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Item 7. Management’s Discussion and Analysis

2025-02-18 compared with 2024-02-15 · 91 added, 79 removed, 136 unchanged (56% of the section changed)

24 unchanged sentences

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

Basis of Presentation

On August 2, 2021, the Company became a standalone publicly traded company and its financial statements post the separation from XPO, Inc.

(the “Separation”) are now prepared on a consolidated basis.

Before the Separation, GXO’s historical financial statements were prepared on a standalone combined basis and were derived from the Consolidated Financial Statements and accounting records of XPO.

The combined Consolidated Financial Statements for all periods presented before the Separation are now referred to as “Consolidated Financial Statements” and have been prepared under the U.S.

generally accepted accounting principles (“GAAP”).

GXO has one reportable segment.

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”).

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 acquisitions of Clipper and PFS, comparisons in our results of operations between 2023 and 2022 are less meaningful.

Due to the acquisitions of Wincanton in 2024 and PFS in 2023, comparisons in our results of operations between 2024 and 2023 are less meaningful.

For additional information regarding our acquisitions, see Note 4.

“Acquisitions” to the Consolidated Financial Statements.

Results of Operations

Year Ended December 31,

(In millions) 2023 2022 $ Change % Change

(In millions, except percentages) 2024 2023 $ Change % Change

Revenue $ 11,709 $ 9,778 $ 1,931 20 %

2 unchanged sentences

Depreciation and amortization expense 415 361 54 15 %

Transaction and integration costs 34 61 (27) (44) %

Transaction and integration costs 76 34 42 n/m

Restructuring costs and other 27 32 (5) (16) %

Litigation expense 59 — 59 n/m

Operating income 218 318 (100) (31) %

Other income, net 1 51 (50) (98) %

Other income, net 31 1 30 n/m

Interest expense, net (103) (53) (50) 94 %

2 unchanged sentences

Net income $ 138 $ 233 $ (95) (41) %

Revenue for 2023 increased by 9%, or $785 million, to $9.8 billion compared with $9.0 billion for 2022.

The increase primarily reflects $378 million from the Clipper Acquisition (for the periods that were not comparable), $82 million from the PFS Acquisition, and growth in Continental Europe.

n/m - not meaningful

Revenue for 2024 increased by 20%, or $1.9 billion, to $11.7 billion compared with $9.8 billion for 2023.

The increase primarily reflects $1.6 billion from the acquisitions of Wincanton and PFS.

Also, revenue increased in our Continental Europe and U.K.

and Ireland businesses, mainly driven by higher pricing.

Foreign currency movements increased revenue by $109 million in 2024.

Direct operating expenses comprise both fixed and variable expenses and consist of operating costs related to our warehouse operations, 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 2023 increased by 8%, or $592 million, to $8.0 billion compared with $7.4 billion for 2022.

Direct operating expense for 2024 increased by 23%, or $1.8 billion, to $9.9 billion compared with $8.0 billion for 2023.

The increase primarily reflects $1.4 billion from the acquisitions of Wincanton and PFS, and higher personnel and temporary labor expenses in the U.K.

and Ireland business from growth in the business.

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 was 84.1% and 82.2% in 2024 and 2023, respectively.

The increase primarily reflects $286 million from the Clipper Acquisition (for the periods that were not comparable), $67 million from the PFS Acquisition, and higher personnel and rent expenses.

The increase in Direct operating expense as a percentage of revenue was primarily related to the Wincanton Acquisition.

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

SG&A for 2023 increased by 13%, or $112 million, to $998 million, compared with $886 million in 2022.

SG&A primarily increased due to the Clipper Acquisition, higher personnel costs for certain administrative functions and bad debt expense.

SG&A for 2024 increased by 6%, or $63 million, to $1.1 billion, compared with $998 million in 2023.

The increase was primarily driven by the acquisitions of Wincanton and PFS.

Depreciation and amortization expense for 2024 increased by $54 million to $415 million compared with $361 million for 2023.

Depreciation and amortization expense included amortization of intangible assets of $71 million and $68 million in 2023 and 2022, respectively.

Depreciation and amortization expense increased primarily due to the Clipper Acquisition.

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

Depreciation and amortization expense included amortization of intangible assets acquired of $108 million and $71 million in 2024 and 2023, respectively.

Transaction and integration costs were $76 million in 2024, compared with $34 million for 2023.

Transaction and integration costs in 2023 included $20 million related to the integration of Clipper and $12 million related to the PFS Acquisition, reflecting costs associated with advisory fees and severance costs.

Transaction and integration costs in 2022 primarily related to $46 million related to the Clipper Acquisition, reflecting costs associated with financing arrangements, advisory fees and integration costs, and $15 million from the Separation, primarily reflecting rebranding costs.

Transaction and integration costs in 2024 primarily included $61 million related to the Wincanton Acquisition and $8 million related to the integration of PFS.

Transaction and integration costs in 2023 primarily included $20 million related to the integration of Clipper Logistics plc and $12 million related to the PFS Acquisition.

We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure.

These costs are primarily related to severance, including projects to optimize human resources, finance and information technology activities, and are not associated with customer attrition.

Restructuring costs and other were $32 million for 2023 and 2022.

Restructuring costs and other for 2023 included $16 million related to a restructuring plan initiated in the fourth quarter of 2022 designed to centralize certain processes and standardize operating structures.

Restructuring costs and other in 2023 also included impairment charges of $11 million, primarily related to closing certain corporate and administrative offices, and $5 million associated with the exit of a non-core businesses in Asia.

Restructuring costs and other for 2022 included $24 million related to severance costs, primarily from the exit of non-core businesses and central efficiency projects, and $8 million related to the deconsolidation of a joint venture.

Other income, net decreased due to lower pension income and foreign currency movements.

Restructuring costs and other were $27 million for 2024, compared with $32 million for 2023.

Restructuring costs and other in 2024 related to a restructuring plan designed to centralize certain finance, human resource and IT functions.

Restructuring costs and other for 2023 included $16 million related to severance, $11 million for impairment charges, and $5 million associated with the exit of a non-core businesses in Asia.

Litigation expense in 2024 related to a settlement agreement dated June 14, 2024.

We recognized $59 million for the settlement, associated legal fees, and other related expenses.

For additional information regarding our legal matters see Note 18.

“Commitments and Contingencies” to the Consolidated Financial Statements.

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

In 2024, pension income primarily increased due to a defined benefit plan assumed in connection with the Wincanton Acquisition.

In 2024, the Company recorded a gain of $8 million in connection with a real estate transaction.

Other income, net was as follows:

Year Ended December 31,

(In millions) 2023 2022 $ Change % Change

(In millions, except percentages) 2024 2023 $ Change % Change

Net periodic pension income

$ 8 $ 33 $ (25) (76) %

Foreign currency gain (loss):

Realized foreign currency option and forward contracts gain (loss)

$ 21 $ 8 $ 13 n/m

Unrealized foreign currency option and forward contracts gain (loss)

4 (11) 15 n/m

Foreign currency gain (loss):

Realized foreign currency option and forward contracts loss (5) (13) 8 (62) %

Unrealized foreign currency option and forward contracts gain 11 4 7 n/m

Foreign currency transaction and remeasurement loss

— (3) 3 (100) %

(3) — (3) n/m

Total foreign currency gain (loss) 3 (9) 12 n/m

2 3 (1) (33) %

Other income, net

$ 1 $ 51 $ (50) (98) %

$ 31 $ 1 $ 30 n/m

n/m - not meaningful

Interest expense, net increased due to the debt from the Clipper Acquisition being outstanding for the full year in 2023 compared with seven months of the prior year and higher variable interest rates on our debt, partially offset by the accretion on cross-currency swaps and interest income in the current period.

Interest expense, net increased due to the debt incurred for the Wincanton Acquisition.

Interest expense, net was as follows:

Year Ended December 31,

(In millions) 2023 2022 $ Change % Change

(In millions, except percentages) 2024 2023 $ Change % Change

Debt and capital leases

5 unchanged sentences

Interest expense, net $ 103 $ 53 $ 50 94 %

Income before income taxes for 2023 increased by $2 million, to $266 million, compared with $264 million for 2022.

The increase was primarily due to growth in our business and lower transaction and integration costs, offset by

higher interest expense and lower other income.

Income from continuing operations before income taxes for our domestic operations was $97 million for 2023, compared with $105 million in 2022.

The decrease was driven by a higher interest expense associated with our debt, partially offset by lower transaction and integration costs.

Income from continuing operations before income taxes for our foreign operations was $169 million for 2023 compared with $159 million in 2022.

The increase was primarily driven by growth in the business and lower transaction and integration costs, partially offset by lower pension income.

Income before income taxes for 2024 decreased by $120 million, to $146 million, compared with $266 million for 2023.

The decrease was mainly driven by higher transaction and integration costs, litigation expense, and interest expense, partially offset by higher other income, net.

Income before income taxes for our domestic operations was a pre-tax loss of $88 million for 2024, compared with $97 million of pre-tax income in 2023.

The decrease from income to a loss in 2024 was primarily driven by higher transaction and integration costs, litigation expense and

interest expense for debt incurred for the Wincanton Acquisition.

Income before income taxes for our foreign operations was $234 million for 2024 compared with $169 million in 2023.

The increase in 2024 was primarily driven by growth in the business and other income, net.

Income tax expense was $8 million in 2024, compared with $33 million in 2023.

Our effective tax rate was 5.6% in 2024 and 12.4% in 2023.

The decrease in our effective income tax rate in 2023 was driven by tax benefits from intangible assets and the release of valuation allowances.

The decrease in our effective income tax rate was driven by income tax benefits from the release of valuation allowances in 2024.

Liquidity and Capital Resources

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We continually evaluate our liquidity requirements and capital structure in light of our operating needs, growth initiatives and capital resources.

As of December 31, 2023, we held cash and cash equivalents of $468 million and we had $799 million of borrowing capacity available, net of letters of credit under our revolving credit facility.

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 contractual obligations, indebtedness and lease obligations, see Note 17.

As of December 31, 2024, we held cash and cash equivalents of $413 million, restricted cash of $72 million recorded in Other long-term assets, and we had $999 million of borrowing capacity available, net of letters of credit under our revolving credit facilities.

During 2024, we deposited €68 million ($70 million as of December 31, 2024) of restricted cash in relation to a contingency, and in January 2025, the Company deposited an additional amount of €16 million ($17 million).

We believe that our cash and cash equivalents on hand, our cash flows from operations, the borrowing capacity under our 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 requirements from contractual obligations, indebtedness and lease obligations, and legal matters, see Note 18.

“Commitments and Contingencies,” Note 10.

“Debt and Financing Arrangements” and Note 9.

“Leases” in Part II, Item 8 of this Annual Report on Form 10-K.

“Leases” to the Consolidated Financial Statements.

Capital Expenditures

4 unchanged sentences

The following table summarizes our asset and liability balances as of December 31, 2024 and 2023:

(In millions) 2023 2022 $ Change % Change

(In millions, except percentages) 2024 2023 $ Change % Change

Total current assets $ 2,641 $ 2,568 $ 73 3 %

2 unchanged sentences

Total long-term liabilities 5,042 3,935 1,107 28 %

Total assets increased by $288 million from December 31, 2022 to December 31, 2023, primarily reflecting increases from the PFS Acquisition.

Total liabilities increased by $20 million from December 31, 2022 to December 31, 2023, reflecting the early repayment of debt, partially offset by increases from the PFS Acquisition.

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

Total liabilities also increased due to issuance of $1.1 billion of unsecured notes to fund the Wincanton Acquisition.

Cash Flow Activity

1 unchanged sentence

Year Ended December 31,

(In millions) 2023 2022 $ Change % Change

(In millions, except percentages) 2024 2023 $ Change % Change

Net cash provided by operating activities $ 549 $ 558 $ (9) (2) %

Net cash used in investing activities (410) (1,149) 739 (64) %

Net cash (used in) provided by financing activities (186) 787 (973) n/m

Effect of exchange rates 13 (18) 31 n/m

Net (decrease) increase in cash, restricted cash and cash equivalents $ (25) $ 162 $ (187) n/m

Net cash used in investing activities (1,157) (410) (747) n/m

Net cash provided by (used in) financing activities 636 (186) 822 n/m

Effect of exchange rates on cash and cash equivalents (13) 13 (26) n/m

Net increase (decrease) in cash, restricted cash and cash equivalents $ 15 $ (25) $ 40 n/m

n/m - not meaningful

Operating Activities

Cash flows provided by operating activities for 2023 increased by $16 million compared with 2022.

The increase was due to $33 million higher net income and $40 million non-cash adjustments, offset by $57 million of working capital used in 2023.

Cash flows provided by operating activities for 2024 decreased by $9 million compared to 2023.

This decline was driven by decreased net income after adjustments for non-cash items, offset by benefits from working capital activity compared to the prior year.

Investing Activities

Investing activities used $410 million of cash in 2023 compared with $1.1 billion in 2022.

During 2023, we used $274 million of cash for capital expenditures, $149 million in connection with the PFS Acquisition and $3 million in settlement of cross-currency swap agreements, excluding accrued interest, partially offset by $18 million of proceeds from the sales of property and equipment.

During 2022, we used $876 million of cash in connection with the Clipper Acquisition, $342 million for capital expenditures, partially offset by $40 million of proceeds from the sales of property and equipment and $21 million in settlement of cross-currency swap agreements, excluding accrued interest.

Investing activities used $1.2 billion of cash in 2024 compared with $410 million in 2023.

During 2024, we used $863 million, net of cash received, to fund the Wincanton Acquisition, used $359 million of cash to purchase property and equipment, partially offset by $61 million of proceeds from the sales of property and equipment and $4 million in net proceeds from the settlement of cross-currency swap agreements, excluding accrued interest.

During 2023, we used $274 million of cash for capital expenditures, used $149 million in connection with the PFS Acquisition and $3 million in settlement of cross-currency swap agreements, excluding accrued interest, partially offset by $18 million of proceeds from the sales of property and equipment.

Financing Activities

Financing activities used $186 million of cash in 2023 and generated $787 million in 2022.

The primary use of cash from financing activities in 2023 was $169 million in repayment of debt and finance leases and $12 million in payments for employee taxes on net settlement of equity awards.

The primary source of cash from financing activities in 2022 was $917 million in proceeds from long-term debt, net, partially offset by $115 million in repayment of debt and finance leases and $16 million in payments for employee taxes on net settlement of equity awards.

Financing activities generated $636 million of cash in 2024 and used $186 million in 2023.

The primary source of cash from financing activities in 2024 was the issuance of long-term debt of $1.1 billion, partially offset by cash used to repay $408 million of debt, $45 million to repay finance lease obligations and $8 million in payments for employee taxes on net settlement of equity awards.

The primary use of cash from financing activities in 2023 was

$140 million in repayment of debt, $29 million to repay finance lease obligations and $12 million in payments for employee taxes on net settlement of equity awards.

Off-Balance Sheet Arrangements

1 unchanged sentence

Contractual Obligations

We lease certain facilities and equipment under operating and finance lease arrangements.

As of December 31, 2024, our outstanding obligations under operating and finance leases were $2.5 billion and $276 million, respectively.

“Leases” to the Consolidated Financial Statements for additional information.

As of December 31, 2023, we had $800 million of unsecured notes outstanding with interest payable in arrears on January 15 and July 15 of each year and $735 million of variable-rate term loans outstanding with interest payable in arrears at our option monthly, quarterly or semiannually.

“Debt and Financing Arrangements” to the Consolidated Financial Statements for additional information.

In addition, we have obligations for agreements to purchase goods or services entered into in the ordinary course of business that are enforceable and legally binding and gross unrecognized tax benefits.

Critical Accounting Policies

For additional information see Note 9.

“Leases” to the Consolidated Financial Statements.

As of December 31, 2024, we had a total of $1.9 billion of Unsecured Notes outstanding, consisting of $1.1 billion Unsecured Notes with interest payable semiannually on May 6 and November 6 of each year and $800 million Unsecured Notes with interest payable semiannually on January 15 and July 15 of each year.

We also have $450 million of variable-rate term loans outstanding with interest payable in arrears at our option monthly, quarterly, or semiannually.

For additional information see Note 10.

“Debt and Financing Arrangements” to the Consolidated Financial Statements.

In addition, we have obligations for agreements to purchase goods or services entered into in the ordinary course of business that are enforceable and legally binding.

Critical Accounting Policies and Estimates

We prepare our Consolidated Financial Statements in accordance with GAAP.

12 unchanged sentences

Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

“Acquisitions” to the Consolidated Financial Statements for additional information.

For additional information see Note 4.

“Acquisitions” to the Consolidated Financial Statements.

Evaluation of Goodwill

16 unchanged sentences

Employee Benefit Plans

We sponsor various retirement plans, the most significant of which is in the U.K.

Retirement Plan”).

We sponsor various retirement plans, with the most significant plans held in the U.K.

Retirement Plans”).

Assumptions used in the accounting for these employee benefit plans include the discount rate and expected return on plan assets.

3 unchanged sentences

A 50-basis-point decrease in the discount rate of the U.K.

Retirement Plan would result in an estimated increase in the accumulated benefit obligation of approximately $44 million.

Retirement Plans would result in an estimated increase in the accumulated benefit obligation of approximately $91 million.

The expected return on plan assets assumption is derived using the current and expected asset allocation of the pension plan assets and considering historical as well as expected returns on various classes of plan assets.

An increase or decrease of 50 basis points in the expected long-term rate of return of the U.K.

Retirement Plan would have decreased or increased 2023 net periodic pension cost by approximately $4 million.

“Employee Benefit Plans” to the Consolidated Financial Statements for additional information.

An increase or decrease of 50 basis points in the expected return on plan assets for the U.K.

Retirement Plans would have decreased or increased our net periodic pension cost by approximately $9 million in 2025.

For additional information see Note 15.

“Employee Benefit Plans” to the Consolidated Financial Statements.

New Accounting Standards

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-K

Item 7. Management’s Discussion and Analysis