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. 24 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 September 30, 2024 compared with the Three Months Ended September 30, 2023 Three Months Ended September 30, (In millions, except percentages) 2024 2023 $ Change % Change Revenue $ 3,157 $ 2,471 $ 686 28 % Direct operating expense 2,671 2,012 659 33 % Selling, general and administrative expense 265 258 7 3 % Depreciation and amortization expense 111 101 10 10 % Transaction and integration costs 21 3 18 n/m Restructuring costs and other 9 7 2 29 % Litigation expense (1) — (1) — % Operating income 81 90 (9) (10) % Other income (expense), net (6) 7 (13) n/m Interest expense, net (33) (14) (19) n/m Income before income taxes 42 83 (41) (49) % Income tax expense (7) (15) 8 (53) % Net income $ 35 $ 68 $ (33) (49) % n/m - not meaningful Revenue for the three months ended September 30, 2024 increased by 28%, or $686 million, to $3.2 billion compared with $2.5 billion for the same period in 2023. The increase primarily reflects $591 million from the acquisitions of Wincanton and PFS. Revenue also increased due to growth in our Continental Europe business. Foreign currency movement increased revenue $35 million for the three months ended September 30, 2024. 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 September 30, 2024 increased by 33%, or $659 million, to $2.7 billion compared with $2.0 billion for the same period in 2023. The acquisitions of Wincanton and PFS increased Direct operating expense by $523 million for the three months ended September 30, 2024. Direct operating expense also increased due to foreign currency movement in our U.K. and Ireland and Continental Europe businesses. As a percentage of revenue, Direct operating expense for the three months ended September 30, 2024, was 84.6% compared with 81.4% for the same period in 2023. The increase in Direct operating expense as a percentage of revenue was primarily related to the Wincanton Acquisition and higher personnel and temporary labor expenses associated with our new contract start-ups. 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 September 30, 2024 increased by $7 million, to $265 million compared with $258 million for the same period in 2023. SG&A primarily increased due to the acquisitions of Wincanton and PFS, partially offset by higher bad debt expense in the prior year. 25 Depreciation and amortization expense for the three months ended September 30, 2024 increased by $10 million, to $111 million compared with $101 million for the same period in 2023. Amortization expense was $36 million and $18 million for the three months ended September 30, 2024 and 2023, respectively. Depreciation and amortization expense primarily increased due to the acquisitions of Wincanton and PFS, partially offset by accelerated depreciation expense in the prior period. Transaction and integration costs for the three months ended September 30, 2024 were $21 million and primarily related to the Wincanton Acquisition. Transaction and integration costs for the three months ended September 30, 2023 were $3 million and primarily related to the PFS Acquisition. Restructuring costs and other are primarily related to severance, including projects to optimize finance, human resources and information technology functions, and are not associated with customer attrition. Restructuring costs and other for the three months ended September 30, 2024 were $9 million compared with $7 million for the same period in 2023. Litigation expense for the three months ended September 30, 2024 related to the reversal of legal expenses associated with a settlement agreement dated June 14, 2024. For additional information regarding this settlement see Note 13. Commitments and Contingencies. Other income (expense), net decreased primarily due to foreign currency loss. Other income, net was as follows: Three Months Ended September 30, (In millions, except percentages) 2024 2023 $ Change % Change Net periodic pension income $ 7 $ 2 $ 5 n/m Foreign currency gain (loss): Realized foreign currency option and forward contracts loss (4) (3) (1) 33 % Unrealized foreign currency option and forward contracts gain (loss) (8) 8 (16) n/m Foreign currency transaction and remeasurement gain 1 — 1 — % Total foreign currency gain (loss) (11) 5 (16) n/m Other loss (2) — (2) — % Other income (expense), net $ (6) $ 7 $ (13) n/m n/m - not meaningful Interest expense, net increased primarily due to debt incurred for the Wincanton Acquisition. Interest expense, net was as follows: Three Months Ended September 30, (In millions, except percentages ) 2024 2023 $ Change % Change Debt and capital leases $ 45 $ 25 $ 20 80 % Cross-currency swaps (10) (9) (1) 11 % Interest income (2) (2) — — % Interest expense, net $ 33 $ 14 $ 19 n/m n/m - not meaningful Income before income taxes for the three months ended September 30, 2024 was $42 million compared with $83 million for the same period in 2023. The decrease was primarily due to higher transaction and integration costs and interest expense. 26 Income tax expense for the three months ended September 30, 2024 was $7 million compared with $15 million for the same period in 2023. Our effective tax rate for the three months ended September 30, 2024 was 16.5%, compared with 17.9% for the same period in 2023. The decrease in our effective tax rate was primarily driven by fluctuations in our jurisdictional income profile. Nine Months Ended September 30, 2024 compared with the Nine Months Ended September 30, 2023 Nine Months Ended September 30, (In millions, except percentages) 2024 2023 $ Change % Change Revenue $ 8,459 $ 7,188 $ 1,271 18 % Direct operating expense 7,116 5,875 1,241 21 % Selling, general and administrative expense 784 761 23 3 % Depreciation and amortization expense 302 268 34 13 % Transaction and integration costs 55 22 33 n/m Restructuring costs and other 26 31 (5) (16) % Litigation expense 59 — 59 — % Operating income 117 231 (114) (49) % Other income, net 1 8 (7) (88) % Interest expense, net (69) (41) (28) 68 % Income before income taxes 49 198 (149) (75) % Income tax expense (11) (38) 27 (71) % Net income $ 38 $ 160 $ (122) (76) % n/m - not meaningful Revenue for the nine months ended September 30, 2024 increased by 18%, or $1.3 billion, to $8.5 billion compared with $7.2 billion for the same period in 2023. The increase primarily reflects an increase of $1.1 billion from the acquisitions of Wincanton and PFS. Revenue also increased due to growth in our U.K. and Ireland and Continental Europe businesses. Foreign currency movement increased revenue $85 million for the nine months ended September 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 nine months ended September 30, 2024 increased by 21%, or $1.2 billion, to $7.1 billion compared with $5.9 billion for the same period in 2023. The acquisitions of Wincanton and PFS increased Direct operating expense by $914 million for the nine months ended September 30, 2024. Direct operating expense also increased due to foreign currency movement in our U.K. and Ireland and Continental Europe businesses. As a percentage of revenue, Direct operating expense for the nine months ended September 30, 2024, was 84.1% compared with 81.7% for the same period in 2023. The increase in Direct operating expense as a percentage of revenue was primarily related to the Wincanton Acquisition and higher personnel and temporary labor expenses associated with our new contract start-ups. 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, 2024 increased by 3%, or $23 million, to $784 million compared with $761 million for the same period in 2023. SG&A increased primarily due to the acquisitions of Wincanton and PFS, partially offset by higher bad debt expense in the prior year. Depreciation and amortization expense for the nine months ended September 30, 2024 increased by $34 million to $302 million compared with $268 million for the same period in 2023. Amortization expense was $77 million and 27 $54 million for the nine months ended September 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 nine months ended September 30, 2024 were $55 million compared with $22 million for the same period in 2023. Transaction and integration costs for the nine months ended September 30, 2024 primarily related to the Wincanton Acquisition. Transaction and integration costs for the nine months ended September 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 and other for the nine months ended September 30, 2024 were $26 million compared with $31 million for the same period in 2023. For the nine months ended September 30, 2024, Restructuring costs and other relate to a restructuring plan designed to centralize certain processes and standardize operating structures. For the nine months ended September 30, 2023, Restructuring costs and other included severance charges of $24 million and impairment charges of $7 million as a result of closing certain corporate and administrative offices and the exit of non-core businesses in Asia. Litigation expense for the nine months ended September 30, 2024 related to a settlement agreement dated June 14, 2024. We recognized $59 million expense for the nine months ended September 30, 2024 for the settlement, associated legal fees, costs and other related expenses. For additional information regarding this settlement see Note 13. Commitments and Contingencies. Other income, net decreased due to foreign currency loss, partially offset by higher pension income. Other income, net was as follows: Nine Months Ended September 30, (In millions, except percentages) 2024 2023 $ Change % Change Net periodic pension income $ 15 $ 6 $ 9 n/m Foreign currency gain (loss): Realized foreign currency option and forward contracts loss (6) (9) 3 (33) % Unrealized foreign currency option and forward contracts gain (loss) (4) 12 (16) n/m Foreign currency transaction and remeasurement loss (2) (1) (1) 100 % Total foreign currency gain (loss) (12) 2 (14) n/m Other loss (2) — (2) — % Other income, net $ 1 $ 8 $ (7) (88) % 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: Nine Months Ended September 30, (In millions, except percentages) 2024 2023 $ Change % Change Debt and capital leases $ 103 $ 72 $ 31 43 % Cross-currency swaps (29) (25) (4) 16 % Interest income (5) (6) 1 (17) % Interest expense, net $ 69 $ 41 $ 28 68 % 28 Income before income taxes for the nine months ended September 30, 2024 was $49 million compared with $198 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. Income tax expense for the nine months ended September 30, 2024, was $11 million compared with $38 million for the same period in 2023. Our effective tax rate for the nine months ended September 30, 2024 was 21.9%, compared to 19.1% for the same period in 2023. The increase in the Company’s effective tax rate for the nine months ended September 30, 2024 is due to a tax benefit related to a valuation allowance release in the prior year period. 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 September 30, 2024, we held cash and cash equivalents of $548 million, restricted cash in Other long-term assets of $21 million and we had $959 million of borrowing capacity, net of letters of credit under our revolving credit facilities . In October and November 2024, we deposited an additional €34 million ($38 million as of September 30, 2024) of restricted cash in connection with the investigation by the Italian authorities. We have agreed to deposit an additional €33 million ($37 million as of September 30, 2024) of restricted cash in December 2024 and January 2025. We believe that our cas h 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: September 30, December 31, (In millions, except percentages) 2024 2023 $ Change % Change Total current assets $ 2,959 $ 2,568 $ 391 15 % Total long-term assets 8,941 6,939 2,002 29 % Total current liabilities 3,432 2,626 806 31 % Total long-term liabilities 5,327 3,935 1,392 35 % Total assets and liabilities increased from December 31, 2023 to September 30, 2024 primarily due to the Wincanton Acquisition. Total long-term liabilities also increased from December 31, 2023 to September 30, 2024 due to the issuance of $1.1 billion of unsecured notes to fund the Wincanton Acquisition. 29 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, (In millions, except percentages) 2024 2023 $ Change % Change Net cash provided by operating activities $ 363 $ 343 $ 20 6 % Net cash used in investing activities (1,107) (192) (915) n/m Net cash provided by (used in) financing activities 829 (170) 999 n/m Effect of exchange rates on cash and cash equivalents 14 (2) 16 n/m Net increase (decrease) in cash, restricted cash and cash equivalents $ 99 $ (21) $ 120 n/m n/m - not meaningful Operating Activities Cash flows provided by operating activities for the nine months ended September 30, 2024 increased by $20 million compared with the same period in 2023. The increase was primarily due to working capital changes, primarily driven by higher factoring of receivables and timing of payments, partially offset by lower net income. Investing Activities Investing activities used $1.1 billion of cash for the nine months ended September 30, 2024 and $192 million for the same period in 2023. During the nine months ended September 30, 2024, we used $863 million, net of cash received, to fund the Wincanton Acquisition, used $255 million of cash to purchase property and equipment, used $5 million of cash in settlement of cross currency swap agreements and received $16 million of cash from sales of property and equipment. 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. Financing Activities Financing activities generated $829 million and used $170 million of cash for the nine months ended September 30, 2024 and September 30, 2023, respectively. The source of cash from financing activities during the nine months ended September 30, 2024 was the issuance of long-term debt of $1,085 million, partially offset by cash used to repay $216 million of debt, $32 million to repay finance lease obligations and $8 million in payments for employee taxes on net settlement of equity awards. The primary uses of cash from financing activities during the nine months ended September 30, 2023 were $139 million to repay debt, $24 million to repay finance lease obligations and $7 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 nine months ended September 30, 2024, we issued $1.1 billion of unsecured notes to fund the Wincanton Acquisition. Other than the unsecured notes noted herein, as of September 30, 2024, the Company’s contractual obligations had not materially changed compared with December 31, 2023. 30 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.