GXO Logistics, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. GXO completed its spin-off from XPO on August 2, 2021 and began NYSE trading as an independent company. The financial statements are historical combined statements derived from XPO’s records, not standalone results; corporate costs were allocated by XPO and may differ from GXO’s costs as a standalone business.
Business context and results
GXO operates one reportable segment, providing contract logistics services including warehousing, fulfillment, distribution and reverse logistics. Revenue is diversified across industries and geographies; e-commerce, omnichannel and consumer technology represented about half of Q2 revenue.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,882m | $1,405m | $3,704m | $2,845m |
| Operating income (loss) | $22m | $(85)m | $52m | $(83)m |
| Operating margin | 1.2% | (6.0)% | 1.4% | (2.9)% |
| Net income (loss) | $14m | $(65)m | $31m | $(75)m |
| Net income (loss) attributable to GXO | $11m | $(65)m | $25m | $(77)m |
| EPS, basic and diluted | $0.10 | $(0.57) | $0.22 | $(0.67) |
| Operating cash flow | Not provided separately | Not provided separately | $146m | $191m |
Q2 revenue increased 34.0% year over year; first-half revenue rose 30.2%. Management attributed the increase mainly to lower COVID-19 impacts, the January 2021 UK Kuehne + Nagel acquisition and favorable foreign exchange. The acquisition contributed 10.7 percentage points to Q2 total revenue growth and 9.4 points to first-half growth; foreign exchange contributed 7.6 and 6.6 points, respectively. European operations grew 49.1% in Q2 and 43.8% in the first half; North American growth was 9.8% and 9.2%.
Q2 direct operating costs were 82.6% of revenue versus 84.2% a year earlier; SG&A was 9.4% versus 12.0%. For the first half, direct costs were 83.0% versus 83.9%, and SG&A was 9.4% versus 10.9%. Management cited lower COVID-related costs, bad debt and overhead expenses. Transaction and integration costs were $35m in Q2 and $53m in the first half, primarily related to the spin-off. First-half restructuring charges were $3m; Q2 included a $1m restructuring credit.
Cash flow, balance sheet and financing
- First-half operating cash flow was $146m, down $45m year over year, primarily due to greater working-capital cash use, partly offset by improved earnings. Capital expenditures were $119m; operating cash flow less property and equipment purchases was approximately $27m, a simple calculation and not a company-defined free-cash-flow measure.
- Investing cash outflow was $71m and financing cash outflow was $78m. Financing included the $128m purchase of the remaining minority interest in XPO Logistics Europe, $56m of debt and finance-lease repayments, and $116m of net transfers from XPO.
- At June 30, cash was $326m; current assets were $1,963m and current liabilities $2,009m. Total debt, including finance leases, was $618m, comprising $437m owed to XPO, $181m of finance leases and other debt, and no securitization borrowing. The $800m revolving credit facility was undrawn. Total assets were $7,068m.
- After quarter-end, GXO issued $800m of notes: $400m due 2026 at 1.65% and $400m due 2031 at 2.65%. In July it settled related-party debt with XPO. These subsequent transactions are not reflected in the June 30 debt balance.
- Management stated that liquidity and capital sources were sufficient for the next 12 months. It expected 2021 net capital expenditures of $225m–$275m, funded by cash and available liquidity.
Outlook, risks and notable items
- Firm remaining performance obligations were approximately $2.1bn at June 30; GXO expected to recognize about 66% over the next three years and the balance thereafter. This excludes certain short-duration and variable-consideration contracts and is subject to contract changes, terminations and currency movements. No formal earnings or revenue guidance is provided in the filing.
- Management said COVID-19 continued to create uncertainty and could affect results through 2021. It cited incremental health and safety costs, while noting variable costs and expense adjustments had helped mitigate effects.
- Other risks include foreign-exchange exposure, interest-rate changes, legal claims, and execution of the transition to standalone operations. GXO’s transitional services from and to XPO generally run no longer than 12 months after the spin-off. The tax matters agreement includes restrictions intended to preserve tax-free treatment for two years.
- In July 2021, responsibility for a frozen UK defined-benefit pension plan transferred to GXO, with a limited guarantee to trustees expiring no later than 2038. GXO also anticipated one-time cash payments and non-cash tax benefits from legal-entity restructuring in the second half of 2021; amounts were not specified.
- Management reported disclosure controls were effective as of June 30, 2021 and no material change in internal control over financial reporting during the quarter. The filing states no material change to previously disclosed risk factors beyond completion of the spin-off.
Investor verification priorities
- Check subsequent standalone filings for actual post-spin-off debt, cash, interest expense and leverage after the $800m notes issuance and settlement of XPO-related debt.
- Compare standalone operating costs with the historical statements, which include XPO corporate allocations and may not represent GXO’s independent cost base.
- Track cash conversion and working capital, including the use and availability of receivables factoring and securitization facilities.
- Assess whether revenue growth and remaining performance obligations convert into sustainable margins and cash flow, separating acquisition and foreign-exchange effects from underlying growth.
- Review the financial effects of the UK pension transfer, restructuring, spin-off arrangements, and any legal or tax contingencies as further details emerge.