GXO Logistics, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q and other written reports and oral statements we make from time to time contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terms such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target,” “trajectory” or the negative of these terms or other comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference include those discussed below and the risks discussed in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). All forward-looking statements set forth in this Quarterly Report on Form 10-Q are qualified by these cautionary statements, and there can be no assurance that the 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. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the SEC on February 15, 2024 (the “2023 Form 10-K”), and the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Business Overview 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. 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 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. To the extent the Company’s actual costs vary from the estimates upon which the price was negotiated, the Company will generate more or less profit. Cost-plus contracts provide for the payment of allowable costs incurred during the performance of the contract plus a specified margin. 19 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 March 31, 2024 Compared with the Three Months Ended March 31, 2023 Three Months Ended March 31, (In millions) 2024 2023 $ Change % Change Revenue $ 2,456 $ 2,323 $ 133 6 % Direct operating expense 2,056 1,906 150 8 % Selling, general and administrative expense 249 258 (9) (3) % Depreciation and amortization expense 92 83 9 11 % Transaction and integration costs 19 13 6 46 % 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 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. 20 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 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 March 31, (In millions) 2024 2023 $ Change % Change Net periodic pension income $ 3 $ 2 $ 1 50 % Foreign currency gain (loss): Realized foreign currency option and forward contracts loss (1) (2) 1 (50) % Unrealized foreign currency option and forward contracts gain 3 1 2 n/m Foreign currency transaction and remeasurement gain (loss) 1 (1) 2 n/m Total foreign currency gain (loss) 3 (2) 5 n/m Other income, net $ 6 $ — $ 6 n/m n/m - not meaningful Interest expense, net was as follows: Three Months Ended March 31, (In millions) 2024 2023 $ Change % Change Debt and capital leases $ 24 $ 24 $ — — % Cross-currency swaps (8) (8) — — % Interest income (3) (3) — — % 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. 21 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 facility and factoring programs. 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) 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: Three Months Ended March 31, (In millions) 2024 2023 $ Change % Change Net cash provided by operating activities $ 50 $ 39 $ 11 28 % Net cash used in investing activities (82) (82) — — % 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 22 Operating Activities 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 $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 $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 We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations As of March 31, 2024, the Company’s contractual obligations had not materially changed compared with December 31, 2023. Critical Accounting Policies and Estimates There have been no material changes to the critical accounting policies and estimates as previously disclosed in “Critical Accounting Policies” in Part II, Item 7 of our Form 10-K for the year ended December 31, 2023. 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.