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GXO LOGISTICS, INC.

(GXO)
  Report
Delayed Nyse  -  04:00:02 2023-01-27 pm EST
51.02 USD   -0.04%
01/25GXO Schedules Fourth Quarter, Full-Year 2022 Earnings Conference Call for Wednesday, February 15, 2023
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01/25GXO Schedules Fourth Quarter, Full-Year 2022 Earnings Conference Call for Wednesday, February 15, 2023
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01/24Gxo Logistics : Investor Day Transcript
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GXO LOGISTICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/09/2022 | 04:12pm EST

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 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, 2021, as filed
with the SEC on February 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.
                                       22

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The Separation


On August 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. On August 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 in the 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 Condensed 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


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"). 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 Clipper Acquisition was subject
to review by the Competition and Markets Authority in the United Kingdom (the
"CMA"). On October 4, 2022, the CMA approved the Clipper Acquisition.

In connection with the Clipper Acquisition, (i) the Company and Clipper entered
into a Cooperation Agreement; (ii) the Company entered into a Delayed Draw Term
Loan; (iii) the Company entered into a Five-Year Term Loan; and (iv) the Company
terminated its Bridge Term Loan. For additional information regarding the
financing agreements entered into in connection with the Clipper Acquisition,
see Note 7. Debt and Financing Arrangements.

The Company included Clipper's results of operations from the date of
acquisition. For the three and nine months ended September 30, 2022, the Company
recorded $239 million and $319 million of revenue, respectively, and $- million
and $1 million of income before income taxes, respectively.

                                       23

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Results of Operations


                                                                             Three Months Ended September 30,
(In millions)                                                2022                2021            $ Change             % Change
Revenue                                                 $      2,287          $ 1,974          $     313                     16  %
Direct operating expense                                       1,885            1,651                234                     14  %
Selling, general and administrative expense                      227              171                 56                     33  %
Depreciation and amortization expense                             89               85                  4                      5  %
Transaction and integration costs                                 14               29                (15)                   (52) %
Restructuring costs and other                                      -                2                 (2)                  (100) %
Operating income                                                  72               36                 36                    100  %
Other income, net                                                 17               11                  6                     55  %
Interest expense, net                                             (6)              (5)                (1)                    20  %
Income before income taxes                                        83               42                 41                     98  %
Income tax (expense) benefit                                     (19)              31                (50)                      n/m
Net income                                              $         64          $    73          $      (9)                   (12) %


n/m - not meaningful

Three Months Ended September 30, 2022 compared with the Three Months Ended September 30, 2021


Revenue for the three months ended September 30, 2022 increased by 16%, or $313
million, to $2.3 billion, compared with $2.0 billion for the same period in
2021. Our North America, Asia and Pacific operations and European operations
reported growth of 18% and 15%, respectively. The Clipper Acquisition
contributed 16% to our European revenue and 10% to total revenue. Foreign
currency movements decreased revenue by approximately 11% for the three months
ended September 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 ended September 30, 2022 was $1.9 billion, or 82% of revenue, compared
with $1.7 billion, or 84% of revenue, for the same period in 2021. For the three
months ended September 30, 2022, direct operating expenses primarily increased
due to higher personnel and temporary labor costs of $131 million, higher
facilities and transportation costs of $76 million and higher costs of materials
and supplies of $16 million, these increases are mainly driven by the Clipper
Acquisition.

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 ended September 30, 2022
increased by $56 million, to $227 million, compared with $171 million for the
same period in 2021. SG&A for the three months ended September 30, 2022
increased compared with the same prior year period due to higher personnel
costs, primarily for certain administrative functions and the Clipper
Acquisition.

Depreciation and amortization expense for the three months ended September 30,
2022 was $89 million, compared with $85 million for the same period in 2021.
Depreciation and amortization expense included amortization of intangible assets
of $21 million and $16 million for the three months ended September 30, 2022 and
2021, respectively. The increase was primarily due to higher depreciation and
amortization from the Clipper Acquisition, partially offset by lower
depreciation as a result of contract modifications in the prior year.

Transaction and integration costs for the three months ended September 30, 2022
were $14 million, primarily related to the Clipper Acquisition and rebranding as
a result of the Separation. Transaction and integration costs for the three
months ended September 30, 2021 were $29 million, primarily related to the
Separation.

Restructuring costs and other for the three months ended September 30, 2022 and 2021 was not material.

                                       24

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Other income, net consists primarily of foreign exchange gains and losses,
including foreign currency contracts, and pension income. Other income, net for
the three months ended September 30, 2022 was $17 million compared with
$11 million for the same period in 2021. For the three months ended September
30, 2022, the gain on foreign currency contracts was $9 million and pension
income was $7 million. For the three months ended September 30, 2021, pension
income was $10 million.

Interest expense, net for the three months ended September 30, 2022 was
$6 million compared with $5 million for the same period in 2021. For the three
months ended September 30, 2022, interest expense primarily related to
outstanding debt and capital lease obligations, partially offset by interest
income on the cross-currency swap agreements. For the three months ended
September 30, 2021, interest expense primarily related to debt issued in
connection with the Separation, and related-party debt with XPO before the
Separation, partially offset by interest income on the cross-currency swap
agreements.

Income before income taxes for the three months ended September 30, 2022
increased by $41 million, to $83 million, compared with $42 million for the same
period in 2021. The increase was primarily due to growth in our business, lower
transaction and integration costs, and other income from a pension plan and
foreign currency contracts.

Income tax for the three months ended September 30, 2022 was $19 million expense
compared with $31 million benefit for the same period in 2021. Our effective tax
rate was 22.5% for the three months ended September 30, 2022 compared with
(72.5)% for the same period in 2021. The change in our effective tax rate was
primarily driven by a discrete tax benefit from the initial recognition of a
deferred tax asset in connection with the Separation.

                                                                             Nine Months Ended September 30,
(In millions)                                                2022                2021            $ Change             % Change
Revenue                                                 $      6,526          $ 5,678          $     848                     15  %
Direct operating expense                                       5,408            4,725                683                     14  %
Selling, general and administrative expense                      637              519                118                     23  %
Depreciation and amortization expense                            242              259                (17)                    (7) %
Transaction and integration costs                                 57               82                (25)                   (30) %
Restructuring costs and other                                     14                5                  9                       n/m
Operating income                                                 168               88                 80                     91  %
Other income, net                                                 56               11                 45                       n/m
Interest expense, net                                            (19)             (16)                (3)                    19  %
Income before income taxes                                       205               83                122                       n/m
Income tax (expense) benefit                                     (51)              21                (72)                      n/m
Net income                                              $        154          $   104          $      50                     48  %


n/m - not meaningful

Nine Months Ended September 30, 2022 compared with the Nine Months Ended September 30, 2021


Revenue for the nine months ended September 30, 2022 increased by 15%, or
$848 million, to $6.5 billion, compared with $5.7 billion for the same period in
2021. For the nine months ended September 30, 2022, our North America, Asia and
Pacific operations and European operations reported growth of 18% and 13%,
respectively. The Clipper Acquisition contributed 7% to European revenue and 5%
to total revenue. Foreign currency movements decreased revenue by approximately
8% for the nine months ended September 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 nine
months ended September 30, 2022 was $5.4 billion, or 83% of revenue, compared
with $4.7 billion, or 83% of revenue for the same period in 2021. For the nine
months ended September 30, 2022, direct operating expenses primarily increased
due to higher personnel and temporary labor
                                       25

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expenses of $457 million, higher facilities and transportation costs of $171 million, and higher costs of materials and supplies of $43 million.


SG&A primarily consists of salary and benefits for executive and administrative
functions, professional fees and legal costs. SG&A for the nine months ended
September 30, 2022 increased by $118 million, to $637 million, compared with
$519 million for the same period in 2021. SG&A for the nine months increased
compared with the same prior year period due to higher personnel costs,
primarily for certain administrative functions.

Depreciation and amortization expense for the nine months ended September 30,
2022 was $242 million, compared with $259 million for the same period in 2021.
Depreciation and amortization expense included amortization of intangible assets
of $48 million and $44 million for the nine months ended September 30, 2022 and
2021, respectively. The decrease was primarily a result of $15 million allocated
corporate charges from XPO before the Separation in the prior year and lower
depreciation as a result of contract modifications in the prior year, partially
offset by higher depreciation and amortization from the Clipper Acquisition.

Transaction and integration costs for the nine months ended September 30, 2022
were $57 million, primarily related to the Clipper Acquisition and rebranding as
a result of the Separation. Transaction and integration costs for the nine
months ended September 30, 2021 were $82 million, primarily related to the
Separation.

Restructuring costs and other for the nine months ended September 30, 2022 were
$14 million. For the nine months ended September 30, 2022, restructuring costs
and other included $8 million related to the deconsolidation of a joint venture
and $6 million related to severance costs. Restructuring costs and other for the
nine months ended September 30, 2021 were $5 million and related to severance
costs.

Other income, net consists primarily of foreign exchange gains and losses,
including foreign currency contracts, and pension income. Other income, net for
the nine months ended September 30, 2022 was $56 million compared with $11
million for the same period in 2021. For the nine months ended September 30,
2022, the gain on foreign currency contracts was $33 million and pension income
was $25 million. For the nine months ended September 30, 2021, pension income
was $10 million.

Interest expense, net for the nine months ended September 30, 2022 was
$19 million compared with $16 million for the same period in 2021. For the nine
months ended September 30, 2022, interest expense primarily related to
outstanding debt and capital lease obligations, partially offset by interest
income on the cross-currency swap agreements. For the nine months ended
September 30, 2021, interest expense primarily related to debt issued in
connection with the Separation, related-party debt with XPO before the
Separation, and capital lease obligations, partially offset by interest income
on the cross-currency swap agreements.

Income before income taxes for the nine months ended September 30, 2022
increased by $122 million, to $205 million, compared with $83 million for the
same period in 2021. The increase was primarily due to growth in our business,
lower transaction and integration costs, and other income from a pension plan
and foreign currency contracts, partially offset by restructuring costs due to
the deconsolidation of a joint venture.

Income tax for the nine months ended September 30, 2022 was $51 million expense
compared with $21 million benefit for the same period in 2021. Our effective tax
rate was 24.7% for the nine months ended September 30, 2022 compared with
(24.8)% for the same period in 2021. The change in our effective tax rate was
primarily driven by a discrete tax benefit from the initial recognition of a
deferred tax asset in connection with the Separation and non-deductible
transaction cost, offset by deferred true-ups in 2022.

                                       26

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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.

Debt and Financing Arrangements

Five-Year Term Loan


On May 25, 2022, we entered into a five-year unsecured Term Loan (the "Five-Year
Term Loan") that provided a $500 million unsecured term loan facility to fund
the Clipper Acquisition. On May 26, 2022, we borrowed $500 million that will
mature on May 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


On March 22, 2022, we entered into an unsecured delayed draw Term Loan (the
"Delayed Draw Term Loan") that provided a £375 million unsecured term loan
facility to fund the Clipper Acquisition. The loan was available to us in U.S.
dollars or British pounds sterling. On May 26, 2022, we borrowed in U.S. dollars
a $165 million 2-year term loan tranche (the "Two-Year Term Loan") and a
$235 million 3-year term loan tranche (the "Three-Year Term Loan") that will
mature on May 26, 2024, and May 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


On February 28, 2022, we entered into an unsecured Bridge Term Loan (the "Bridge
Term Loan") that provided a £745 million 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.

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 on January 15
and July 15 of each year, beginning January 15, 2022, and maturing on July 15,
2026. The 2031 Notes bear interest at a rate of 2.65% per annum payable
semiannually in cash in arrears on January 15 and July 15 of each year,
beginning January 15, 2022, and maturing on July 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 of September 30, 2022.
                                       27

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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.
Information related to the trade receivables sold was as follows:

                                            Three Months Ended                Nine Months Ended
                                               September 30,                    September 30,
     (In millions)                            2022             2021           2022            2021
     Factoring agreements
     Receivables sold in period       $      259              $ 132      $    716           $   331
     Cash consideration                      258                132           714               331
     Securitization program
     Receivables sold in period       $        -              $ 418      $      -           $ 1,320
     Cash consideration                        -                418             -             1,320



Covenants and Compliance

As of September 30, 2022, we were in compliance with the covenants contained in our debt and financing arrangements.

Financial Condition

The following table summarizes our asset and liability balances as of September 30, 2022 and December 31, 2021:


                                                     September 30,         December 31,
(In millions)                                             2022                 2021              $ Change             % Change
Total current assets                                 $     2,242          $     2,099          $     143                      7  %
Total long-term assets                                     6,564                5,172              1,392                     27  %
Total current liabilities                                  2,275                2,329                (54)                    (2) %
Total long-term liabilities                                3,932                2,552              1,380                     54  %



The increase in our assets and liabilities from December 31, 2021 to September 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, were summarized as
follows:
                                                                       Nine Months Ended September 30,
(In millions)                                         2022                2021             $ Change             % Change

Net cash provided by operating activities $ 316 $ 251 $ 65

                     26  %
Net cash used in investing activities                 (1,056)              (140)              (916)                      n/m
Net cash provided by (used in) financing                 863               (165)             1,028                       n/m

activities

Effect of exchange rates on cash and cash                (22)                 1                (23)                      n/m

equivalents

Net increase (decrease) in cash and cash          $      101          $     (53)         $     154                       n/m
equivalents


n/m - not meaningful
                                       28
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Operating Activities


Cash flows from operating activities for the nine months ended September 30,
2022 increased by $65 million compared with the same period in 2021. The
increase was due to $50 million higher net income in 2022 and $39 million
non-cash adjustments driven by a deferred tax benefit in 2021, partially offset
by a $24 million decrease in working capital.

Investing Activities


Investing activities used $1,056 million of cash for the nine months ended
September 30, 2022, compared with $140 million used for the same period of 2021.
During the nine months ended September 30, 2022, we used $874 million, net of
cash received, to fund the Clipper Acquisition, used $239 million to purchase
property and equipment, received $26 million in proceeds from the settlement of
cross-currency swap agreements, excluding accrued interest, and received $22
million from sales of property and equipment. During the nine months ended
September 30, 2021, we used $180 million to purchase property and equipment,
received $34 million net cash from the Kuehne + Nagel acquisition, and received
$8 million from sales of property and equipment.

Financing Activities


Financing activities generated $863 million of cash for the nine months ended
September 30, 2022, compared with $165 million used for the same period of 2021.
The primary sources of cash from financing activities in the nine months ended
September 30, 2022, were $898 million in proceeds from long-term debt, net,
partially offset by $23 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 nine months ended
September 30, 2021, were $774 million of net transfers to XPO, $128 million in
the purchase of noncontrolling interest, $64 million in repayments of debt and
finance leases, and $21 million in repayment of debt related to a trade
securitization program, partially offset by $794 million in proceeds from
long-term debt.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet financing 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
ended December 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.

                                       29

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