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 theSecurities and Exchange Commission (the "SEC"). All forward-looking statements set forth in this Quarterly Report 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 endedDecember 31, 2021 , as filed with theSEC onFebruary 17, 2022 (the "2021 Form 10-K"), and the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q.
Business Overview
GXO Logistics, Inc. , together with its subsidiaries ("GXO," the "Company" or "we"), is the largest pure-play contract logistics provider in the world and a foremost innovator in an industry propelled by strong secular tailwinds. Our customers rely on us to move their goods with high efficiency through their supply chains - from the moment inbound goods arrive at our logistics sites, 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 multi-year agreements, and our facility lease arrangements generally align with contract length. Most of our customer contracts contain both fixed and variable components. The fixed component is typically designed to cover facility, technology and equipment costs and may cover management costs, while the variable component is determined based on expected volumes and associated labor costs. We use technology to manage advanced automation, labor productivity, safety and the complex flow of goods within sophisticated logistics environments. We strive to provide all of our customers with consistently high levels of service and cutting-edge automation managed by our proprietary technology. We also collaborate with our largest customers on planning and forecasting and provide assistance with network optimization, working with these customers to design or redesign their supply chains to meet specific goals, such as sustainability metrics. Our multidisciplinary, consultative approach has led to many of our key customer relationships extending for years and expanding in scope. 21 --------------------------------------------------------------------------------
The Separation
OnAugust 2, 2021 , we completed the separation from XPO Logistics, Inc. ("XPO") (the "Separation"). Prior to the Separation, the Company's financial statements were prepared on a standalone combined basis and were derived from the consolidated financial statements and accounting records of XPO. OnAugust 2, 2021 , the Company became a standalone publicly-traded company, and its financial statements post-Separation are prepared on a consolidated basis. The combined consolidated financial statements for all periods presented prior to the Separation are now also referred to as "condensed consolidated financial statements" and have been prepared in accordance with generally accepted accounting principles inthe United States of America ("GAAP").
Prior to the Separation, the Company's historical assets and liabilities presented were wholly owned by XPO and were reflected on a historical cost basis. In connection with the Separation, the Company's assets and liabilities were transferred to the Company on a carryover basis.
Prior to the Separation, the historical results of operations included allocations of XPO costs and expenses, including XPO's corporate function, which incurred a variety of expenses including, but not limited to, information technology, human resources, accounting, sales and sales operations, procurement, executive services, legal, corporate finance and communications. An allocation of these expenses is included to burden all business units comprising XPO's historical results of operations, including GXO. The charges reflected have been either specifically identified or allocated using drivers including proportional adjusted earnings before interest, taxes, depreciation and amortization, which include adjustments for transaction and integration costs, as well as restructuring costs and other adjustments, or headcount. The majority of these allocated costs is recorded within Selling, general and administrative expense; Depreciation and amortization expense; and Transaction and integration costs in the Condensed Consolidated Statements of Operations.
The Company's consolidated financial statements include the accounts of GXO and its majority-owned subsidiaries and variable interest entities of which the Company is the primary beneficiary. The Company has eliminated intercompany accounts and transactions.
We have a single reportable segment.
Clipper Acquisition
OnMay 24, 2022 , the Company completed the acquisition ofClipper Logistics plc ("Clipper"), an omnichannel retail logistics specialist based inLeeds, England (the "Clipper Acquisition"). The Company acquired Clipper for$1,103 million , consisting of$900 million in cash and the issuance of 3,749,266 shares of GXO common stock having a value of$203 million . The Competition and Markets Authority (the "CMA") in theU.K. is currently reviewing the Clipper Acquisition. The Company estimates that the CMA's review of the acquisition will be completed during the second half of 2022. In connection with the Clipper Acquisition, (i) the Company and Clipper entered into a Cooperation Agreement; (ii) the Company entered into a Term Loan; (iii) the Company entered into a Five-Year Term Loan; and (iv) the Company terminated its Bridge Term Loan agreement. For additional information regarding the financing agreements entered in connection with the Clipper Acquisition, see Note 6-Debt and Financing Arrangements. The results of operations of Clipper are included in our consolidated financial statements from the date of acquisition. The Company recorded$80 million and$1 million of revenue and income before income taxes for both the three and six months endedJune 30, 2022 , respectively. 22 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended June 30, (In millions) 2022 2021 $ Change % Change Revenue$ 2,156 $ 1,882 $ 274 15 % Direct operating expense 1,775 1,554 221 14 % Selling, general and administrative expense 220 177 43 24 % Depreciation and amortization expense 77 95 (18) (19) % Transaction and integration costs 24 35 (11) (31) % Restructuring costs (credits) and other 1 (1) 2 n/m Operating income 59 22 37 n/m Other income (expense), net 23 (1) 24 n/m Interest expense, net (9) (6) (3) 50 % Income before income taxes 73 15 58 n/m Income tax expense (21) (1) (20) n/m Net income$ 52 $ 14 $ 38 n/m n/m - not meaningful
Three Months Ended
Revenue for the three months endedJune 30, 2022 , increased by 15%, or$274 million , to$2.2 billion , compared with$1.9 billion for the same period in 2021. For the three months endedJune 30, 2022 , ourNorth America ,Asia and Pacific operations reported growth of 22%, and our European operations reported growth of 11%. The Clipper Acquisition contributed 6% to revenue in our European operations and 4% to total revenue for the three months endedJune 30, 2022 . Foreign currency movements decreased revenue by approximately 9% for the three months endedJune 30, 2022 . Direct operating expenses comprise both fixed and variable expenses and consist of operating costs related to our logistics facilities, including personnel costs and 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 three months endedJune 30, 2022 was$1.8 billion , or 82% of revenue, compared with$1.6 billion , or 83% of revenue, for the same period in 2021. For the three months endedJune 30, 2022 , direct operating expenses increased by$147 million due to higher personnel and temporary labor expenses, as well as higher third-party facilities and transportation costs of$33 million . 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 three months endedJune 30, 2022 , increased by$43 million , to$220 million , compared with$177 million for the same period in 2021. SG&A for the three months endedJune 30, 2022 increased compared with the same prior year period due to higher personnel costs, primarily for certain administrative functions, reflecting the growth in our business. Depreciation and amortization expense for the three months endedJune 30, 2022 , was$77 million , compared with$95 million for the same period in 2021. The decrease was primarily due to allocated corporate charges from XPO before the Separation of$9 million and the impact of foreign currency movements. Depreciation and amortization expense included amortization of intangible assets of$13 million and$14 million for the three months endedJune 30, 2022 and 2021, respectively. Transaction and integration costs for the three months endedJune 30, 2022 were$24 million and primarily related to the Clipper Acquisition. Transaction and integration costs for the three months endedJune 30, 2021 were$35 million and primarily related to the Separation.
Restructuring costs (credits) and other for the three months ended
23 -------------------------------------------------------------------------------- Other income for the three months endedJune 30, 2022 was$23 million . For the three months endedJune 30, 2022 , pension income was$9 million and the gain on foreign currency contracts was$16 million . Other expense for the three months endedJune 30, 2021 was not material. Interest expense, net for the three months endedJune 30, 2022 was$9 million compared with$6 million for the same period in 2021. For the three months endedJune 30, 2022 , interest expense primarily related to debt issued in the second half of 2021, debt issued in 2022, and capital lease obligations, partially offset by interest income on the cross-currency swap agreements. For the three months endedJune 30, 2021 , interest expense primarily related to related-party debt obligations with XPO before the Separation and capital lease obligations. Income before income taxes for the three months endedJune 30, 2022 increased by$58 million , to$73 million , compared with$15 million for the same period in 2021. The increase was primarily due to higher revenue and increased other income as a result of pension income and foreign currency contracts. Income tax expense for the three months endedJune 30, 2022 was$21 million compared with$1 million for the same period in 2021. Our effective tax rate was 29.4% for the three months endedJune 30, 2022 compared with 10.2% for the same period in 2021. The change in our effective tax rate was primarily driven by an increase in pre-tax losses in certain jurisdictions for which no benefit was recognized, non-deductible transaction cost, offset by deferred true-ups. Six Months Ended June 30, (In millions) 2022 2021 $ Change % Change Revenue$ 4,239 $ 3,704 $ 535 14 % Direct operating expense 3,523 3,074 449 15 % Selling, general and administrative expense 410 348 62 18 % Depreciation and amortization expense 153 174 (21) (12) % Transaction and integration costs 43 53 (10) (19) % Restructuring costs and other 14 3 11 n/m Operating income 96 52 44 85 % Other income (expense), net 39 - 39 n/m Interest expense, net (13) (11) (2) 18 % Income before income taxes 122 41 81 n/m Income tax expense (32) (10) (22) n/m Net income$ 90 $ 31 $ 59 n/m n/m - not meaningful
Six Months Ended
Revenue for the six months endedJune 30, 2022 , increased by 14%, or$535 million , to$4.2 billion , compared with$3.7 billion for the same period in 2021. For the six months endedJune 30, 2022 , ourNorth America ,Asia and Pacific operations reported growth of 18%, and our European operations reported growth of 12%. The Clipper Acquisition contributed 3% to revenue in our European operations and 2% to total revenue for the six months endedJune 30, 2022 . Foreign currency movements decreased revenue by approximately 7% for the six months endedJune 30, 2022 . Direct operating expenses comprise both fixed and variable expenses and consist of operating costs related to our logistics facilities, including personnel costs and facility and equipment expenses, such as rent, utilities, equipment maintenance and repair, transportation costs, costs of materials and supplies and information technology expenses. Direct operating expense for the six months endedJune 30, 2022 , was$3.5 billion , or 83% of revenue, compared with$3.1 billion , or 83% of revenue for the same period in 2021. For the six months endedJune 30, 2022 , direct operating expenses increased by$327 million due to higher personnel and temporary labor expenses, as well as higher third-party facilities and transportation costs of$67 million . 24 -------------------------------------------------------------------------------- SG&A primarily consists of salary and benefits for executive and administrative functions, professional fees and legal costs. SG&A for the six months endedJune 30, 2022 , increased by$62 million , to$410 million , compared with$348 million for the same period in 2021. SG&A for the six months increased compared with the same prior year period due to higher personnel costs, primarily for certain administrative functions, reflecting the growth in our business. Depreciation and amortization expense for the six months endedJune 30, 2022 was$153 million , compared with$174 million for the same period in 2021. The decrease was a result of allocated corporate charges from XPO before the Separation of$14 million and the impact of foreign currency movements. Depreciation and amortization expense included amortization of intangible assets of$27 million and$28 million for the six months endedJune 30, 2022 and 2021, respectively. Transaction and integration costs for the six months endedJune 30, 2022 were$43 million and primarily related to the Clipper Acquisition. Transaction and integration costs for the six months endedJune 30, 2021 were$53 million and primarily related to the Separation. Restructuring costs and other for the six months endedJune 30, 2022 , were$14 million . For the six months endedJune 30, 2022 , restructuring costs and other included$6 million related to severance costs and$8 million related to the deconsolidation of a joint venture. Restructuring costs and other for the six months endedJune 30, 2021 were$3 million and primarily related to severance costs.
Other income for the six months ended
Interest expense, net for the six months endedJune 30, 2022 was$13 million compared with$11 million for the same period in 2021. For the six months endedJune 30, 2022 , interest expense primarily related to debt issued in the second half of 2021, debt issued in 2022, and capital lease obligations, partially offset by interest income on the cross-currency swap agreements. For the six months endedJune 30, 2021 , interest expense primarily related to related-party debt obligations with XPO before the Separation and capital lease obligations. Income before income taxes for the six months endedJune 30, 2022 increased by$81 million , to$122 million , compared with$41 million for the same period in 2021. The increase was primarily due to higher revenue and increased other income as a result of pension income and foreign currency contracts, partially offset by the deconsolidation of a joint venture. Income tax expense for the six months endedJune 30, 2022 , was$32 million compared with$10 million for the same period in 2021. Our effective tax rate was 26.4% for the six months endedJune 30, 2022 compared with 24.9% for the same period in 2021. The change in our effective tax rate was primarily driven by$5 million non-deductible transaction cost, offset by$4 million of deferred true-ups.
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. Our principal uses of cash in the future will be to fund our operations, working capital needs, capital expenditures, repayment of borrowings and strategic business development transactions. The timing and magnitude of our 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. We believe that our existing liquidity and sources of capital are sufficient to support our operations over the next 12 months.
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Debt and Financing Arrangements
Five-Year Term Loan
OnMay 25, 2022 , we entered into a five-year unsecured Term Loan (the "Five-Year Term Loan due 2027") that provided a$500 million unsecured term loan facility to fund the Clipper Acquisition. OnMay 26, 2022 , we borrowed$500 million that will mature onMay 26, 2027 . The loan bears interest at a fluctuating rate per annum equal to, at our option, the alternate base rate or the adjusted Secured Overnight Financing Rate (SOFR), plus an applicable margin based on the Company's credit ratings.
Delayed Draw Term Loan
OnMarch 22, 2022 , we entered into an unsecured delayed draw Term Loan (the "Delayed Draw Term Loan") that provided a £375 million ($457 million as ofJune 30, 2022 ) unsecured term loan facility to fund the Clipper Acquisition. The loans were available to us inU.S. dollars or British pounds sterling. OnMay 26, 2022 , we borrowed inU.S. dollars a$165 million 2-year term loan tranche (the "Two-Year Term Loan due 2024") and a$235 million 3-year term loan tranche (the "Three-Year Term Loan due 2025") that will mature onMay 26, 2024 , andMay 26, 2025 , respectively. Loans bear interest at a fluctuating rate per annum equal to, at our option, the alternate base rate or the adjusted SOFR, plus an applicable margin based on the Company's credit ratings.
Bridge Term Loan
OnFebruary 28, 2022 , we entered into an unsecured Bridge Term Loan (the "Bridge Term Loan") that provided a £745 million ($907 million as ofJune 30, 2022 ) unsecured term loan facility to fund the Clipper Acquisition. The commitments under the Bridge Term Loan were terminated with the effectiveness of the Five-Year Term Loan and the Delayed Draw Term Loan. No amounts were drawn under the Bridge Term Loan credit agreement.
Unsecured Notes
In 2021, we completed an offering of$800 million aggregate principal amount of notes, consisting of$400 million of notes due 2026 (the "2026 Notes") and$400 million of notes due 2031 (the "2031 Notes"). The 2026 Notes bear interest at a rate of 1.65% per annum payable semiannually in cash in arrears onJanuary 15 andJuly 15 of each year, beginningJanuary 15, 2022 , and maturing onJuly 15, 2026 . The 2031 Notes bear interest at a rate of 2.65% per annum payable semiannually in cash in arrears onJanuary 15 andJuly 15 of each year, beginningJanuary 15, 2022 , and maturing onJuly 15, 2031 .
Revolving Credit Facility
In 2021, we entered into a five-year unsecured multi-currency Revolving Credit Facility (the "Revolving Credit Facility"). The Revolving Credit Facility provides commitments of up to$800 million , of which$60 million is available for the issuance of letters of credit. No amounts were outstanding under the Revolving Credit Facility as ofJune 30, 2022 .
Sales of Certain Receivables
We sell certain of our trade accounts receivables on a non-recourse basis to third-party financial institutions under various factoring agreements. We also sold certain European trade accounts receivables under a securitization program. In the first quarter of 2022, we terminated our securitization program. We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. We use the sale of certain receivables to help manage our working capital. 26
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Information related to the trade receivables sold was as follows:
Three Months Ended Six Months Ended June 30, June 30, (In millions) 2022 2021 2022 2021 Factoring agreements Receivables sold in period$ 228 $ 100 $ 457 $ 200 Cash consideration 228 100 456 200 Securitization program Receivables sold in period $ -$ 474 $ -$ 902 Cash consideration - 474 - 902 Covenants and Compliance
As of
Financial Condition
The following table summarizes our asset and liability balances as of
(In millions) June 30, 2022 December 31, 2021 $ Change % Change Total current assets$ 2,256 $ 2,099$ 157 7 % Total long-term assets 6,450 5,172 1,278 25 % Total current liabilities 2,364 2,329 35 2 % Total long-term liabilities 3,781 2,552 1,229 48 % The increase in our assets and liabilities fromDecember 31, 2021 toJune 30, 2022 primarily reflects the assets acquired and liabilities assumed, as well as various debt instruments entered into in connection with the Clipper Acquisition.
Cash Flow Activity
Our cash flows from operating, investing and financing activities, as reflected on our Condensed Consolidated Statements of Cash Flows, are summarized as follows: Six Months Ended June 30, (In millions) 2022 2021 $ Change % Change Net cash provided by operating activities$ 200 $ 146 $ 54 37 % Net cash used in investing activities (1,003) (71) (932) n/m Net cash provided by (used in) financing 869 (78) 947 n/m
activities
Effect of exchange rates on cash and cash (15) 1 (16) n/m
equivalents
Net increase (decrease) in cash and cash$ 51 $ (2) $ 53 n/m equivalents n/m - not meaningful Operating Activities Cash flows from operating activities for the six months endedJune 30, 2022 increased by$54 million compared with the same period in 2021. The increase was primarily due to a$59 million increase in net income, partially offset by an$11 million decrease in non-cash items. 27 --------------------------------------------------------------------------------
Investing Activities
Investing activities used$1,003 million of cash for the six months endedJune 30, 2022 , compared with$71 million used for the same period of 2021. During the six months endedJune 30, 2022 , we used$874 million , net of cash received, to fund the Clipper Acquisition, used$154 million to purchase property and equipment, received$10 million in proceeds from cross-currency swap agreements, excluding accrued interest, and received$6 million from sales of property and equipment. During the six months endedJune 30, 2021 , we used$119 million to purchase property and equipment, received$34 million net cash from the Kuehne + Nagel acquisition, received$12 million in connection with the purchase and sale of affiliate trade receivables, and received$2 million from sales of property and equipment. Financing Activities Financing activities generated$869 million of cash for the six months endedJune 30, 2022 , compared with$78 million used for the same period of 2021. The primary sources of cash from financing activities in the six months endedJune 30, 2022 , were$898 million in proceeds from long-term debt, partially offset by$15 million repayment of debt and finance leases and$12 million in payments for employee taxes on net settlement of equity awards. The primary uses of cash from financing activities in the six months endedJune 30, 2021 , were$128 million in the purchase of a noncontrolling interest,$56 million in repayments of debt and finance leases, and$25 million in repayment of debt related to a trade securitization program, partially offset by$116 million of net transfers from XPO.
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
The Company's contractual cash requirements have not changed materially since the 2021 Form 10-K, except for the new term loan credit agreements described above.
Critical Accounting Policies and Estimates
Preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. There have been no material changes to the critical accounting policies and estimates as previously disclosed in Part II, Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , and that are hereby incorporated by reference.
Accounting Pronouncements
Information related to new accounting standards is included in Note 1-Basis of Presentation and Significant Accounting Policies to the condensed consolidated financial statements. 28
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