Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q and other written reports and oral statements we make from time to time contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terms such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target,” “trajectory” or the negative of these terms or other comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference include those discussed below and the risks discussed in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). All forward-looking statements set forth in this Quarterly Report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that
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they will have the expected consequence to or effects on the Company or its business or operations. The following discussion should be read in conjunction with the Company’s unaudited Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this Quarterly Report, and with the audited consolidated financial statements and related notes thereto included in the 2019 Annual Report on Form 10-K. Forward-looking statements set forth in this Quarterly Report speak only as of the date hereof, and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, changes in expectations or the occurrence of unanticipated events, except to the extent required by law.
Executive Summary
XPO Logistics, Inc., a Delaware corporation, together with its subsidiaries (“XPO,” or “we”), is a top ten global provider of cutting-edge supply chain solutions to the most successful companies in the world.
We have two reporting segments: Transportation and Logistics. In 2019, approximately 64% of our revenue came from Transportation; the other 36% came from Logistics. Within each segment, we have robust service offerings that are positioned to capitalize on fast-growing areas of customer demand. Substantially all of our services operate under the single brand of XPO Logistics.
As of June 30, 2020, we had approximately 96,000 employees and 1,506 locations in 30 countries, and over 50,000 customers. Our operations help our customers move their goods most efficiently throughout their supply chains.
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it impacts our customers, employees and other business partners. See “Effects of COVID-19” below.
Transportation Segment
Our Transportation segment includes our services for truck brokerage; expedite; truckload; less-than-truckload (“LTL”); last mile; intermodal and drayage; managed transportation; and global forwarding. We offer these services in both North America and Europe with the exception of intermodal and drayage, which are North American services, and truckload, which is primarily in Europe. Within each region, the complementary services we provide represent an opportunity to provide multiple solutions to our larger customers.
Globally, we are the second largest freight brokerage provider, and a top five provider of managed transportation. Many of our other transportation services hold market-leading positions in their respective geographies.
In North America, we are the largest provider of last mile logistics for heavy goods, the largest manager of expedited shipments, a top three provider of LTL transportation and a top three provider of intermodal services, with a national drayage network. We also offer ocean, air, ground and cross-border freight forwarding services domestically and internationally.
In Europe, we provide truckload transportation as a brokered service using independent carriers, and as dedicated and non-dedicated capacity using our owned fleet. Our other transportation offerings in Europe are LTL transportation, which we provide with one of the largest LTL networks in Western Europe, last mile logistics for heavy goods and freight forwarding. Our transportation networks in Europe cover the regions that produce over 90% of its combined gross domestic product.
Our Transportation segment uses a blended model of owned, contracted and brokered capacity that gives us extensive flexibility in providing shippers with optimal solutions. The non-asset portion of our model is predominately variable-cost and includes our brokerage operations, as well as contracted capacity with independent providers. As of June 30, 2020, globally, we had approximately 10,000 independent carriers and owner-operators under contract to provide drayage, expedite, last mile and LTL services to our customers, and more than 50,000 independent brokered carriers representing over 1,000,000 trucks on the road.
The asset portion of our transportation model encompasses approximately 15,000 tractors and 38,000 trailers operated by professional drivers employed by XPO. These assets are primarily related to our LTL operations in North America and our truckload operations in Europe. Our owned fleet also provides supplemental capacity for our brokerage operations as needed.
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Logistics Segment
Our Logistics segment, which we sometimes refer to as supply chain or contract logistics, provides order fulfillment and other distribution services differentiated by our ability to deliver technology-enabled, customized solutions. XPO is the second largest provider of contract logistics globally. We have the largest outsourced e-fulfillment platform in Europe and a major platform for e-fulfillment in North America. Once we secure a logistics contract, the average customer tenure is approximately five years and can lead to more opportunities.
Our logistics services include high-value-add warehousing and distribution, e-commerce and omnichannel fulfillment, cold-chain logistics, packaging and labeling, factory support, aftermarket support, inventory management, order personalization and supply chain optimization, such as production flow management. In addition, we are a major provider of reverse logistics, which is also called returns management. Reverse logistics is a fast-growing area of contract logistics that includes the inspection, repackaging, refurbishment, resale or disposal of returned merchandise, as well as refunding and warranty management. These services are highly valued by companies with consumer end-markets, as shoppers are increasingly “test-driving” the products they buy online.
As of June 30, 2020, we operated 201 million square feet (19 million square meters) of contract logistics warehouse space worldwide. Approximately 94 million square feet (9 million square meters) was located in North America, where we are a market leader in logistics capacity; 99 million square feet (9 million square meters) was located in Europe; and 8 million square feet (1 million square meters) was located in Asia. Customers served by our Logistics segment include many of the preeminent names in retail and e-commerce, food and beverage, technology, aerospace, wireless, industrial and manufacturing, chemical, agribusiness, life sciences and healthcare. These are all sectors where we have significant expertise.
Our logistics network benefits from deep roots in the e-commerce sector, which continues to show strong, secular growth. E-commerce is predicted to continue to grow globally at a double-digit rate through at least 2022, even before the tailwind of COVID-19 stay-at-home mandates. This level of growth makes it difficult for many companies to handle fulfillment in-house while providing high levels of service.
We have the capabilities to provide solutions for pure-play e-commerce companies, omnichannel retailers, manufacturers with aftermarket distribution channels, and the reverse logistics inflows that have become a natural byproduct of order fulfillment. In March 2020, we announced a definitive agreement to acquire the majority of Kuehne + Nagel’s contract logistics operations in the United Kingdom, with closing planned for later this year. This will expand our platform in European e-commerce — where we are the largest outsourced e-fulfillment provider — and deepen our presence in the beverage, technology and food service sectors.
Our experience with fast-growing product categories makes us a valuable partner to customers who need agile logistics processes. Together with XPO Direct™, our shared-space distribution offering, our Logistics segment provides companies with superior control, flexible warehousing and staffing, advanced automation and predictive analytics that help manage peaks in demand.
Operating Philosophy
We believe that our rapid pace of innovation differentiates our services, allows us to better utilize our assets and makes the most of the talent within our organization. Our proprietary technology strengthens our relationships with customers by addressing their immediate supply chain needs and anticipating their future needs. Technology allows us to be a true partner to our customers, helping them meet their objectives for efficiency, safety and customer service.
We concentrate our technology efforts in four areas: our digital freight marketplace, automation and intelligent machines, dynamic data science, and visibility and customer service, specifically in the e-commerce supply chain. Our 2019 investment in technology was among the highest in our industry at approximately $550 million. Our global team of approximately 1,600 technology professionals works closely with our operations in North America and Europe and can deploy new software very rapidly on our cloud-based platform.
We prioritize innovations that can benefit our customers and create value for our shareholders. For example, our XPO Smart™ analytics and planning tools use machine learning to drive productivity in our logistics and LTL operations. Our XPO Connect™ digital marketplace gives our transportation customers a bird’s-eye view of
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available capacity under real-time market conditions. The platform matches shippers and carriers with digital efficiency, benefitting both parties and contributing to our financial performance.
Environmental sustainability is another area where our commitment sets an example in the industry. In the U.S., XPO has been named a Top 75 Green Supply Chain Partner by Inbound Logistics for five consecutive years. In France, where XPO has been awarded the designation Objectif CO 2 for outstanding environmental performance by the Ministry of the Environment, we have renewed our commitment to the CO 2 Charter for another three years. In Spain, all of our sites meet Leadership in Energy and Environmental Design (“LEED”) energy certification standards for 100% consumption of renewable energy. In the United Kingdom, the warehouse of the future we created with Nestlé is operating with environmentally friendly ammonia refrigeration systems, energy-saving lighting, air-source heat pumps for administration areas and rainwater harvesting.
A number of our logistics facilities are ISO14001-certified, which ensures environmental and other regulatory compliances. We monitor fuel emissions from forklifts in our warehouses, with protocols in place to take immediate corrective action if needed. Our packaging engineers ensure that the optimal carton size is used for each product slated for distribution, and when feasible, we purchase recycled packaging. As a byproduct of our reverse logistics operations, we recycle millions of electronic components and batteries each year.
In transportation, we have made substantial investments in fuel-efficient Freightliner Cascadia tractors in North America; these use Environmental Protection Agency (“EPA”) 2013-compliant and Greenhouse Gas 2014-compliant Selective Catalytic Reduction technology. Our North American LTL locations have energy-saving policies in place and are implementing a phased upgrade to LED lighting. In Europe, we own one of the industry’s most modern road fleets: our tractors are 98% compliant with Euro V, EEV and Euro VI standards.
We also own a large fleet of natural gas trucks operating in France, the United Kingdom, Spain and Portugal and, in 2019, we invested in 100 new Stralis Natural Power Euro VI tractors for our LTL network in France. These tractors use a combination of liquified and compressed natural gas to generate lower NOx emissions than the Euro VI standard and reduce noise in densely populated areas. In Spain, where we own government-approved mega-trucks, we have embarked on a collaborative research project with the General State Administration to test duo-trailer vehicles and capture data about environmental and safety performance in commercial use. Our last mile operations in Europe are using electric vehicles for deliveries in certain urban areas, reducing those emissions to zero.
Effects of COVID-19
As a global provider of supply chain solutions, our business can be impacted to varying degrees by factors beyond our control. The rapid escalation of COVID-19 into a pandemic in 2020 has affected, and will continue to affect, economic activity broadly and customer sectors served by our industry.
In response to the COVID-19 pandemic, the governments of many countries, states, cities and other geographic regions have taken and are continuing to take preventative or reactive actions, such as imposing restrictions on travel and business operations and establishing guidelines for social distancing and occupational safety. Due to the critical role we play in moving goods and equipment in the markets we serve, XPO is considered an “essential business,” providing supply chain solutions to crucial industries and delivering critical consumer goods. As a result, the substantial majority of our sites have remained open and operating, and we have continued to serve our customers while employing significant measures to protect our employees and keep them safe.
The COVID-19 pandemic and associated impacts on economic activity had an adverse effect on our results of operations and financial condition for the three and six months ended June 30, 2020, as discussed below. We experienced declines in demand for our services beginning in the first quarter, reaching their lowest levels in April, and sequentially strengthening in May and June. Impacts on our business generally began a few weeks earlier in Europe than in the U.S., following the onset of the pandemic in Asia.
Due to the unprecedented and evolving nature of the COVID-19 pandemic, it remains very difficult to predict the extent of the impact on our industry generally and our business in particular. Furthermore, the extent and pace of a recovery remains uncertain and may differ significantly among the countries in which we operate. While we anticipate that our results of operations will continue to be impacted by this pandemic in the third and fourth quarters of 2020, we are unable to reasonably estimate the extent of the impact on our full-year results of operations, our liquidity or our overall financial position.
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We have incurred incremental costs related to COVID-19 to ensure that we meet the needs of our customers and employees; these include costs for personal protective equipment (“PPE”), temporary site closures, site cleanings and enhanced employee benefits. In the second quarter of 2020, we also implemented supplemental “appreciation pay” programs for thousands of frontline employees who continued to work during the pandemic. We expect to continue to incur additional costs, which may be significant, as we continue to implement operational changes in response to the pandemic. However, the majority of our cost base is variable, and we have taken and will continue to take aggressive actions to adjust our expenses to reflect changes in demand for our services. These actions include reduced use of contractors, reduced employee hours, furloughs, layoffs and required use of paid time off, consistent with local regulations. While we do not expect to be able to fully offset the decrease in demand for our services arising from the economic disruption of the pandemic, the actions we are taking and have taken, combined with the variable components of our cost structure, should help mitigate the impact on our profitability relative to the impact on our revenue and volumes.
Maintaining strong liquidity has been and will continue to be a top priority for XPO amid the current economic disruption. As discussed in greater detail below, as of June 30, 2020, we had $2.8 billion of available liquidity, including $2.3 billion of cash and cash equivalents. In the three months ended June 30, 2020, we expanded our liquidity by $1.5 billion through the addition of a $350 million term loan and letter of credit facility and the issuance of $1.15 billion in senior notes. We expect to incur incremental interest expense in 2020 as a result of issuing this new debt. We have reduced our planned capital expenditures substantially for 2020, while continuing to invest in key growth initiatives.
In response to the pandemic, we are using a combination of rigorous protective measures, technology and virtual communications to keep our employees safe, including these and other measures:
• Globally, our employees are working remotely if able to do so.
• For employees who need to work on site, we follow the guidance of the World Health Organization, the U.S. Centers for Disease Control, local regulators, and our own health and safety protocols.
• We are providing PPE in all our workplaces and social distancing is in effect.
• Our facilities worldwide engage in ongoing cleaning of high-touch areas, as well as deep cleaning in facilities likely to have been exposed to COVID-19.
• We added Pandemic Paid Sick Leave to provide U.S. and Canadian employees an additional two weeks of 100% sick leave.
• We guarantee up to three additional paid days for employees of a facility that closes temporarily for deep cleaning.
• We instituted a contactless delivery policy to ensure that our drivers can maintain a safe distance from customers when delivering freight.
• We provided Frontline Employee Appreciation Pay to U.S. and Canadian employees.
• We expanded access to mental health counseling services.
A further discussion of the impact of the COVID-19 pandemic on our business is set forth below in Part II, Item 1A. Risk Factors.
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Consolidated Summary Financial Table
Three Months Ended June 30, Percent of Revenue Change Six Months Ended June 30, Percent of Revenue Change
(Dollars in millions) 2020 (1)
2019 (2)
2020 2019 2020 vs. 2019 2020 (3)
2019 (4)
2020 2019 2020 vs. 2019
Revenue $ 3,502 $ 4,238 100.0 % 100.0 % (17.4) % $ 7,366 $ 8,358 100.0 % 100.0 % (11.9) %
Cost of transportation and services 1,641 2,108 46.9 % 49.7 % (22.2) % 3,539 4,204 48.0 % 50.3 % (15.8) %
Direct operating expense 1,370 1,417 39.1 % 33.4 % (3.3) % 2,730 2,823 37.1 % 33.8 % (3.3) %
SG&A expense 632 455 18.0 % 10.7 % 38.9 % 1,157 941 15.7 % 11.3 % 23.0 %
Operating (loss) income (141) 258 (4.0) % 6.1 % (154.7) % (60) 390 (0.8) % 4.7 % (115.4) %
Other expense (income) (21) (13) (0.6) % (0.3) % 61.5 % (39) (30) (0.5) % (0.4) % 30.0 %
Foreign currency loss (gain) 3 8 0.1 % 0.2 % (62.5) % (5) 10 (0.1) % 0.1 % (150.0) %
Debt extinguishment loss — — — % — % — % — 5 — % 0.1 % (100.0) %
Interest expense 82 72 2.3 % 1.7 % 13.9 % 154 143 2.1 % 1.7 % 7.7 %
(Loss) income before income tax (benefit) provision (205) 191 (5.9) % 4.5 % (207.3) % (170) 262 (2.3) % 3.1 % (164.9) %
Income tax (benefit) provision (71) 46 (2.0) % 1.1 % (254.3) % (61) 65 (0.8) % 0.8 % (193.8) %
Net (loss) income $ (134) $ 145 (3.8) % 3.4 % (192.4) % $ (109) $ 197 (1.5) % 2.4 % (155.3) %
(1) Consolidated operating loss for the three months ended June 30, 2020 includes $50 million of restructuring expense and $46 million of transaction and integration costs.
(2) Consolidated operating income for the three months ended June 30, 2019 includes $4 million of restructuring expense and $1 million of transaction and integration costs.
(3) Consolidated operating loss for the six months ended June 30, 2020 includes $90 million of transaction and integration costs and $53 million of restructuring expense.
(4) Consolidated operating income for the six months ended June 30, 2019 includes $17 million of restructuring expense and $2 million of transaction and integration costs.
The transaction and integration costs for the second quarter and first six months of 2020 are primarily related to our previously announced exploration of strategic alternatives. The review of strategic alternatives was terminated in March 2020, but certain of these costs continued into the second quarter of 2020. For further information on our restructuring actions, see Note 4—Restructuring Charges to the Condensed Consolidated Financial Statements. We also incurred in the second quarter and first six months of 2020, net incremental and direct costs as a result of the COVID-19 pandemic.
Three and Six Months Ended June 30, 2020 Compared with Three and Six Months Ended June 30, 2019
Revenue for the second quarter of 2020 decreased 17.4% to $3.5 billion, compared with the same quarter in 2019. Revenue for the first six months of 2020 decreased 11.9% to $7.4 billion, compared with the same period in 2019. The decrease in both periods is primarily due to the impact of COVID-19. The revenue decrease in the first six months of 2020 also resulted from the curtailment of our direct postal injection business in the first quarter of 2019. Additionally, foreign currency movement reduced revenue by approximately 0.8 percentage points in the second quarter of 2020 and 0.9 percentage points in the first six months of 2020.
Cost of transportation and services includes the cost of providing or procuring freight transportation for XPO customers and salaries paid to employee drivers in our truckload and LTL businesses.
Cost of transportation and services for the second quarter of 2020 was $1.6 billion, or 46.9% of revenue, compared with $2.1 billion, or 49.7% of revenue, for the same quarter in 2019. Cost of transportation and services for the first six months of 2020 was $3.5 billion, or 48.0% of revenue, compared with $4.2 billion, or 50.3% of revenue, for the same period in 2019. The year-over-year reduction as a percentage of revenue in both periods was primarily driven
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by a higher mix of contract logistics revenue, lower third-party transportation costs in our transportation segment, and lower fuel costs. These lower costs were partially offset by incremental PPE and other COVID-19-related costs.
Direct operating expenses are comprised of both fixed and variable expenses and consist of operating costs related to our contract logistics facilities, last mile warehousing facilities, LTL service centers and European LTL network. Direct operating expenses consist mainly of personnel costs, facility and equipment expenses, such as rent, utilities, equipment maintenance and repair, costs of materials and supplies, information technology expenses, depreciation expense, and gains and losses on sales of property and equipment.
Direct operating expense for the second quarter of 2020 was $1.4 billion, or 39.1% of revenue, compared with $1.4 billion, or 33.4% of revenue, for the same quarter in 2019. Direct operating expense for the first six months of 2020 was $2.7 billion, or 37.1% of revenue, compared with $2.8 billion, or 33.8% of revenue, for the same period in 2019. The year-over-year increases as a percentage of revenue were primarily driven by the significant decline in revenue due to COVID-19, as well as incremental PPE and other COVID-19-related costs. Additionally, the second quarters of 2020 and 2019 included $12 million and $19 million, respectively, and the first six months of 2020 and 2019 included $39 million and $40 million, respectively, from gains on sales of property and equipment.
Sales, general and administrative expense (“SG&A”) primarily consists of salaries and commissions for the sales function, salary and benefit costs for executive and certain administration functions, depreciation and amortization expense, professional fees, facility costs, bad debt expense and legal costs.
SG&A for the second quarter of 2020 was $632 million, or 18.0% of revenue, compared with $455 million, or 10.7% of revenue, for the same quarter in 2019. SG&A for the first six months of 2020 was $1.2 billion, or 15.7% of revenue, compared with $941 million, or 11.3% of revenue, for the same period in 2019. SG&A in the second quarter and first six months of 2020 included approximately $33 million and $73 million, respectively, of expenses related to our exploration of strategic alternatives, including professional service fees and retention costs. The year-over-year increases as a percentage of revenue also resulted from the significant decline in revenue due to COVID-19, higher restructuring costs, increased bad debt and self-insurance expenses and incremental PPE and other COVID-19-related costs.
Other expense (income) for the second quarter of 2020 was $21 million of income, compared with $13 million of income for the same quarter in 2019. Other expense (income) for the first six months of 2020 was $39 million of income, compared with $30 million of income for the same period in 2019. The year-over-year increases primarily reflect higher net periodic pension income of $7 million in the second quarter of 2020 and $13 million in the first six months of 2020, compared with the same periods in 2019.
Foreign currency loss (gain) was a $3 million loss for the second quarter of 2020, compared with an $8 million loss for the same quarter in 2019. Foreign currency loss in the second quarter of 2020 primarily reflected unrealized losses on foreign currency option and forward contracts. Foreign currency loss in the second quarter of 2019 primarily reflected unrealized losses incurred on foreign currency option and forward contracts. Foreign currency loss (gain) was a $5 million gain for the first six months of 2020, compared with a $10 million loss for the same period in 2019. Foreign currency gain in the first six months of 2020 primarily reflected realized gains on foreign currency option and forward contracts and other derivative contracts, including a gain on a terminated net investment hedge. Foreign currency loss in the first six months of 2019 primarily reflected unrealized losses on foreign currency option and forward contracts. For additional information on our foreign currency option and forward contracts, see Note 5—Derivative Instruments to our Condensed Consolidated Financial Statements.
Debt extinguishment loss was $5 million for the first six months of 2019 and related to the write-off of debt issuance costs for an unsecured credit facility that was repaid in the first quarter of 2019. There were no debt extinguishment losses in the second quarter of 2019 or in the first six months of 2020.
Interest expense increased to $82 million for the second quarter of 2020 from $72 million for the second quarter of 2019. Interest expense increased to $154 million for the first six months of 2020 from $143 million for the first six months of 2019. The increases in interest expense in both the second quarter and the six-month period were primarily due to higher average total indebtedness, including the senior notes due 2025 (the “Senior Notes due 2025”) that were issued in the second quarter of 2020, partially offset by lower interest rates in the second quarter and first six months of 2020.
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Our effective income tax rates were 34.8% and 24.1% for the second quarter of 2020 and 2019, respectively, and 35.8% and 24.7% for the first six months of 2020 and 2019, respectively. The effective tax rates for both the second quarter and six-month periods of 2020 and 2019 were based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented. There were no material discrete items impacting the effective tax rate for the second quarter and six-month periods of 2020 or 2019. The increase in our effective income tax rates for the second quarter and first six months of 2020 compared to prior-year periods was primarily driven by contribution- and margin-based taxes and the mix of earnings among jurisdictions.
The U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted in March 2020 provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. We have applied the provisions of the CARES Act relating to income taxes and realized a $4 million reduction in cash taxes as well as an immaterial income tax benefit on our Condensed Consolidated Statements of (Loss) Income in the first quarter of 2020. Additionally, we are benefiting from the ability to defer the payment of certain payroll taxes that would otherwise be required in 2020. We have not applied for any government loans under the CARES Act or similar laws.
Restructuring Charges
We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure, including actions in response to COVID-19. Restructuring charges were recorded on our Condensed Consolidated Statements of (Loss) Income as follows:
Three Months Ended June 30, Six Months Ended June 30,
(In millions) 2020 2019 2020 2019
Cost of transportation and services $ 1 $ — $ 1 $ 3
Direct operating expense 6 — 6 —
Sales, general and administrative expense 43 4 46 14
Total $ 50 $ 4 $ 53 $ 17
For more information, see Note 4—Restructuring Charges to the Condensed Consolidated Financial Statements. Upon successful completion of the restructuring initiatives recorded in the first six months of 2020, we expect to achieve annualized pre-tax savings of approximately $100 million by mid-2021. We expect to incur additional restructuring charges during the remainder of fiscal 2020 of approximately $15 million under previously approved restructuring actions. In addition, we may incur incremental restructuring costs in 2020 as we modify and right-size our operations due to the business impacts of COVID-19; however, we are currently unable to reasonably estimate these costs.
Transportation Segment
Three Months Ended June 30, Percent of Revenue Change Six Months Ended June 30, Percent of Revenue Change
(Dollars in millions) 2020 2019 2020 2019 2020 vs. 2019 2020 2019 2020 2019 2020 vs. 2019
Revenue $ 2,127 $ 2,747 100.0 % 100.0 % (22.6) % $ 4,586 $ 5,406 100.0 % 100.0 % (15.2) %
Operating (loss) income (15) 243 (0.7) % 8.8 % (106.2) % 105 371 2.3 % 6.9 % (71.7) %
Total depreciation and amortization 113 108 4.6 % 223 224 (0.4) %
Transportation segment revenue decreased 22.6% to $2.1 billion for the second quarter of 2020, compared with $2.7 billion for the same quarter in 2019. Revenue decreased 15.2% to $4.6 billion for the first six months of 2020, compared with $5.4 billion for the same period in 2019. The decline in revenue in both the second quarter and the six-month period of 2020 reflected the impact of COVID-19. The revenue decrease in the first six months of 2020 also resulted from the curtailment of our direct postal injection business in the first quarter of 2019. Additionally,
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foreign currency movement reduced revenue by approximately 0.4 percentage points in the second quarter of 2020 and 0.6 percentage points in the first six months of 2020.
Transportation segment operating loss was $15 million, or 0.7% of revenue, for the second quarter of 2020, compared with operating income of $243 million, or 8.8% of revenue, for the same quarter in 2019. Operating income for the first six months of 2020 decreased to $105 million, or 2.3% of revenue, compared with $371 million, or 6.9% of revenue, for the same period in 2019. The decrease in both periods was primarily driven by lower revenue, partially offset by lower third-party transportation, fuel and personnel costs. Partially offsetting these lower costs were higher facility costs, expenses related to our exploration of strategic alternatives, restructuring-related expenses, bad debt expense and incremental PPE and other COVID-19-related costs. Additionally, the second quarter of 2020 reflected lower gains on sales of property and equipment of $9 million, while for the first six-month period, the gains in 2020 were essentially unchanged compared to the prior-year period. Depreciation and amortization expense in the first six months of 2019 included $6 million related to the impairment of customer relationship intangible assets associated with exiting the direct postal injection business.
Logistics Segment
Three Months Ended June 30, Percent of Revenue Change Six Months Ended June 30, Percent of Revenue Change
(Dollars in millions) 2020 2019 2020 2019 2020 vs. 2019 2020 2019 2020 2019 2020 vs. 2019
Revenue $ 1,404 $ 1,526 100.0 % 100.0 % (8.0) % $ 2,841 $ 3,020 100.0 % 100.0 % (5.9) %
Operating (loss) income (43) 61 (3.1) % 4.0 % (170.5) % (5) 107 (0.2) % 3.5 % (104.7) %
Total depreciation and amortization 80 67 19.4 % 149 128 16.4 %
Logistics segment revenue decreased 8.0% to $1.4 billion for the second quarter of 2020, compared with $1.5 billion for the same quarter in 2019. Revenue decreased 5.9% to $2.8 billion for the first six months of 2020, compared with $3.0 billion for the same period in 2019. These decreases reflect the impact of COVID-19, our elimination of certain low-margin business and the downsizing of business by our largest customer in North America. Additionally, foreign currency movement reduced revenue by approximately 1.6 percentage points in the second quarter of 2020 and 1.5 percentage points in the first six months of 2020.
Logistics segment operating loss was $43 million, or 3.1% of revenue, for the second quarter of 2020, compared with operating income of $61 million, or 4.0% of revenue, for the same quarter in 2019. Operating loss for the first six months of 2020 was $5 million, or 0.2% of revenue, compared with operating income of $107 million, or 3.5% of revenue, for the same period in 2019. The decrease in both periods was primarily driven by lower revenue, increased depreciation and amortization expense, expenses related to our exploration of strategic alternatives, restructuring-related expenses and incremental PPE and other COVID-19-related costs, partially offset by lower temporary labor costs. Depreciation and amortization expense was higher in the second quarter and first six months of 2020 compared to the prior-year periods due to the impact of prior capital investments, new contract startups, and accelerated depreciation due to contract modifications.
Liquidity and Capital Resources
As of June 30, 2020, we had cash and cash equivalents of $2.3 billion. Our principal existing sources of cash are (i) cash generated from operations; (ii) borrowings available under our Second Amended and Restated Revolving Loan Credit Agreement, as amended (the “ABL Facility”) and a Senior Secured Term Loan Credit Agreement; and (iii) proceeds from the issuance of other debt. As of June 30, 2020, we have $354 million available to draw under our ABL Facility, based on a borrowing base of $969 million, outstanding borrowings of $600 million and outstanding letters of credit of $15 million. We also have $150 million available to draw under the Senior Secured Term Loan Credit Agreement.
Managing our balance sheet prudently and maintaining appropriate liquidity are high priorities during the disruption caused by COVID-19. In order to best position us to navigate this uncertain period, we have taken a number of actions to further strengthen our liquidity.
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We borrowed a net $600 million in revolving loans under our existing ABL Facility during the six months ended June 30, 2020. In addition, in early April 2020 we entered into the Senior Secured Term Loan Credit Agreement which allows us to borrow up to $150 million in aggregate principal amount of committed secured term loans and request the issuance of up to $200 million in aggregate face amount of secured letters of credit under an evergreen letter of credit facility. Also in the second quarter of 2020, we completed private placements of $1.15 billion aggregate principal amount of Senior Notes due 2025. The Senior Secured Term Loan Credit Agreement and Senior Notes due 2025 are discussed further below. And in June 2020, we amended certain provisions of the ABL Facility to provide additional debt financing flexibility.
We continually evaluate our liquidity requirements in light of our operating needs, growth initiatives and capital resources. We believe that our existing liquidity and sources of capital are sufficient to support our operations over the next 12 months.
Trade Receivables Securitization and Factoring Programs
We sell certain of our trade accounts receivable on a non-recourse basis to third-party financial institutions under factoring agreements. We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. We also sell trade accounts receivable under a securitization program described below. We use trade receivables securitization and factoring programs to help manage our cash flows and offset the impact of extended payment terms for some of our customers.
XPO Logistics Europe SA (“XPO Logistics Europe”), one of our majority-owned subsidiaries, participates in a trade receivables securitization program co-arranged by Crédit Agricole, BNP Paribas and HSBC (the “Purchasers”). Under the program, a wholly-owned bankruptcy-remote special purpose entity of XPO Logistics Europe sells trade receivables that originate with wholly-owned subsidiaries of XPO Logistics Europe in the United Kingdom and France to unaffiliated entities managed by the Purchasers. The special purpose entity is a variable interest entity and is consolidated by XPO based on our control of the entity’s activities.
We account for transfers under our securitization and factoring arrangements as sales because we sell full title and ownership in the underlying receivables and control of the receivables is considered transferred. For these transfers, the receivables are removed from our Condensed Consolidated Balance Sheets at the date of transfer. In the securitization and factoring arrangements, any continuing involvement with the receivables is limited to servicing the receivables. The fair value of any servicing assets and liabilities is immaterial. Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables, which we report within short-term debt on our Condensed Consolidated Balance Sheets. These borrowings amounted to €98 million ($110 million) as of June 30, 2020. See Note 6—Debt to our Condensed Consolidated Financial Statements for additional information on these borrowings.
Under a securitization program that was terminated in July 2019, if transfers were accounted for as sales, the consideration received included a simultaneous cash payment and a deferred purchase price receivable. The deferred purchase price receivable was not a trade receivable and was recorded based on its fair value and reported within Other current assets on our Condensed Consolidated Balance Sheets. The cash payment which we received on the date of the transfer was reflected within Net cash provided by operating activities on our Condensed Consolidated Statements of Cash Flows. As we received cash payments on the deferred purchase price receivable, it was reflected as an investing activity. The new program does not include a deferred purchase price mechanism.
The maximum amount of net cash proceeds available at any one time under the current securitization program is €400 million (approximately $449 million as of June 30, 2020), and this amount includes any unsecured borrowings related to the program. As of June 30, 2020, €161 million (approximately $181 million) was available to us based on the level of receivables sold and outstanding as of that date. The securitization program expires in July 2022 and contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio.
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Information related to the trade receivables sold was as follows:
Three Months Ended June 30, Six Months Ended June 30,
(In millions) 2020 2019 2020 2019
Securitization programs (1)
Receivables sold in period
$ 598 $ 338 $ 1,289 $ 661
Cash consideration
598 269 1,289 529
Deferred purchase price
— 69 — 132
Factoring programs
Receivables sold in period
$ 199 $ 235 $ 463 $ 419
Cash consideration
199 234 462 417
(1) Receivable transfers under the securitization programs are accounted for as either sales or secured borrowings. In the prior program, a portion of the transfers were accounted for as secured borrowings whereas under the new program, all transfers are accounted for as sales. This change had the effect of significantly increasing the amount of trade receivables we reported as sold in the second quarter of 2020.
In addition to the cash considerations referenced above, we received $66 million and $137 million in the three and six months ended June 30, 2019, respectively, for the realization of cash on the deferred purchase price receivable for our prior securitization program.
Secured Debt
In April 2020, we entered into the Senior Secured Term Loan Credit Agreement, comprised of a $150 million committed secured term loan facility and a $200 million uncommitted secured evergreen letter of credit facility. The term loan facility is available to be drawn upon, subject to customary conditions, in multiple borrowings within six months of the closing date. Any term loans thereunder will bear interest at a rate equal to London Interbank Offered Rate (“LIBOR”) or base rate, at our election, plus an applicable margin of 3.00% to 4.50%, for LIBOR loans, or 2.00% to 3.50%, for base rate loans, in each case depending upon the time elapsed since the closing date. The term loan facility matures in April 2021.
Letters of credit under the letter of credit facility shall expire within one year of issuance and may contain automatic one-year renewals until the letter of credit facility terminates. As of June 30, 2020, we have issued $199 million in aggregate face amount of letters of credit, which replaced letters of credit outstanding under our ABL Facility, and have not drawn on the term loan commitments. The credit agreement governing the term loan and letter of credit facilities contains representations and warranties and affirmative and negative covenants customary for financings of this type as well as customary events of default.
Term Loan Facility
In March 2019, we entered into an amendment to our senior secured term loan credit agreement and borrowed an additional $500 million of incremental loans under a new tranche of term loans. For more information on these amendments, refer to Note 6—Debt to our Condensed Consolidated Financial Statements.
Senior Notes due 2025
In the second quarter of 2020, we completed private placements of $1.15 billion aggregate principal amount of Senior Notes due 2025. The Senior Notes due 2025 mature on May 1, 2025 and bear interest at a rate of 6.25% per annum. Interest on the notes is paid semi-annually. $850 million of the notes were issued at par, and $300 million of the notes were issued subsequently at 101.75% of face value. Net proceeds from the notes have been invested in cash and cash equivalents.
The Senior Notes due 2025 are guaranteed by each of our direct and indirect wholly-owned restricted subsidiaries (other than some excluded subsidiaries) that are obligors under, or guarantee obligations under, our ABL Facility or existing term loan facility or guarantee certain of our other indebtedness. The Senior Notes due 2025 and the related guarantees are unsecured, unsubordinated indebtedness for us and our guarantors. The Senior Notes due 2025 contain covenants customary for notes of this nature.
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Senior Notes due 2024
In February 2019, we completed a private placement of $1.0 billion aggregate principal amount of senior notes (“Senior Notes due 2024”), which bear interest at a rate of 6.75% per annum. Proceeds from the Senior Notes due 2024 were used to repay our outstanding obligation under an unsecured credit facility and to finance a portion of our share repurchases described in Note 7—Stockholders’ Equity to our Condensed Consolidated Financial Statements.
Borrowings related to Securitization Program
Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables. These borrowings, which amounted to $110 million as of June 30, 2020, are owed to the program’s Purchasers and are included in short-term debt until they are repaid in the following month’s settlement. There were no borrowings related to the program at December 31, 2019. The securitization program expires in July 2022 and contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio. For additional information on the securitization program, see Note 1—Organization, Description of Business and Basis of Presentation to our Condensed Consolidated Financial Statements.
Share Repurchases
In December 2018, our Board of Directors authorized the repurchase of up to $1 billion of our common stock (the “2018 Program”), which was completed in the first quarter of 2019. The share repurchases under the 2018 Program were funded by an unsecured credit facility and our available cash.
In February 2019, our Board of Directors authorized additional repurchases of up to $1.5 billion of our common stock (the “2019 Program”). The 2019 authorization permits us to purchase shares in both the open market and in private transactions, with the timing and number of shares dependent on a variety of factors, including price, general business conditions, market conditions, alternative investment opportunities and funding considerations. We are not obligated to repurchase any specific number of shares and may suspend or discontinue the program at any time. The share purchases under the 2019 Program were funded by our available cash and proceeds from our 2019 debt offerings.
Information regarding our shares repurchased, based on settlement date, is as follows:
Three Months Ended June 30, Six Months Ended June 30,
(In millions, except per share data) 2020 2019 2020 2019
2019 Program 2019 Program 2019 Program 2019 Program 2018 Program
Shares purchased and retired — 2 2 17 8
Aggregate value $ — $ 120 $ 114 $ 883 $ 464
Average price per share $ — $ 56.78 $ 66.58 $ 50.70 $ 59.47
Remaining authorization $ 503 $ 617 $ 503 $ 617 $ —
Loan Covenants and Compliance
As of June 30, 2020, we were in compliance with the covenants and other provisions of our debt agreements. Any failure to comply with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.
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Sources and Uses of Cash
Six Months Ended June 30,
(In millions) 2020 2019
Net cash provided by operating activities $ 394 $ 164
Net cash used in investing activities (172) (14)
Net cash provided by (used in) financing activities 1,701 (153)
Effect of exchange rates on cash, cash equivalents and restricted cash (15) (2)
Net increase (decrease) in cash, cash equivalents and restricted cash $ 1,908 $ (5)
During the six months ended June 30, 2020, we: (i) generated cash from operating activities of $394 million; (ii) received net proceeds of $1.8 billion on our debt and short-term borrowings; and (iii) generated proceeds from sales of property and equipment (primarily real estate) of $77 million. We used cash during this period primarily to: (i) purchase property and equipment of $255 million; (ii) repurchase common stock of $114 million; and (iii) make payments on debt and finance leases of $40 million.
During the six months ended June 30, 2019, we: (i) generated cash from operating activities of $164 million; (ii) collected $137 million on a deferred purchase price receivable; (iii) generated proceeds from sales of property and equipment of $85 million, and (iv) received proceeds of $1.8 billion on our long-term debt. We used cash during this period primarily to: (i) purchase property and equipment of $236 million, (ii) repurchase common stock of $1.3 billion, (iii) make payments on long-term debt and capital leases of $565 million, and (iv) pay debt issuance costs of $27 million.
Cash flows from operating activities for the six months ended June 30, 2020 increased by $230 million, compared with the same period in 2019. The increase reflects the impact of lower cash usage of $514 million from operating assets and liabilities, partially offset by $284 million of lower cash-related net income for the six months ended June 30, 2020, compared with the same period in 2019. Cash-related net income represents total cash flows from operating activities less changes in assets and liabilities on the Condensed Consolidated Statements of Cash Flows. The largest components of cash-related net income are Net (loss) income plus Depreciation, amortization and net lease activity. Within operating assets and liabilities, accounts receivable were a source of cash for the six months ended June 30, 2020 as compared to a significant use of cash in the prior period reflecting lower revenues in the current period and a year-over-year increase of $45 million in proceeds from factoring. Also impacting our operating assets and liabilities were payments of approximately $75 million related to the exploration of strategic alternatives and higher interest payments of $24 million in the first half of 2020, partially offset by lower tax payments of $48 million.
Investing activities used $172 million and $14 million of cash in the six months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020, we used $255 million of cash to purchase property and equipment and received $77 million from sales of property and equipment. During the six months ended June 30, 2019, we primarily: (i) used $236 million of cash to purchase property and equipment; (ii) received $85 million from sales of property and equipment; and (iii) received proceeds of $137 million related to the realization of cash on deferred purchase price receivable.
Financing activities provided $1.7 billion of cash in the six months ended June 30, 2020 and used $153 million of cash in the six months ended June 30, 2019. The primary sources of cash from financing activities during the six months ended June 30, 2020 were: (i) $1.1 billion of net proceeds from the issuance of Senior Notes due 2025; (ii) $600 million of proceeds from borrowings on our ABL Facility, net of payments; and (iii) $109 million from borrowings related to our securitization program. The primary uses of cash from financing activities during the first six months of 2020 were $114 million used to purchase XPO common stock and $40 million used to repay debt and finance leases. By comparison, the primary uses of cash during the six months ended June 30, 2019 were the $1.3 billion repurchase of XPO common stock and $565 million used to repay debt and finance leases, including a $500 million repayment of borrowings under the unsecured credit facility. The primary sources of cash from financing activities during the six months ended June 30, 2019 were $1.7 billion of net proceeds from the issuance of long-term debt, consisting of the incremental term loans and Senior Notes due 2024, as well as amounts received under the senior variable funding notes in connection with our previously terminated trade securitization program.
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Contractual Obligations
As described more fully above, we received proceeds of approximately $1.15 billion from our Senior Notes due 2025 in the second quarter of 2020. Additional interest payments of approximately $38 million are due in 2020, and additional annual interest payments of approximately $76 million are due in 2021 through 2024. During the six months ended June 30, 2020, there were no other material changes to our December 31, 2019 contractual obligations. We anticipate net capital expenditures to be between $250 million and $300 million in 2020, which reflects a decrease of approximately $225 million from the estimate provided in our 2019 Form 10-K, primarily due to the impact of COVID-19, as discussed previously.
New Accounting Standards
Information related to new accounting standards is included in Note 1—Organization, Description of Business and Basis of Presentation to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.