Exhibit 10.13 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). |
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Exhibit | Description | |
10.9 +* | Employment Agreement between the registrant and Mario Harik, dated October 10, 2011 (incorporated herein by reference to Exhibit 10.14 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). | |
10.10 +* | Employment Agreement between the registrant and Gordon Devens, dated October 31, 2011 (incorporated herein by reference to Exhibit 10.15 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). | |
10.11 +* | Form of Restricted Stock Unit Award Agreement (Service-Vesting) (2011 Omnibus Incentive Compensation Plan) (incorporated herein by reference to Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). | |
10.12 +* | Form of Performance-Based Restricted Stock Unit Award Agreement (2011 Omnibus Incentive Compensation Plan) (incorporated herein by reference to Exhibit 10.19 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). | |
10.13 +* | Form of Option Award Agreement (2011 Omnibus Incentive Compensation Plan) (incorporated herein by reference to Exhibit 10.20 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). | |
10.14 +* | Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (2011 Omnibus Incentive Compensation Plan) (incorporated herein by reference to Exhibit 10.21 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). | |
10.15 +* | Form of Option Award Agreement for Non-Employee Directors (2011 Omnibus Incentive Compensation Plan) (incorporated herein by reference to Exhibit 10.22 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). | |
10.16 +* | Form of Option Award Agreement (2001 Amended and Restated Stock Option Plan) (grants from June 2011 through September 2011) (incorporated herein by reference to Exhibit 10.23 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). | |
10.17 +* | Form of Option Award Agreement (2001 Amended and Restated Stock Option Plan) (grants through May 2011) (incorporated herein by reference to Exhibit 10.24 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). | |
10.18 * | Revolving and Term Loan Agreement dated January 31, 2008 among National City Bank,Express-1 Expedited Solutions, Inc., Express 1, Inc., Express-1 Dedicated, Inc., Concert Group Logistics, Inc. and Bounce Logistics, Inc. (incorporated herein by reference to Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012). | |
10.19 * | Amendment to Revolving and Term Loan Agreement | |
10.20 * | ||
Second Amendment to | ||
10.21 * | Commercial Term Note (incorporated herein by reference to Exhibit 99.3 to the March 2010 Form 8-K). | |
10.22 * | Commercial Revolving Note (incorporated herein by reference to Exhibit 99.2 to the registrant’s Current Report on Form 8-K dated March 31, 2011). | |
10.23 +* | Employment Agreement between the |
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Exhibit | Description | |
10.24 * | ||
14 * | Senior Officer Code of Business Conduct and Ethics (incorporated herein by reference to Exhibit 14.1 to the registrant’s Current Report on Form 8-K dated January 20, 2012). | |
21 | Subsidiaries of the | |
23 | ||
Consent of | ||
31.1 | ||
Certification of the | ||
31.2 | ||
Certification of the | ||
32.1ł | ||
Certification of the | ||
32.2ł | ||
Certification of the | ||
101.INS † | XBRL Instance Document. | |
101.SCH † | XBRL Taxonomy Extension Schema. | |
101.CAL † | XBRL Taxonomy Extension Calculation Linkbase. | |
101.DEF † | XBRL Taxonomy Extension Definition Linkbase. | |
101.LAB † | XBRL Taxonomy Extension Label Linkbase. | |
101.PRE † | XBRL Taxonomy Extension Presentation Linkbase. |
* | Incorporated by reference. |
+ | This exhibit |
This exhibit will not be deemed “filed” for |
‡ | |||||
The schedules to this agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish supplementally a copy of any such omitted schedules to the Commission upon request. |
† | |||||
otherwise are not subject liability under those sections. |
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