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, 2024, as filed with the SEC on February 18, 2025 (the “2024 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. 22 On April 29, 2024, we completed the acquisition of Wincanton plc (now Wincanton Limited), a U.K. logistics provider specializing in both warehousing and transportation solutions (“the Wincanton Acquisition”). The Wincanton Acquisition was subject to review by the Competition and Markets Authority (the “CMA”) in the U.K. On June 19, 2025, the CMA approved the Wincanton Acquisition, subject to the divestment of certain grocery contracts in the U.K. Due to the acquisition of Wincanton in 2024, comparisons in our results of operations between 2025 and 2024 are less meaningful. For additional information regarding our acquisitions see Note 5. “Acquisition” in Condensed Consolidated Financial Statements. Results of Operations Three Months Ended June 30, 2025 compared with the Three Months Ended June 30, 2024 Three Months Ended June 30, (In millions, except percentages) 2025 2024 $ Change % Change Revenue $ 3,299 $ 2,846 $ 453 16 % Direct operating expense 2,813 2,389 424 18 % Selling, general and administrative expense 272 270 2 1 % Depreciation and amortization expense 110 99 11 11 % Transaction and integration costs 14 15 (1) (7) % Restructuring costs and other 2 1 1 100 % Regulatory matter and litigation expense (1) (3) 2 (67) % Operating income 89 75 14 19 % Other income (expense), net (10) 1 (11) n/m Interest expense, net (36) (23) (13) 57 % Income before income taxes 43 53 (10) (19) % Income tax expense (15) (14) (1) 7 % Net income $ 28 $ 39 $ (11) (28) % n/m - not meaningful Revenue for the three months ended June 30, 2025 increased by 16%, or $453 million, to $3.3 billion compared with $2.8 billion for the same period in 2024. The increase reflects $168 million from the Wincanton Acquisition and growth in our business. Foreign currency favorable movements increased our revenue by $127 million for the three months ended June 30, 2025. 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, 2025 increased by 18%, or $424 million, to $2.8 billion compared with $2.4 billion for the same period in 2024. The increase reflects $148 million from the Wincanton Acquisition, growth in our business and foreign currency movements. As a percentage of revenue, Direct operating expense for the three months ended June 30, 2025, was 85.3% compared with 83.9% for the same period in 2024. 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 benefits costs for executive and administrative functions, professional fees, bad debt expense and legal costs. SG&A for the three months ended June 30, 2025 increased by $2 million, to $272 million compared with $270 million for the same period in 2024. Depreciation and amortization expense for the three months ended June 30, 2025 increased by $11 million, to $110 million compared with $99 million for the same period in 2024. Amortization expense was $30 million and $22 million for the three months ended June 30, 2025 and 2024, respectively. Depreciation and amortization expense increased primarily due to the Wincanton Acquisition. 23 Transaction and integration costs for the three months ended June 30, 2025 and 2024 were $14 million and $15 million, respectively, and primarily related to the Wincanton Acquisition. Other income (expense), net decreased to an expense, primarily due to increased unrealized foreign currency loss on foreign currency contracts. Other income (expense), net was as follows: Three Months Ended June 30, (In millions, except percentages) 2025 2024 $ Change % Change Net periodic pension income $ 4 $ 5 $ (1) (20) % Foreign currency gain (loss): Realized foreign currency option and forward contracts loss (4) (1) (3) n/m Unrealized foreign currency option and forward contracts gain (loss) (8) 1 (9) n/m Foreign currency transaction and remeasurement loss (2) (4) 2 (50) % Total foreign currency loss (14) (4) (10) n/m Other income (expense), net $ (10) $ 1 $ (11) n/m n/m - not meaningful Interest expense, net, primarily increased due to debt incurred for the Wincanton Acquisition. Interest expense, net was as follows: Three Months Ended June 30, (In millions, except percentages) 2025 2024 $ Change % Change Debt and capital leases $ 45 $ 34 $ 11 32 % Cross-currency swaps (8) (11) 3 (27) % Interest income (1) — (1) n/m Interest expense, net $ 36 $ 23 $ 13 57 % n/m - not meaningful Income before income taxes for the three months ended June 30, 2025 was $43 million compared with $53 million for the same period in 2024. The decrease in income before income taxes was due to higher operating income, offset by higher other expense, net, and higher interest expense, net. Income tax expense for the three months ended June 30, 2025 was $15 million compared with $14 million for the same period in 2024. Our effective tax rate for the three months ended June 30, 2025 was 34.6% compared with 25.4% for the same period in 2024. The increase in our effective tax rate was primarily driven by a decrease in pre-tax income. While the United States has not adopted the Pillar Two Global Anti-Base Erosion rules issued by the Organization for Economic Co-operation and Development (“Pillar Two”), we have incorporated the estimated annual effect of Pillar Two into our income tax provision for the three months ended June 30, 2025. For the three months ended June 30, 2024, Pillar Two did not have a material impact on our income tax expense. 24 Six Months Ended June 30, 2025 compared with the Six Months Ended June 30, 2024 Six Months Ended June 30, (In millions, except percentages) 2025 2024 $ Change % Change Revenue $ 6,276 $ 5,302 $ 974 18 % Direct operating expense 5,371 4,445 926 21 % Selling, general and administrative expense 533 519 14 3 % Depreciation and amortization expense 219 191 28 15 % Transaction and integration costs 36 34 2 6 % Restructuring costs and other 19 17 2 12 % Regulatory matter and litigation expense 65 60 5 8 % Operating income 33 36 (3) (8) % Other income (expense), net (15) 7 (22) n/m Interest expense, net (68) (36) (32) 89 % Income (loss) before income taxes (50) 7 (57) n/m Income tax expense (17) (4) (13) n/m Net income (loss) $ (67) $ 3 $ (70) n/m n/m - not meaningful Revenue for the six months ended June 30, 2025 increased by 18%, or $974 million, to $6.3 billion compared with $5.3 billion for the same period in 2024. The increase reflects $655 million from the Wincanton Acquisition and growth in our business. Foreign currency favorable movements increased our revenue by $94 million for the six months ended June 30, 2025. Direct operating expense for the six months ended June 30, 2025 increased by 21%, or $926 million, to $5.4 billion compared with $4.4 billion for the same period in 2024. The increase reflects $595 million from the Wincanton Acquisition, growth in our business and foreign currency movements. As a percentage of revenue, Direct operating expense for the six months ended June 30, 2025, was 85.6% compared with 83.8% for the same period in 2024. The increase in Direct operating expense as a percentage of revenue was primarily related to the Wincanton Acquisition. SG&A for the six months ended June 30, 2025 increased by $14 million, to $533 million compared with $519 million for the same period in 2024. SG&A increased primarily due to the Wincanton Acquisition. Depreciation and amortization expense for the six months ended June 30, 2025 increased by $28 million, to $219 million compared with $191 million for the same period in 2024. Amortization expense was $59 million and $41 million for the six months ended June 30, 2025 and 2024, respectively. Depreciation and amortization expense increased primarily due to the Wincanton Acquisition. Transaction and integration costs for the six months ended June 30, 2025 and 2024 were $36 million and $34 million, respectively and primarily related to the Wincanton Acquisition. Restructuring costs and other were primarily related to severance in connection with actions taken to optimize certain administrative functions. Restructuring costs and other for the six months ended June 30, 2025 were $19 million, compared with $17 million for the same period in 2024. Regulatory matter and litigation expense for the six months ended June 30, 2025 and 2024, were $65 million and $60 million, respectively. For the six months ended June 30, 2025, we recorded $65 million of expense related to a regulatory matter for the deductibility of value-added tax payments made by us to certain third-party service providers challenged by the Italian authorities. For the six months ended June 30, 2024, we recorded $60 million of litigation expense related to a dispute between us and one of our customers, which was settled in the second quarter 25 of 2024. For additional information regarding our regulatory and legal matters, see Note 14. “Commitments and Contingencies” in Part I, Item 1 of this Quarterly Report on Form 10-Q . Other income (expense), net decreased to an expense, primarily due to increased unrealized foreign currency loss on foreign currency contracts. Other income (expense), net was as follows: Six Months Ended June 30, (In millions, except percentages) 2025 2024 $ Change % Change Net periodic pension income $ 9 $ 8 $ 1 13 % Foreign currency gain (loss): Realized foreign currency option and forward contracts loss (4) (2) (2) 100 % Unrealized foreign currency option and forward contracts gain (loss) (18) 4 (22) n/m Foreign currency transaction and remeasurement loss (2) (3) 1 (33) % Total foreign currency loss (24) (1) (23) n/m Other income (expense), net $ (15) $ 7 $ (22) n/m n/m - not meaningful Interest expense, net, primarily increased due to debt incurred for the Wincanton Acquisition. Interest expense, net was as follows: Six Months Ended June 30, (In millions, except percentages) 2025 2024 $ Change % Change Debt and capital leases $ 88 $ 58 $ 30 52 % Cross-currency swaps (17) (19) 2 (11) % Interest income (3) (3) — — % Interest expense, net $ 68 $ 36 $ 32 89 % Income (loss) before income taxes for the six months ended June 30, 2025 was a $50 million loss compared with $7 million income for the same period in 2024. The decrease in income before income taxes to a loss was due to lower operating income, higher other expense, net, and higher interest expense, net. Income tax expense for the six months ended June 30, 2025 was $17 million compared with $4 million for the same period in 2024. Our effective tax rate for the six months ended June 30, 2025 was an expense on a pre-tax loss of (35.3)%, compared to an expense on pre-tax income of 52.3% for the same period in 2024. The change in our effective tax rate was primarily driven by a decrease in pre-tax income, offset by non-deductible regulatory matter and transaction costs. While the United States has not adopted Pillar Two, we have incorporated the estimated annual effect of Pillar Two into our income tax provision for the six months ended June 30, 2025, and we expect to incur additional income tax related to Pillar Two during fiscal 2025. For the six months ended June 30, 2024, Pillar Two did not have a material impact on our income tax expense. Pillar Two did not have a material impact on our fiscal 2024 income tax expense. We continue to monitor Pillar Two developments, including the impact of the statement issued by the G7 on June 28, 2025 regarding the interplay between the U.S. international tax system and Pillar Two as it relates to U.S.-headquartered companies. 26 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 facilities 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, repurchases of our common stock 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, 2025, we held cash and cash equivalents of $205 million and restricted cash of $2 million, and we had $1,003 million of borrowing capacity, net of letters of credit under our revolving credit facilities . On February 18, 2025, our board of directors authorized and announced the repurchase of up to $500 million (the “Repurchase Plan”) of our common stock. The Repurchase Plan permits shares of common stock to be repurchased from time to time in management’s discretion, through a variety of methods, including a 10b5-1 trading plan, open market purchases, privately negotiated transactions or otherwise. The timing and number of shares of common stock repurchased will depend on a variety of factors, including price, general business and market conditions, alternative investment opportunities and funding considerations. We will fund the repurchases with existing cash, borrowings on our revolving credit facility, and/or other financing sources. The Repurchase Plan does not obligate the Company to repurchase any specific number of shares of common stock and may be suspended or discontinued at any time. As of June 30, 2025, the remaining authorization under the Repurchase Plan was $300 million. 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 4. “Leases,” Note 7. “Debt and Financing Arrangements” and Note 14. “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, except percentages) 2025 2024 $ Change % Change Current assets $ 2,589 $ 2,641 $ (52) (2) % Long-term assets 9,337 8,625 712 8 % Current liabilities 3,410 3,189 221 7 % Long-term liabilities 5,541 5,042 499 10 % Current assets primarily decreased due to cash used for the repurchase of our common stock and repayment of debt, partially offset by an increase in accounts receivable resulting from foreign currency translation. Long-term assets primarily increased due to the addition of operating lease assets and the impact of foreign currency translation. Current liabilities primarily increased due to bank overdraft and the increase in the fair value of our derivatives. Long-term liabilities primarily increased due to the addition of capital and operating lease liabilities and the increase in the fair value of our derivatives. Also, our assets and liabilities increased due to foreign currency translation from our non-USD operations, primarily the British pound sterling and the Euro. 27 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, except percentages) 2025 2024 $ Change % Change Net cash provided by operating activities $ 32 $ 165 $ (133) (81) % Net cash used in investing activities (123) (1,014) 891 (88) % Net cash provided by (used in) financing activities (227) 857 (1,084) n/m Effect of exchange rates on cash and cash equivalents 40 (7) 47 n/m Net increase (decrease) in cash, restricted cash and cash equivalents $ (278) $ 1 $ (279) n/m n/m - not meaningful Operating Activities Cash flows provided by operating activities for the six months ended June 30, 2025 decreased by $133 million compared with the same period in 2024. The decrease was primarily due to lower income and increased working capital consumption driven by accounts payable for the six months ended June 30, 2025, compared with the same period in 2024. Investing Activities Investing activities used $123 million of cash for the six months ended June 30, 2025 and $1.0 billion for the same period in 2024. During the six months ended June 30, 2025 we used $125 million of cash to purchase property and equipment and received $2 million of cash from sales of property and equipment. 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. Financing Activities Financing activities used $227 million and generated $857 million of cash for the six months ended June 30, 2025 and June 30, 2024, respectively. The primary use of cash from financing activities during the six months ended June 30, 2025 was $200 million to repurchase shares of our common stock under the Repurchase Plan, $55 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, partially offset by $64 million increase in bank overdraft and $8 million of net borrowings under our revolving credit facilities. The primary source of cash from financing activities during the six months ended June 30, 2024 was $1.1 billion of proceeds from issuance of long-term debt and $3 million increase in bank overdraft, partially offset by $196 million of cash used to repay debt, $19 million of cash used 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. 28 Contractual Obligations As of June 30, 2025, the Company’s contractual obligations had not materially changed compared with December 31, 2024. 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 2024 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.