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. 23 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 June 30, 2024 compared with the Three Months Ended June 30, 2023 Three Months Ended June 30, (In millions) 2024 2023 $ Change % Change Revenue $ 2,846 $ 2,394 $ 452 19 % Direct operating expense 2,389 1,957 432 22 % Selling, general and administrative expense 270 245 25 10 % Depreciation and amortization expense 99 84 15 18 % 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 75 99 (24) (24) % Other income, net 1 1 — n/m Interest expense, net (23) (14) (9) 64 % 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 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 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 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. 24 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 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 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. 25 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 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 26 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. 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 $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): Realized foreign currency option and forward contracts loss (2) (6) 4 (67) % Unrealized foreign currency option and forward contracts gain 4 4 — 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: Six Months Ended June 30, (In millions) 2024 2023 $ Change % Change Debt and capital leases $ 58 $ 47 $ 11 23 % Cross-currency swaps (19) (16) (3) 19 % Interest income (3) (4) 1 (25) % Interest expense, net $ 36 $ 27 $ 9 33 % 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. 27 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 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 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: June 30, December 31, (In millions) 2024 2023 $ Change % Change Total current assets $ 2,797 $ 2,568 $ 229 9 % Total long-term assets 8,563 6,939 1,624 23 % Total current liabilities 3,269 2,626 643 24 % Total long-term liabilities 5,158 3,935 1,223 31 % 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: Six Months Ended June 30, (In millions) 2024 2023 $ Change % Change Net cash provided by operating activities $ 165 $ 100 $ 65 65 % 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 increase (decrease) in cash, restricted cash and cash equivalents $ 1 $ (190) $ 191 n/m n/m - not meaningful 28 Operating Activities 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 $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 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 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 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 2023 Form 10-K. 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.