Attached files

file filename
EX-32.1 - EX-32.1 - XPO Logistics, Inc.exhibit321.htm
EX-31.1 - EX-31.1 - XPO Logistics, Inc.exhibit311.htm
EX-32.2 - EX-32.2 - XPO Logistics, Inc.exhibit322.htm
EX-31.2 - EX-31.2 - XPO Logistics, Inc.exhibit312.htm
EXCEL - IDEA: XBRL DOCUMENT - XPO Logistics, Inc.Financial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
Form 10-Q 
_____________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
¨
TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                     
Commission file number: 001-32172
_____________________________________
XPO 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, CT
 
06831
(Address of principal executive offices)
 
(Zip code)
(855) 976-4636
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 _____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
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.
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
 
 
 
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 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of November 4, 2014, there were 64,448,865 shares of the registrant’s common stock, par value $0.001 per share, outstanding.



XPO Logistics, Inc.
Form 10-Q
Index
 
 
 
 
 
 


2


Part I—Financial Information
Item 1. Financial Statements.

3


XPO Logistics, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data) 
 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
680,101

 
$
21,524

Accounts receivable, net of allowances of $8,148 and $3,539, respectively
475,323

 
134,227

Prepaid expenses
16,682

 
3,935

Deferred tax asset, current
8,581

 
3,041

Income tax receivable
13,217

 

Other current assets
9,875

 
7,304

Total current assets
1,203,779

 
170,031

Property and equipment, net of $33,392 and $11,803 in accumulated depreciation, respectively
224,138

 
56,571

Goodwill
918,485

 
363,448

Identifiable intangible assets, net of $54,560 and $15,411 in accumulated amortization, respectively
363,004

 
185,179

Deferred tax asset, long-term
76

 
72

Restricted cash
10,315

 
2,141

Other long-term assets
26,496

 
2,799

Total long-term assets
1,542,514

 
610,210

Total assets
$
2,746,293

 
$
780,241

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
241,354

 
$
71,391

Accrued salaries and wages
45,577

 
11,741

Accrued expenses, other
47,772

 
9,489

Current maturities of long-term debt
2,907

 
2,028

Other current liabilities
7,960

 
4,684

Total current liabilities
345,570

 
99,333

Senior notes due 2019
500,000

 

Convertible senior notes
102,339

 
106,268

Revolving credit facility and other long-term debt, net of current maturities
229

 
75,373

Deferred tax liability, long-term
83,813

 
15,200

Other long-term liabilities
61,854

 
28,224

Total long-term liabilities
748,235

 
225,065

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Series A convertible perpetual preferred stock, $.001 par value; 10,000,000 shares; 73,335 and 74,175 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
42,258

 
42,737

Series B convertible perpetual preferred stock, $.001 par value; 371,848 shares; 371,848 and 0 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
363,898

 

Common stock, $.001 par value; 150,000,000 shares authorized; 64,486,445 issued and outstanding at September 30, 2014 and 30,583,073 and 30,538,073 shares issued and outstanding, respectively, at December 31, 2013
64

 
30

Additional paid-in capital
1,413,860

 
524,972

Treasury stock, at cost, 0 and 45,000 shares held at September 30, 2014 and December 31, 2013, respectively

 
(107
)
Accumulated deficit
(167,592
)
 
(111,789
)
Total stockholders’ equity
1,652,488

 
455,843

Total liabilities and stockholders’ equity
$
2,746,293

 
$
780,241


See accompanying notes to condensed consolidated financial statements.

4


XPO Logistics, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
662,470

 
$
193,982

 
$
1,525,882

 
$
445,071

Operating expenses
 
 
 
 
 
 
 
Cost of purchased transportation and services
487,365

 
159,147

 
1,170,509

 
374,636

Direct operating expense
71,026

 
2,077

 
102,118

 
2,077

Sales, general and administrative expense
117,717

 
51,177

 
300,148

 
112,159

Total operating expenses
676,108

 
212,401

 
1,572,775

 
488,872

Operating loss
(13,638
)
 
(18,419
)
 
(46,893
)
 
(43,801
)
Other expense
296

 
235

 
546

 
294

Interest expense
17,842

 
6,415

 
31,303

 
12,585

Loss before income tax provision
(31,776
)
 
(25,069
)
 
(78,742
)
 
(56,680
)
Income tax benefit
(20,077
)
 
(19,044
)
 
(25,147
)
 
(18,748
)
Net loss
(11,699
)
 
(6,025
)
 
(53,595
)
 
(37,932
)
Cumulative preferred dividends
(733
)
 
(743
)
 
(2,208
)
 
(2,229
)
Net loss available to common shareholders
$
(12,432
)
 
$
(6,768
)
 
$
(55,803
)
 
$
(40,161
)
Basic loss per share
 
 
 
 
 
 
 
Net loss
$
(0.23
)
 
$
(0.28
)
 
$
(1.13
)
 
$
(1.99
)
Diluted loss per share
 
 
 
 
 
 
 
Net loss
$
(0.23
)
 
$
(0.28
)
 
$
(1.13
)
 
$
(1.99
)
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
54,470

 
24,222

 
49,497

 
20,167

Diluted weighted average common shares outstanding
54,470

 
24,222

 
49,497

 
20,167

See accompanying notes to condensed consolidated financial statements.

5


XPO Logistics, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
 
Nine Months Ended September 30,
 
2014
 
2013
Operating activities
 
 
 
Net loss
$
(53,595
)
 
$
(37,932
)
Adjustments to reconcile net loss to net cash from operating activities
 
 
 
Provisions for allowance for doubtful accounts
5,108

 
1,855

Depreciation and amortization
63,790

 
11,743

Stock compensation expense
5,636

 
3,374

Accretion of debt
4,199

 
4,437

Deferred tax expense
(28,686
)
 
(18,882
)
Other
2,147

 
(201
)
Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(73,472
)
 
(28,096
)
Income tax payable
2,889

 
(662
)
Prepaid expense and other current assets
3,027

 
(2,373
)
Other long-term assets
(1,688
)
 
(97
)
Accounts payable
39,714

 
(1,725
)
Accrued expenses and other liabilities
17,674

 
7,014

Cash flows used by operating activities
(13,257
)
 
(61,545
)
Investing activities
 
 
 
Acquisition of businesses, net of cash acquired
(813,657
)
 
(352,266
)
Payment for purchases of property and equipment
(21,600
)
 
(6,535
)
Other
339

 
125

Cash flows used by investing activities
(834,918
)
 
(358,676
)
Financing activities
 
 
 
Proceeds from common stock offerings, net
733,954

 
239,660

Proceeds from issuance of preferred stock, net
363,898

 

Proceeds from issuance of senior notes, net
489,641

 

Proceeds from borrowing on revolving credit facility
130,000

 

Repayment of borrowings on revolving credit facility
(205,000
)
 

Dividends paid to preferred stockholders
(2,208
)
 
(2,229
)
Payments of tax withholdings for restricted shares
(2,501
)
 
(1,585
)
Other
(1,032
)
 
(659
)
Cash flows provided by financing activities
1,506,752

 
235,187

Net increase (decrease) in cash
658,577

 
(185,034
)
Cash and cash equivalents, beginning of period
21,524

 
252,293

Cash and cash equivalents, end of period
$
680,101

 
$
67,259

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
15,282

 
$
6,611

Cash (received) paid for income taxes
$
(1,091
)
 
$
907

Equity portion of acquisition purchase price
$
138,252

 
$
10,446

See accompanying notes to condensed consolidated financial statements.

6


XPO Logistics, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended September 30, 2014
(Unaudited)
(In thousands)
 
 
Series A Preferred Stock
 
Series B Preferred Stock
 
Common Stock
 
Treasury Stock
 
Paid-In
 
Accumulated
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit
 
Total
Balance, December 31, 2013
74

 
$
42,737

 

 
$

 
30,583

 
$
30

 
(45
)
 
$
(107
)
 
$
524,972

 
$
(111,789
)
 
$
455,843

Net loss

 

 

 

 

 

 

 

 

 
(53,595
)
 
$
(53,595
)
Exercise of warrants and stock options and other

 

 

 

 
330

 

 

 

 
(1,983
)
 

 
$
(1,983
)
Conversion of preferred stock to common stock
(1
)
 
(479
)
 

 

 
120

 

 

 

 
479

 

 
$

Proceeds from issuance of preferred stock, net of issuance costs

 

 
372

 
363,898

 

 

 

 

 

 

 
$
363,898

Proceeds from common stock offering, net of issuance costs

 

 

 

 
27,953

 
28

 

 

 
733,926

 

 
$
733,954

Issuance of common stock for acquisitions

 

 

 

 
4,704

 
5

 
45

 
107

 
138,140

 

 
$
138,252

Issuance of common stock upon conversion of senior notes, net of tax

 

 

 

 
796

 
1

 

 

 
12,690

 

 
$
12,691

Dividend paid

 

 

 

 

 

 

 

 

 
(2,208
)
 
$
(2,208
)
Stock compensation expense

 

 

 

 

 

 

 

 
5,636

 

 
$
5,636

Balance, September 30, 2014
73

 
$
42,258

 
372

 
$
363,898

 
64,486

 
$
64

 

 
$

 
$
1,413,860

 
$
(167,592
)
 
$
1,652,488

See accompanying notes to condensed consolidated financial statements.

7


XPO Logistics, Inc.
Notes to Condensed Consolidated Financial Statements
Three and Nine Months Ended September 30, 2014 and 2013
(Unaudited)
1. Organization
Nature of Business
XPO Logistics, Inc. (“XPO,” the “Company,” “we,” “us” or “our”)—provides premium transportation and logistics services to thousands of customers through our four business units:
Freight Brokerage—provides services primarily to customers in North America under the brands XPO Logistics, XPO Last Mile (formerly 3PD), and Pacer. These services include truckload, less-than truckload and intermodal brokerage, and last-mile delivery logistics services for the delivery of heavy goods. Freight brokerage services are arranged using relationships with subcontracted motor and rail carriers, as well as vehicles that are owned and operated by independent contract drivers.
Expedited Transportation—provides services under the brands XPO Express (formerly Express-1), XPO NLM and XPO Air Charter to customers in North America. These services include the management of time-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 as 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 under the brands XPO Global Logistics (formerly Concert Group Logistics) and Ocean World Lines (a Pacer brand) to North America-based customers with domestic and global interests. These services are sold and arranged under the authority of XPO Global Logistics through a network of Company-owned and independently-owned offices in the United States, Canada, Europe and Asia.
Contract Logistics—provides specialized logistics and comprehensive supply chain management solutions to large multi-national and medium-sized corporations and government agencies under the brand New Breed Logistics, which was acquired in September 2014. See Note 3—Acquisitions. New Breed Holding Company ("New Breed") and its subsidiaries conduct operations principally in the United States. These services include value-added warehousing and distribution, reverse logistics, transportation management, freight bill audit and payment, lean manufacturing support, aftermarket support and supply chain optimization.
For specific financial information relating to the above segments, refer to Note 15—Segment Reporting.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with the instructions to Form 10-Q. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. However, management believes that the disclosures contained herein are adequate to make the information presented not misleading.
These unaudited condensed consolidated financial statements reflect, in the opinion of the Company, all material adjustments (which include only normal recurring adjustments) necessary to fairly present the Company’s financial position as of September 30, 2014 and December 31, 2013, and results of operations for the three- and nine-month periods ended September 30, 2014 and 2013. The preparation of the condensed 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 prepared on the basis of the most current and best available information and actual results could differ materially from those estimates. Intercompany transactions have been eliminated in the consolidated balance sheets and results of operations. Where the presentation of these intercompany eliminations differs between the consolidated and reportable segment financial statements, reconciliations of certain line items are provided.
These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2013 that are set forth in the

8


Company’s Annual Report on Form 10-K, a copy of which is available on the SEC’s website (www.sec.gov). Results of operations for interim periods are not necessarily indicative of results to be expected for a full year.

Use of Estimates
The Company prepares its unaudited condensed consolidated 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 liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting period. The Company reviews its estimates on 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, recognition of revenue, costs of purchased transportation and services, direct operating expenses, recoverability of long-lived assets, estimated legal accruals, estimated restructuring accruals, valuation allowances for deferred taxes, reserve for uncertain tax positions, and allowance for doubtful accounts. These evaluations are performed and adjustments are made as information is available. Management believes that these estimates, which have been discussed with the audit committee of the Company’s board of directors, are reasonable; however, actual results could differ from these estimates.
Statements of Operations, Balance Sheet, and Statement of Cash Flows Presentation
Certain line items from the December 31, 2013 consolidated balance sheet and condensed consolidated statement of cash flows for the nine-months ended September 30, 2013 have been conformed to the 2014 presentation. The carrier costs related to unbilled revenue are now included in accounts payable rather than accrued expenses, other. The conformed line items had no impact on previously reported results.
Certain line items from the condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2013 have been conformed to the 2014 presentation, including the retitling of direct expense to cost of purchased transportation and services and the addition of the direct operating expense category. The conformed line items had no impact on previously reported results.
Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue at the point in time when delivery is completed and the shipping terms of the contract have been satisfied, with related costs of delivery being accrued as incurred and expensed within the same period in which the associated revenue is recognized. The Company’s warehousing, distribution and supply chain services revenues are recognized as the storage or service is rendered. The Company uses 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.
For all subsidiaries other than XPO NLM and New Breed when serving as an agent for its customers in arranging purchased transportation, the Company reports revenue on a gross basis in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) Topic 605, “Reporting Revenue Gross as Principal Versus Net as an Agent.” The Company believes presentation on a gross basis is appropriate under ASC Topic 605 in light of the following factors:
 
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 (requirements may include, for example, on-time delivery, handling freight loss and damage claims, establishing pick-up and delivery times, and tracking shipments in transit).
For Expedited Transportation and Freight Brokerage, the Company has complete discretion to select contractors or other transportation providers (collectively, “service providers”). For Freight Forwarding, the Company enters into agreements with significant service providers that specify the cost 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-

9


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 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 the Company for a portion (typically 70-80%) of credit losses. The Company retains the risk that the independent station owners will not meet this obligation.
Specific to the Company’s intermodal business, the Company has entered into certain agreements that represent multiple-deliverable arrangements. Deliverables under the arrangements represent separate units of accounting that have stand-alone value and no customer-negotiated refunds or return rights exist for the delivered services. These deliverables consist of network management fees, equipment use fees, ocean carrier intermodal services and drayage services. Revenue is allocated to each deliverable based on the relative selling price method. The relative selling price method is based on a hierarchy consisting of vendor-specific objective evidence (VSOE), if available, third-party evidence (TPE), if VSOE is not available, or estimated selling prices (ESP), if neither VSOE nor TPE is available. For the ocean carrier intermodal and drayage services, revenue is allocated based on VSOE. VSOE is not available for either the network management fees or the equipment fees. TPE was established for the equipment fees by evaluating similar and interchangeable competitor services in stand-alone sales. TPE could not be established for the network management fees. Therefore, the Company determined ESP for the network management fees by considering several external and internal factors including, but not limited to, pricing practices, similar product offerings, margin objectives and internal costs. ESP for each deliverable is updated, when appropriate, to ensure that it reflects recent pricing experience. Revenue is recognized for each of the deliverables when the revenue recognition conditions discussed above are met.
Specific to the Company's contract logistics business, a significant portion of its revenue is recognized based on objective criteria that do not require significant estimates or uncertainties. For example, transaction volumes, time and material, fixed-price and cost-reimbursable arrangements are based on specific, objective criteria under the contracts. Revenues on cost-reimbursable contracts are recognized by applying a factor to costs as incurred, such factor being determined by the contract provisions. Revenues on unit-price contracts are recognized at the contractual selling prices of work completed. Revenues on time and material contracts are recognized at the contractual rates as the labor hours and direct expenses are incurred. Revenues from fixed-price contracts are recognized as services are provided, unless revenues are earned and obligations fulfilled in a different pattern. Generally, the contracts contain provisions for adjustments to future pricing based upon changes in volumes, services and other market conditions, such as inflation. Revenues relating to such incentive or contingency payments are recorded when the contingency is satisfied and the Company concludes the amounts are earned. The contracts typically span several years and involve delivery of services in a number of different manners. Revenues recognized under these contracts do not require the use of significant estimates that are susceptible to change. The Company evaluates a client's agreements for multiple elements and aggregation of individual contracts into a multiple element agreement. The Company believes the current contracts do not meet the criteria required for multiple element contract accounting. Each contract is negotiated independently on a stand-alone basis, and prices are established based on operation-specific requirements. Furthermore, the Company's clients frequently choose their vendors and award business at the conclusion of a competitive bidding process for each service. However, should a client award multiple contracts that the Company subsequently determines are inter-dependent, the analysis of the value and timing of revenue recognition may subsequently change.
For the Company’s subsidiaries XPO NLM and New Breed when serving as an agent for its customers in arranging purchased transportation, revenue is recognized on a net basis in accordance with ASC Topic 605. The Company does not serve as the primary obligor. XPO NLM receives a fixed management fee for its services while New Breed receives a variable fee after deducting the cost of purchased transportation. Neither entity assumes credit risk in these transactions. In certain instances with XPO NLM, the Company also does not have discretion to select its service providers.
The Company’s Freight Forwarding segment collects certain taxes and duties on behalf of its 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 revenue recognized of $7.7 million and $1.1 million for the three-month periods ended September 30, 2014 and 2013, respectively, and $14.8 million and $3.4 million for the nine-month periods ended September 30, 2014 and 2013, respectively.
Cash and Cash Equivalents
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.

10


Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoice amount or in the case of unbilled amounts at the expected invoice amount. 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 prepaid rent, software maintenance costs, insurance premiums, other prepaid operating expenses, certain inventories at XPO Last Mile and New Breed, receivables related to certain working capital adjustments from acquisitions, and other miscellaneous receivables. Prepaid expenses are amortized into expense over the respective contract term or other applicable time period.
Property and Equipment
Property and equipment are generally recorded at cost or in the case of acquired property and equipment 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 internally-developed software, the Company has adopted the provisions of ASC Topic 350, “IntangiblesGoodwill and Other.” Accordingly, certain costs incurred in the planning and evaluation stage of internally-developed computer software are expensed as incurred. Costs incurred during the application development stage are capitalized and included in property and equipment. Capitalized internally-developed software also includes the fair value of acquired internally-developed technology. The net book value of capitalized internally-developed software totaled $68.2 million and $31.7 million as of September 30, 2014 and December 31, 2013, respectively.
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
Rail cars
25 to 30 years
Containers and chassis
15 to 20 years
Machinery and equipment
5 to 10 years
Office equipment
5 to 7 years
Computer equipment
4 to 5 years
Computer software
3 to 5 years
Satellite equipment
3 to 5 years
Warehouse equipment
7 to 10 years
For additional information refer to Note 7—Property and Equipment.
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. During June 2014, the Company rebranded its Express-1 business to XPO Express. As a result of this action, the Company accelerated the amortization of $3.3 million in indefinite-lived intangible assets related to the Express-1 trade name based on the reduction in its remaining useful life. The full $3.3 million of accelerated amortization was recorded during the quarter ended June 30, 2014 and represented the full value of the Express-1 trade name intangible asset.
The Company follows the provisions of ASC Topic 350, “IntangiblesGoodwill and Other,” which requires an annual impairment test for goodwill. The Company may first choose to perform a qualitative evaluation of the likelihood of goodwill impairment. If the Company determines a quantitative evaluation is necessary, the goodwill at the reporting unit is 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

11


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 each of the Company’s reporting units, the excess of the fair value over the book value ranged from 20% to over 600%. For additional information refer to Note 9—Goodwill.
Intangible Assets with Definite Lives
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. For the periods presented, the Company did not recognize any impairment of the identified intangible assets.

The Company’s intangible assets subject to amortization consist of customer lists and relationships, carrier relationships, trade names, non-compete agreements, and other intangibles. Customer lists and relationships and trade names are amortized on an accelerated basis over the period of economic benefit based on the estimated cash flows attributable to the related intangible assets. Non-compete agreements, carrier relationships and other intangibles are amortized on a straight-line basis over the estimated useful lives of the related intangible asset. The estimated useful lives of the respective intangible assets by type are as follows:
Classification
Estimated Useful Life
Customer lists and relationships
3 to 14 years
Carrier relationships
2 years
Trade name
1 to 5 years
Non-compete agreements
Term of agreement
Other intangible assets
3 months to 5 years
For additional information refer to Note 8—Intangible Assets.
Restricted Cash
Restricted cash primarily consists of cash held to fund healthcare claims for employees in our contract logistics business who are covered by the McNamara-O'Hara Service Contract Act (SCA), cash held as collateral for letters of credit in conjunction with the acquisition of New Breed, and cash held as security under XPO Last Mile’s captive insurance contracts.
Other Long-Term Assets
Other long-term assets consist primarily of debt issuance costs related to the Company’s 7.875% senior notes due 2019, revolving credit facility and convertible senior notes, favorable leasehold interests (recorded as part of purchase accounting), balances representing deposits and notes receivable from various XPO Global Logistics independent station owners, and incentive payments to independent station owners within the XPO Global Logistics network. The debt issuance costs related to the revolving credit facility are amortized on a straight-line basis over the respective term while the debt issuance costs related to the senior notes and convertible senior notes are amortized using the effective interest method. The favorable leasehold interest assets are amortized through rent expense on a straight-line basis over the remaining lease term. 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.


12



The following table outlines the Company’s other long-term assets as of September 30, 2014 and December 31, 2013 (in thousands):
 
As of September 30, 2014
 
As of December 31, 2013
Debt issuance costs
$
15,788

 
$
1,582

Long-term deposits
4,299

 
1,171

Favorable leasehold interests
3,383

 

Other long-term assets
3,026

 
46

   Total Other Long-Term Assets
$
26,496

 
$
2,799

Accrued Expenses, Other
Accrued expenses, other consist primarily of accrued purchased services; accrued container and railcar costs, including maintenance; accruals for various insurance claims; accrued interest on the Company's outstanding debt; accrued facility charges related to the Company's contract logistics business; accrued property and other taxes; deferred revenue; and other miscellaneous accrued expenses. The following table outlines the Company’s accrued expenses, other as of September 30, 2014 and December 31, 2013 (in thousands):
 

As of September 30, 2014

As of December 31, 2013
Accrued purchased services
$
16,729


$
7,301

Accrued container and railcar costs
6,764



Accrued insurance claims
6,048


437

Accrued interest
3,938


1,498

Accrued facility charges
3,233



Accrued property and other taxes
2,968



Deferred revenue
2,765



Other accrued expenses
5,327

 
253

   Total Accrued Expenses, Other
$
47,772


$
9,489


13


Other Long-Term Liabilities
Other long-term liabilities consist primarily of the holdback of a portion of the purchase price in connection with acquisitions, reserves for uncertain tax positions, asset retirement obligations, unfavorable leasehold interests (recorded as part of purchase accounting), an unfavorable customer contract (recorded as part of purchase accounting), deferred rent liabilities, certain liability insurance reserves, vacant rent accruals related to facility closures, and other long-term liabilities. The unfavorable leasehold interest liabilities are amortized through rent expense on a straight-line basis over the remaining lease term. The following table outlines the Company’s other long term liabilities as of September 30, 2014 and December 31, 2013 (in thousands):
 
 
As of September 30, 2014
 
As of December 31, 2013
Acquisition-related holdbacks
$
21,651

 
$
22,500

Uncertain tax positions
7,796

 
916

Asset retirement obligations
7,388

 

Unfavorable leasehold interests
6,276

 
233

Unfavorable customer contract
5,185

 

Long-term portion of deferred rent liability
4,913

 
4,387

Long-term workers compensation insurance claims
3,820

 

Long-term portion of vacant rent liability
3,445

 
143

Other long-term liabilities
1,380

 
45

   Total Other Long-Term Liabilities
$
61,854

 
$
28,224

Income Taxes
Taxes on income are provided for in accordance with 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 condensed 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, and 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. Management 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 likely than not that such deferred tax assets will not be realized.
Accounting for uncertainty in income taxes is determined based on 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. ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. For additional information refer to Note 12—Income Taxes.
Foreign Currency Translation
The statements of operations of foreign subsidiaries whose functional currencies are other than the U.S. dollar are translated into U.S. dollars using average exchange rates for the period and the exchange gain or loss is reflected in expense in the condensed consolidated statements of operations. Exchange gains or losses are not material to the condensed consolidated statements of operations for the periods presented. The net assets of foreign subsidiaries whose functional currencies are other than the U.S. dollar are translated into U.S. dollars using exchange rates as of the balance sheet date. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in stockholders’ equity. Transaction gains and losses were not significant for any of the periods presented.



14


Fair Value Measurements
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.

At September 30, 2014 and December 31, 2013, the Company’s financial assets that were accounted for at fair value on a recurring basis included $201.4 million and $1.6 million of money market funds, respectively.
Estimated Fair Value of Financial Instruments
The aggregate net fair value estimates 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 periods ended September 30, 2014 and December 31, 2013. 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.
As of September 30, 2014, the Company had outstanding $500 million of 7.875% Senior Notes due September 1, 2019, which the Company is obligated to repay at face value unless they are redeemed prior to the maturity date. Holders of the senior notes are due interest semiannually in arrears on March 1 and September 1 of each year commencing March 1, 2015 and maturing on September 1, 2019. Prior to September 1, 2016, the Company may redeem some or all of the senior notes due 2019 at a price equal to 100% of the principal amount of the notes plus the applicable “make-whole” premium. Additionally, the Company may redeem some or all of the senior notes beginning on September 1, 2016. The initial redemption price is 103.938% of their principal amount, plus accrued interest. The redemption price will decline each year after 2016 and will be 100% of their principal amount, plus accrued interest, beginning on September 1, 2018. In addition, on or prior to September 1, 2016, the Company may redeem up to 40% of the aggregate principal amount of notes with the proceeds of certain equity offerings at 107.875% of their principal amount plus accrued interest. The fair value of the senior notes due 2019 equaled the carrying value as of September 30, 2014. For additional information refer to Note 6—Debt.
As of September 30, 2014, the Company had outstanding $120.7 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. The conversion rate is 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. The fair value of the convertible senior notes was $284.7 million as of September 30, 2014. For additional information refer to Note 6—Debt.
Stock-Based Compensation
The Company accounts for share-based compensation based on the 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 units subject to service or performance-based vesting conditions only, the fair value is established based on the market price on the date of the grant. For grants of restricted stock units subject to service, performance and market-based vesting conditions, the fair value is established using the Monte Carlo simulation lattice model. For grants of options, the Company uses the Black-Scholes option pricing model to estimate the fair value of share-based payment awards. The determination of the fair value of share-based awards is affected by the Company’s stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.

15


The weighted-average fair value of each stock option recorded in expense for the three- and nine-month periods ended September 30, 2014 and 2013 was estimated on the date of grant using the Black-Scholes option pricing model and is amortized over the requisite service period of the 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. For additional information refer to Note 11—Stock-Based Compensation.
Earnings per Share
Earnings per common share are computed in accordance with ASC Topic 260, “Earnings per Share,” which requires companies to present basic earnings per share and diluted earnings per share. For additional information refer to Note 13—Earnings per Share.
3. Acquisitions
2014 Acquisitions
New Breed Logistics
On July 29, 2014, the Company entered into a definitive Agreement and Plan of Merger (the “New Breed Merger Agreement”) with New Breed, providing for the Company to acquire all of New Breed (the “New Breed Transaction”). New Breed is a provider of highly engineered contract logistics solutions for multi-national and medium-sized corporations and government agencies in the United States. The closing of the transaction was effective on September 2, 2014. At the closing, the Company paid $615.8 million in cash including a $1.1 million estimate of the working capital adjustment.
In conjunction with the New Breed Merger Agreement, the Company entered into a subscription agreement with Louis DeJoy, the Chief Executive Officer of New Breed. Pursuant to the subscription agreement, Mr. DeJoy purchased $30.0 million of unregistered XPO common stock at a per share purchase price in cash equal to (1) the closing price of XPO common stock on the New York Stock Exchange on July 29, 2014 with respect to 50% of such purchase and (2) the closing price of XPO common stock on the New York Stock Exchange on the trading day immediately preceding September 2, 2014 with respect to the remaining 50% of such purchase. Due to the interrelationship between the New Breed Merger Agreement and the subscription agreement, the Company considers the substance of the consideration paid to be a combination of net cash and equity as described below.
The fair value of the total consideration paid under the New Breed Merger Agreement was $615.9 million and consisted of $585.8 million of net cash paid at the time of closing, including an estimate of the working capital adjustment, and $30.1 million of equity representing the fair value of 1,060,598 shares of the Company’s common stock at the closing market price of $32.45 per share on September 2, 2014 less a marketability discount on the shares issued due to a holding period restriction. The net cash paid at the time of closing consisted of $615.8 million less the $30.0 million used by Louis DeJoy to purchase XPO common stock per the subscription agreement.
The New Breed Transaction 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 condensed consolidated balance sheet at their estimated fair values as of September 2, 2014, with the remaining unallocated purchase price recorded as goodwill. Goodwill represents the expected synergies and cost rationalization from the merger of operations as well as intangible assets that do not qualify for separate recognition such as an assembled workforce. The following table outlines the consideration transferred and purchase price allocation at the respective estimated fair values as of September 2, 2014 (in thousands):
 

16


Consideration
$
615,857

Cash and cash equivalents
1,939

Accounts receivable
112,074

Prepaid and other current assets
10,617

Income tax receivable
16,137

Restricted cash
8,530

Property and equipment
114,119

Trademarks/trade names
4,460

Contractual customer relationships asset
115,120

Contractual customer relationships liability
(5,640
)
Non-contractual customer relationships
16,730

Other long-term assets
6,230

Accounts payable
(17,732
)
Accrued expenses
(32,953
)
Deferred tax liabilities, non-current
(78,095
)
Other long-term liabilities
(7,873
)
Goodwill
$
352,194

As of September 30, 2014, the purchase price allocation is considered final, except for the settlement of any working capital adjustments and the fair value of accounts receivable, property and equipment, intangible assets, taxes and assumed liabilities. All goodwill recorded in the acquisition relates to the Contract Logistics reportable segment. The goodwill as a result of the acquisition is not deductible for income tax purposes.
Atlantic Central Logistics
On July 28, 2014, the Company entered into a Stock Purchase Agreement with Perry Barbaruolo, Thomas G. Bartley, Robert Humes II, Jeffrey E. Patterson, Brian Ruane, The Bryn Mawr Trust Company of Delaware, as Trustee of the Perry Barbaruolo 2014 Delaware Trust, Thomas Bartley, as Trustee of the Janice C. Day 2014 Trust, Thomas Bartley, as Trustee of the Jessica M. Clark 2014 Trust, Thomas Bartley, as Trustee of the Jacqueline M. Patterson 2014 Trust, Thomas Bartley, as Trustee of the Patterson 2014 Grandchildren's Trust, The Bryn Mawr Trust Company of Delaware as Trustee of the Brian Ruane 2014 Delaware Trust, and The Bryn Mawr Trust Company of Delaware, as Trustee of the Richard Roberts 2014 Trust to acquire all of the outstanding capital stock of Simply Logistics, Inc. d/b/a Atlantic Central Logistics (“ACL”) for $36.2 million in cash consideration and deferred payments. ACL provides e-commerce fulfillment services by facilitating the time-sensitive, local movement of goods between distribution centers and the end-consumer. 
The ACL 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 condensed consolidated balance sheet at their estimated fair values as of July 28, 2014 with the remaining unallocated purchase price recorded as goodwill. As a result of the acquisition, the Company recorded goodwill of $25.3 million and intangible assets of $11.7 million. All goodwill recorded related to the acquisition relates to the Freight Brokerage reportable segment. The goodwill as a result of the acquisition is not deductible for income tax purposes. As of September 30, 2014, the purchase price is considered final except for the settlement of any working capital adjustments and the fair value of accounts receivable, intangible assets, taxes and assumed liabilities.
Pacer International
On January 5, 2014, the Company entered into a definitive Agreement and Plan of Merger (the “Pacer Merger Agreement”) with Pacer International, Inc. ("Pacer"), providing for the acquisition of Pacer by the Company (the “Pacer Transaction”). Pacer is an asset-light North American freight transportation and logistics services provider. The closing of the transaction was effective on March 31, 2014 (the “Effective Time”).
At the Effective Time, each share of Pacer’s common stock, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time was converted into the right to receive (i) $6.00 in cash and (ii) 0.1017 of a share of XPO common stock, which amount is equal to $3.00 divided by the average of the volume-weighted average closing prices of

17


XPO common stock for the ten trading days prior to the Effective Time (the “Pacer Merger Consideration”). Pursuant to the terms of the Pacer Merger Agreement, all vested and unvested Pacer options outstanding at the Effective Time were settled in cash based on the value of the Pacer Merger Consideration. In addition, all Pacer restricted stock, and all vested and unvested Pacer restricted stock units and performance units outstanding at the Effective Time were converted into the right to receive the Pacer Merger Consideration. The fair value of the total consideration paid under the Pacer Merger Agreement was $331.5 million and consisted of $223.3 million of cash paid at the time of closing and $108.2 million of equity representing the fair value of 3,688,246 shares of the Company’s common stock at the closing market price of $29.41 per share on March 31, 2014 less a marketability discount on a portion of shares issued to certain former Pacer executives due to a holding period restriction. The marketability discount did not have a material impact on the fair value of the equity consideration provided.
The Pacer Transaction 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 condensed consolidated balance sheet at their fair values as of March 31, 2014, with the remaining unallocated purchase price recorded as goodwill. Goodwill represents the expected synergies and cost rationalization from the merger of operations as well as intangible assets that do not qualify for separate recognition such as an assembled workforce. The following table outlines the consideration transferred and purchase price allocation at the respective fair values as of March 31, 2014 (in thousands):
 
Consideration
$
331,488

Cash and cash equivalents
22,302

Accounts receivable
118,842

Prepaid and other current assets
9,384

Deferred tax assets, current
2,202

Property and equipment
50,593

Trademarks/trade names
2,760

Non-compete agreements
2,310

Contractual customer relationships
66,250

Non-contractual customer relationships
1,010

Other long-term assets
5,790

Accounts payable
(71,042
)
Accrued salaries and wages
(3,105
)
Accrued expenses, other
(23,021
)
Other current liabilities
(1,496
)
Deferred tax liabilities, non-current
(17,286
)
Other long-term liabilities
(11,909
)
Goodwill
$
177,904

As of September 30, 2014, the purchase price allocation is considered final, except for the fair value of taxes and assumed liabilities. All goodwill recorded related to the acquisition relates to the Freight Brokerage reportable 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 not deductible for income tax purposes. Total tax deductible goodwill was $323.2 million on the acquisition date of March 31, 2014. The difference between book and tax goodwill represents the tax basis in goodwill from acquisitions made by Pacer prior to the acquisition by XPO.
In connection with the Pacer Transaction, certain members of the Pacer senior management team signed employment agreements with the Company that became effective upon completion of the acquisition. As part of their employment agreements, the Company granted these Pacer management team members an aggregate of 122,569 time-based restricted stock unit (“RSU”) awards under the XPO Logistics, Inc. Amended and Restated 2011 Omnibus Incentive Compensation Plan. 




18


2013 Acquisitions
NLM
On December 10, 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 Landstar Supply Chain Solutions, Inc. known as 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 condensed consolidated balance sheet at their fair values as of December 28, 2013 with the remaining unallocated purchase price recorded as goodwill. Goodwill represents the expected synergies and cost rationalization from the joining of operations as well as intangible assets that do not qualify for separate recognition such as an assembled workforce. The following table outlines the consideration transferred and purchase price allocation at the respective fair values as of December 28, 2013 (in thousands):
Consideration
$
87,000

Cash and cash equivalents
7,381

Accounts receivable
35,975

Prepaid and other assets
1,110

Property and equipment
13,577

Trademarks/trade names
440

Non-compete agreements
465

Customer relationships
25,200

Accounts payable
(43,519
)
Other current liabilities
(479
)
Goodwill
$
46,850

As of September 30, 2014, the purchase price allocation is considered final. All goodwill recorded related to the acquisition relates to the Expedited Transportation reportable segment and is fully deductible for income tax purposes based on the Internal Revenue Code Section 338(h)(10) election made with respect to the NLM Transaction. 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.
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 condensed 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 $14.1 million and intangible assets of $11.3 million. All goodwill recorded related to the acquisition relates to the Freight Brokerage reportable segment and is fully deductible for income tax purposes. In addition, the Company recorded an acquired technology asset of $0.9 million as property and equipment in the condensed consolidated balance sheet. As of September 30, 2014, the purchase price allocation is considered final. The working capital adjustment in connection with this acquisition has been finalized and there was no 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. ("3PD"), Logistics Holding Company Limited, Mr. Karl Meyer, Karl Frederick Meyer 2008 Irrevocable Trust II, Mr. Randall Meyer, Mr. Daron

19


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 $364.3 million and consisted of $333.2 million of net cash payable at the time of closing, $22.5 million of deferred payments, $7.4 million representing the fair value of 407,479 restricted shares of the Company’s common stock at the closing market price of $21.99 per share on August 15, 2013 less a marketability discount of $1.6 million on shares issued to the sellers due to a holding period restriction, and the final working capital adjustment of $1.2 million. The majority of the shares issued are restricted until September 2, 2016.
The 3PD Transaction 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 condensed consolidated balance sheet at their fair values as of August 15, 2013, with the remaining unallocated purchase price recorded as goodwill. Goodwill represents the expected synergies and cost rationalization from the joining of operations as well as intangible assets that do not qualify for separate recognition such as an assembled workforce. The following table outlines the consideration transferred and purchase price allocation at the respective fair values as of August 15, 2013 (in thousands):
 
Consideration
$
364,329

Cash and cash equivalents
950

Accounts receivable
30,261

Prepaid and other current assets
1,743

Deferred tax assets, current
559

Property and equipment
22,965

Trademarks/trade names
5,900

Non-compete agreements
1,550

Customer relationships
110,600

Carrier relationships
12,100

Other long-term assets
409

Accounts payable
(12,975
)
Accrued salaries and wages
(1,724
)
Accrued expenses, other
(4,214
)
Other current liabilities
(5,389
)
Deferred tax liabilities, non-current
(29,755
)
Goodwill
$
231,349

All goodwill recorded related to the acquisition relates to the Freight Brokerage reportable 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 not deductible for income tax purposes. Total tax deductible goodwill was $27.1 million on the acquisition date of August 15, 2013. The difference between book and tax goodwill represents the tax basis in goodwill from acquisitions made by 3PD prior to the acquisition by XPO.
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 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 exceeding $32.50 per share for a designated period of time and continued employment at the Company by the grantee as of the vesting date.



20


Interide Logistics
On May 6, 2013, pursuant to an asset purchase agreement, the Company acquired substantially all of the assets of Interide Logistics, LC (“Interide”) for $3.1 million in cash consideration and 36,878 restricted shares of the Company’s common stock with a value of $0.6 million, excluding any working capital adjustments, with no assumption of debt. Interide is a non-asset, third-party transportation logistics service provider focusing on freight brokerage with offices in Salt Lake City, UT, Louisville, KY and St. Paul, MN.
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 condensed consolidated balance sheet at their 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 $3.4 million and intangible assets of $1.7 million. All goodwill recorded related to the acquisition relates to the Freight Brokerage reportable segment and is fully deductible for income tax purposes. The working capital adjustment in connection with this acquisition has been finalized and there was no 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 condensed consolidated balance sheet at their 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 $7.4 million and intangible assets of $2.8 million. All goodwill recorded related to the acquisition relates to the Freight Brokerage reportable segment and is fully deductible for income tax purposes.
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 condensed consolidated balance sheet at their 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. All goodwill recorded related to the acquisition relates to the Expedited Transportation reportable segment and is fully deductible for income tax purposes. The working capital adjustment in connection with this acquisition has been finalized and there was no material change in the purchase price as a result.








21


Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations for the nine-month periods ended September 30, 2014 and 2013 present consolidated information of the Company as if the acquisitions of New Breed, Pacer and 3PD had occurred as of January 1, 2013 (in thousands):
 
 
Pro Forma Nine
Months Ended
September 30, 2014
 
Pro Forma Nine
Months Ended
September 30, 2013
Revenue
$
2,149,150

 
$
1,808,496

Operating loss
$
(32,282
)
 
$
(15,697
)
Net loss
$
(70,609
)
 
$
(50,386
)
Loss per common share

 

Basic
$
(1.31
)
 
$
(1.07
)
Diluted
$
(1.31
)
 
$
(1.07
)
The unaudited pro forma consolidated results for the nine-month periods were prepared using the acquisition method of accounting and are based on the historical financial information of New Breed, Pacer, 3PD and the Company. The unaudited pro forma consolidated results incorporate historical financial information for all significant acquisitions pursuant to SEC regulations since January 1, 2013. The historical financial information has been adjusted to give effect to pro forma adjustments that are: (i) directly attributable to the acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations actually would have been had it completed these acquisitions on January 1, 2013.
4. Restructuring Charges
On March 31, 2014, the Company initiated a facility rationalization and severance program to close facilities and reduce employment in order to improve efficiency and profitability in conjunction with its acquisition of Pacer. The program includes facility exit activities and employment reduction initiatives.
The amount of restructuring charges incurred during the nine-month period ended September 30, 2014 and included in our condensed consolidated statement of operations as sales, general and administrative expense is summarized below (in thousands). These charges are not allocated to our reportable segments. No amount of the restructuring liability was included in the purchase price allocation for Pacer as all activities were initiated by XPO to benefit the post-combination period.
 
Contract termination
 
Severance
 
Total
Reserve balance at December 31, 2013
$

 
$

 
$

Charges incurred
4,815

 
5,280

 
10,095

Payments
(1,061
)
 
(3,262
)
 
(4,323
)
Reserve balance at September 30, 2014
$
3,754

 
$
2,018

 
$
5,772

5. Commitments and Contingencies
Purchase Commitments
As of September 30, 2014, the Company had approximately $12.2 million in future minimum payments required under non-cancellable service agreements for ongoing services, maintenance and support to information technology providers. Remaining future minimum payments related to these agreements amount to approximately $8.7 million, $3.2 million and $0.3 million for the periods ending September 30, 2015, 2016 and 2017, respectively.
During the three- and nine-month periods ended September 30, 2014, $2.7 million and $6.0 million of expense was recognized related to these agreements, respectively.

22


Lease Commitments
As of September 30, 2014, the Company had approximately $312.5 million in future minimum payments required under operating leases for various real estate, double-stack railcars, containers, chassis, tractors, data processing equipment, transportation and office equipment leases that have an initial or remaining non-cancellable lease term. Remaining future minimum payments related to these operating leases amount to approximately $95.6 million, $71.4 million, $53.3 million, $38.0 million, and $54.2 million for the periods ending September 30, 2015, 2016, 2017, 2018, and 2019 and thereafter, respectively.
Rent expense was $25.1 million and $2.7 million for the three-month periods ended September 30, 2014 and 2013, respectively, and $48.9 million and $4.6 million for the nine-month periods ended September 30, 2014 and 2013, respectively.
The Company receives income from others for the use of its double-stack railcars and containers. These income amounts are included in revenues. Rental income was $9.3 million for the three-month period ended September 30, 2014 and $18.5 million for the nine-month period ended September 30, 2014, respectively.
Litigation
The Company is involved, and will continue to be involved, in numerous legal proceedings arising out of the conduct of its business. These proceedings may include, among other matters, claims for property damage or personal injury incurred in connection with the transportation of freight and employment-related claims, including claims involving asserted breaches of employee restrictive covenants and tortious interference with contract. These proceedings also include numerous purported class-action lawsuits, multi-plaintiff and individual lawsuits and state tax and other administrative proceedings that claim that the Company’s owner operators or contract carriers should be treated as employees, rather than independent contractors. These lawsuits and proceedings may seek substantial monetary damages (including claims for unpaid wages, overtime, failure to provide meal and rest periods, unreimbursed business expenses and other items), injunctive relief, or both.
The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. In connection with certain acquisitions of privately-held businesses, the Company has retained purchase price holdbacks to provide security for a negotiated duration with respect to damages incurred in connection with pre-acquisition claims and litigation matters. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount accrued therefor or the applicable purchase price holdback, the Company assesses whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred. If there is a reasonable possibility that a loss, or additional loss, may have been incurred, the Company discloses the estimate of the possible loss or range of loss if it is material and an estimate can be made, or states that such an estimate cannot be made. The evaluation as to whether a loss is reasonably possible or probable is based on the Company’s assessment, in conjunction with legal counsel, regarding the ultimate outcome of the matter.
The Company believes that it has adequately accrued for, or has adequate purchase price holdbacks with respect to, the potential impact of loss contingencies that are probable and reasonably estimable, and there was no indication of a reasonable possibility that a material loss, or additional material loss (including in excess of any applicable purchase price holdback), may have been incurred. The Company does not believe that the ultimate resolution of any matters to which the Company is presently party will have a material adverse effect on its results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
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 could be negatively impacted.
California DLSE claims
The Company’s Pacer subsidiary, which was acquired on March 31, 2014, received notices from the California Labor Commissioner, Division of Labor Standards Enforcement (the “DLSE”), that a total of 153 owner operators contracted with certain Pacer subsidiaries have filed claims with the DLSE in which they assert that they should be classified as employees, as opposed to independent contractors. These claims seek reimbursement for the owner operators’ business expenses, including fuel, tractor maintenance and tractor lease payments. A decision has been rendered by a DLSE hearing officer in seven of these claims, who awarded a total of $2.2 million to the seven claimants. Pacer has appealed these awards to California Superior

23


Court, San Diego, where a de novo trial will be held on the merits of those claims. As part of the acquisition accounting process, XPO is currently evaluating these claims and the recent award to the seven claimants and will determine the fair value of these claims, if any, in the forthcoming measurement period. As of September 30, 2014, the Company has not established any reserve with respect to these matters or other claims involving Pacer, all of which XPO continues to evaluate as part of the acquisition accounting process.
Pacer Acquisition Litigation
Between January 8 and January 16, 2014, five substantially identical putative class actions were filed in the Tennessee Chancery Court against the Company, Pacer and Pacer’s directors challenging the Company’s acquisition of Pacer. By stipulation and order dated February 18, 2014, the Chancery Court for Davidson County consolidated these cases under the caption In re Pacer International, Inc. Shareholder Litigation, No. 14-39-IV. The operative complaint in the consolidated case alleges, among other things, that the directors of Pacer breached their fiduciary duties to Pacer’s shareholders in connection with the proposed acquisition of Pacer by XPO by agreeing to the proposed merger at an allegedly unfair price pursuant to a purportedly flawed and conflicted sales process, by including certain allegedly preclusive deal-protection measures, and by misrepresenting and/or omitting certain allegedly material information in the proxy statement relating to the transaction. The parties have reached an agreement in principle to settle all of these claims, which the Company continues to believe are without merit. The Court has entered an order preliminarily approving the settlement. The settlement remains subject to final Court approval. There can be no assurance that the parties will ultimately enter into a definitive settlement agreement or that the Court will approve the settlement. The proposed settlement is not material to the Company's financial statements.
6. Debt
Senior Notes due 2019
On August 25, 2014, the Company completed a private placement of $500.0 million aggregate principal amount of 7.875% senior notes due September 1, 2019 (the "Senior Notes due 2019"). Total unamortized debt issuance costs related to the Senior Notes due 2019 classified in other long-term assets at September 30, 2014 are $10.2 million.
The Senior Notes due 2019 were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and, outside the United States, only to non-U.S. investors pursuant to Regulation S. The Senior Notes due 2019 were not registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent an effective registration statement or an applicable exemption from registration requirements or a transaction not subject to the registration requirements of the Securities Act or any state securities laws. The Senior Notes due 2019 bear interest at a rate of 7.875% per annum payable semiannually, in cash in arrears, on March 1 and September 1 of each year, commencing March 1, 2015 and maturing on September 1, 2019. The Senior Notes due 2019 are guaranteed by each of the Company’s direct and indirect wholly-owned restricted subsidiaries (other than certain excluded subsidiaries) that are obligors under, or guarantee obligations under, the Company’s existing credit agreement (or certain replacements thereof) or guarantee certain capital markets indebtedness of the Company or any guarantor of the Senior Notes due 2019. The Senior Notes due 2019 and the guarantees thereof are unsecured, unsubordinated indebtedness of the Company and the guarantors. Among other things, the covenants of the Senior Notes due 2019 limit the Company’s ability to, with certain exceptions: incur indebtedness or issue disqualified stock; grant liens; pay dividends or make distributions in respect of capital stock; make certain investments or other restricted payments; prepay or repurchase subordinated debt; sell or transfer assets; engage in certain mergers, consolidations, acquisitions and dispositions; and enter into certain transactions with affiliates. The Company was in compliance, in all material respects, with all covenants related to the Senior Notes due 2019 as of September 30, 2014.
Prior to September 1, 2016, the Company may redeem some or all of the Senior Notes due 2019 at a price equal to 100% of the principal amount of the notes plus the applicable “make-whole” premium. The "make-whole" premium equals the greater of 1% of the then outstanding principal amount of the note and the excess of (a) the present value at such redemption date of (i) the redemption price of the note, at September 1, 2016, plus (ii) all required interest payments due on the note through September 1, 2016 (excluding accrued but unpaid interest), computed using a discount rate equal to the treasury rate as of such redemption date, plus 50 basis points; over (b) the then outstanding principal amount of the note. On and after September 1, 2016, the Company may redeem some or all of the notes for a redemption price that declines each year. The initial redemption price is 103.938% of their principal amount, plus accrued interest. The redemption price will decline each year after 2016 and will be 100% of their principal amount, plus accrued interest, beginning on September 1, 2018. In addition, on or prior to September 1, 2016, the Company may redeem up to 40% of the aggregate principal amount of notes with the proceeds of certain equity offerings at 107.875% of their principal amount plus accrued interest. The Company may make such redemption only if, after any such redemption, at least 60% of the aggregate principal amount of notes originally issued remains outstanding.

24


Debt Facilities
The Company may from time to time use debt 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.
As of September 30, 2014, the Company and certain of its wholly-owned subsidiaries, as borrowers, were parties to a $415 million multicurrency secured Amended and Restated Revolving Loan Credit Agreement (the “Amended Credit Agreement”) with the lender parties thereto and Morgan Stanley Senior Funding, Inc., as administrative agent for such lenders, with a commitment termination date of October 17, 2018. The principal amount of the commitments under the Amended Credit Agreement may be increased by an aggregate amount of up to $100 million, subject to certain terms and conditions specified in the Amended Credit Agreement. The Amended Credit Agreement replaces and supersedes in its entirety the $125 million multicurrency secured Revolving Loan Credit Agreement that the Company entered into on October 18, 2013. At September 30, 2014, the Company had outstanding letters of credit of $15.0 million. Of the $15.0 million of letters of credit outstanding, $5.2 million were fully cash collateralized by the Company. The collateral is included in restricted cash on the condensed consolidated balance sheet as of September 30, 2014. The Company’s availability under the Amended Credit Agreement is not impacted by the cash collateralized outstanding letters of credit. Total unamortized debt issuance costs related to the Amended Credit Agreement classified in other long-term assets at September 30, 2014 are $3.3 million.

On August 8, 2014, the Company amended its revolving loan facility to permit, among other things, the acquisition of New Breed and the related transactions and the offering of the Senior Notes due 2019.

The proceeds of the Amended Credit Agreement may be used by the Company and its subsidiaries for ongoing working capital needs, other general corporate purposes, including strategic acquisitions, and fees and expenses in connection with the transaction. At September 30, 2014, the Company had no amount drawn under the Amended Credit Agreement. The Company was in compliance, in all material respects, with all covenants related to the Amended Credit Agreement as of September 30, 2014. Borrowings under the Amended Credit Agreement bear interest at a per annum rate equal to, at the Company’s 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%. 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 Amended 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 Amended Credit Agreement.
All obligations under the Amended Credit Agreement are secured by substantially all of the Company’s assets and 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. Within the meaning of Regulation 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 Amended Credit Agreement contains representations, warranties and covenants that are customary for agreements of this type. Among other things, the covenants in the Amended Credit Agreement limit the Company’s 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 Amended Credit Agreement also requires the Company to maintain minimum EBITDA or, at the Company’s election, maintain a Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) of not less than 1.00 to 1.00. If an event of default under the Amended 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.

Convertible Senior Notes
At September 30, 2014, the Company had outstanding $120.7 million aggregate principal amount of 4.50% Convertible Senior Notes due October 1, 2017 (the “Notes”). Total unamortized debt issuance costs classified in other long-term assets at September 30, 2014 are $2.3 million. Interest is payable on the Notes on April 1 and October 1 of each year.
During the nine months ended September 30, 2014, the Company issued an aggregate of 796,418 shares of the Company’s common stock to certain holders of the Notes in connection with the conversion of $13.1 million aggregate principal amount of the Notes. The conversions were allocated to long-term debt and equity in the amounts of $10.5 million and $10.5 million, respectively. Certain of these transactions represented induced conversions pursuant to which the Company

25


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, were 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 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 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 Notes are currently redeemable under this provision. 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 to, 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 present values of the remaining 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 4.50%. The make-whole premium is paid to holders whether or not they convert the convertible senior notes following the Company’s issuance of a redemption notice.
The Notes do not contain any financial or operating covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. If the Company undergoes a fundamental change, holders may, subject to certain conditions, require the Company to repurchase for cash all or part of their convertible senior notes at a repurchase price equal to 100% of the principal amount of the convertible senior notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The following table outlines the Company’s debt obligations as of September 30, 2014 and December 31, 2013 (in thousands):

Interest rates
 
Term (months)
 
As of September 30, 2014
 
As of December 31, 2013
Senior notes due 2019
7.88
%
 
60
 
$
500,000

 
$

Convertible senior notes
4.50
%
 
60
 
120,653

 
133,742

Revolving credit facility
4.38
%
 
60
 

 
75,000

Notes payable
N/A

 
N/A
 
2,901

 
2,205

Capital leases for equipment
14.20
%
 
59
 
235

 
196

Total debt

 

 
623,789

 
211,143

Less: unamortized discount on convertible senior notes

 

 
(18,314
)
 
(27,474
)
Less: current maturities of long-term debt

 

 
(2,907
)
 
(2,028
)
Total long-term debt, net of current maturities

 

 
$
602,568

 
$
181,641

7. Property and Equipment
The following table sets forth the Company’s property and equipment as of September 30, 2014 and December 31, 2013 (in thousands):

26


 
As of September 30, 2014
 
As of December 31, 2013
Property and Equipment, at cost

 

Leasehold improvements
$
30,705

 
$
7,969

Buildings
1,115

 
1,115

Vehicles
4,302

 
2,723

Rail cars
18,081

 

Containers and chassis
1,992

 

Machinery and equipment
37,150

 

Office equipment
12,138

 
6,636

Computer equipment
30,944

 
8,218

Computer software
100,634

 
39,709

Satellite equipment
1,563

 
1,496

Warehouse equipment
18,906

 
508


257,530

 
68,374

Less: Accumulated depreciation
(33,392
)
 
(11,803
)
Total Property and Equipment, net
$
224,138

 
$
56,571

Depreciation of property and equipment was $10.8 million and $2.3 million for the three-month periods ended September 30, 2014 and 2013, respectively, and $21.7 million and $3.9 million for the nine-month periods ended September 30, 2014 and 2013, respectively.
8. Intangible Assets
The following table sets forth the Company’s identifiable intangible assets as of September 30, 2014 and December 31, 2013 (in thousands).
 
As of September 30, 2014
 
As of December 31, 2013
Indefinite lived intangibles

 

Trade name
$

 
$
3,346

Definite lived intangibles:

 

Customer lists and relationships
378,026

 
168,666

Carrier relationships
12,100

 
12,100

Trade name
15,426

 
8,041

Non-compete agreements
9,840

 
6,265

Other intangible assets
2,172

 
2,172


417,564

 
197,244

Less: accumulated amortization
(54,560
)
 
(15,411
)
Intangible assets, net
$
363,004

 
$
181,833

Total identifiable intangibles
$
363,004

 
$
185,179

Estimated future amortization expense for amortizable intangible assets for the next five years is as follows (in thousands): 

2014

2015

2016

2017

2018
Estimated future amortization expense
$
20,050


$
66,060


$
52,345


$
41,420


$
38,878

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.

27


Intangible asset amortization expense recorded in sales, general and administrative expense was $16.5 million and $6.2 million for the three-month periods ended September 30, 2014 and 2013, respectively, and $42.1 million and $7.9 million for the nine-month periods ended September 30, 2014 and 2013, respectively.
9. Goodwill
The following table is a roll-forward of goodwill from December 31, 2013 to September 30, 2014. The current period additions are the result of the goodwill recognized as excess purchase price in the acquisitions of Pacer, ACL and New Breed (in thousands):
 
 
Expedited
Transportation
 
Freight
Forwarding
 
Freight
Brokerage
 
Contract Logistics
 
Total
Goodwill at December 31, 2013
$
58,412

 
$
9,222

 
295,814

 

 
$
363,448

Acquisitions

 

 
203,332

 
352,194

 
555,526

Other adjustments
(3
)
 

 
(486
)
 

 
(489
)
Goodwill at September 30, 2014
$
58,409

 
$
9,222

 
$
498,660

 
$
352,194

 
$
918,485

10. Stockholder’s Equity
On September 11, 2014, the Company entered into an Investment Agreement (the “Investment Agreement”) with Public Sector Pension Investment Board (“PSP Investments”), GIC Private Limited ("GIC") (an affiliate of Singapore’s sovereign wealth fund), and Ontario Teachers’ Pension Plan Board (“OTPP”). Pursuant to the Investment Agreement, on September 17, 2014, the Company issued and sold 10,702,934 shares (the “Purchased Common Shares”) in the aggregate of Company common stock, par value $0.001 per share (the “Company Common Stock”), and 371,848 shares (the “Purchased Preferred Stock” and, together with the Purchased Common Shares, the “Purchased Securities”) in the aggregate of the Company’s Series B Convertible Perpetual Preferred Stock, par value $0.001 per share, in a private placement. The purchase price per Purchased Common Share was $30.66 (resulting in aggregate gross proceeds to the Company of approximately $328.2 million), and the purchase price per share of Purchased Preferred Stock was $1,000 (resulting in aggregate gross proceeds to the Company of approximately $371.8 million). Subject to the approval of the Company’s stockholders, the Purchased Preferred Stock will be mandatorily converted into an aggregate of 12,128,115 additional shares of Company Common Stock. The Company intends to hold a special meeting of stockholders to obtain approval for conversion during the fourth quarter of 2014. The issuance and sale of the Purchased Securities pursuant to the Investment Agreement are exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) of the Securities Act, or any state securities laws. The aggregate purchase price for the Purchased Securities is $700.0 million and the Company received net proceeds of $684.7 million after equity issuance costs. The total net proceeds from the investment were allocated between common and preferred stock based on the relative fair values of each instrument.
The Purchased Preferred Stock was issued with an initial conversion price of $30.66, which represented a 5% discount to the then-current trailing 20-day volume weighted average price. As of September 11, 2014, the Company's common stock price was $34.05. As a result, the conversion feature was issued “in-the-money” and the Company allocated the intrinsic value of the conversion feature of $40.9 million to additional paid-in capital. The beneficial conversion feature is contingent upon receiving the approval of the Company's stockholders and will be recognized in net income/(loss) available to common shareholders when stockholder approval is obtained.
Prior to May 31, 2015, holders of the shares of Series B Convertible Perpetual Preferred Stock shall be entitled to participate equally and ratably with the holders of shares of common stock in all dividends on the shares of common stock. Commencing on May 31, 2015, holders of the shares of Series B Convertible Perpetual Preferred Stock shall be entitled to cumulative dividends on the Series B Preferred Stock payable quarterly in January, April, July and October of each year at an annual rate of 7.5% per share; however, the Company intends to mandatorily convert the Series B Preferred Stock into Company Common Stock prior to that date. The Company may make each dividend payment in cash or, at the Company's option, by the issuance of additional shares of Series B Preferred Stock. If dividends are paid-in-kind, the Company will evaluate the need for a beneficial conversion feature upon each issuance by determining if the common stock price then in effect exceeds the accounting conversion price upon issuance.
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, the Company 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 $413.2 million in net proceeds from the February 2014 Offering after underwriting discounts and expenses.

28


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.
11. Stock-Based Compensation
The following table summarizes the Company’s equity awards outstanding and exercisable as of December 31, 2013 and September 30, 2014:  
 
Options
 
Restricted Stock Units
 
Options
 
Weighted Average
Exercise Price
 
Exercise
Price Range
 
Weighted Average
Remaining Term
 
Restricted
Stock Units
 
Weighted Average
Grant Date Fair Value
Outstanding at December 31, 2013
1,421,520

 
$
11.02

 
$2.28 - $23.19
 
6.93
 
1,351,655

 
$
13.26

Granted
50,000

 
$
27.48

 
$23.31 - $31.28
 

 
1,301,015

 
$
25.44

Exercised
(72,431
)
 
$
6.55

 
$2.96 - $16.98
 

 
(224,235
)
 
$
13.56

Forfeited
(43,194
)
 
$
13.11

 
$10.53 - $17.10
 

 
(84,005
)
 
$
13.97

Outstanding at September 30, 2014
1,355,895

 
$
11.80

 
$2.28 - $31.28
 
6.63
 
2,344,430

 
$
19.96

The stock-based compensation expense for outstanding RSUs was $1.3 million and $0.8 million for the three-month periods ended September 30, 2014 and 2013, respectively, and $4.4 million and $2.2 million for the nine-month periods ended September 30, 2014 and 2013, respectively. Of the 2,344,430 outstanding RSUs, 478,474 vest subject to service conditions and 1,865,956 vest subject to service and a combination of market and performance conditions.
As of September 30, 2014, the Company had approximately $9.5 million of unrecognized compensation cost related to non-vested RSU compensation that is anticipated to be recognized over a weighted-average period of approximately 2.12 years. Remaining estimated compensation expense related to outstanding restricted stock-based grants is $1.4 million, $4.2 million, $3.3 million, $0.4 million and $0.2 million for the periods ending December 31, 2014, 2015, 2016, 2017 and 2018, respectively. The remaining estimated compensation expense excludes the impact of performance-based RSUs not deemed probable as of September 30, 2014. The unrecognized compensation cost related to performance-based RSUs not deemed probable as of September 30, 2014 is $25.3 million.
As of September 30, 2014, the Company had 830,245 options vested and exercisable and $2.9 million of unrecognized compensation cost related to stock options. The remaining estimated compensation expense related to the existing stock options is $0.4 million, $1.2 million, $0.9 million, $0.3 million and $0.1 million for the periods ended December 31, 2014, 2015, 2016, 2017 and 2018, respectively.
12. Income Taxes
The Company has determined its interim tax provision projecting an estimated annual effective tax rate. For the three- and nine-months ended September 30, 2014, the Company recorded an income tax benefit of $20.1 million and $25.1 million, respectively, yielding an effective tax rate of (63.2%) and (31.9%), respectively. The effective tax rate differs from the U.S. statutory rate of 35% in the periods ended September 30, 2014 primarily due to the impact of the release of the previously recorded valuation allowance during the period due to the acquired deferred tax liabilities resulting from the New Breed acquisition and the change in the mix of income among the jurisdictions in which the Company does business.
For the three- and nine-months ended September 30, 2013, the Company recorded an income tax benefit of $19.0 million and $18.7 million, respectively, yielding an effective tax rate of (76.0%) and (33.1%), respectively. The effective tax rate differs from the expected effective tax rate of 35% due primarily to the impact of the release of the previously recorded valuation allowance during the period due to the acquired deferred tax liabilities resulting from the 3PD acquisition.
The Company had a valuation allowance of $6.9 million as of September 30, 2014 on the deferred tax assets generated for state and foreign net operating losses where it is not more likely than not that the deferred tax assets will be utilized. In evaluating the Company’s ability to realize its deferred income tax assets, the Company considers all available positive and negative evidence, including operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction by jurisdiction basis.

29


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 September 30, 2014, the Company has not made a provision for U.S. or additional foreign withholding taxes for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration, if any exists. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.
13. 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, outstanding during the period, if dilutive. Due to the contingent stockholder approval necessary to convert the Series B Convertible Perpetual Preferred Stock into common stock, the Series B Convertible Perpetual Preferred Stock will not be included in the denominator used to calculate diluted earnings per common share until the contingency has been satisfied. The weighted average of potentially dilutive securities excluded from the computation of diluted earnings per share for the three- and nine-periods ended September 30, 2014 and 2013 is shown per the table below.
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Basic common stock outstanding
54,469,943

 
24,221,987

 
49,497,353

 
20,167,436

Potentially Dilutive Securities:

 

 

 

Shares underlying the conversion of preferred stock to common stock
10,476,430

 
10,604,891

 
10,485,283

 
10,608,752

Shares underlying the conversion of the convertible senior notes
7,341,490

 
8,749,239

 
7,473,420

 
8,749,239

Shares underlying warrants to purchase common stock
8,222,305

 
7,348,157

 
8,011,371

 
6,721,704

Shares underlying stock options to purchase common stock
557,973

 
424,122

 
529,072

 
347,356

Shares underlying restricted stock units
821,892

 
432,888

 
713,498

 
332,488


27,420,090

 
27,559,297

 
27,212,644

 
26,759,539

Diluted weighted shares outstanding
81,890,033

 
51,781,284

 
76,709,997

 
46,926,975

The impact of this dilution was not reflected in the earnings per share calculations in the condensed consolidated statements of operations because the impact was anti-dilutive. The treasury method was used to determine the shares underlying warrants, stock options and RSUs for potential dilution with an average market price of $31.57 per share and $22.31 per share for the three-month periods ended September 30, 2014 and 2013, respectively, and $28.96 per share and $18.81 per share for the nine-month periods ended September 30, 2014 and 2013, respectively.
14. Related Party Transactions
During the period ended September 30, 2014, the Company leased office space from three entities owned and controlled by Louis DeJoy, the former Chief Executive Officer of New Breed, who became an employee upon the Company's acquisition of New Breed. The non-cancellable lease agreements expire at various dates in 2019. The Company recorded payments associated with these lease agreements in the amount of $0.2 million for the three- and nine-months ended September 30, 2014. See Note 3—Acquisitions for further discussion on the common stock issued to Mr. DeJoy as part of the acquisition of New Breed.
On August 15, 2013, the Company completed its acquisition of 3PD, pursuant to a Stock Purchase Agreement to which Mr. James J. Martell was a party. Mr. Martell is a member of the board of directors of the Company and also was an investor in, and member of the board of directors of, 3PD. Mr. Martell recused himself from, and did not participate in, deliberations of the Company’s board of directors with respect to the acquisition of 3PD. Other than his interest in the purchase price paid pursuant to the Stock Purchase Agreement, Mr. Martell did not receive compensation in connection with the acquisition of 3PD. On July 12, 2013, Mr. Martell entered into a subscription agreement with the Company pursuant to which, on August 15, 2013, he

30


invested $0.7 million of the after-tax proceeds he received in the transaction in restricted shares of the Company’s common stock.
15. Segment Reporting
The Company determines its operating segments based on the information 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 six operating segments, which are aggregated into four reportable segments. The Company’s operating segments are Expedite, Freight Forwarding, Truck Brokerage, Last Mile, Intermodal and Contract Logistics. Truck Brokerage, Last Mile and Intermodal are aggregated into one Freight Brokerage reportable segment based on qualitative similarities within the businesses as well as similar economic characteristics. The differences in the Company's operating and reportable segments from the Company's last annual report are directly related to its acquisitions of Pacer and New Breed during the period ended September 30, 2014. Based on the nature of its operations, Pacer was divided between the Company's Freight Forwarding, Truck Brokerage and Intermodal operating segments while New Breed represents the Contract Logistics operating segment in its entirety. See Note 1 of the condensed consolidated financial statements for further information.
These reportable segments are strategic business units through which the Company offers different services. The Company evaluates the performance of the segments primarily based on their respective net operating margin and also evaluates revenues, net revenue margin and operating income. Accordingly, interest expense and other non-operating items are not reported in segment results. In addition, the Company has disclosed a corporate segment, which is not an operating segment and includes the costs of the Company’s executive and shared service teams, professional services such as legal and consulting, board of directors, and certain other corporate costs associated with operating as a public company. The Company allocates charges to the reportable segments for IT services, depreciation of IT fixed assets as well as centralized recruiting and training resources. Intercompany transactions have been eliminated in the consolidated balance sheets and results of operations. Intra-segment transactions have been eliminated in the reportable segment results of operations whereas inter-segment transactions represent a reconciling item to consolidated results as shown below.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on various financial measures of the respective business segments. The chief operating decision maker does not review assets by segment for purposes of allocating resources and therefore assets by segment are not disclosed. The following schedule identifies select financial data for each of the Company’s reportable segments for the three- and nine-month periods ended September 30, 2014 and 2013, respectively (in thousands):

31


XPO Logistics, Inc.
Segment Data
(Unaudited)
(In thousands)


Freight
Brokerage
 
Expedited
Transportation
 
Freight
Forwarding
 
Contract Logistics
 
Corporate
 
Eliminations
 
Total
Three Months Ended September 30, 2014

 

 

 

 

 

 

Revenue
$
518,656

 
$
36,489

 
$
59,721

 
$
50,120

 
$

 
$
(2,516
)
 
$
662,470

Operating income (loss)
1,973

 
2,874

 
(20
)
 
4,504

 
(22,969
)
 

 
(13,638
)
Depreciation and amortization
21,090

 
1,615

 
509

 
3,450

 
583

 

 
27,247

Interest expense
273

 
1

 
1

 
18

 
17,549

 

 
17,842

Tax provision (benefit)
64

 

 
14

 

 
(20,155
)
 

 
(20,077
)
Goodwill
498,660

 
58,409

 
9,222

 
352,194

 

 

 
918,485

Three Months Ended September 30, 2013

 

 

 

 

 

 

Revenue
$
152,616

 
$
25,101

 
$
19,129

 
$

 
$

 
$
(2,864
)
 
$
193,982

Operating (loss) income
(3,415
)
 
1,739

 
(2,588
)
 

 
(14,155
)
 

 
(18,419
)
Depreciation and amortization
4,611

 
262

 
3,227

 

 
296

 

 
8,396

Interest expense
2

 
2

 

 

 
6,411

 

 
6,415

Tax provision (benefit)
305

 
(2
)
 

 

 
(19,347
)
 

 
(19,044
)
Goodwill
282,065

 
11,560

 
9,222

 

 

 

 
302,847

Nine Months Ended September 30, 2014

 

 

 

 

 

 

Revenue
$
1,243,734

 
$
106,530

 
$
133,405

 
$
50,120

 
$

 
$
(7,907
)
 
$
1,525,882

Operating income (loss)
2,408

 
6,256

 
(368
)
 
4,504

 
(59,693
)
 

 
(46,893
)
Depreciation and amortization
49,354

 
8,181

 
1,110

 
3,450

 
1,695

 

 
63,790

Interest expense
283

 
5

 
13

 
18

 
30,984

 

 
31,303

Tax provision (benefit)
688

 

 
47

 

 
(25,882
)
 

 
(25,147
)
Goodwill
498,660

 
58,409

 
9,222

 
352,194

 

 

 
918,485

Nine Months Ended September 30, 2013

 

 

 

 

 

 

Revenue
$
326,206

 
$
75,421

 
$
54,700

 
$

 
$

 
$
(11,256
)
 
$
445,071

Operating (loss) income
(12,224
)
 
3,678

 
(1,738
)
 

 
(33,517
)
 

 
(43,801
)
Depreciation and amortization
6,805

 
821

 
3,407

 

 
710

 

 
11,743

Interest expense
7

 
6

 

 

 
12,572

 

 
12,585

Tax provision (benefit)
346

 

 

 

 
(19,094
)
 

 
(18,748
)
Goodwill
282,065

 
11,560

 
9,222

 

 

 

 
302,847

16. Subsequent Events
Preferred Stock Dividend
On September 22, 2014, 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 October 15, 2014.

32


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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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” 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 us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe 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 elsewhere in this Quarterly Report, the risks discussed in our other filings with the SEC and the following: economic conditions generally; competition; our ability to find suitable acquisition candidates and execute our acquisition strategy; the expected impact of acquisitions, including the expected impact on our results of operations; our ability to raise debt and equity capital; our ability to attract and retain key employees to execute our growth strategy; litigation, including litigation related to alleged misclassification of independent contractors; our ability to develop and implement a suitable information technology system; our ability to maintain positive relationships with our network of third-party transportation providers; our ability to retain our and acquired businesses’ largest customers; our ability to successfully integrate New Breed, Pacer, NLM, 3PD and other acquired businesses and realize anticipated synergies and cost savings; rail and other network changes; weather and other service disruptions; and governmental regulation. 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 us will be realized or, even if substantially realized, that they will have the expected consequences to or effects on us or our business or operations. 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.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K.
Executive Summary
XPO Logistics, Inc. is one of the largest asset-light providers of transportation logistics services and the leading provider of highly engineered, technology-enabled contract logistics in North America. We provide premium transportation logistics services to shippers and carriers that outsource their freight needs to us as an asset-light, third party logistics provider.
On September 2, 2014, we closed the acquisition of New Breed Holding Company ("New Breed") and entered into the contract logistics business. Our acquisition of New Breed allows us to design, implement, operate and optimize mission-critical and requirement-intensive outsourced supply chains for some of the world’s leading organizations. Through New Breed’s supply chain technology and operational expertise, we solve complex supply chain problems and create and implement transformative solutions for our clients, while reducing their operating costs and inventory levels and improving their customer service. New Breed provides supply chain solutions primarily to leading corporations that operate in five key industries-telecommunications, aerospace and defense, medical equipment, retail and industrials-that have demanding requirements for quality standards, real-time data visibility, customer service, handling of high-value products, high transaction volumes, large number of SKUs and/or time-assured deliveries.
As of September 30, 2014, we operated at 198 locations: 179 Company-owned branches and 19 agent-owned offices.
We offer our services through four segments. Our freight brokerage segment places shippers’ freight with qualified carriers, primarily trucking companies and rail carriers. 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. Our contract logistics segment provides value-added warehousing and distribution, reverse logistics, transportation

33


management, freight bill audit and payment, lean manufacturing support, aftermarket support and supply chain optimization for our clients.
In September 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 Gross Domestic Product (“GDP”). Our acquisitions of 3PD Holding, Inc. (“3PD”) and Optima Service Solutions, LLC (“Optima”) in 2013 and Atlantic Central Logistics ("ACL") in 2014 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, 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. Following the acquisition of Pacer International, Inc. ("Pacer") in March of 2014, we are 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. Due to the acquisition of New Breed in September 2014, we became a leading provider of highly engineered, technology-enabled contract logistics services for large manufacturers and service companies. 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 scalable IT platform that includes 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 our 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. We use 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. In 2014, we acquired Pacer, the third largest provider of intermodal transportation services in North America, New Breed and ACL. 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: 12 in Freight Brokerage, 10 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.
Acquisitions of New Breed and ACL
On July 29, 2014, we entered into a Merger Agreement with New Breed Holding Company. New Breed is a provider of highly engineered contract logistics solutions for large multi-national and medium-sized corporations and government agencies in the United States. The closing of the transaction was effective on September 2, 2014. The fair value of the total consideration paid under the New Breed Merger Agreement was $615.9 million and consisted of $585.8 million of net cash paid at the time of closing, including an estimate of the working capital adjustment, and $30.1 million of equity representing the fair value of 1,060,598 shares of the Company’s common stock. In conjunction with the New Breed Merger Agreement, we entered into a

34


subscription agreement with Louis DeJoy, the Chief Executive Officer of New Breed. Pursuant to the subscription agreement, Mr. DeJoy purchased $30.0 million of XPO common stock.
On July 28, 2014, the Company entered into a Stock Purchase Agreement to acquire all of the outstanding capital stock of Simply Logistics, Inc., d/b/a Atlantic Central Logistics, for $36.2 million in cash consideration and deferred payments. ACL focuses on serving demand for e-commerce fulfillment by facilitating the time-sensitive, local movement of goods between distribution centers and the end-consumer. For additional information refer to Note 3—Acquisitions.
Senior Notes due 2019
On August 25, 2014, we completed a private placement of $500.0 million aggregate principal amount of 7.875% senior notes due September 1, 2019 (the "Senior Notes due 2019") to qualified institutional buyers. The Senior Notes due 2019 were not registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent an effective registration statement or an applicable exemption from registration requirements or a transaction not subject to the registration requirements of the Securities Act or any state securities laws. The Senior Notes due 2019 will bear interest at a rate of 7.875% per annum payable semiannually, in cash in arrears, on March 1 and September 1 of each year, commencing March 1, 2015 and maturing on September 1, 2019. The Senior Notes due 2019 are guaranteed by each of our direct and indirect wholly-owned restricted subsidiaries (other than certain excluded subsidiaries) that are obligors under, or guarantee obligations under, our existing credit agreement (or certain replacements thereof) or guarantee certain capital markets indebtedness of the Company or any guarantor of the Senior Notes due 2019. The Senior Notes due 2019 and the guarantees thereof are unsecured, unsubordinated indebtedness of the Company and the guarantors. For additional information refer to Note 6—Debt.
Investment in Common Stock and Preferred Stock
On September 11, 2014, we entered into an Investment Agreement (the "Investment Agreement") with Public Sector Pension Investment Board ("PSP Investments"), GIC Private Limited ("GIC") (an affiliate of Singapore’s sovereign wealth fund), and Ontario Teachers’ Pension Plan Board ("OTPP"). Pursuant to the Investment Agreement, on September 17, 2014, we issued and sold 10,702,934 shares in the aggregate of common stock and 371,848 shares in the aggregate of our Series B Convertible Perpetual Preferred Stock in a private placement. The purchase price per Purchased Common Share was $30.66 (resulting in aggregate gross proceeds to the Company of approximately $328.2 million), and the purchase price per share of Purchased Preferred Stock was $1,000 (resulting in aggregate gross proceeds to the Company of approximately $371.8 million). Subject to the approval of our stockholders, the Purchased Preferred Stock will be mandatorily converted into an aggregate of 12,128,115 additional shares of Company Common Stock at an initial conversion price of $30.66. We intend to hold a special meeting of stockholders to obtain approval for conversion during the fourth quarter of 2014. The aggregate purchase price for the Purchased Securities is $700.0 million and we received net proceeds of $684.7 million after equity issuance costs.
The Purchased Preferred Stock was issued with an initial conversion price of $30.66, which represented a 5% discount to the then-current trailing 20-day volume weighted average price. As of September 11, 2014, our common stock price was $34.05. As a result, the conversion feature was issued “in-the-money” and we allocated the intrinsic value of the conversion feature of $40.9 million to additional paid-in capital. The beneficial conversion feature is contingent upon receiving the approval of our stockholders and will be recognized in net income/(loss) available to common shareholders when stockholder approval is obtained.
Prior to May 31, 2015, holders of the shares of Series B Convertible Perpetual Preferred Stock shall be entitled to participate equally and ratably with the holders of shares of common stock in all dividends on the shares of common stock. Commencing on May 31, 2015, holders of the shares of Series B Convertible Perpetual Preferred Stock shall be entitled to cumulative dividends on the Series B Preferred Stock payable quarterly in January, April, July and October of each year at an annual rate of 7.5% per share payable in cash or, at our option, by the issuance of additional shares of Series B Preferred Stock. If dividends are paid-in-kind, we will evaluate the need for a beneficial conversion feature upon each issuance by determining if the common stock price then in effect exceeds the accounting conversion price upon issuance. For additional information refer to Note 10—Stockholder's Equity.
Rebranding of Express-1 and 3PD
During the quarter ended June 30, 2014, the Company rebranded its Express-1 business to XPO Express and its last mile delivery logistics business to XPO Last Mile. As a result of these actions, the Company accelerated the amortization of $3.3 million of indefinite-lived intangible assets related to the Express-1 trade name based on the reduction in its remaining useful life. The full $3.3 million of accelerated amortization was recorded during the quarter ended June 30, 2014 and represented the full value of the Express-1 trade name intangible asset. The impact of rebranding the last mile business was a shortening of the useful life of the 3PD trade name definite-lived intangible asset. The last mile rebranding did not have a material impact on

35


results for the third quarter. During the quarter ended September 30, 2014, the Company incurred an additional $0.8 million of rebranding costs related to XPO Express and XPO Last Mile.
Restructuring
On March 31, 2014, we initiated a facility rationalization and severance program to close facilities and reduce employment in order to improve efficiency and profitability in conjunction with our acquisition of Pacer. The program includes facility exit activities and employment reduction initiatives. During the quarter ended September 30, 2014, we incurred an additional $3.1 million of restructuring costs related to the program. For additional information refer to Note 4—Restructuring Charges.
Amended Revolving Loan Credit Agreement
On April 1, 2014, we and certain of our wholly-owned subsidiaries entered into a $415 million multicurrency secured revolving loan facility with a commitment termination date of October 17, 2018. The principal amount of the commitments under the amended credit facility may be increased by an aggregate amount of up to $100 million, subject to certain terms and conditions specified in the Amended Credit Agreement. The Amended Credit Agreement replaces and supersedes in its entirety the $125 million multicurrency secured Credit Agreement that we entered into on October 18, 2013. We can use the proceeds of the Amended Credit Agreement for ongoing working capital needs and other general corporate purposes, including strategic acquisitions. At September 30, 2014, the Company had no amount drawn under the Amended Credit Agreement.
On August 8, 2014, we amended our revolving loan facility to permit, among other things, the acquisition of New Breed and the related transactions and the offering of the Senior Notes due 2019.
Convertible Debt Conversions
To date, we have entered into transactions pursuant to which we have issued an aggregate of 1,405,370 shares of our common stock to certain holders of the 4.50% Convertible Senior Notes due October 1, 2017 (the “Notes”) in connection with the conversion of $23.1 million aggregate principal amount of the Notes. Certain of 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, are 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.
Statement of Operations Presentation
Certain prior period statement of operations line items have been conformed to the 2014 presentation, including the retitling of direct expense to cost of purchased transportation and services and the addition of the direct operating expense category. The conformed line items had no impact on previously reported income. The conformed statements of operations data for the years ended December 2013, 2012 and 2011 and the three-months ended March 31, June 30, September 30, and December 31, 2013 are shown below on a consolidated basis and for the Freight Brokerage segment.




















36





XPO Logistics, Inc.
Prior Period Results Conformed to 2014 Presentation
Statements of Operations Data
(Unaudited)
(In thousands)
AS CONFORMED
 
For the
Year Ended
 
For the
Three Months Ended
 
For the
Year Ended
 
December 31,
2011
 
December 31,
2012
 
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
December 31,
2013
Revenue
$
177,076

 
$
278,591

 
$
113,999

 
$
137,091

 
$
193,982

 
$
257,231

 
$
702,303

Cost of purchased transportation and services
147,298

 
237,765

 
97,739

 
117,751

 
159,147

 
204,159

 
578,796

Net revenue
29,778

 
40,826

 
16,260

 
19,340

 
34,835

 
53,072

 
123,507

Direct operating expense

 

 

 

 
2,077

 
4,278

 
6,355

SG&A expense
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries & benefits
16,338

 
39,278

 
18,048

 
20,491

 
26,948

 
34,799

 
100,286

Other SG&A expense
3,937

 
11,616

 
4,262

 
5,198

 
8,067

 
7,762

 
25,289

Purchased services
6,733

 
15,388

 
3,815

 
5,914

 
7,805

 
5,741

 
23,275

Depreciation and amortization
1,046

 
2,508

 
1,502

 
1,752

 
8,357

 
9,016

 
20,627

Total SG&A expense
28,054

 
68,790

 
27,627

 
33,355

 
51,177

 
57,318

 
169,477

Operating income (loss)
$
1,724

 
$
(27,964
)
 
$
(11,367
)
 
$
(14,015
)
 
$
(18,419
)
 
$
(8,524
)
 
$
(52,325
)
Freight Brokerage
Prior Period Results Conformed to 2014 Presentation
Statements of Operations Data
(Unaudited)
(In thousands)
AS CONFORMED
 
For the
Year Ended
 
For the
Three Months Ended
 
For the
Year Ended
 
December 31,
2011
 
December 31,
2012
 
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
December 31,
2013
Revenue
$
29,186

 
$
125,121

 
$
78,230

 
$