What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-03 · 98 added, 97 removed, 131 unchanged (60% of the section changed)

15 unchanged sentences

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

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

We strive to provide all customers with consistent quality service and cutting-edge automation.

We also collaborate with our largest customers on planning and forecasting and assist with network optimization, working with these customers to design or redesign their supply chains to meet specific goals, such as environmental, social and governance.

4 unchanged sentences

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

The vast majority of our contracts with customers are long-term in nature, and our facility lease arrangements generally align with contract length.

The vast majority of our contracts with customers are long-term in nature, and our warehouse lease arrangements generally align with contract length.

The Company has both fixed-price contracts (closed book or hybrid contracts) and cost-plus contracts (open book contracts).

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

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

The fixed component is typically designed to cover warehouse, technology and equipment costs, while the variable component is determined based on expected volumes and associated labor costs.

Under fixed-price contracts, the Company agrees to perform the specified work for a pre-determined price.

4 unchanged sentences

Results of Operations

Three Months Ended June 30,

Three Months Ended September 30, 2023 Compared with the Three Months Ended September 30, 2022

Three Months Ended September 30,

(In millions) 2023 2022 $ Change % Change

7 unchanged sentences

Other income, net 7 17 (10) (59) %

Interest expense, net (14) (9) (5) 56 %

Interest expense, net (14) (6) (8) n/m

Income before income taxes 83 83 — — %

2 unchanged sentences

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Three Months Ended June 30, 2023, compared with the Three Months Ended June 30, 2022

Revenue for the three months ended June 30, 2023, increased by 11%, or $238 million, to $2.4 billion compared with $2.2 billion for the same period in 2022.

The increase in 2023 compared to the prior period primarily reflects an increase of $154 million from the Clipper Acquisition for the periods that were not comparable and growth in our Continental Europe business, primarily driven by new contract implementations.

Foreign currency movement increased revenue by $17 million in 2023.

Direct operating expenses is 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 three months ended June 30, 2023, increased by 10%, or $182 million, to $2.0 billion compared with $1.8 billion for the same period in 2022.

Direct operating expense increased primarily due to the Clipper Acquisition and higher personnel and temporary labor expenses due to growth in our business.

As a percentage of revenue, direct operating expense for the three months ended June 30, 2023, was 81.7% compared with 82.3% for the same period in 2022.

Revenue for the three months ended September 30, 2023, increased by 8%, or $184 million, to $2.5 billion compared with $2.3 billion for the same period in 2022.

The increase in 2023 compared to the prior period primarily reflects growth in our Continental Europe and United Kingdom and Ireland operations.

Foreign currency movement increased revenue by $126 million for the three months ended September 30, 2023 compared with the prior period.

Direct operating expense is comprised of both fixed and variable expenses and consist of operating costs related to our warehouses, including personnel costs, rent expenses, utility costs, equipment maintenance and repair costs, transportation costs, costs of materials and supplies and information technology expenses.

Direct operating expense for the three months ended September 30, 2023, increased by 7%, or $127 million, to $2.0 billion compared with $1.9 billion for the same period in 2022.

Direct operating expense increased primarily due to higher personnel and temporary labor expenses and higher facilities and equipment expense.

As a percentage of revenue, direct operating expense for the three months ended September 30, 2023, was 81.4% compared with 82.4% for the same period in 2022.

Selling, general and administrative expense (“SG&A”) primarily consists of salary and benefits for executive and administrative functions, professional fees and legal costs.

SG&A for the three months ended June 30, 2023,

SG&A for the three months ended September 30, 2023,

increased by 14%, or $31 million, to $258 million compared with $227 million for the same period in 2022.

SG&A increased due to the Clipper Acquisition.

Depreciation and amortization expense for the three months ended June 30, 2023 increased by $7 million to $84 million compared with $77 million for the same period in 2022.

Amortization expense was $19 million and $13 million for the three months ended June 30, 2023 and 2022, respectively.

Depreciation and amortization expense increased primarily due to the Clipper Acquisition.

Transaction and integration costs for the three months ended June 30, 2023, were $6 million compared with $24 million for the same period in 2022.

Transaction and integration costs for the three months ended June 30, 2023 and 2022, primarily relate to the Clipper Acquisition.

SG&A increased due to higher personnel costs, primarily for certain administrative functions, and higher bad debt expense.

Depreciation and amortization expense for the three months ended September 30, 2023 increased by $12 million to $101 million compared with $89 million for the same period in 2022.

Amortization expense was $18 million and $21 million for the three months ended September 30, 2023 and 2022, respectively.

The increase in depreciation and amortization expense was primarily related to increased depreciation expense due to the impact of prior capital investments associated with new contracts.

Transaction and integration costs for the three months ended September 30, 2023 were $3 million and primarily related to the acquisition of PFSweb, Inc.

Transaction and integration costs for the three months ended September 30, 2022 were $14 million and primarily related to the Clipper Acquisition.

Restructuring costs and other are primarily related to severance, including projects to optimize finance, human resources and information technology functions, and are not associated with customer attrition.

Restructuring costs and other for the three months ended June 30, 2023 were $3 million compared with $1 million for the same period in 2022.

Other income, net decreased due to foreign currency movements and pension income.

Restructuring costs and other for the three months ended September 30, 2023 was $7 million and primarily related to the exit of non-core businesses in Asia.

Other income, net decreased due to foreign currency movements and lower pension income.

Other income, net was as follows:

Three Months Ended June 30,

Three Months Ended September 30,

(In millions) 2023 2022 $ Change % Change

4 unchanged sentences

(3) 10 (13) n/m

Unrealized foreign currency contracts gain

3 9 (6) (67) %

Foreign currency remeasurement loss

Unrealized foreign currency contracts gain (loss)

Foreign currency remeasurement gain

— 1 (1) (100) %

Total foreign currency gain (loss) (1) 14 (15) n/m

Total foreign currency gain 5 10 (5) (50) %

Other income, net $ 7 $ 17 $ (10) (59) %

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Interest expense, net increased primarily due to debt incurred for the Clipper Acquisition.

Interest expense, net increased primarily due to higher variable interest rates on our debt compared with the prior period.

Interest expense, net was as follows:

Three Months Ended June 30,

Three Months Ended September 30,

(In millions) 2023 2022 $ Change % Change

2 unchanged sentences

Cross-currency swaps

(8) (3) (5) n/m

(9) (9) — — %

Interest income

(1) — (1) n/m

Interest expense, net $ 14 $ 9 $ 5 56 %

(2) (1) (1) 100 %

Interest expense, net $ 14 $ 6 $ 8 n/m

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Income before income taxes for the three months ended June 30, 2023, increased to $86 million compared with $73 million for the same period in 2022.

The increase was due to higher operating income, partially offset by lower other income and higher interest expense.

Income tax expense for the three months ended June 30, 2023, was $20 million compared with $21 million for the same period in 2022.

Our effective tax rate was 23.0% for the three months ended June 30, 2023, compared with 29.4% for the same period in 2022.

The decrease in our effective tax rate was primarily driven by a decrease in pre-tax losses in certain jurisdictions for which no benefit was recognized and higher transaction costs for the same period in 2022 related to the Clipper Acquisition which were non deductible.

Six Months Ended June 30,

Income before income taxes for both the three months ended September 30, 2023 and 2022 was $83 million.

Income tax expense for the three months ended September 30, 2023 was $15 million compared with $19 million for the same period in 2022.

Our effective tax rate was 17.9% for the three months ended September 30, 2023, compared with 22.5% for the same period in 2022.

The change in our effective tax rate was primarily driven by a tax benefit related to return-to-provision true-up adjustments.

Nine Months Ended September 30, 2023 Compared with the Nine Months Ended September 30, 2022

Nine months ended September 30,

(In millions) 2023 2022 $ Change % Change

4 unchanged sentences

Transaction and integration costs 22 57 (35) (61) %

Restructuring costs and other 24 14 10 71 %

Restructuring costs and other 31 14 17 n/m

Operating income 231 168 63 38 %

5 unchanged sentences

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Six Months Ended June 30, 2023 compared with the Six Months Ended June 30, 2022

Revenue for the six months ended June 30, 2023 increased by 11%, or $478 million, to $4.7 billion compared with $4.2 billion for the same period in 2022.

The increase primarily reflects an increase of $378 million from the Clipper Acquisition for the periods that were not comparable and growth in our business, primarily driven by new contract implementations.

Foreign currency movement decreased revenue by $83 million in 2023.

Direct operating expense for the six months ended June 30, 2023 increased by 10%, or $340 million, to $3.9 billion compared with $3.5 billion for the same period in 2022.

Direct operating expense increased primarily due to the Clipper Acquisition, as well as higher facilities expense and higher personnel and temporary labor expenses due to growth in our business.

As a percentage of revenue, direct operating expense for the six months ended June 30, 2023, was 81.9% compared with 83.1% for the same period in 2022.

Revenue for the nine months ended September 30, 2023 increased by 10%, or $662 million, to $7.2 billion compared with $6.5 billion for the same period in 2022.

The increase primarily reflects an increase of $378 million from the Clipper Acquisition for the periods that were not comparable and growth in our Continental Europe operations.

Foreign currency movement increased revenue by $43 million for the nine months ended September 30, 2023 compared with the prior period.

Direct operating expense for the nine months ended September 30, 2023 increased by 9%, or $467 million, to $5.9 billion compared with $5.4 billion for the same period in 2022.

Direct operating expense increased primarily due to the Clipper Acquisition, as well as higher personnel and temporary labor expenses and higher facilities and equipment expense.

As a percentage of revenue, direct operating expense for the nine months ended September 30, 2023, was 81.7% compared with 82.9% for the same period in 2022.

Selling, general and administrative expense (“SG&A”) primarily consists of salary and benefits for executive and administrative functions, professional fees and legal costs.

SG&A for the six months ended June 30, 2023, increased by 23%, or $93 million, to $503 million compared with $410 million for the same period in 2022.

SG&A increased primarily due to the Clipper Acquisition and higher personnel costs, primarily for certain administrative functions, reflecting the growth in our business.

Depreciation and amortization expense for the six months ended June 30, 2023 increased by $14 million to $167 million compared with $153 million for the same period in 2022.

Amortization expense was $36 million and $27 million for the six months ended June 30, 2023 and 2022, respectively.

SG&A for the nine months ended September 30, 2023, increased by 19%, or $124 million, to $761 million compared with $637 million for the same period in 2022.

SG&A increased primarily due to the Clipper Acquisition and higher personnel costs, primarily for certain administrative functions, and higher bad debt expense.

Depreciation and amortization expense for the nine months ended September 30, 2023 increased by $26 million to $268 million compared with $242 million for the same period in 2022.

Amortization expense was $54 million and $48 million for the nine months ended September 30, 2023 and 2022, respectively.

Depreciation and amortization expense increased primarily due to the Clipper Acquisition.

Transaction and integration costs for the six months ended June 30, 2023, were $19 million compared with $43 million for the same period in 2022.

Transaction and integration costs for the six months ended June 30, 2023 and 2022, primarily relate to the Clipper Acquisition.

Transaction and integration costs for the nine months ended September 30, 2023 were $22 million compared with $57 million for the same period in 2022.

Transaction and integration costs for the nine months ended September 30, 2023 and 2022, primarily related to the Clipper Acquisition.

Restructuring costs and other for the six months ended June 30, 2023 were $24 million compared with $14 million for the same period in 2022.

For the six months ended June 30, 2023, Restructuring costs and other included severance charges of $18

million and impairment charges of $6 million as a result of closing certain corporate and administrative offices.

For the six months ended June 30, 2022, Restructuring costs and other included severance charges of $6 million and $8 million related to the deconsolidation of a joint venture.

Other income, net decreased due to foreign currency movements and pension income.

Restructuring costs and other for the nine months ended September 30, 2023 was $31 million and included severance charges of

$24 million and impairment charges of $7 million due to closing certain corporate and administrative offices and the exit of non-core businesses in Asia.

For the nine months ended September 30, 2022, Restructuring costs and other was $14 million and included severance charges of $6 million and $8 million related to the deconsolidation of a joint venture.

Other income, net decreased due to foreign currency movements and lower pension income.

Other income, net was as follows:

Six Months Ended June 30,

Nine Months Ended September 30,

(In millions) 2023 2022 $ Change % Change

8 unchanged sentences

(1) (2) 1 (50) %

Total foreign currency gain (loss) (3) 21 (24) n/m

Total foreign currency gain 2 31 (29) (94) %

Other income, net $ 8 $ 56 $ (48) (86) %

n/m - not meaningful

Interest expense, net increased primarily due to debt incurred for the Clipper Acquisition.

Interest expense, net increased primarily due to debt incurred for the Clipper Acquisition and higher variable interest rates on our debt compared with the prior period, partially offset by higher gains on cross-currency swaps in the current period.

Interest expense, net was as follows:

Six Months Ended June 30,

Nine Months Ended September 30,

(In millions) 2023 2022 $ Change % Change

Debt and capital leases

$ 47 $ 21 $ 26 n/m

$ 72 $ 37 $ 35 95 %

Cross-currency swaps

(16) (7) (9) n/m

(25) (16) (9) 56 %

Interest income

2 unchanged sentences

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Income before income taxes for the six months ended June 30, 2023, decreased to $115 million compared with $122 million for the same period in 2022.

The decrease was due to lower other income and higher interest expense, offset by higher operating income.

Income tax expense for the six months ended June 30, 2023, was $23 million compared with $32 million for the same period in 2022.

Our effective tax rate was 19.9% for the six months ended June 30, 2023, compared with 26.4% for the same period in 2022.

The decrease in our effective tax rate was primarily driven by a valuation allowance release, a decrease in pre-tax losses in certain jurisdictions for which no benefit was recognized and higher transaction costs for the same period in 2022 related to the Clipper Acquisition which were non deductible.

Income before income taxes for the nine months ended September 30, 2023, decreased to $198 million compared with $205 million for the same period in 2022.

The decrease was due to lower Other income, net and higher interest expense, partially offset by higher operating income.

Income tax expense for the nine months ended September 30, 2023 was $38 million compared with $51 million for the same period in 2022.

Our effective tax rate was 19.1% for the nine months ended September 30, 2023, compared with 24.7% for the same period in 2022.

The change in our effective tax rate was primarily driven by a tax benefit related to a valuation allowance release.

Liquidity and Capital Resources

2 unchanged sentences

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

As of June 30, 2023, we held cash and cash equivalents of $305 million and we had $799 million of borrowing capacity available, net of letters of credit under our Revolving Credit Facility.

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

As of September 30, 2023, we held cash and cash equivalents of $473 million and we had $799 million of borrowing capacity available, net of letters of credit under our Revolving Credit Facility.

We continually evaluate our liquidity requirements and capital structure in consideration 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.

Sales of Certain Receivables

Factoring Programs

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

1 unchanged sentence

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) 2023 2022 2023 2022

1 unchanged sentence

Cash consideration 286 258 815 714

Net cash used in operating cash flows (1)

(1) The three months ended June 30, 2022, includes $8 million of cash used by factoring programs.

The six months ended June 30, 2022, includes $116 million of cash provided by factoring program, reduced by $118 million of cash used in the securitization program that was terminated in the first quarter of 2022.

Net cash provided by operating cash flows (1)

(1) The nine months ended September 30, 2022, includes $134 million of cash provided by factoring program, reduced by $118 million of cash used in the securitization program that was terminated in the first quarter of 2022.

Covenants and Compliance

1 unchanged sentence

In addition, the facilities require us to maintain a consolidated leverage ratio below a specified maximum.

As of June 30, 2023, we were in compliance with the covenants contained in our debt and financing arrangements.

As of September 30, 2023, we were in compliance with the covenants contained in our debt and financing arrangements.

Financial Condition

The following table summarizes our asset and liability balances:

June 30, December 31,

(In millions) 2023 2022 $ Change % Change

Total current assets $ 2,306 $ 2,428 $ (122) (5) %

Total long-term assets 6,820 6,791 29 — %

Total current liabilities 2,403 2,532 (129) (5) %

Total long-term liabilities 3,912 4,009 (97) (2) %

The decrease in total assets and total liabilities from December 31, 2022 to June 30, 2023, primarily reflects the early repayment of our $115 million two-year term loan and the decrease in accounts payable due to the timing of payments.

(In millions) September 30, 2023 December 31, 2022 $ Change % Change

Current assets

$ 2,466 $ 2,428 $ 38 2 %

Long-term assets

6,625 6,791 (166) (2) %

$ 9,091 $ 9,219 $ (128) (1) %

Current liabilities

$ 2,434 $ 2,532 $ (98) (4) %

Long-term liabilities

3,840 4,009 (169) (4) %

Total Liabilities

$ 6,274 $ 6,541 $ (267) (4) %

The decrease in total assets from December 31, 2022 to September 30, 2023 reflects a decrease in long-term assets primarily due to depreciation and amortization of property and equipment, operating leases and intangible assets.

The decrease in total liabilities from December 31, 2022 to September 30, 2023 primarily reflects the decrease in accounts payable due to the timing of payments and the early repayment of our $115 million two-year term loan.

Cash Flow Activity

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

Six Months Ended June 30,

Nine Months Ended September 30,

(In millions) 2023 2022 $ Change

1 unchanged sentence

Net cash used in investing activities (192) (1,056) 864 (82) %

Net cash provided by (used in) financing activities (155) 869 (1,024) (118) %

Effect of exchange rates on cash and cash equivalents 5 (15) 20 n/m

Net (decrease) increase in cash and cash equivalents $ (190) $ 51 $ (241) n/m

n/m - not meaningful

Net cash provided by (used in) financing activities (170) 863 (1,033) n/m

Effect of exchange rates on cash, restricted cash and cash equivalents (2) (22) 20 (91) %

Net (decrease) increase in cash, restricted cash and cash equivalents $ (21) $ 101 $ (122) (121) %

Operating Activities

Cash flows provided by operating activities for the six months ended June 30, 2023, decreased by $100 million compared with the same period in 2022, primarily due to the decrease in accounts payable and accrued expenses due to the timing of payments for transaction and integration costs and severance costs.

Cash flows provided by operating activities for the nine months ended September 30, 2023 increased by $27 million compared with the same period in 2022 due to increase in cash generated from net income adjusted for non-cash charges.

Investing Activities

Investing activities used $140 million of cash for the six months ended June 30, 2023, compared with $1.0 billion used for the same period of 2022.

During the six months ended June 30, 2023, we used $150 million of cash to purchase property and equipment and received $10 million of cash from sales of property and equipment.

During the six months ended June 30, 2022, we used $874 million, net of cash received, to fund the Clipper Acquisition, used $154 million of cash to purchase property and equipment, received $14 million from the release of an escrow related to the Kuehne + Nagel acquisition, received $10 million in proceeds from cross-currency swap agreements, excluding accrued interest, and received $6 million of cash from sales of property and equipment.

Investing activities used $192 million of cash for the nine months ended September 30, 2023, compared with $1.1 billion used for the same period of 2022.

During the nine months ended September 30, 2023, we used $205 million of cash to purchase property and equipment and received $13 million of cash from sales of property and equipment.

During the nine months ended September 30, 2022, we used $874 million, net of cash received, to fund the Clipper Acquisition, used $239 million of cash to purchase property and equipment, received $26 million in proceeds from cross-currency swap agreements, excluding accrued interest, and received $22 million of cash from sales of property and equipment.

Financing Activities

Financing activities used $155 million of cash for the six months ended June 30, 2023, including $138 million used to repay debt, $16 million to repay finance lease obligations and $6 million in payments for employee taxes on stock-based compensation awards.

Financing activities generated $869 million of cash for the six months ended

June 30, 2022, including $898 million in proceeds from long-term debt, partially offset by $15 million to repay finance lease obligations and $12 million in payments for employee taxes on stock-based compensation awards.

Financing activities used $170 million of cash for the nine months ended September 30, 2023, including $139 million used to repay debt, $24 million to repay finance lease obligations and $7 million in payments for employee taxes on stock-based compensation awards.

Financing activities generated $863 million of cash for the nine months ended September 30, 2022, including $898 million in proceeds from long-term debt, partially offset by $23 million to repay finance lease obligations and $12 million in payments for employee taxes on stock-based compensation awards.

Off-Balance Sheet Arrangements

1 unchanged sentence

Contractual Obligations

As of June 30, 2023, the Company’s contractual obligations had not materially changed compared with December 31, 2022.

As of September 30, 2023, the Company’s contractual obligations had not materially changed compared with December 31, 2022.

Critical Accounting Policies and Estimates

3 unchanged sentences

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