What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-08 · 89 added, 169 removed, 60 unchanged (81% of the section changed)

11 unchanged sentences

Business Overview

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

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

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

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 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.

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

We expect to attract new customers and expand the services we provide to existing customers through new projects, thus earning more of their external and internal logistics spending.

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

GXO Logistics, Inc., together with its subsidiaries (“GXO,” the “Company,” “our” or “we”), is the largest pure-play contract logistics provider in the world and a foremost innovator in the industry.

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

Our customers rely on us to move their goods with high efficiency through their supply chains — from the moment goods arrive at our warehouses through fulfillment and distribution, and the management of returned products.

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 services.

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

6 unchanged sentences

Cost-plus contracts provide for the payment of allowable costs incurred during the performance of the contract plus a specified margin.

On May 24, 2022, the Company completed the acquisition of Clipper Logistics plc (“Clipper”), an omnichannel retail logistics specialist based in Leeds, England (the “Clipper Acquisition”).

Due to the Clipper Acquisition, comparisons in our results of operations between 2023 and 2022 are less meaningful.

On October 23, 2023, the Company completed the acquisition of PFSweb, Inc.

(“PFS”), an e-commerce order fulfillment company based in Irving, Texas (the “PFS Acquisition”).

Results of Operations

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

Three Months Ended September 30,

Three Months Ended March 31, 2024 Compared with the Three Months Ended March 31, 2023

Three Months Ended March 31,

(In millions) 2024 2023 $ Change % Change

4 unchanged sentences

Transaction and integration costs 19 13 6 46 %

Restructuring costs and other 7 — 7 n/m

Operating income 90 72 18 25 %

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

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

Income before income taxes 83 83 — — %

Income tax expense (15) (19) 4 (21) %

Net income $ 68 $ 64 $ 4 6 %

Restructuring costs and other 16 21 (5) (24) %

Litigation expense 63 — 63 n/m

Operating income (loss) (39) 42 (81) n/m

Other income, net 6 — 6 n/m

Interest expense, net (13) (13) — — %

Income (loss) before income taxes (46) 29 (75) n/m

Income tax (expense) benefit 10 (3) 13 n/m

Net income (loss) $ (36) $ 26 $ (62) n/m

n/m - not meaningful

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 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 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.

Revenue for the three months ended March 31, 2024, increased by 6%, or $133 million, to $2.5 billion compared with $2.3 billion for the same period in 2023.

The increase in 2024 compared to the prior period primarily reflects $63 million from the PFS Acquisition and $50 million due to favorable foreign currency movement.

Direct operating expense is comprised of both fixed and variable expenses and consists 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 March 31, 2024, increased by 8%, or $150 million, to $2.1 billion compared with $1.9 billion for the same period in 2023.

Direct operating expense increased primarily due to $94 million higher personnel and temporary labor expenses, excluding the PFS Acquisition.

The PFS Acquisition increased Direct operating expense by $51 million.

As a percentage of revenue, direct operating expense for the three months ended March 31, 2024, was 83.7% compared with 82.0% for the same period in 2023.

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

SG&A for the three months ended March 31, 2024, decreased by $9 million, to $249 million compared with $258 million for the same period in 2023.

SG&A decreased due to lower personnel costs, primarily for certain administrative functions.

Depreciation and amortization expense for the three months ended March 31, 2024 increased by $9 million to $92 million compared with $83 million for the same period in 2023.

Amortization expense was $19 million and $17 million for the three months ended March 31, 2024 and 2023, respectively.

Transaction and integration costs for the three months ended March 31, 2024 were $19 million and primarily related to the acquisition of Wincanton plc (the “Wincanton Acquisition”).

Transaction and integration costs for the three months ended March 31, 2023 were $13 million and primarily related to the integration of Clipper Logistics plc.

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 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.

Restructuring costs and other for the three months ended March 31, 2024 were $16 million compared with $21 million for the same period in 2023.

Restructuring costs and other for the three months ended March 31, 2024 relate to a restructuring plan designed to centralize certain processes and standardize operating structures.

For the three months ended March 31, 2023, restructuring costs and other included severance charges of $15 million and impairment charges of $6 million as a result of closing certain corporate and administrative offices.

Litigation expense primarily relates to an ongoing legal matter.

During the first quarter of 2024, a trial was held in the United States District Court for the Western District of Missouri in connection with a dispute between the Company and one of its customers related to the start-up of the customer’s warehouse that occurred in 2018 (Lindt et al v.

GXO Warehouse Company, Inc., docket no.

4:22-cv-00384-BP).

In March 2024, the jury returned verdicts in favor of the customer.

The Company recognized a $63 million expense in the three months ended March 31, 2024 for the jury verdicts, potential post-trial awards of interest, associated legal fees, costs and other related expenses.

The Company believes that this case was incorrectly decided and intends to pursue post-verdict remedies as necessary, including an appeal, and will pursue reimbursement under its existing insurance policies.

Other income, net increased due to foreign currency gains and higher pension income.

Other income, net was as follows:

Three Months Ended September 30,

Three Months Ended March 31,

(In millions) 2024 2023 $ Change % Change

1 unchanged sentence

$ 3 $ 2 $ 1 50 %

Foreign currency:

Realized foreign currency contracts gain (loss)

(3) 10 (13) n/m

Unrealized foreign currency contracts gain (loss)

Foreign currency remeasurement gain

Foreign currency gain (loss):

Realized foreign currency option and forward contracts loss

(1) (2) 1 (50) %

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

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

Unrealized foreign currency option and forward contracts gain

Foreign currency transaction and remeasurement gain (loss)

Total foreign currency gain (loss) 3 (2) 5 n/m

Other income, net $ 6 $ — $ 6 n/m

n/m - not meaningful

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 September 30,

Three Months Ended March 31,

(In millions) 2024 2023 $ Change % Change

5 unchanged sentences

(3) (3) — — %

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

n/m - not meaningful

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

Revenue $ 7,188 $ 6,526 $ 662 10 %

Direct operating expense 5,875 5,408 467 9 %

Selling, general and administrative expense 761 637 124 19 %

Depreciation and amortization expense 268 242 26 11 %

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

Restructuring costs and other 31 14 17 n/m

Operating income 231 168 63 38 %

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

Interest expense, net (41) (19) (22) n/m

Income before income taxes 198 205 (7) (3) %

Income tax expense (38) (51) 13 (25) %

Net income $ 160 $ 154 $ 6 4 %

n/m - not meaningful

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 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 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 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:

Nine Months Ended September 30,

(In millions) 2023 2022 $ Change % Change

Net periodic pension income

$ 6 $ 25 $ (19) (76) %

Foreign currency:

Realized foreign currency contracts gain (loss)

(9) 19 (28) n/m

Unrealized foreign currency contracts gain

12 14 (2) (14) %

Foreign currency remeasurement loss

(1) (2) 1 (50) %

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 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:

Nine Months Ended September 30,

(In millions) 2023 2022 $ Change % Change

Debt and capital leases

$ 72 $ 37 $ 35 95 %

Cross-currency swaps

(25) (16) (9) 56 %

Interest income

(6) (2) (4) n/m

Interest expense, net $ 41 $ 19 $ 22 n/m

n/m - not meaningful

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.

Interest expense, net $ 13 $ 13 $ — — %

Income (loss) before income taxes for the three months ended March 31, 2024 was a loss of $46 million compared with income of $29 million for the same period in 2023.

The decrease was primarily due to a $63 million litigation expense recorded in the three months ended March 31, 2024.

Income taxes for the three months ended March 31, 2024 was a $10 million tax benefit compared with a $3 million tax expense for the same period in 2023.

Our effective tax rate for the three months ended March 31, 2024 was a benefit on pre-tax loss of 21.1%, compared to an expense on pre-tax income of 11.0% for the same period in 2023.

In 2023, our effective tax rate was reduced by discrete tax benefits from the release of valuation allowances.

Liquidity and Capital Resources

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 facilities.

Our principal uses of cash in the future will be 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.

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.

Factoring Programs

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

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

Information related to the trade receivables sold was as follows:

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

(In millions) 2023 2022 2023 2022

Receivables sold in period $ 288 $ 259 $ 820 $ 716

Cash consideration 286 258 815 714

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

The covenants in the unsecured notes, term loans and revolving credit facilities, which are customary for financings of this type, limit our ability to incur indebtedness and grant liens, among other restrictions.

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

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

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 new contract 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.

As of March 31, 2024, we held cash and cash equivalents of $423 million and we had $799 million of borrowing capacity, net of letters of credit under our revolving credit facility.

Additionally, we entered into borrowing agreements during the first quarter of 2024 to fund the Wincanton Acquisition.

We believe that our cash and cash equivalents on hand, cash flows from operations, the revolving credit facility, and the use of our factoring programs will provide sufficient liquidity to operate our business and fund our current and assumed obligations for at least the next 12 months.

For additional information regarding our cash requirement from lease obligations, indebtedness and contractual obligations, see Note 3.

Leases, Note 5.

Debt and Financing Arrangements, Note 12.

Commitments and Contingencies, and Note 13.

Subsequent Events, in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Financial Condition

The following table summarizes our asset and liability balances:

(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.

(In millions) March 31, 2024 December 31, 2023 $ Change % Change

Total current assets $ 2,463 $ 2,568 $ (105) (4) %

Total long-term assets 6,917 6,939 (22) — %

Total current liabilities 2,625 2,626 (1) — %

Total long-term liabilities 3,852 3,935 (83) (2) %

Total current assets and liabilities decreased from December 31, 2023 to March 31, 2024 primarily due to the seasonality of our business.

Total long-term liabilities decreased from December 31, 2023 to March 31, 2024 due to the repayment of $100 million of the Five-Year Term Loan due 2027 on May 6, 2024 that was classified as current liabilities as of March 31, 2024.

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:

Nine Months Ended September 30,

Three Months Ended March 31,

(In millions) 2024 2023 $ Change

1 unchanged sentence

Net cash used in investing activities (82) (82) — — %

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) %

Net cash used in financing activities (8) (29) 21 (72) %

Effect of exchange rates on cash and cash equivalents (5) 3 (8) n/m

Net decrease in cash, restricted cash and cash equivalents $ (45) $ (69) $ 24 (35) %

n/m - not meaningful

Operating Activities

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.

Cash flows provided by operating activities for the three months ended March 31, 2024 increased $11 million compared with the same period in 2023.

The increase was primarily due to the increase in working capital, partially offset by lower net income.

Investing Activities

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.

Investing activities used $82 million of cash for the three months ended March 31, 2024 and 2023.

During the three months ended March 31, 2024, we used $73 million of cash to purchase property and equipment and $15 million to purchase Wincanton shares and received $6 million of cash from sales of property and equipment.

During the three months ended March 31, 2023, we used $91 million of cash to purchase property and equipment and received $9 million of cash from sales of property and equipment.

Financing Activities

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.

Financing activities used $8 million of cash for the three months ended March 31, 2024, including $8 million to repay finance lease obligations and $4 million in payments for employee taxes on net settlement of equity awards.

Financing activities used $29 million of cash for the three months ended March 31, 2023, including $21 million to repay debt, $8 million to repay finance lease obligations and $4 million in payments for employee taxes on net settlement of equity awards.

Off-Balance Sheet Arrangements

1 unchanged sentence

Contractual Obligations

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

As of March 31, 2024, the Company’s contractual obligations had not materially changed compared with December 31, 2023.

Critical Accounting Policies and Estimates

1 unchanged sentence

Accounting Pronouncements

Information related to new accounting standards is included in Note 1 — Basis of Presentation and Significant Accounting Policies in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Information related to new accounting standards is included in Note 1.

Basis of Presentation and Significant Accounting Policies in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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