XPO Posts Solid Bottom-Line Numbers In Third Quarter Despite Persistent Macro Weakness

XPO Logistics Inc. XPO reported late Oct. 28 gains in third-quarter net income, operating income and adjusted diluted earnings per share despite year-on-year declines in revenue, a sign that technology-driven productivity gains offset continued weakness in macroeconomic activity, especially in the less-than-truckload (LTL) sector in which XPO is a major player.

XPO reported $121 million in adjusted net income, essentially unchanged from the 2018 quarter. The 2019 net income results exclude $15 million in pretax restructuring costs and unrealized gains on foreign currency contracts. Operating income was $229 million, compared with $209 million in the 2018 quarter, XPO xaid.

The company reported adjusted diluted earnings per share (EPS) of $1.18, a 33% gain from the 89 cents per share in the year-earlier quarter. The 2019 EPS results were up 16 cents per share ahead of analysts estimates reported on Seeking Alpha, a financial website. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), an important financial metric for XPO, rose to $438 million from $415 million in the 2018 quarter. 

The solid bottom-line numbers come amid a weakening environment for the industrial economy, and by extension, segments of the transport business in which XPO operates. LTL tonnage declined 3.1% year-on-year, XPO said. Brokerage loads fell 4% year-on-year, though the company said it sourced transportation at a rate 3% better than what can be found on the DAT load boards.

The company lowered its full-year revenue forecasts to a decline of 2.5% to 4% from a range of minus 1% to a positive 1%. XPO Chairman and CEO Brad Jacobs said in an interview that he doesn't see much near-term improvement in the macro landscape for either LTL or freight brokerage.

The company is banking instead on aggressive deployment of its IT toolbox, as well as cost controls, to outpace the macro weakness. LTL yield rose 2.9%, an indication that XPO is squeezing more profits out of less tonnage. Contract renewal rates rose 4% year-over-year, XPO said.

XPO's LTL operating ratio, the ratio of operating revenues to expenses, dropped to 80.8%, the best third-quarter ratio in decades. The ratio means that XPO spent 80 cents for every revenue dollar it took in. The company affirmed its projection of at least $1 billion of EBITDA from LTL in 2021.

XPO, which is spending about $600 million a year on IT, said it is working on 10 initiatives designed to generate $700 million to $1 billion in profit improvement, largely exclusive of the macro environment. The company is targeting the $5 billion a year it spends on what it calls "variable labor," another way of saying that it wants to wring more productivity out of its existing labor force.

The company left much of its prior guidance unchanged. Adjusted EBITDA will come in at $1.675 to $1.725 billion, up 7% to 10%, or year-over-year growth of 7% to 10%, unchanged from prior guidance. Free cash flow will fall in the range of $575 million to $675 million. Capital expenditures will be in the range of $400 million to $450 million.

The company generated $257 million in free cash flow in the third quarter.

XPO's transportation segment generated revenue of $2.68 billion for the third quarter 2019, compared with $2.85 billion for the same period in 2018. The decline primarily reflected reduced business from Amazon.com, Inc. AMZN, which took away about two-thirds of its $900 million annual spend with XPO. XPO, for its part, never identified Amazon, referring to it only as the company's single-largest customer.

XPO's logistics segment generated revenue of $1.51 billion for the third quarter 2019, compared with $1.52 billion for the same period in 2018. Organic revenue growth came in at 2.4%, led by consumer packaged goods, food and beverage and aerospace in North America and by e-commerce in Europe, largely offset by a reduction in business from Amazon.

XPO, which built much of its business on the backs of 17 acquisitions between 2011 and 2015, is in the early stages of discussions with potential sellers, Jacobs said. XPO has been off the M&A trail since it bought Con-way more than four years ago. 

Jacobs said there is no time frame to pull the M&A trigger, adding that the company is performing well in its current form.

Image Sourced from Pixabay. Credit: Peter H.