What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-09 · 137 added, 153 removed, 80 unchanged (78% of the section changed)

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All forward-looking statements set forth in this Quarterly Report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations.

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with the audited Combined Financial Statements and corresponding notes included in the Form 10 declared effective on July 21, 2021 (the “Form 10”).

This MD&A contains forward-looking statements.

The matters discussed in these forward-looking statements are subject to risk, uncertainties and other factors that could cause actual results to differ materially from those projected or implied in the forward-looking statements.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the audited Combined Financial Statements and corresponding notes included in the Form 10 declared effective on July 21, 2021 (the “Form 10”).

Business Overview

GXO Logistics, Inc.

(“GXO”, the “Company” or “we”) is the largest pure-play contract logistics provider in the world and a foremost innovator in the logistics industry in North America and Europe.

We provide high-value-add warehousing and distribution, order fulfillment, e-commerce and reverse logistics, and other supply chain services differentiated by our ability to deliver technology-enabled, customized solutions at scale.

(“GXO”, the “Company” or “we”) is the largest pure-play contract logistics provider in the world and a foremost innovator in the logistics industry.

We provide high-value-add warehousing and distribution, order fulfillment, ecommerce, reverse logistics, and other supply chain services differentiated by our ability to deliver technology-enabled, customized solutions at scale.

Our revenue is diversified across numerous verticals and customers, including many multinational corporations.

Our customers rely on us to move their goods with high efficiency through their supply chains — from the moment inbound goods arrive at our logistics sites, through fulfillment and distribution and, in a growing number of cases, the management of returned products.

Our customer base includes many blue-chip leaders in attractive sectors that demonstrate high growth or durable demand over time, with significant growth potential through customer outsourcing of logistics services.

We strive to provide all of our customers with consistently high levels of service and cutting-edge automation managed by our proprietary technology.

Our customers rely on us to move their goods with high efficiency through their supply chains — from the moment inbound goods arrive at our logistics sites, through fulfillment and distribution and, in an increasing number of cases, the management of returned products.

Our customer base includes many blue-chip leaders in sectors that demonstrate high growth or durable demand over time, with significant growth potential through customer outsourcing of logistics services.

We strive to provide all of our customers with consistently high levels of service and cutting-edge automation driven by our proprietary technology.

We also collaborate with our largest customers on planning and forecasting, and provide assistance with network optimization, working with these customers to design or redesign their supply chains to meet specific goals, such as sustainability metrics.

Our multidisciplinary, consultative approach has led to many of our key customer relationships extending for years and growing in scope.

The most dramatic growth in secular demand in recent years has been in e-commerce and related sectors, including omnichannel retail and other direct-to-consumer channels.

Our multidisciplinary, consultative approach has fostered many long-term, expanding relationships with key customers.

The most dramatic growth in secular demand for our services in recent years has been in ecommerce and related sectors, including omnichannel retail and other direct-to-consumer channels.

As part of our growth strategy, we intend to develop additional business in consumer and other verticals where we already have deep expertise, prominent customer relationships and a strong track record of successful performance.

We also intend to expand into new verticals by leveraging our capacity and technological strengths, and by marketing the benefits of our proprietary platform for

warehouse operations.

We also intend to expand into new verticals by leveraging our capacity and technological strengths, and by marketing the benefits of our proprietary platform for warehouse operations.

We use this technology to manage advanced automation, labor productivity, safety and the complex flow of goods within sophisticated logistics environments.

Our business model is asset-light and historically resilient in cycles, with high returns, strong free cash flow and visibility into revenue and earnings.

Our business model is historically asset-light and resilient in down cycles, with high returns, strong free cash flow and visibility into revenue and earnings.

The vast majority of our contracts with customers are multi-year agreements, and our facility lease arrangements generally align with contract length.

Most of our customer contracts contain both fixed and variable components.

The fixed component is typically designed to cover facility, technology and equipment costs, and may cover management costs, while the variable component is determined based on actual volumes and associated labor costs.

The fixed component is typically designed to cover facility, technology and equipment costs, and may cover management costs, while the variable component is based on actual volumes and associated labor costs.

The Separation

On August 2, 2021, XPO Logistics, Inc.

(together with its subsidiaries, “XPO”) completed the previously announced spin-off of GXO in a transaction intended to be tax free for U.S.

federal income tax purposes, which was accomplished by the distribution of 100% of the outstanding common stock of GXO to XPO stockholders as of the close of business on July 23, 2021, the record date for the distribution.

(“XPO”) completed the previously announced spin-off of GXO (the “Separation”) in a transaction intended to be tax-free for U.S.

federal income tax purposes, which was accomplished by the distribution of 100 percent of the outstanding common stock of GXO to XPO stockholders as of the close of business on July 23, 2021, the record date for the distribution.

XPO stockholders received one share of GXO common stock for every share of XPO common stock held at the close of business on the record date.

GXO is now a standalone publicly traded company, and, on August 2, 2021, regular-way trading of the common stock commenced on the New York Stock Exchange (the “NYSE”) under the ticker symbol “GXO.”

The spin-off was completed pursuant to the Separation and Distribution Agreement and various other agreements that govern aspects of our relationship with XPO, including, but not limited to a Tax Matters Agreement (“TMA”), an Employee Matters Agreement (“EMA”), a Transition Services Agreement (“TSA”) and an Intellectual Property License Agreement (“IPLA”).

See Note 10—Subsequent Events for additional details.

GXO is now a standalone publicly traded company.

On August 2, 2021, regular-way trading of GXO’s common stock commenced on the New York Stock Exchange (“NYSE”) under the ticker symbol “GXO.”

The Separation was completed pursuant to the Separation and Distribution Agreement and various other agreements that govern aspects of our relationship with XPO, including, but not limited to a Transition Services Agreement (“TSA”), a Tax Matters Agreement (“TMA”), an Employee Matters Agreement (“EMA”) and an Intellectual Property License Agreement (“IPLA”).

See Note 3—The Separation for additional details of the agreements executed in connection with the Separation.

Impacts of COVID-19

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The rapid escalation of COVID-19 into a pandemic in 2020 affected, and may continue to affect, economic activity broadly and customer sectors served by our industry.

We believe the COVID-19 pandemic and associated impacts on economic activity had adverse effects on our results of operations and financial condition as of and for the three and six months ended June 30, 2020, and to a lesser extent for the three and six months ended June 30, 2021, as discussed below.

Due to the evolving nature of the COVID-19 pandemic, it remains difficult to predict the extent of the impact on our industry and our business in particular.

Furthermore, the extent and pace of a recovery remains uncertain and may differ significantly among the countries in which we operate.

Our results of operations may continue to be impacted by the pandemic throughout 2021.

We have incurred net incremental and direct costs related to COVID-19 to ensure that we meet the needs of our customers and employees;

these include costs for personal protective equipment, site cleanings and enhanced employee benefits.

The majority of our cost base is variable, and while we expect to continue to incur additional costs related to the pandemic, we also have the ability to continue to adjust our expenses to address significant changes in demand for our services, if necessary, as we did in 2020.

These actions include reduced use of contractors, reduced employee hours, furloughs, layoffs and required use of paid time off, consistent with applicable regulations.

The totality of the actions we have taken during the pandemic, and continue to take, combined with the variable components of our cost structure, have mitigated the impact on our profitability relative to the impact on our revenue and volumes, while our strong liquidity and disciplined capital management enable us to continue to invest in key growth initiatives.

Our operating results and cash flows fluctuated as a result of changes due to the COVID-19 pandemic and the seasonality of our business during the three and nine months ended September 30, 2020, and to a lesser extent for the three and nine months ended September 30, 2021, as discussed below.

Future operating results and cash flows may fluctuate due to these and other factors beyond our control, which may include the cost and availability of labor, the timely procurement of equipment, the impact of product component shortages for our customers, foreign exchange rate fluctuations, changes in government regulations, and economic changes in our operating regions.

While we generally are able to pass cost increases through to our customers, inflation may affect our operating results and cash flows.

The timing of these pass-through costs can vary and lag.

The totality of the actions we have taken, and continue to take, during the pandemic combined with the variable components of our cost structure, have mitigated the impact on our profitability relative to the impact on our revenue and volumes while our strong liquidity and disciplined capital management enable us to continue to invest in key growth initiatives.

However, due to the evolving nature of the COVID-19 pandemic and the efficacy and distribution of the vaccines, the extent of the impact of the pandemic on our industry and our business in particular remain difficult to predict.

Furthermore, the extent and pace of a recovery remain uncertain and may differ significantly among the countries in which we operate.

Our results of operations may continue to be impacted by the pandemic throughout 2021 and 2022.

Basis of Presentation

The Condensed Combined Financial Statements of the Company were prepared on a standalone basis and have been derived from the consolidated financial statements and accounting records of XPO.

Historically, separate financial

statements have not been prepared for the Company, and it has not operated as a standalone business separate from XPO.

The combined financial statements include certain assets and liabilities that have historically been held by XPO or by other XPO subsidiaries but are specifically identifiable or otherwise attributable to the Company.

Significant intercompany balances and transactions between the operations of the GXO legal entities have been eliminated in the accompanying combined financial statements.

All significant related party transactions between GXO and XPO have been included in these combined financial statements as components of XPO investment.

We prepare our combined financial statements in accordance with accounting principles generally accepted in the United States of America, which requires us to make estimates and assumptions that impact the amounts reported and disclosed in our combined financial statements and the accompanying notes.

We prepared these estimates based on the most current and best available information, but actual results could differ materially from these estimates and assumptions, particularly in light of the outbreak of a strain of coronavirus, COVID-19.

The Combined Balance Sheets include certain assets and liabilities directly attributable to GXO, and the Combined Statements of Operations include allocations of XPO costs and expenses, as described below.

XPO’s corporate function (“Corporate”) incurs a variety of expenses including, but not limited to, information technology, human resources, accounting, sales and sales operations, procurement, executive services, legal, corporate finance and communications.

For purposes of the Condensed Combined Statements of Operations, an allocation of these expenses is included to burden all business units comprising XPO’s historical operations, including GXO.

The charges reflected have either been specifically identified or allocated using drivers including proportional adjusted earnings before interest, taxes, depreciation and amortization, which includes adjustments for transaction and integration costs, as well as restructuring costs and other adjustments, or headcount.

The majority of these allocated costs are recorded in Sales, general and administrative expense (“SG&A”) and Depreciation and amortization expense in the Condensed Combined Statements of Operations.

We believe the assumptions regarding allocations of XPO corporate expenses are reasonable.

Nevertheless, the Condensed Combined Financial Statements may not reflect the combined results of operations, financial position and cash flows had the Company been a standalone entity during the periods presented.

XPO investment represents XPO’s historical investment in GXO and includes the net effects of transactions with and allocations from XPO as well as GXO’s accumulated earnings.

Certain transactions between GXO and XPO, including XPO’s non-GXO subsidiaries, have been included in these Condensed Combined Financial Statements, and are considered to be effectively settled at the time the transaction is recorded.

The total net effect of the cash settlement of these transactions is reflected in the Condensed Combined Statements of Cash Flows as a financing activity and in the Condensed Combined Balance Sheets as XPO investment.

The components of the net transfers to and from XPO include certain costs allocated from Corporate functions, income tax expense, certain cash receipts and payments made on behalf of GXO and general financing activities.

Prior to the Separation on August 2, 2021, our historical financial statements were prepared on a standalone combined basis and were derived from the consolidated financial statements and accounting records of XPO.

On August 2, 2021, the Company became a standalone publicly traded company, and its financial statements are now presented on a consolidated basis.

The unaudited financial statements for all periods presented, including the historical results of the Company prior to August 2, 2021, are now referred to as “Condensed Consolidated Financial Statements,” and have been prepared pursuant to the rules and regulations for reporting on Form 10-Q.

Accordingly, certain information and disclosures required by U.S.

generally accepted accounting principles (“GAAP”) for complete consolidated financial statements are not included herein.

Prior to the Separation on August 2, 2021, all the assets and liabilities were reflected on a historical cost basis, as immediately prior to the Separation all of the assets and liabilities presented were wholly owned by XPO and were generally transferred to the Company at a carry-over basis.

Prior to the Separation on August 2, 2021 the Condensed Consolidated Statements of Operations included allocations of XPO costs and expenses including XPO’s corporate function which incurred a variety of expenses including, but not limited to, information technology, human resources, accounting, sales and sales operations, procurement, executive services, legal, corporate finance and communications.

An allocation of these expenses is included to burden all business units comprising XPO’s historical operations, including GXO.

The charges reflected have been either specifically identified or allocated using drivers including proportional adjusted earnings before interest, taxes, depreciation and amortization, which includes adjustments for transaction and integration costs, as well as restructuring costs and other adjustments, or headcount.

The majority of these allocated costs are recorded in Sales, general and administrative expense (“SG&A”), Transaction-related costs and Depreciation and amortization expense in the Condensed Consolidated Statements of Operations.

All charges and allocations for facilities, functions and services performed by XPO organizations have been deemed settled in cash by GXO to XPO in the period in which the cost was recorded on the Condensed Consolidated Statements of Operations.

For periods ended on or prior to August 2, 2021, we were a member of the XPO consolidated group and our U.S.

taxable income was included XPO’s consolidated U.S.

federal income tax return as well as in tax returns filed by XPO with certain state and local taxing jurisdictions.

Our foreign income tax returns are filed on a separate company basis.

For periods ended prior to the Separation, our current and deferred income taxes have been computed and presented herein under the “separate return method” as if GXO were a separate tax paying entity.

GXO has a single reportable segment.

Results of Operations

Three Months Ended

June 30, Percent of Revenue Six Months Ended

June 30, Percent of Revenue

Three Months Ended September 30, Nine Months Ended September 30,

(In millions) 2021 2020 2021 2020

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Operating income (loss) 36 49 88 (34)

Other (income) expense 1 (1) 0.1 % (0.1) % — (2) — % (0.1) %

Other income (11) — (11) (2)

Interest expense 5 6 16 18

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42 43 83 (50)

Income tax provision (benefit) 1 (24) 0.1 % (1.7) % 10 (18) 0.3 % (0.6) %

Income tax expense (benefit) (31) 20 (21) 2

Net income (loss)

$ 73 $ 23 $ 104 $ (52)

Three and Six Months Ended June 30, 2021 Compared with Three and Six Months Ended June 30, 2020

Revenue for the second quarter of 2021 increased 34.0% to $1.9 billion, compared with $1.4 billion for the same quarter in 2020.

Revenue for the six months ended June 30, 2021 increased 30.2% to $3.7 billion, compared with $2.8 billion for the same period in 2020.

For the three and six months ended June 30, 2021, the increase in revenue compared to the same prior-year periods primarily reflects the reduced impact of COVID-19 in 2021.

For the three and six months ended June 30, 2021, our European operations reported growth of 49.1% and 43.8%, respectively, and our North American operations reported growth of 9.8% and 9.2%, respectively.

Also impacting our revenue was the Kuehne + Nagel business we acquired in January 2021, which contributed approximately 17.5 and 15.5 percentage points, respectively, to revenue growth in our European operations and 10.7 and 9.4 percentage points, respectively, to our total revenue growth for the three and six months ended June 30, 2021 compared to the same prior-year periods.

Foreign currency movement increased revenue by approximately 7.6 and 6.6 percentage points for the three and six months ended June 30, 2021, respectively.

Revenue for the three months ended September 30, 2021 increased 24.6% to $2.0 billion, compared with $1.6 billion for the same period in 2020.

Revenue for the nine months ended September 30, 2021 increased 28.2% to $5.7 billion, compared with $4.4 billion for the same period in 2020.

For the three and nine months ended September 30, 2021, the increase in revenue compared to the same prior-year periods primarily reflects the reduced impact of COVID-19 in 2021.

For the three and nine months ended September 30, 2021, our European operations reported growth of 34.1% and 40.2%, respectively, and our North American operations reported growth of 8.5% and 9.0%, respectively.

Also impacting our revenue was the Kuehne + Nagel business we acquired in January 2021, which contributed approximately 16.3 and 15.8 percentage points, respectively, to revenue growth in our European operations and 10.3 and 9.7 percentage points, respectively, to our total revenue growth for the three and nine months ended September 30, 2021 compared to the same prior-year periods.

Foreign currency movement increased revenue by approximately 2.2 and 5.1 percentage points for the three and nine months ended September 30, 2021, respectively.

Direct operating expenses are comprised of both fixed and variable expenses and consist of operating costs related to our logistics facilities, including personnel costs, facility and equipment expenses, such as rent, utilities, equipment maintenance and repair, transportation costs, costs of materials and supplies and information technology expenses.

Direct operating expense for the second quarter of 2021 was $1.6 billion, or 82.6% of revenue, compared with $1.2 billion, or 84.2% of revenue, for the same quarter of 2020.

Direct operating expense for the six months ended June 30, 2021 was $3.1 billion, or 83.0% of revenue, compared with $2.4 billion, or 83.9% of revenue, for the same prior-year period.

For the three and six months ended June 30, 2021, direct operating expenses decreased by approximately 1.6% and 0.9%, respectively, as a percentage of revenue, reflecting significant lower COVID-19 related costs.

Direct operating expense for the three months ended September 30, 2021 was $1.7 billion, or 83.6% of revenue, compared with $1.3 billion, or 81.8% of revenue, for the same period in 2020.

For the three months ended September 30, 2021, direct operating expenses increased by approximately 1.8% due to higher personnel and temporary labor expense.

Direct operating expense for the nine months ended September 30, 2021 was $4.7 billion, or 83.2% of revenue, compared with $3.7 billion, or 83.2% of revenue.

For the nine months ended September 30, 2021, direct operating expense as a percentage of revenue remained flat with the prior year period.

SG&A, including the allocated costs of XPO, primarily consists of salary and benefit costs for executive and certain administration functions, professional fees, facility costs other than those related to our logistics facilities, bad debt expense and legal costs.

SG&A was $177 million for the second quarter of 2021, or 9.4% of revenue, compared with $168 million, or 12.0% of revenue, for the same quarter in 2020.

SG&A was $348 million for the six months ended June 30, 2021, or 9.4% of revenue, compared with $310 million, or 10.9% of revenue, for the same prior year period.

For the three and six months ended June 30, 2021, the decrease in SG&A as a percentage of revenue primarily reflects lower bad debt and overhead expenses.

Depreciation and amortization expense for the second quarter of 2021 was $95 million, compared with $87 million for the same quarter in 2020.

Depreciation and amortization expense for the six months ended June 30, 2021 was $174 million, compared with $163 million for the same prior-year period.

SG&A for the three months ended September 30, 2021 was $171 million, or 8.7% of revenue, compared with $157 million, or 9.9% of revenue, for the same period in 2020.

SG&A for the nine months ended September 30, 2021 was $519 million, or 9.1% of revenue, compared with $467 million, or 10.5% of revenue, for the same prior-year period.

For the three and nine months ended September 30, 2021, SG&A as a percentage of revenue benefited from the significant year-over-year increase in revenue as well as lower allocated costs from XPO.

Depreciation and amortization expense for the three months ended September 30, 2021 was $85 million, compared with $83 million for the same prior-year period.

Depreciation and amortization expense for the nine months ended September 30, 2021 was $259 million, compared with $246 million for the same prior-year period.

The increase was primarily due to the impact of prior capital investments associated with new contract startups.

Depreciation and amortization expense included allocated corporate charges of $9 million and $7 million for the three months ended June 30, 2021 and 2020 and $14 million for both the six months ended June 30, 2021 and 2020.

Depreciation and amortization expense included amortization of acquisition-related intangible assets of $14 million for the three months ended June 30, 2021 and 2020 and $28 million for the six months ended June 30, 2021 and 2020.

Transaction and integration costs for the three and six months ended June 30, 2021 are primarily related to costs related to the spin-off.

For the three and six months ended June 30, 2020, transaction and integration costs are primarily related to XPO’s previous exploration of strategic alternatives.

Depreciation and amortization expense included allocated corporate charges of $1 million and $7 million for the three months ended September 30, 2021 and 2020 and $15 million and $21 million for the nine months ended September 30, 2021 and 2020, respectively.

Depreciation and amortization expense included amortization of acquisition-related intangible assets of $16 million and $15 million for the three months ended September 30, 2021 and 2020, respectively, and $44 million and $43 million for the nine months ended September 30, 2021 and 2020, respectively.

Transaction and integration costs for the three and nine months ended September 30, 2021 was $29 million and $82 million, respectively, are primarily related to costs related to the Separation.

For the three and nine months ended September 30, 2020, transaction and integration costs are primarily related to costs allocated by XPO related to XPO’s exploration of strategic alternatives in 2020.

We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure.

For the second quarter of 2021, we recorded a restructuring credit of $1 million and for the six months ended June 30, 2021, recorded $3 million of restructuring charges, primarily related to severance costs.

Restructuring charges for the three and six months ended June 30, 2021 included an adjustment to a previously recognized liability.

For the three and nine months ended September 30, 2021, we recorded restructuring charges of $2 million and $5 million, respectively, primarily related to severance costs.

For the three and nine months ended September 30, 2020, we recorded restructuring charges of $5 million and $25 million, respectively, primarily related to severance costs.

Restructuring charges for the three and nine months ended September 30, 2021 included an adjustment to a previously recognized liability.

For further information on our restructuring actions, see Note 6—Restructuring Charges.

Other (income) expense primarily includes pension income and expense.

We recorded expense of $1 million for the second quarter of 2021 and Other (income) expense was immaterial for the six months ended June 30, 2021.

For the three and six months ended June 30, 2020, we recorded income of $1 million and $2 million, respectively.

Interest expense relates to our related-party debt obligations with XPO.

Interest expense for the second quarter of 2021 was $6 million compared with $5 million for the same quarter in 2020.

Interest expense for the six months ended June 30, 2021 was $11 million compared with $12 million for the same period in 2020.

Our effective income tax rate was 10.2% and 27.2% in the second quarter of 2021 and 2020, respectively, and 24.9% and 20.1% for the six months ended June 30, 2021 and 2020, respectively.

The effective tax rates for the second quarter of 2021 and 2020 were based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented.

The change in our effective tax rate for the second quarter of 2021 compared to the same quarter in 2020 was primarily driven by higher pre-tax book income which diluted the impact of contribution- and margin-based taxes.

The effective tax rate for the six months ended June 30, 2021, was higher due to a reduction in pre-tax losses in certain jurisdictions for which no benefit can be recognized.

Other income primarily includes pension income.

In connection with the Separation, GXO became the plan sponsor for the U.K.

defined benefit pension plan.

See Note 10—Pension for further information.

We recorded income of $11 million for the three and nine months ended September 30, 2021.

Other income was immaterial for the three months ended September 30, 2020 and was $2 million for the nine months ended September 30, 2020.

Interest expense primarily relates to the Notes issued during the third quarter of 2021 and our related-party debt obligations with XPO prior to the Separation.

Interest expense for the three months ended September 30, 2021 was $5 million compared with $6 million for the same period in 2020.

Interest expense for the nine months ended September 30, 2021 was $16 million compared with $18 million for the same period in 2020.

Our effective tax rate for the three months ended September 30, 2021 and 2020 was (72.5)% and 49.0%, respectively, and (24.8)% and (5.0)% for the nine months ended September 30, 2021 and 2020, respectively.

The effective tax rates for the third quarter of 2021 and 2020 were determined using an estimate of our annual effective tax rate, adjusted for discrete items that occurred within the periods presented.

The changes in the effective tax rates for the three months ended September 30, 2021 compared with the same periods in 2020 were driven by a decrease in pre-tax losses in certain jurisdictions for which no benefit can be recognized and a discrete tax benefit of $42 million from the initial recognition of a deferred tax asset in connection with the Separation.

Liquidity and Capital Resources

Historically, our principal existing sources of cash are cash generated from operations and funding from XPO.

Treasury activities at XPO are generally centralized, while certain balances are managed locally, except as noted below.

To the extent cash and cash equivalents are legally owned by GXO, they are reflected in the combined financial statements.

Our European subsidiaries use a centralized notional pooling approach to cash management and the financing of their operations.

To the extent additional financing is required, XPO, including its affiliates, funds the European subsidiaries’ operating and investing activities.

This arrangement is not reflective of the manner in which the Company would have financed its operations had it been a standalone business separate from XPO during the periods presented.

All cash management accounts and transactions are reflected in the Combined Balance Sheets as cash and cash equivalents and in the Combined Statements of Cash Flows as operating activities.

For our European subsidiaries, none of the cash and cash equivalents or debt at the corporate level has been assigned to the Company in the Combined Financial Statements.

Under the notional pooling arrangements, since there is no immediate contractual obligation for us to cover any negative cash positions of these pooling arrangements related to other members, including other XPO affiliates, no obligation or guarantee to cover any such negative cash positions has been included in the Combined Balance Sheets.

Prior to the Separation on August 2, 2021, the Company participated in XPO’s centralized treasury model, which included its cash pooling and other intercompany financing arrangements.

We have historically generated, and expect to continue to generate, positive cash flow from operations.

Our ability to fund our operations and anticipated capital needs is reliant upon the generation of cash from operations, supplemented as necessary by periodic utilization of our Revolving Credit Facility.

Our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures, repayment of borrowings and strategic business development transactions.

The timing and magnitude of our start ups can vary and may positively or negatively impact our cash flows.

We continually evaluate our liquidity requirements and capital structure in light of our operating needs, growth initiatives and capital resources.

We believe that our existing liquidity and sources of capital are sufficient to support our operations over the next 12 months.

Revolving Credit Facility

In June 2021, we entered into a five-year,unsecured, multi-currency revolving credit facility (the “Revolving Credit Facility”).

The Revolving Credit Facility provides commitments of up to $800 million, of which $60 million will be available for the issuance of letters of credit.

There were no amounts outstanding under the Revolving Credit Facility as of September 30, 2021.

Unsecured Notes

In July 2021, the Company completed an offering of $800 million aggregate principal amount of notes, consisting of $400 million of notes due 2026 (the “2026 Notes”) and $400 million of notes due 2031 (the “2031 Notes”, and together with the 2026 Notes, the “Notes”).

The 2026 Notes bear interest at a rate of 1.65% per annum payable semiannually in cash in arrears on January 15 and July 15 of each year, beginning January 15, 2022, and mature on July 15, 2026.

The 2031 Notes bear interest at a rate of 2.65% per annum payable semiannually in cash in arrears on January 15 and July 15 of each year, beginning January 15, 2022, and mature on July 15, 2031.

At September 30, 2021, the Company was in compliance with the covenants of the indenture governing the Notes.

Trade Receivables Securitization and Factoring Programs

We sell certain of our trade accounts receivable on a non-recourse basis to third-party financial institutions under factoring agreements.

We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Combined Statements of Cash Flows.

We also sell certain European trade accounts receivable under a securitization program described below.

We use trade receivables securitization and factoring programs to help manage our cash flows and offset the impact of extended payment terms for some of our customers.

XPO Logistics Europe SAS (“XPO Logistics Europe”), one of our wholly-owned subsidiaries, participates in a trade receivables securitization program co-arranged by three European banks (the “Purchasers”).

Under the program, a wholly-owned bankruptcy-remote special purpose entity of XPO Logistics Europe sells trade receivables that originate with wholly-owned subsidiaries of XPO Logistics Europe to unaffiliated entities managed by the Purchasers.

The special purpose entity is a variable interest entity and has been presented within these combined financial statements based on our control of the entity’s activities.

We also sell certain European trade accounts receivable under a securitization program that contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio.

We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.

The trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables.

We use trade receivables securitization and factoring programs to help manage our cash flows.

Under the securitization program, one of our wholly owned subsidiaries, GXO Logistics Europe, participates in a trade receivables securitization program co-arranged by two European banks (the “Purchasers”).

Under the program, a wholly-owned bankruptcy-remote special purpose entity of GXO Logistics Europe sells trade receivables that originate with wholly-owned subsidiaries of GXO Logistics Europe to unaffiliated entities managed by the Purchasers.

The special purpose entity is a variable interest entity and has been presented within these condensed consolidated financial statements based on our control of the entity’s activities.

In July 2021, in connection with the Separation, XPO’s existing trade receivable securitization program was amended;

the previous €400 million ($460 million) program is now comprised of two separate €200 million ($230 million) programs, one of which remains with GXO and expires July 2024.

As of July 2021, GXO’s special purpose entity no longer purchases trade receivables from XPO.

As of December 31, 2020, current assets include trade receivables purchased from XPO in connection with our trade receivables securitization program of $105 million.

The trade receivables that had been purchased from XPO prior to the Separation have been reflected within Other current assets in the Condensed Consolidated Balance Sheets.

We account for transfers under our securitization and factoring arrangements as sales because we sell full title and ownership in the underlying receivables and control of the receivables is considered transferred.

For these transfers, the receivables are removed from our Combined Balance Sheets at the date of transfer.

For these transfers, the receivables are removed from our Condensed Consolidated Balance Sheets at the date of transfer.

In the securitization and factoring arrangements, our continuing involvement is limited to servicing the receivables.

The fair value of any servicing assets and liabilities is immaterial.

Our current trade receivables securitization program also permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables, which we report within short-term debt on our Combined Balance Sheets.

In addition to selling trade receivables which originate with GXO, the special purpose entity also purchases trade receivables from XPO and sells assets to the Purchasers.

The trade receivables which have been purchased from XPO have been reflected within Other current assets in the Combined Balance Sheets, and the related cash flows have been reflected within Purchase and sale of affiliate trade receivables, net, within investing activities in the Combined Statements of Cash Flows.

See Note 2—Basis of Presentation for additional information related to our receivables securitization secured borrowing program and these borrowings.

The maximum amount of net cash proceeds available at any one time under the current program, inclusive of any unsecured borrowings, is €400 million (approximately $474 million as of June 30, 2021).

As of June 30, 2021, €59 million (approximately $70 million) was available under the program, subject to having sufficient receivables available to sell to the Purchasers.

In July 2021, we amended our existing trade receivables securitization program.

The existing €400 million program is now comprised of two separate €200 million programs, one of which will continue to be available to us and one of which will be available only to XPO following the spin-off.

The new program expires in 2024.

Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables which are included in short-term debt on our Condensed Consolidated Balance Sheets until they are repaid in the following month’s settlement.

Information related to the trade receivables sold was as follows:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(In millions) 2021 2020 2021 2020

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Cash consideration 132 96 331 517

Revolving Credit Facility

In June 2021, in preparation for the spin-off, we entered into a five-year, unsecured, multi-currency revolving credit facility (the “Revolving Credit Facility”).

Initially, the Revolving Credit Facility provides commitments of up to $800 million, of which $60 million will be available for the issuance of letters of credit.

Loans under the Revolving Credit Facility will bear interest at a fluctuating rate equal to:

(i) with respect to borrowings in dollars, at GXO’s option, the alternate base rate or the reserve-adjusted LIBOR, (ii) with respect to borrowings in Canadian dollars, the reserve-adjusted Canadian Dollar Offered Rate and (iii) with respect to borrowings in Euros, the reserve-adjusted Euro Interbank Offered Rate, in each case, plus an applicable margin calculated based on GXO’s credit ratings.

The availability of the Revolving Credit Facility was subject to the spin-off occurring.

The covenants in the Revolving Credit Facility, which are customary for financings of this type, limit our ability to incur indebtedness and grant liens, among other restrictions.

In addition, the Revolving Credit Facility requires us to maintain a consolidated leverage ratio below a specified maximum.

There was no amount outstanding under the Revolving Credit Facility as of June 30, 2021.

Financial Condition

The following table summarizes our asset and liability balances as of June 30, 2021 and December 31, 2020:

June 30, December 31,

(In millions) 2021 2020

The following table summarizes our asset and liability balances as of September 30, 2021 and December 31, 2020:

(In millions) September 30, 2021 December 31, 2020

Total current assets $ 1,958 $ 1,836

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Total long-term liabilities 2,551 1,862

The increase in our assets and liabilities from December 31, 2020 to June 30, 2021 primarily reflects the impact of the Kuehne + Nagel business acquired in January 2021.

The increase in our assets and liabilities from December 31, 2020 to September 30, 2021 primarily reflects the impact of the Kuehne + Nagel business acquired in January 2021.

Total long-term assets also reflects an increase in start-up costs and operating lease assets associated with our new contracts.

Total long-term liabilities also reflects the settlement of related-party notes and issuance of the Notes during the third quarter.

Cash Flow Activity

Our cash flows from operating, investing and financing activities, as reflected on our Condensed Combined Statements of Cash Flows, are summarized as follows:

Six Months Ended June 30,

Our cash flows from operating, investing and financing activities, as reflected on our Condensed Consolidated Statements of Cash Flows, are summarized as follows:

Nine Months Ended September 30,

(In millions) 2021 2020

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Net increase (decrease) in cash, cash equivalents and restricted cash $ (53) $ 209

During the six months ended June 30, 2021, we:

(i) generated cash from operating activities of $146 million and (ii) received net transfers from XPO of $116 million.

We used cash during this period primarily to:

(i) purchase the remaining non-controlling interest in XPO Logistics Europe that we did not own for $128 million;

(ii) purchase property and equipment of $119 million and (iii) make payments on debt and finance leases of $56 million.

During the six months ended June 30, 2020, we:

(i) generated cash from operating activities of $191 million;

(ii) received net transfers from XPO of $44 million;

and (iii) received net proceeds related to secured borrowing activity of $45 million.

We used cash during this period primarily to:

(i) purchase property and equipment of $102 million;

and (ii) make payments on debt and finance leases of $71 million.

Cash flows from operating activities for the six months ended June 30, 2021 decreased by $45 million compared with 2020.

The decrease reflects the impact of increased use of cash for working capital in 2021, partially offset by higher net income.

Investing activities used $71 million of cash for the six months ended June 30, 2021, compared with $94 million used for the same period of 2020.

During the six months ended June 30, 2021, we used $119 million of cash to purchase property and equipment and received $12 million, net, in connection with the purchase and sale of affiliate trade receivables.

During the same period in 2020, we used $102 million of cash to purchase property and equipment;

received $6 million of cash from sales of property and equipment and received $2 million, net, in connection with the purchase and sale of affiliate trade receivables.

Financing activities used $78 million of cash for the six months ended June 30, 2021 and generated $34 million of cash for the same period in 2020.

The primary uses of cash from financing activities for the six months ended June 30, 2021 were to purchase the remaining non-controlling interest in XPO Logistics Europe that we did not own for $128 million, $56 million used to repay debt and finance leases and $25 million from net borrowings related to our securitization program.

The primary source of cash from financing activities for the six months ended June 30, 2021 was $116 million of net transfers from XPO.

By comparison, the primary sources of cash from financing activities in the six months ended June 30, 2020 were $45 million of net proceeds related to secured borrowing activity and $44 million of net transfers from XPO.

The primary uses of cash from financing activities in the six months ended June 30, 2020 were $71 million used to repay debt and finance leases.

Operating Activities

Cash flows from operating activities for the nine months ended September 30, 2021 decreased by $94 million compared with 2020.

This reflects the impact of increased use of cash for working capital in 2021, partially offset by higher net income.

Investing Activities

Investing activities used $140 million of cash for the nine months ended September 30, 2021, compared with $163 million used for the same period of 2020.

During the nine months ended September 30, 2021, we used $180 million of cash to purchase property and equipment;

and received $8 million of cash from sales of property and equipment.

During the nine months ended September 30, 2020, we used $159 million of cash to purchase property and equipment;

used $15 million, net, in connection with the purchase and sale of affiliate trade receivables and received $11 million of cash from sales of property and equipment.

We anticipate net capital expenditures to be between $225 million and $250 million in 2021, funded by cash on hand and available liquidity.

Financing Activities

Financing activities used $165 million of cash for the nine months ended September 30, 2021.

The primary uses of cash from financing activities for the nine months ended September 30, 2021 were to purchase the remaining noncontrolling interest in GXO Logistics Europe that we did not own for $128 million, $64 million used to repay debt and finance leases, $21 million to repay borrowings related to our securitization program and $774 million of

net transfers to XPO in connection with the Separation.

The primary source of cash from financing activities for the nine months ended September 30, 2021 was the issuance of long-term debt of $794 million.

Financing activities generated $28 million of cash for the nine months ended September 30, 2020.

The primary sources of cash from financing activities in the nine months ended September 30, 2020 were $112 million of net transfers from XPO and $17 million from net borrowings related to our securitization program.

The primary uses of cash from financing activities in the nine months ended September 30, 2020 were $85 million used to repay debt and finance leases and $21 million to purchase a noncontrolling interest in GXO Logistics Europe.

Off-Balance Sheet Arrangements

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Contractual Obligations

As of June 30, 2021, the Company’s future contractual obligations have not materially changed as compared with December 31, 2020, except for the principal amount of indebtedness incurred in connection with the spin-off of $800 million and associated interest payments of $17 million per year.

See Note 10—Subsequent Events for

additional details.

We anticipate net capital expenditures to be between $225 million and $275 million in 2021, funded by cash on hand and available liquidity.

As of September 30, 2021, the Company’s future contractual obligations have not materially changed as compared with December 31, 2020, except for the aggregate principal amount of indebtedness associated with the Notes of $800 million and associated interest payments of $17 million per year.

See Note 8—Debt and Financing Arrangements for additional details.

Critical Accounting Policies

Our significant accounting policies, which include management’s best estimates and judgments, are included in Note 2 to the combined financial statements for the year ended December 31, 2020 included in the Form 10.

Our significant accounting policies, which include management’s best estimates and judgments, are included in Note 2—Basis of Presentation to the combined financial statements for the year ended December 31, 2020 included in the Form 10.

See Note 2—Basis of Presentation for information on the adoption of new accounting standards during 2021.

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Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted

Information related to new accounting standards is included in Note 2—Basis of Presentation to the Condensed Combined Financial Statements.

Information related to new accounting standards is included in Note 2—Basis of Presentation to the Condensed Consolidated Financial Statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis