GXO Logistics, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. GXO operates as a single reportable segment, providing contract logistics services. It became a standalone publicly traded company on August 2, 2021, following its spin-off from XPO Logistics.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,974 million | $1,584 million | $5,678 million | $4,429 million |
| Operating income (loss) | $36 million | $49 million | $88 million | $(34) million |
| Net income (loss) attributable to GXO | $72 million | $18 million | $97 million | $(59) million |
| Diluted earnings (loss) per share | $0.62 | $0.16 | $0.84 | $(0.51) |
| Operating cash flow | Not separately provided | Not separately provided | $251 million | $345 million |
- Q3 revenue grew 24.6%; nine-month revenue grew 28.2%. Management attributed growth primarily to lower COVID-19 impacts, the January 2021 Kuehne + Nagel acquisition, and currency movements.
- Q3 direct operating expense was 83.6% of revenue, versus 81.8% a year earlier; for the nine months it was 83.2% in both periods. Q3 SG&A was 8.7% of revenue versus 9.9%; nine-month SG&A was 9.1% versus 10.5%.
- Operating margin was approximately 1.8% in Q3 versus 3.1% in Q3 2020; nine-month operating margin was approximately 1.6% versus negative 0.8%. Q3 operating income fell despite higher revenue, with direct costs rising faster than revenue.
- Q3 net income included a $42 million discrete tax benefit from recognizing a deferred tax asset associated with the Separation-related intellectual-property licensing arrangements. The filing reports an effective tax rate of negative 72.5% for Q3 2021.
Balance sheet, debt and liquidity
- At September 30, 2021, cash and cash equivalents were $275 million, total assets $7.1 billion, and total equity $2.3 billion. Current assets of $2.0 billion were below current liabilities of $2.2 billion.
- Total debt carrying value was $974 million, including $792 million carrying value for the $800 million of notes issued in July and $177 million of finance leases and other debt; short-term borrowings and finance-lease obligations were $40 million. The $800 million notes comprise $400 million due 2026 at 1.65% and $400 million due 2031 at 2.65%.
- The company had no borrowings under its $800 million revolving credit facility at quarter-end and reported compliance with the notes’ covenants. Management said existing liquidity and capital sources were sufficient for the next 12 months.
- Nine-month operating cash flow of $251 million declined $94 million year over year, reflecting increased working-capital use, partly offset by higher net income. Capital expenditures were $180 million; management expected 2021 net capital expenditures of $225 million to $250 million.
- Cash declined $53 million during the first nine months to $275 million. Financing cash use included $774 million of net transfers to XPO, $128 million to buy out the remaining GXO Logistics Europe noncontrolling interest, and debt and lease repayments; debt issuance provided $794 million.
Material changes, outlook and risks
- The Kuehne + Nagel U.K. contract logistics acquisition contributed materially to growth and added operating lease assets and liabilities. European operations grew 34.1% in Q3, including an estimated 16.3 percentage points from the acquisition; North American operations grew 8.5%.
- Results before the August 2 Separation include allocated XPO corporate costs and are not fully comparable with standalone results. GXO recorded $29 million of Q3 and $82 million of nine-month transaction and integration costs, primarily related to the Separation. Transition services from XPO generally run for no more than 12 months after distribution.
- Management provided no specific revenue or earnings guidance in this filing. It cited ongoing uncertainty from COVID-19, labor availability and cost, equipment procurement, customer component shortages, foreign exchange, inflation and the timing of passing cost increases through to customers. Management said pandemic effects could continue through 2021 and 2022.
- A one-time cash tax payment of approximately $20 million was expected in Q4 2021 due to legal-entity restructuring. Fixed customer-contract obligations were approximately $2.1 billion, with about 67% expected to be recognized as revenue over the next three years.
- Foreign exchange remains a notable exposure: a modeled 10% strengthening of the U.S. dollar would reduce net assets by $35 million against the euro and $53 million against sterling. Legal proceedings are described as ordinary-course matters; management does not expect their resolution to materially adversely affect the company, but notes outcomes are uncertain.
Investor facts to verify
- How much of reported revenue growth and future performance is attributable to the Kuehne + Nagel acquisition, currency and underlying organic growth.
- Whether direct-cost inflation, labor pressures and start-up costs affect margins, and how quickly cost increases are passed through to customers.
- The sustainability of cash generation given the year-over-year operating cash flow decline, working-capital needs and planned capital expenditures.
- The cash-tax timing and amount, and the final tax consequences of the Separation and related restructuring.
- Standalone costs after XPO transition services end, including whether historical XPO cost allocations reflect GXO’s ongoing cost base.