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 Acquisition 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 September 30, 2025 compared with the Three Months Ended September 30, 2024 Three Months Ended September 30, (In millions, except percentages) 2025 2024 $ Change % Change Revenue $ 3,395 $ 3,157 $ 238 8 % Direct operating expense 2,857 2,671 186 7 % Selling, general and administrative expense 285 265 20 8 % Depreciation and amortization expense 118 111 7 6 % Transaction and integration costs 14 21 (7) (33) % Restructuring costs and other 3 9 (6) (67) % Regulatory matter and litigation expense — (1) 1 (100) % Operating income 118 81 37 46 % Other income (expense), net 5 (6) 11 n/m Interest expense, net (35) (33) (2) 6 % Income before income taxes 88 42 46 n/m Income tax expense (28) (7) (21) n/m Net income $ 60 $ 35 $ 25 71 % n/m - not meaningful Revenue for the three months ended September 30, 2025 increased by 8%, or $238 million, to $3.4 billion compared with $3.2 billion for the same period in 2024. The increase reflects growth in our business and $115 million of favorable foreign currency movements for the three months ended September 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 September 30, 2025 increased by 7%, or $186 million, to $2.9 billion compared with $2.7 billion for the same period in 2024. The increase reflects growth in our business and foreign currency movements. As a percentage of revenue, Direct operating expense for the three months ended September 30, 2025, was 84.2% compared with 84.6% for the same period in 2024. 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, 2025 increased by $20 million, to $285 million compared with $265 million for the same period in 2024. Depreciation and amortization expense for the three months ended September 30, 2025 increased by $7 million, to $118 million compared with $111 million for the same period in 2024. Amortization expense was $31 million and $36 million for the three months ended September 30, 2025 and 2024, respectively. 23 Transaction and integration costs for the three months ended September 30, 2025 and 2024 were $14 million and $21 million, respectively, and primarily related to the Wincanton Acquisition. Other income (expense), net increased from expense to income, primarily due to foreign currency gain on foreign currency contracts. Other income (expense), net was as follows: Three Months Ended September 30, (In millions, except percentages) 2025 2024 $ Change % Change Net periodic pension income $ 5 $ 7 $ (2) (29) % Foreign currency gain (loss): Realized foreign currency option and forward contracts loss (5) (4) (1) 25 % Unrealized foreign currency option and forward contracts gain (loss) 7 (8) 15 n/m Foreign currency transaction and remeasurement gain, net of intercompany forwards — 1 (1) (100) % Total foreign currency gain (loss) 2 (11) 13 n/m Other loss (2) (2) — — % Other income (expense), net $ 5 $ (6) $ 11 n/m n/m - not meaningful Interest expense, net was as follows: Three Months Ended September 30, (In millions, except percentages) 2025 2024 $ Change % Change Debt and capital leases $ 46 $ 45 $ 1 2 % Cross-currency swaps (9) (10) 1 (10) % Interest income (2) (2) — — % Interest expense, net $ 35 $ 33 $ 2 6 % Income before income taxes for the three months ended September 30, 2025 was $88 million compared with $42 million for the same period in 2024. The increase in income before income taxes primarily reflects growth in our business. Income tax expense for the three months ended September 30, 2025 and 2024 was $28 million co mpared with $7 million, respectively, and the Company’s effective tax rate for the three months ended September 30, 2025 and 2024 was 31.2% and 16.5%, respectively . The change in the Company’s effective tax rate was primarily driven by a jurisdictional shift 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 September 30, 2025. For the three months ended September 30, 2024, Pillar Two did not have a material impact on our income tax expense. 24 Nine Months Ended September 30, 2025 compared with the Nine Months Ended September 30, 2024 Nine Months Ended September 30, (In millions, except percentages) 2025 2024 $ Change % Change Revenue $ 9,671 $ 8,459 $ 1,212 14 % Direct operating expense 8,228 7,116 1,112 16 % Selling, general and administrative expense 818 784 34 4 % Depreciation and amortization expense 337 302 35 12 % Transaction and integration costs 50 55 (5) (9) % Restructuring costs and other 22 26 (4) (15) % Regulatory matter and litigation expense 65 59 6 10 % Operating income 151 117 34 29 % Other income (expense), net (10) 1 (11) n/m Interest expense, net (103) (69) (34) 49 % Income before income taxes 38 49 (11) (22) % Income tax expense (45) (11) (34) n/m Net income (loss) $ (7) $ 38 $ (45) n/m n/m - not meaningful Revenue for the nine months ended September 30, 2025 increased by 14%, or $1.2 billion, to $9.7 billion compared with $8.5 billion for the same period in 2024. The increase reflects $655 million from the Wincanton Acquisition, and growth in our business. Favorable foreign currency movements increased our revenue by $209 million for the nine months ended September 30, 2025. Direct operating expense for the nine months ended September 30, 2025 increased by 16%, or $1.1 billion, to $8.2 billion compared with $7.1 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 nine months ended September 30, 2025, was 85.1% compared with 84.1% 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 nine months ended September 30, 2025 increased by $34 million, to $818 million compared with $784 million for the same period in 2024. SG&A increased primarily due to the Wincanton Acquisition. Depreciation and amortization expense for the nine months ended September 30, 2025 increased by $35 million, to $337 million compared with $302 million for the same period in 2024. Amortization expense was $90 million and $77 million for the nine months ended September 30, 2025 and 2024, respectively. Depreciation and amortization expense increased primarily due to the Wincanton Acquisition. Transaction and integration costs for the nine months ended September 30, 2025 and 2024 were $50 million and $55 million, respectively and primarily related to the Wincanton Acquisition. Restructuring costs and other were primarily related to severance paid to our executive team, as well as actions taken to optimize certain administrative functions. Restructuring costs and other for the nine months ended September 30, 2025 were $22 million, compared with $26 million for the same period in 2024. Regulatory matter and litigation expense for the nine months ended September 30, 2025 and 2024, were $65 million and $59 million, respectively. For the nine months ended September 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 nine months ended September 30, 2024, we recorded 25 $59 million of litigation expense related to a dispute between us and one of our customers, which was settled in the second quarter 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 from income to expense, primarily due to foreign currency loss on foreign currency contracts. Other income (expense), net was as follows: Nine Months Ended September 30, (In millions, except percentages) 2025 2024 $ Change % Change Net periodic pension income $ 14 $ 15 $ (1) (7) % Foreign currency gain (loss): Realized foreign currency option and forward contracts loss (9) (6) (3) 50 % Unrealized foreign currency option and forward contracts loss (11) (4) (7) n/m Foreign currency transaction and remeasurement loss, net of intercompany forwards (2) (2) — — % Total foreign currency loss (22) (12) (10) 83 % Other loss (2) (2) — — % 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: Nine Months Ended September 30, (In millions, except percentages) 2025 2024 $ Change % Change Debt and capital leases $ 134 $ 103 $ 31 30 % Cross-currency swaps (26) (29) 3 (10) % Interest income (5) (5) — — % Interest expense, net $ 103 $ 69 $ 34 49 % Income before income taxes for the nine months ended September 30, 2025 was $38 million compared with $49 million for the same period in 2024. The decrease in income before income taxes primarily reflects higher operating income due to growth in our business, offset by higher other expense, net and interest expense, net. Income tax expense for the nine months ended September 30, 2025 and 2024 was $45 million and $11 million, respectively, and the Company’s effective tax rate for the nine months ended September 30, 2025 and 2024 was 118.1%, and 21.9%, respectively. The change in the Company’s effective tax rate was primarily driven by a non-deductible regulatory matter in 2025. 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 nine months ended September 30, 2025, and we expect to incur additional income tax related to Pillar Two during fiscal 2025. For the nine months ended September 30, 2024, Pillar Two did not have a material impact on our income tax expense. We continue to monitor Pillar Two developments, including the impact of the statement issued by the Group of Seven (“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 September 30, 2025, we held cash and cash equivalents of $339 million and restricted cash of $5 million, and we had $969 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 September 30, 2025, the remaining authorization under the Repurchase Plan was $300 million. We believe that our cas h and cash equivalents on hand, our cash flows generated by our operations, amounts available under the revolving credit facilities, the use of our factoring programs, and refinancing options available to us in the capital markets, will provide sufficient liquidity to operate our business and fund our current and assumed obligations for at least the next 12 months and for the foreseeable future thereafter. 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: September 30, December 31, (In millions, except percentages) 2025 2024 $ Change % Change Current assets $ 2,806 $ 2,641 $ 165 6 % Long-term assets 9,101 8,625 476 6 % Current liabilities 3,934 3,189 745 23 % Long-term liabilities 4,985 5,042 (57) (1) % Current liabilities primarily increased due to the current portion of our long-term debt. Our assets and liabilities increased due to foreign currency translation from our non-USD operations, primarily the British pound sterling and the Euro, compared to December 31, 2024. 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: Nine Months Ended September 30, (In millions, except percentages) 2025 2024 $ Change % Change Net cash provided by operating activities $ 264 $ 363 $ (99) (27) % Net cash used in investing activities (169) (1,107) 938 (85) % Net cash provided by (used in) financing activities (266) 829 (1,095) n/m Effect of exchange rates on cash and cash equivalents 30 14 16 n/m Net increase (decrease) in cash, restricted cash and cash equivalents $ (141) $ 99 $ (240) n/m n/m - not meaningful Operating Activities Cash flows provided by operating activities for the nine months ended September 30, 2025, decreased by $99 million compared with the same period in 2024. The decrease was due to working capital consumption resulting from decreased collections and increased vendor payments, partially offset by income (loss) adjusted for non-cash items for the nine months ended September 30, 2025, compared with the same period in 2024. Investing Activities Investing activities used $169 million and $1.1 billion of cash for the nine months ended September 30, 2025 and September 30, 2024, respectively. During the nine months ended September 30, 2025, we utilized $269 million of cash to purchase property and equipment, settled $1 million of cash in cross-currency swap agreements, and received $101 million of cash from sales of property and equipment. The nine months ended September 30, 2025, include the purchase of property and equipment, which was sold for $90 million in the third quarter of 2025. During the nine months ended September 30, 2024, we utilized $863 million, net of cash acquired, to fund the Wincanton Acquisition, utilized $255 million of cash to purchase property and equipment, settled $5 million of cash in cross-currency swap agreements, and received $16 million of cash from sales of property and equipment. Financing Activities Financing activities used $266 million and generated $829 million of cash for the nine months ended September 30, 2025 and September 30, 2024, respectively. The primary use of cash from financing activities during the nine months ended September 30, 2025 was $200 million to repurchase shares of our common stock under the Repurchase Plan, $56 million to repay debt, $38 million to repay finance lease obligations and $8 million in payments for employee taxes on net settlement of equity awards, partially offset by $38 million of net borrowings under our revolving credit facilities. The source of cash from financing activities during the nine months ended September 30, 2024, was $1.1 billion of proceeds from issuance of long-term debt, partially offset by $150 million of cash used to repay debt, $32 million of cash used to repay finance lease obligations, and $8 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 September 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.