What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-06 compared with 2024-05-08 · 149 added, 61 removed, 88 unchanged (70% of the section changed)

23 unchanged sentences

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

On April 29, 2024, the Company completed the acquisition of Wincanton plc (“Wincanton”), a U.K.

logistics provider specializing in both warehousing and transportation solutions (“the Wincanton Acquisition”).

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”).

For additional information regarding our acquisitions see Note 4.

Acquisitions.

Results of Operations

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

Three Months Ended March 31,

Three Months Ended June 30, 2024 compared with the Three Months Ended June 30, 2023

Three Months Ended June 30,

(In millions) 2024 2023 $ Change % Change

3 unchanged sentences

Depreciation and amortization expense 99 84 15 18 %

Transaction and integration costs 19 13 6 46 %

Transaction and integration costs 15 6 9 n/m

Restructuring costs and other 1 3 (2) (67) %

Litigation expense (3) — (3) n/m

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

Operating income 75 99 (24) (24) %

Other income, net 1 1 — n/m

Interest expense, net (23) (14) (9) 64 %

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

Income before income taxes 53 86 (33) (38) %

Income tax expense (14) (20) 6 (30) %

Net income $ 39 $ 66 $ (27) (41) %

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.

Revenue for the three months ended June 30, 2024 increased by 19%, or $452 million, to $2.8 billion compared with $2.4 billion for the same period in 2023.

The increase primarily reflects $396 million from the acquisitions of Wincanton and PFS.

Revenue also increased due to growth in our U.K.

and Ireland business, primarily driven by new contract implementations.

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.

Direct operating expense for the three months ended June 30, 2024 increased by 22%, or $432 million, to $2.4 billion compared with $2.0 billion for the same period in 2023.

The acquisitions of Wincanton and PFS increased Direct operating expense by $340 million.

Direct operating expense also increased due to higher personnel and temporary labor expenses in the U.K.

and Ireland from growth in the business.

As a percentage of revenue, Direct operating expense for the three months ended June 30, 2024, was 83.9% compared with 81.7% 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.

SG&A for the three months ended June 30, 2024 increased by $25 million, to $270 million compared with $245 million for the same period in 2023.

SG&A primarily increased due to the acquisitions of Wincanton and PFS.

Depreciation and amortization expense for the three months ended June 30, 2024 increased by $15 million, to $99 million compared with $84 million for the same period in 2023.

Amortization expense was $22 million and $19 million for the three months ended June 30, 2024 and 2023, respectively.

Depreciation and amortization expense primarily increased due to the acquisitions of Wincanton and PFS.

Transaction and integration costs for the three months ended June 30, 2024 were $15 million and primarily related to the Wincanton Acquisition.

Transaction and integration costs for the three months ended June 30, 2023 were $6 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 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.

Restructuring costs and other for the three months ended June 30, 2024 were $1 million compared with $3 million for the same period in 2023.

Litigation expense related to a legal settlement.

On June 14, 2024, the Company’s subsidiary GXO Warehouse Company, Inc.

entered into a settlement agreement for the claims 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.

We recognized a $3 million expense reduction for three months ended June 30, 2024 for the settlement.

For additional information regarding our legal matters see Note 13.

Commitments and Contingencies.

Other income, net was as follows:

Three Months Ended March 31,

Three Months Ended June 30,

(In millions) 2024 2023 $ Change % Change

Net periodic pension income

$ 5 $ 2 $ 3 n/m

Foreign currency gain (loss):

Realized foreign currency option and forward contracts loss

(1) (4) 3 (75) %

Unrealized foreign currency option and forward contracts gain

1 3 (2) (67) %

Foreign currency transaction and remeasurement loss

(4) — (4) n/m

Total foreign currency loss (4) (1) (3) n/m

Other income, net $ 1 $ 1 $ — n/m

n/m - not meaningful

Interest expense, net increased primarily due to debt incurred for the Wincanton Acquisition, partially offset by higher gains on cross-currency swaps in the current period.

Interest expense, net was as follows:

Three Months Ended June 30,

(In millions) 2024 2023 $ Change % Change

Debt and capital leases

$ 34 $ 23 $ 11 48 %

Cross-currency swaps

(11) (8) (3) 38 %

Interest income

— (1) 1 (100) %

Interest expense, net $ 23 $ 14 $ 9 64 %

Income before income taxes for the three months ended June 30, 2024 was $53 million compared with $86 million for the same period in 2023.

The decrease was primarily due to higher transaction and integration costs and interest expense, net.

Income tax expense for the three months ended June 30, 2024 was $14 million compared with $20 million for the same period in 2023.

Our effective tax rate for the three months ended June 30, 2024 was 25.4%, compared with 23.0% for the same period in 2023.

The increase in our effective tax rate was driven by non-deductible items partially offset by a return-to-provision benefit in 2024.

Six Months Ended June 30, 2024 compared with the Six Months Ended June 30, 2023

Six Months Ended June 30,

(In millions) 2024 2023 $ Change % Change

Revenue $ 5,302 $ 4,717 $ 585 12 %

Direct operating expense 4,445 3,863 582 15 %

Selling, general and administrative expense 519 503 16 3 %

Depreciation and amortization expense 191 167 24 14 %

Transaction and integration costs 34 19 15 79 %

Restructuring costs and other 17 24 (7) (29) %

Litigation expense 60 — 60 n/m

Operating income 36 141 (105) (74) %

Other income, net 7 1 6 n/m

Interest expense, net (36) (27) (9) 33 %

Income before income taxes 7 115 (108) (94) %

Income tax expense (4) (23) 19 (83) %

Net income $ 3 $ 92 $ (89) (97) %

n/m - not meaningful

Revenue for the six months ended June 30, 2024 increased by 12%, or $585 million, to $5.3 billion compared with $4.7 billion for the same period in 2023.

The increase primarily reflects an increase of $459 million from the acquisitions of Wincanton and PFS.

Revenue also increased due to growth in our U.K.

and Ireland business, primarily driven by new contract implementations.

Foreign currency movement increased revenue $50 million for the six months ended June 30, 2024.

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 six months ended June 30, 2024 increased by 15%, or $582 million, to $4.4 billion compared with $3.9 billion for the same period in 2023.

The acquisitions of Wincanton and PFS increased Direct operating expense by $391 million.

Direct operating expense also increased due to higher personnel and temporary labor expenses in the U.K.

and Ireland from growth in the business.

As a percentage of revenue, Direct operating expense for the six months ended June 30, 2024, was 83.8% compared with 81.9% for the same period in 2023.

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, 2024 increased by 3%, or $16 million, to $519 million compared with $503 million for the same period in 2023.

SG&A increased primarily due to the acquisitions of Wincanton and PFS.

Depreciation and amortization expense for the six months ended June 30, 2024 increased by $24 million to $191 million compared with $167 million for the same period in 2023.

Amortization expense was $41 million and $36 million for the six months ended June 30, 2024 and 2023, respectively.

Depreciation and amortization expense increased primarily due to the acquisitions of Wincanton and PFS.

Transaction and integration costs for the six months ended June 30, 2024 were $34 million compared with $19 million for the same period in 2023.

Transaction and integration costs for the six months ended June 30, 2024 primarily related to the Wincanton Acquisition.

Transaction and integration costs for the six months ended June 30, 2023 primarily related to the integration of Clipper Logistics plc.

Restructuring costs

and other for the six months ended June 30, 2024 were $17 million compared with $24 million for the same period in 2023.

For the six months ended June 30, 2024, Restructuring costs and other relate to a restructuring plan designed to centralize certain processes and standardize operating structures.

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.

Litigation expense related to a legal settlement.

On June 14, 2024, the Company’s subsidiary GXO Warehouse Company, Inc.

We recognized $60 million expense for the six months ended June 30, 2024 for the settlement, associated legal fees, costs and other related expenses.

For additional information regarding our legal matters see Note 13.

Commitments and Contingencies.

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

Other income, net was as follows:

Six Months Ended June 30,

(In millions) 2024 2023 $ Change % Change

Net periodic pension income

$ 8 $ 4 $ 4 100 %

Foreign currency gain (loss):

2 unchanged sentences

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

Foreign currency transaction and remeasurement loss

(3) (1) (2) n/m

Total foreign currency loss (1) (3) 2 (67) %

Other income, net $ 7 $ 1 $ 6 n/m

n/m - not meaningful

Interest expense, net increased primarily due to debt incurred for the Wincanton Acquisition, partially offset by higher gains on cross-currency swaps in the current period.

Interest expense, net was as follows:

Three Months Ended March 31,

Six Months Ended June 30,

(In millions) 2024 2023 $ Change % Change

6 unchanged sentences

Interest expense, net $ 36 $ 27 $ 9 33 %

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.

n/m - not meaningful

Income before income taxes for the six months ended June 30, 2024 was $7 million compared with $115 million for the same period in 2023.

The decrease was primarily due to higher costs associated with litigation expense, transaction and integration costs and interest expense, net.

Income tax expense for the six months ended June 30, 2024, was $4 million compared with $23 million for the same period in 2023.

Our effective tax rate for the six months ended June 30, 2024 was 52.3%, compared to 19.9% for the same period in 2023.

The increase in the Company’s effective tax rate for the six months ended June 30, 2024, was primarily driven by a decrease in pre-tax income partially offset by non-deductible items.

Liquidity and Capital Resources

3 unchanged sentences

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.

As of June 30, 2024, we held cash and cash equivalents of $469 million and we had $926 million of borrowing capacity, net of letters of credit under our revolving credit facilities.

We believe that our cash and cash equivalents on hand, cash flows from operations, the revolving credit facilities, 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 6.

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.

Debt and Financing Arrangements and Note 13.

Commitments and Contingencies 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

June 30, December 31,

(In millions) 2024 2023 $ Change % Change

Total current assets $ 2,797 $ 2,568 $ 229 9 %

2 unchanged sentences

Total long-term liabilities 5,158 3,935 1,223 31 %

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.

Total assets and liabilities increased from December 31, 2023 to June 30, 2024 primarily due to the Wincanton Acquisition.

Total long-term liabilities increased from December 31, 2023 to June 30, 2024 primarily due to issuance of $1.1 billion of unsecured notes to fund the Wincanton Acquisition.

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,

Six Months Ended June 30,

(In millions) 2024 2023 $ Change

Net cash provided by operating activities $ 165 $ 100 $ 65 65 %

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

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

Net cash used in investing activities (1,014) (140) (874) n/m

Net cash provided by (used in) financing activities 857 (155) 1,012 n/m

Effect of exchange rates on cash and cash equivalents (7) 5 (12) n/m

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

Net increase (decrease) in cash, restricted cash and cash equivalents $ 1 $ (190) $ 191 n/m

n/m - not meaningful

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.

Cash flows provided by operating activities for the six months ended June 30, 2024 increased $65 million compared with the same period in 2023.

The increase was primarily due to working capital changes, primarily driven by collection of receivables and timing of payments, 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.

Investing activities used $1,014 million of cash for the six months ended June 30, 2024 and $140 million for the same period in 2023.

During the six months ended June 30, 2024, we used $863 million, net of cash received, to fund the Wincanton Acquisition, used $161 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, 2023, we used $150 million of cash to purchase property and equipment and received $10 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.

Financing activities generated $857 million and used $155 million of cash for the six months ended June 30, 2024 and June 30, 2023, respectively.

The source of cash from financing activities during the six months ended June 30, 2024 was the issuance of long-term debt of $1,085 million, partially offset by cash used to repay $196 million of debt, $19 million to repay finance lease obligations and $7 million in payments for employee taxes on net settlement of equity awards.

The primary uses of cash from financing activities in during the six months ended June 30, 2023 were $138 million to repay debt, $16 million to repay finance lease obligations and $6 million in payments for employee taxes on net settlement of equity awards.

Off-Balance Sheet Arrangements

1 unchanged sentence

Contractual Obligations

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

During the six months ended June 30, 2024, we entered into a $1.1 billion of unsecured notes to fund the Wincanton Acquisition.

Other than the unsecured notes noted herein, as of June 30, 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.

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 2023 Form 10-K.

Accounting Pronouncements

2 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