GXO Logistics, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS GXO Logistics, Inc. Condensed Combined Balance Sheets (Unaudited) June 30, December 31, (In millions) 2021 2020 ASSETS Current assets Cash and cash equivalents $ 326 $ 328 Accounts receivable, net of allowances of $ 13 and $ 18 , respectively 1,297 1,224 Other current assets 340 284 Total current assets 1,963 1,836 Long-term assets Property and equipment, net of $ 1,048 and $ 922 in accumulated depreciation, respectively 838 770 Operating lease assets 1,744 1,434 Goodwill 2,058 2,063 Identifiable intangible assets, net of $ 398 and $ 373 in accumulated amortization, respectively 295 299 Other long-term assets 170 146 Total long-term assets 5,105 4,712 Total assets $ 7,068 $ 6,548 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 458 $ 415 Accrued expenses 973 784 Short-term borrowings and current finance lease liabilities 36 58 Short-term operating lease liabilities 414 332 Other current liabilities 128 149 Total current liabilities 2,009 1,738 Long-term liabilities Long-term debt and finance lease liabilities 582 615 Deferred tax liability 63 54 Long-term operating lease liabilities 1,340 1,099 Other long-term liabilities 160 94 Total long-term liabilities 2,145 1,862 Commitments and contingencies Equity XPO investment 2,835 2,765 Accumulated other comprehensive income 39 58 Total equity before noncontrolling interests 2,874 2,823 Noncontrolling interests 40 125 Total equity 2,914 2,948 Total liabilities and equity $ 7,068 $ 6,548 See accompanying notes to condensed combined financial statements. 2 GXO Logistics, Inc. Condensed Combined Statements of Operations (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In millions, except per share data) 2021 2020 2021 2020 Revenue $ 1,882 $ 1,405 $ 3,704 $ 2,845 Direct operating expense 1,554 1,185 3,074 2,388 Sales, general and administrative expense 177 168 348 310 Depreciation and amortization expense 95 87 174 163 Transaction and integration costs 35 25 53 42 Restructuring costs (credit) ( 1 ) 25 3 25 Operating income (loss) 22 ( 85 ) 52 ( 83 ) Other (income) expense 1 ( 1 ) — ( 2 ) Interest expense 6 5 11 12 Income (loss) before income taxes 15 ( 89 ) 41 ( 93 ) Income tax provision (benefit) 1 ( 24 ) 10 ( 18 ) Net income (loss) 14 ( 65 ) 31 ( 75 ) Net income attributable to noncontrolling interests ( 3 ) — ( 6 ) ( 2 ) Net income (loss) attributable to GXO $ 11 $ ( 65 ) $ 25 $ ( 77 ) Earnings per share data Basic and Diluted earnings (loss) per share $ 0.10 $ ( 0.57 ) $ 0.22 $ ( 0.67 ) Common shares outstanding Number of Basic and Diluted shares outstanding 115 115 115 115 See accompanying notes to condensed combined financial statements. 3 GXO Logistics, Inc. Condensed Combined Statements of Comprehensive Income (Loss) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In millions) 2021 2020 2021 2020 Net income (loss) $ 14 $ ( 65 ) $ 31 $ ( 75 ) Other comprehensive income (loss), net of tax Foreign currency translation gain (loss), net of tax effect of $( 1 ), $( 1 ), $ 2 and $( 3 ) $ 19 $ 31 $ ( 26 ) $ ( 48 ) Unrealized gain (loss) on financial assets/liabilities designated as hedging instruments, net of tax effect of $ — , $ — , $( 1 ) and $ — — 2 ( 1 ) 2 Other comprehensive income (loss) 19 33 ( 27 ) ( 46 ) Comprehensive income (loss) $ 33 $ ( 32 ) $ 4 $ ( 121 ) Less: Comprehensive income (loss) attributable to noncontrolling interests ( 1 ) 2 ( 2 ) — Comprehensive income (loss) attributable to GXO $ 34 $ ( 34 ) $ 6 $ ( 121 ) See accompanying notes to condensed combined financial statements. 4 GXO Logistics, Inc. Condensed Combined Statements of Cash Flow (Unaudited) Six Months Ended June 30, (In millions) 2021 2020 Operating activities Net income (loss) $ 31 $ ( 75 ) Adjustments to reconcile net income (loss) to net cash from operating activities Depreciation, amortization and net lease activity 174 163 Other 10 26 Changes in assets and liabilities Accounts receivable ( 9 ) 74 Other assets ( 73 ) ( 26 ) Accounts payable ( 40 ) ( 92 ) Accrued expenses and other liabilities 53 121 Net cash provided by operating activities 146 191 Investing activities Payment for purchases of property and equipment ( 119 ) ( 102 ) Proceeds from sales of property and equipment 2 6 Purchase and sale of affiliate trade receivables, net 12 2 Other 34 — Net cash used in investing activities ( 71 ) ( 94 ) Financing activities Net proceeds (repayments) related to trade securitization program ( 25 ) 45 Repayment of debt and finance leases ( 56 ) ( 71 ) Purchase of noncontrolling interests ( 128 ) — Net transfers from XPO 116 44 Other 15 16 Net cash provided by (used in) financing activities ( 78 ) 34 Effect of exchange rates on cash, cash equivalents and restricted cash 1 ( 10 ) Net increase (decrease) in cash, cash equivalents and restricted cash ( 2 ) 121 Cash, cash equivalents, and restricted cash, beginning of period 328 200 Cash, cash equivalents, and restricted cash, end of period $ 326 $ 321 Supplemental disclosure of cash flow information: Leased assets obtained in exchange for new operating lease liabilities, including $ 281 related to an acquisition in 2021 $ 576 $ 243 Leased assets obtained in exchange of new finance lease liabilities, including $ 23 related to an acquisition in 2021 33 54 Cash paid for interest 10 12 Cash paid for income taxes 22 1 See accompanying notes to condensed combined financial statements. 5 GXO Logistics, Inc. Condensed Combined Statements of Changes in Equity (Unaudited) (In millions) XPO Investment Accumulated Other Comprehensive Income (Loss) Equity Before Noncontrolling Interests Non-controlling Interests Total Equity Balance as of March 31, 2021 $ 2,903 $ 16 $ 2,919 $ 124 $ 3,043 Net income 11 — 11 3 14 Other comprehensive income (loss) — 23 23 ( 4 ) 19 Purchase of noncontrolling interest — — — ( 128 ) ( 128 ) Net transfers from (to) XPO ( 79 ) — ( 79 ) 40 ( 39 ) Other — — — 5 5 Balance as of June 30, 2021 $ 2,835 $ 39 $ 2,874 $ 40 $ 2,914 (In millions) XPO Investment Accumulated Other Comprehensive Income (Loss) Equity Before Noncontrolling Interests Non-controlling Interests Total Equity Balance as of December 31, 2020 $ 2,765 $ 58 $ 2,823 $ 125 $ 2,948 Net income 25 — 25 6 31 Other comprehensive loss — ( 19 ) ( 19 ) ( 8 ) ( 27 ) Purchase of noncontrolling interest — — — ( 128 ) ( 128 ) Net transfers from XPO 45 — 45 40 85 Other — — — 5 5 Balance as of June 30, 2021 $ 2,835 $ 39 $ 2,874 $ 40 $ 2,914 (In millions) XPO Investment Accumulated Other Comprehensive Income (Loss) Equity Before Noncontrolling Interests Non-controlling Interests Total Equity Balance as of March 31, 2020 $ 2,688 $ ( 141 ) $ 2,547 $ 128 $ 2,675 Net loss ( 65 ) — ( 65 ) — ( 65 ) Other comprehensive income — 31 31 2 33 Net transfers to XPO ( 2 ) — ( 2 ) — ( 2 ) Balance as of June 30, 2020 $ 2,621 $ ( 110 ) $ 2,511 $ 130 $ 2,641 (In millions) XPO Investment Accumulated Other Comprehensive Income (Loss) Equity Before Noncontrolling Interests Non-controlling Interests Total Equity Balance as of December 31, 2019 $ 2,633 $ ( 66 ) $ 2,567 $ 130 $ 2,697 Net income (loss) ( 77 ) — ( 77 ) 2 ( 75 ) Other comprehensive loss — ( 44 ) ( 44 ) ( 2 ) ( 46 ) Net transfers from XPO 65 — 65 — 65 Balance as of June 30, 2020 $ 2,621 $ ( 110 ) $ 2,511 $ 130 $ 2,641 See accompanying notes to condensed combined financial statements. 6 GXO Logistics, Inc. Notes to Condensed Combined Financial Statements (Unaudited) 1. Organization GXO Logistics, Inc. (“GXO”, the “Company” or “we”) is the largest pure-play contract logistics provider in the world and a foremost innovator in the logistics industry in North America and Europe. We provide high-value-add warehousing and distribution, order fulfillment and other supply chain services differentiated by our ability to deliver technology-enabled, customized solutions. In addition, we are a major provider of reverse logistics, which is also called returns management. We serve a broad range of customers in the e-commerce and retail, food and beverage, consumer packaged goods, aerospace, consumer technology, manufacturing and other industries. We present our operations in the Condensed Combined Financial Statements as one reportable segment. On August 2, 2021, XPO Logistics, Inc. (together with its subsidiaries, “XPO”) completed the previously announced spin-off of GXO in a transaction intended to be tax free for U.S. federal income tax purposes, which was accomplished by the distribution of 100% of the outstanding common stock of GXO to XPO stockholders as of the close of business on July 23, 2021, the record date for the distribution. XPO stockholders received one share of GXO common stock for every share of XPO common stock held at the close of business on the record date. GXO is now a standalone publicly traded company, and, on August 2, 2021, regular-way trading of the common stock commenced on the New York Stock Exchange (the “NYSE”) under the ticker symbol “GXO.” The spin-off was completed pursuant to the Separation and Distribution Agreement and various other agreements that govern aspects of our relationship with XPO, including, but not limited to a Tax Matters Agreement (“TMA”), an Employee Matters Agreement (“EMA”), a Transition Services Agreement (“TSA”) and an Intellectual Property License Agreement (“IPLA”). See Note 10—Subsequent Events for additional details. 2. Basis of Presentation The Condensed Combined Financial Statements of GXO were prepared on a standalone basis and have been derived from the consolidated financial statements and accounting records of XPO. These financial statements reflect the combined historical results of operations, financial position and cash flows of GXO in accordance with U.S. generally accepted accounting principles (“GAAP”). Historically, separate financial statements have not been prepared for the Company and it has not operated as a standalone business separate from XPO. The combined financial statements include certain assets and liabilities that have historically been held by XPO or by other XPO subsidiaries but are specifically identifiable or otherwise attributable to the Company. All significant intercompany transactions between XPO and the Company have been included as components of XPO investment in the combined financial statements, as they are to be considered effectively settled upon effectiveness of the spin-off. The Condensed Combined Financial Statements are presented as if the GXO businesses had been combined for all periods presented. The assets and liabilities in the Condensed Combined Financial Statements have been reflected on a historical cost basis, as immediately prior to the spin-off all of the assets and liabilities presented are wholly owned by XPO and are being transferred to GXO at a carry-over basis. The Condensed Combined Balance Sheets include certain assets and liabilities directly attributable to GXO, and the Condensed Combined Statements of Operations include allocations of XPO costs and expenses, as described below. XPO’s corporate function (“Corporate”) incurs 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. For purposes of the Condensed Combined Statements of Operations, an allocation of these expenses is included to burden all business units comprising XPO’s historical operations, including GXO. The charges reflected have either been specifically identified or allocated using drivers including proportional adjusted earnings before interest, taxes, depreciation and amortization, which includes adjustments for 7 transaction and integration costs, as well as restructuring costs and other adjustments, or headcount. The majority of these allocated costs are recorded in Sales, general and administrative expense (“SG&A”) and Depreciation and amortization expense in the Condensed Combined Statements of Operations. We believe the assumptions regarding allocations of XPO corporate expenses are reasonable. Nevertheless, the Condensed Combined Financial Statements may not reflect the combined results of operations, financial position and cash flows had the Company been a standalone entity during the periods presented. XPO investment represents XPO’s historical investment in GXO and includes the net effects of transactions with and allocations from XPO as well as GXO’s accumulated earnings. Certain transactions between GXO and XPO, including XPO’s non-GXO subsidiaries, have been included in these Condensed Combined Financial Statements, and are considered to be effectively settled at the time the transaction is recorded. The total net effect of the cash settlement of these transactions is reflected in the Condensed Combined Statements of Cash Flows as a financing activity and in the Condensed Combined Balance Sheets as XPO investment. The components of the net transfers to and from XPO include certain costs allocated from Corporate functions, income tax expense, certain cash receipts and payments made on behalf of GXO and general financing activities. Principles of Combination The Condensed Combined Financial Statements include the accounts and business activities distributed across the legal entities of GXO. Significant intercompany balances and transactions among the operations of the GXO legal entities have been eliminated in the Condensed Combined Financial Statements. All significant related party transactions between GXO and XPO have been included in these Condensed Combined Financial Statements as components of XPO investment. The Condensed Combined Financial Statements reflect all adjustments that are of a normal recurring nature and are necessary for a fair presentation of financial condition, operating results and cash flows for the interim periods presented. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. Significant Accounting Policies Trade Receivables Securitization and Factoring Programs We sell certain of our trade accounts receivable on a non-recourse basis to third-party financial institutions under factoring agreements. We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Combined Statements of Cash Flows. We also sell certain European trade accounts receivable under a securitization program described below. We use trade receivables securitization and factoring programs to help manage our cash flows and offset the impact of extended payment terms for some of our customers. XPO Logistics Europe SAS (“XPO Logistics Europe”), one of our wholly-owned subsidiaries, participates in a trade receivables securitization program co-arranged by three European banks (the “Purchasers”). Under the program, a wholly-owned bankruptcy-remote special purpose entity of XPO Logistics Europe sells trade receivables that originate with wholly-owned subsidiaries of XPO Logistics Europe to unaffiliated entities managed by the Purchasers. The special purpose entity is a variable interest entity and has been presented within these combined financial statements based on our control of the entity’s activities. We account for transfers under our securitization and factoring arrangements as sales because we sell full title and ownership in the underlying receivables and control of the receivables is considered transferred. For these transfers, the receivables are removed from our Combined Balance Sheets at the date of transfer. In the securitization and factoring arrangements, our continuing involvement is limited to servicing the receivables. The fair value of any servicing assets and liabilities is immaterial. In addition to selling trade receivables which originate with GXO, the special purpose entity also purchases trade receivables from XPO and sells assets to the Purchasers. The trade receivables which have been purchased from XPO have been reflected within Other current assets in the Condensed Combined Balance Sheets, and the related cash flows have been reflected within Purchase and sale of affiliate trade receivables, net, within investing activities 8 in the Condensed Combined Statements of Cash Flows. See Note 6—Debt for additional information related to our receivables securitization secured borrowing program and these borrowings. Information related to the trade receivables sold was as follows: Three Months Ended June 30, Six Months Ended June 30, (In millions) 2021 2020 2021 2020 Securitization programs Receivables sold in period $ 474 $ 317 $ 902 $ 636 Cash consideration 474 317 902 636 Factoring programs Receivables sold in period 100 176 200 422 Cash consideration 100 176 200 421 Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The levels of inputs used to measure fair value are: • Level 1—Quoted prices for identical instruments in active markets; • Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and • Level 3—Valuations based on inputs that are unobservable, generally utilizing pricing models or other valuation techniques that reflect management’s judgment and estimates. We base our fair value estimates on market assumptions and available information. The carrying values of cash and cash equivalents, accounts receivable, financial assets purchased from XPO, accounts payable, accrued expenses and current maturities of long-term debt approximated their fair values as of June 30, 2021 and December 31, 2020 due to their short-term nature and/or being receivable or payable on demand. The Level 1 cash equivalents include money market funds valued using quoted prices in active markets. The fair value of cash equivalents approximates its carrying value and amounted to $ 49 million and $ 54 million as of June 30, 2021 and December 31, 2020, respectively. The cash equivalents are classified as Level 1 within the fair value hierarchy. Leases We determine if an arrangement is a lease at inception. For leases with terms greater than 12 months, we recognize operating lease right-of-use assets and liabilities at the lease commencement date based on the estimated present value of the lease payments over the lease term. For most of our leases, the implicit rate cannot be readily determined and, as a result, we use the incremental borrowing rates of XPO at commencement date to determine the present value of future lease payments. We include options to extend or terminate a lease in the lease term when we are reasonably certain to exercise such options. We exclude variable lease payments (such as payments based on an index or reimbursements of lessor costs) from our initial measurement of the lease liability. We account for lease and non-lease components within a contract as a single lease component for our real estate leases. Lease expense for our operating leases is recognized on a straight-line basis over the lease term, with the exception of variable lease costs, which is expensed as incurred. For the three and six months ended June 30, 2021, operating 9 lease cost was $ 201 million and $ 403 million, respectively. For the three and six months ended June 30, 2020, operating lease cost was $ 154 million and $ 311 million, respectively. For finance leases, amortization of the right-of-use asset is recognized in Depreciation and amortization expense on a straight-line basis over the lease term, and interest expense is accreted on the lease liability using the effective interest method. Adoption of New Accounting Standards In December 2019, the Financial Accounting Standard Board (“FASB”) issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to enhance consistency and comparability among reporting entities. We adopted this standard on January 1, 2021 on a prospective basis. The adoption did not have a material effect on our Condensed Combined Financial Statements. Accounting Pronouncements Issued but Not Yet Adopted In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The amendments are elective and are effective upon issuance through December 31, 2022. We are currently evaluating the impact of the new guidance. 3. Acquisitions European Acquisition In January 2021, we acquired the majority of Kuehne + Nagel’s contract logistics operations in the United Kingdom, which generated annual revenues of approximately £ 450 million ($ 585 million) in 2020. The operations provide a range of logistics services, including inbound and outbound distribution, reverse logistics management and inventory management. We have recorded preliminary estimates for the fair value of acquired assets and liabilities assumed, including approximately $ 300 million of operating lease assets and operating lease liabilities. Pro forma results of operations for this acquisition have not been presented as it is not material to the condensed combined results of operations. XPO Logistics Europe Purchase Our historical results reflect a noncontrolling interest in XPO Logistics Europe, a business we acquired majority ownership of in 2015. In the second quarter of 2021, we completed the buy-out and squeeze-out for the remaining 3 % of XPO Logistics Europe that we did not already own at a cost of € 108 million ($ 128 million) and transferred € 34 million ($ 40 million) to XPO. Following the buy-out and squeeze-out, we own all of the outstanding shares of XPO Logistics Europe. 10 4. Revenue Recognition Disaggregation of Revenues We disaggregate our revenue by geographic area. Our revenue disaggregated by geographical area, based on sales office location, was as follows: Three Months Ended June 30, Six Months Ended June 30, (In millions) 2021 2020 2021 2020 Revenue United States $ 551 $ 509 $ 1,135 $ 1,045 United Kingdom 615 338 1,167 667 France 190 142 370 292 Europe (excluding France and United Kingdom) 482 383 947 769 Other 44 33 85 72 Total $ 1,882 $ 1,405 $ 3,704 $ 2,845 Our revenue can also be disaggregated by various verticals, reflecting our customers’ principal industry sector. Our revenue disaggregated by industry sector was as follows: Three Months Ended June 30, Six Months Ended June 30, (In millions) 2021 2020 2021 2020 Revenue E-commerce, omnichannel and consumer technology $ 947 $ 696 $ 1,814 $ 1,379 Food and beverage 252 194 574 403 Consumer packaged goods 224 161 451 340 Other 459 354 865 723 Total $ 1,882 $ 1,405 $ 3,704 $ 2,845 Contract Assets and Liabilities Contract assets include costs we have incurred and capitalized in conjunction with customer contracts, which are primarily amortized to Direct operating expense on our Condensed Combined Statements of Operations over the contract term. As of June 30, 2021 and December 31, 2020, the Company had contract assets of $ 140 million and $ 66 million, respectively, recorded within Other long-term assets on our Condensed Combined Balance Sheets. Contract assets as of June 30, 2021 primarily increased due to capital investments associated with new contracts. Contract liabilities include advance payments and billings in excess of revenue recognized. The activity for our contract liabilities, which are recorded within Other current liabilities and Other long-term liabilities on our Condensed Combined Balance Sheets, was as follows: (In millions) Balance as of December 31, 2020 $ 97 Revenue recognized ( 76 ) Unearned revenue (1) 131 Foreign exchange and other ( 3 ) Balance as of June 30, 2021 $ 149 (1) Includes $ 82 million related to the Kuehne + Nagel acquisition. 11 Remaining Performance Obligations Remaining performance obligations relate to firm customer contracts for which services have not been performed and future revenue recognition is expected. As permitted in determining the remaining performance obligation, we omit obligations that have original expected durations of one year or less or contain variable consideration. On June 30, 2021, the fixed consideration component of our remaining performance obligation was approximately $ 2.1 billion, and we expect to recognize approximately 66 % of that amount over the next three years and the remainder thereafter. We estimate remaining performance obligations at a point in time and actual amounts may differ from these estimates due to changes in foreign currency exchange rates and contract revisions or terminations. 5. Restructuring Charges We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure. These actions generally include severance and facility-related costs, including impairment of operating lease assets, and are intended to improve our efficiency and profitability. Our restructuring related activity was as follows: (In millions) Balance as of December 31, 2020 $ 20 Charges incurred (1) 3 Payments ( 9 ) Foreign exchange and other ( 8 ) Balance as of June 30, 2021 $ 6 (1) Charges incurred are net of adjustments to previously recognized liabilities. We expect the remaining restructuring liability at June 30, 2021, which primarily relates to severance, to be substantially paid within twelve months. 6. Debt The following table summarizes the carrying value of our debt: (In millions) June 30, 2021 December 31, 2020 Borrowings related to trade securitization program $ — $ 26 Finance leases and other 181 161 Related-party debt 437 486 Total debt 618 673 Short-term borrowings and current finance lease liabilities 36 58 Long-term debt $ 582 $ 615 The fair value of our debt and classification in the fair value hierarchy was as follows: (In millions) Fair Value Level 1 Level 2 Level 3 June 30, 2021 $ 618 $ 2 $ 179 $ 437 December 31, 2020 673 2 185 486 We valued Level 1 debt using quoted prices in active markets. We valued Level 2 debt using bid evaluation pricing models or quoted prices of securities with similar characteristics. We valued Level 3 debt using non-observable inputs. 12 Borrowings related to Securitization Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables. These borrowings are owed to the program’s Purchasers and are included in short-term debt until they are repaid in the following month’s settlement. The securitization program contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio. For additional information on the securitization program, see Note 2—Basis of Presentation. Related-Party Debt Loan Agreement with North American Subsidiary In 2015, XPO entered into a loan agreement with a North American subsidiary of GXO, under which XPO granted the subsidiary an unsecured loan bearing interest at a rate of 5.625 % with a principal amount not exceeding $ 391 million and maturing in June 2024. As of June 30, 2021 and December 31, 2020, the Company had an outstanding loan payable to XPO of $ 162 million and $ 186 million, respectively. As of June 30, 2021, the notes were guaranteed by an XPO affiliate. Loan Agreements with European Subsidiaries Additionally, XPO entered into several loan agreements with European subsidiaries of GXO, under which XPO granted the subsidiaries unsecured loans with principal amounts of: • € 20 million (approximately $ 23 million as of June 30, 2021) entered into in 2013, bearing interest at a variable rate of twelve-month Euribor plus 1 % and maturing in October 2026; and • £ 82 million (approximately $ 113 million as of June 30, 2021) entered into in 2016, bearing interest at a variable rate of twelve-month LIBOR plus 1 % and maturing in October 2026. The outstanding amounts related to these loans payable to XPO was $ 136 million and $ 135 million as of June 30, 2021 and December 31, 2020, respectively. Additionally, in 2015, XPO entered into a loan agreement under which it granted XPO Logistics Europe a loan in the amount of € 335 million, bearing interest at a fixed rate of 5.625 % and maturing in June 2024. The loan payable was $ 139 million and $ 165 million at June 30, 2021 and December 31, 2020, respectively. In July 2021, we settled our related-party debt obligations with XPO. Revolving Credit Facility In June 2021, in preparation for the spin-off, we entered into a five-year , unsecured, multi-currency revolving credit facility (the “Revolving Credit Facility”). Initially, the Revolving Credit Facility provides commitments of up to $ 800 million, of which $ 60 million will be available for the issuance of letters of credit. Loans under the Revolving Credit Facility will bear interest at a fluctuating rate equal to: (i) with respect to borrowings in dollars, at GXO’s option, the alternate base rate or the reserve-adjusted LIBOR, (ii) with respect to borrowings in Canadian dollars, the reserve-adjusted Canadian Dollar Offered Rate and (iii) with respect to borrowings in Euros, the reserve-adjusted Euro Interbank Offered Rate, in each case, plus an applicable margin calculated based on GXO’s credit ratings. The availability of the Revolving Credit Facility was subject to the spin-off occurring. The covenants in the Revolving Credit Facility, which are customary for financings of this type, limit our ability to incur indebtedness and grant liens, among other restrictions. In addition, the Revolving Credit Facility requires us to maintain a consolidated leverage ratio below a specified maximum. There was no amount outstanding under the Revolving Credit Facility as of June 30, 2021. 13 7. Earnings per Share On August 2, 2021, the date of the spin-off, 114,626,250 shares of the common stock of GXO were distributed to XPO shareholders of record as of the record date. This share amount is utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the spin-off. For the three and six months ended June 30, 2021 and 2020, these shares are treated as issued and outstanding for purposes of calculating historical earnings per share. For periods prior to the spin-off, it is assumed that there are no dilutive equity instruments as there were no equity awards of GXO outstanding prior to the spin-off. 8. Commitments and Contingencies We are involved, and will continue to be involved, in numerous proceedings arising out of the conduct of our business. These proceedings may include personal injury claims arising from the transportation and handling of goods, contractual disputes and employment-related claims, including alleged violations of wage and hour laws. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We review and adjust accruals for loss contingencies quarterly and as additional information becomes available. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount accrued, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred. If there is a reasonable possibility that a loss, or additional loss, may have been incurred, we disclose the estimate of the possible loss or range of loss if it is material and an estimate can be made, or disclose that such an estimate cannot be made. The determination as to whether a loss can reasonably be considered to be possible or probable is based on our assessment, together with legal counsel, regarding the ultimate outcome of the matter. We believe that we have adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not believe that the ultimate resolution of any matters to which we are presently a party will have a material adverse effect on our results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our financial condition, results of operations or cash flows. Legal costs incurred related to these matters are expensed as incurred. XPO carries liability and excess umbrella insurance policies that are deemed sufficient to cover potential legal claims arising in the normal course of conducting our operations. In the event we are required to satisfy a legal claim outside the scope of the coverage provided by insurance, our financial condition, results of operations or cash flows could be negatively impacted. Effective August 2, 2021, GXO carries insurance policies that are deemed sufficient to cover potential legal claims arising in the normal course of conducting our operations as a logistics company. See Note 10—Subsequent Events for additional details. 9. Related Party Transactions between the Company and XPO, and other non-GXO subsidiaries of XPO, are deemed related-party transactions. Related-party transactions are comprised of the following: (i) those that have been effectively settled or are expected to be settled for cash, and (ii) those which have historically not been settled and which have been or are expected to be forgiven by either party. For those that have been or are expected to be cash settled, we have recorded related-party receivables (assets) or payables (liabilities) in the Condensed Combined Balance Sheets as of June 30, 2021 and December 31, 2020. For those that have been or are expected to be forgiven, the amounts have been recorded as an adjustment of XPO Investment in the Condensed Combined Balance Sheets as of June 30, 2021 and December 31, 2020. Allocation of General Corporate Expenses The Combined Statements of Operations include expenses for certain centralized functions and other programs provided and/or administered by XPO that are charged directly to the Company. In addition, for purposes of preparing these Combined Financial Statements, a portion of XPO’s total corporate expenses have been allocated to 14 the Company. See Note 2—Basis of Presentation for a discussion of the methodology used to allocate such costs for purposes of preparing these combined financial statements. Costs of $ 88 million and $ 157 million for the three and six months ended June 30, 2021, respectively, and costs of $ 67 million and $ 126 million for the three and six months ended June 30, 2020, respectively, have been reflected in SG&A in our Condensed Combined Statements of Operations for our allocated share of XPO’s corporate overhead. These amounts may not reflect the costs GXO would have incurred had the Company been a standalone entity during the periods presented. Transactions with XPO and its non-GXO Subsidiaries Revenue and costs generated from related parties for each of the three and six months ended June 30 were as follows: Three Months Ended June 30, Six Months Ended June 30, (In millions) 2021 2020 2021 2020 Revenue $ 3 $ 3 $ 7 $ 7 Costs 32 25 64 53 Current assets include trade receivables purchased from XPO in connection with our trade receivables securitization program of $ 93 million and $ 105 million as of June 30, 2021 and December 31, 2020, respectively. These receivables were originated by XPO and are classified as financial assets within other current assets on the Condensed Combined Balance Sheets. Balances with XPO and its non-GXO Subsidiaries Assets and liabilities on the Condensed Combined Balance Sheets include the following related-party amounts that are expected to be cash settled as of June 30, 2021 and December 31, 2020: (In millions) June 30, 2021 December 31, 2020 Amounts due from XPO and its affiliates Trade receivables (1) $ 19 $ 9 Other current assets (2) 2 2 Other long-term assets (3) 14 53 Amounts due to XPO and its affiliates Trade payables (4) 36 20 Other current liabilities (5) 4 11 Accrued expenses (6) 2 2 Loans payable (7) 437 486 (1) Primarily represents trade receivables generated from revenue with XPO. (2) Primarily relates to interest receivable from loans receivable from XPO. (3) Represents loans receivable from XPO. (4) Represents trade payables due to XPO. (5) Primarily relates to facility expense and taxes payable due to XPO. (6) Represents accrued interest on loans due to XPO. (7) Represents loans due to XPO. See Note 6—Debt for further information. 10. Subsequent Events Notes offering In preparation for the spin-off, in July 2021, we settled our related party debt obligations with XPO, and 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”, and together with the 2026 Notes, the “Notes”). 15 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 mature 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 mature on July 15, 2031. The net proceeds from the sale of the Notes were used to fund a cash payment to XPO, to provide working capital and/or to pay fees, costs and expenses incurred in connection with the spin-off and related transactions. Securitization amendment In July 2021, we amended our existing trade receivables securitization program. The existing € 400 million program is now comprised of two separate € 200 million programs, one of which will continue to be available to us and one of which will be part of XPO following the spin-off. The new program expires in 2024. UK pension transfer In July 2021, responsibility for the assets and liabilities for the United Kingdom defined benefit pension plan was transferred from XPO to GXO. The plan will continue as a frozen plan that does not allow for new plan participants or additional benefit accruals. We provide the Trustees of the UK Defined Benefit pension plan a limited guarantee that expires no later than 2038. Changes to legal entity structure and tax matters In July and August 2021, we amended certain legal entity structures and transferred assets pursuant to a legal entity restructuring. As a result of these changes, we anticipate incurring one-time cash payments and non-cash tax benefits in the second half of 2021. Distribution from XPO On August 2, 2021, XPO completed the previously announced spin-off of GXO in a transaction intended to be tax free for U.S. federal income tax purposes, which was accomplished by the distribution of 100% of the outstanding common stock of GXO to XPO stockholders as of the close of business on July 23, 2021, the record date for the distribution. XPO stockholders received one share of GXO common stock for every share of XPO common stock held at the close of business on the record date. GXO is now a standalone publicly traded company, and, on August 2, 2021, regular-way trading of GXO’s common stock commenced on the NYSE under the ticker symbol “GXO.” The spin-off was completed pursuant to the Separation and Distribution Agreement and various other agreements that govern aspects of our relationship with XPO, including, but not limited to a TSA, a TMA, an EMA and IPLA. The Separation and Distribution Agreement contains provisions that, among other things, relate to (i) assets, liabilities and contracts to be transferred, assumed and assigned to each of GXO and XPO as part of the spin-off, (ii) cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of GXO business with GXO and financial responsibility for the obligations and liabilities of XPO’s remaining business with XPO, (iii) the allocation among GXO and XPO of rights and obligations under existing insurance policies with respect to occurrences prior to completion of the spin-off, and (iv) procedures governing the resolution of disputes, controversies or claims that may arise between GXO and XPO related to the separation or distribution. Under the TSA, (i) XPO will provide GXO and certain of its affiliates, on an interim, transitional basis, various services and (ii) GXO will provide XPO and certain of its affiliates, on an interim, transitional basis, various services. The services to be provided will include, among others, treasury administration, employee benefits administration, information technology services, regulatory services, general administrative services and other support services. The services generally commenced on the date of the spin-off and will terminate no later than twelve months following the distribution date. The TMA governs XPO’s and GXO’s rights, responsibilities and obligations with respect to tax matters; including responsibility for taxes, entitlement to refunds, allocation of tax attributes, preparation of tax returns, control of tax, contests and other tax matters. GXO is generally responsible for federal, state and foreign income taxes (i) imposed 16 on a separate return basis on GXO or any of its subsidiaries or (ii) imposed on a consolidated or combined return basis with respect to audit or other adjustments attributable to GXO or any of its subsidiaries, in each case, with respect to taxable periods, or portions thereof, that ended on or prior to the spin-off. The TMA provides special rules that allocate responsibility for tax liabilities arising from a failure of the spin-off transactions to qualify for tax-free treatment based on the reasons for such failure. The TMA also imposes restrictions on GXO during the two-year period following the spin-off that are intended to prevent the spin-off and certain related transactions from failing to qualify as transactions that are generally tax-free. The EMA allocates assets, liabilities and responsibilities relating to employee compensation and benefit plans and programs and other related matters in connection with the spin-off. The IPLA will provide the parties with reciprocal, non-exclusive licenses under certain intellectual property rights transferred to GXO and certain intellectual property rights retained by XPO in order to provide the parties freedom to operate their respective businesses. 17