GXO Logistics, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS GXO Logistics, Inc. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (Dollars in millions, shares in thousands, except per share amounts) 2022 2021 2022 2021 Revenue $ 2,287 $ 1,974 $ 6,526 $ 5,678 Direct operating expense 1,885 1,651 5,408 4,725 Selling, general and administrative expense 227 171 637 519 Depreciation and amortization expense 89 85 242 259 Transaction and integration costs 14 29 57 82 Restructuring costs and other — 2 14 5 Operating income 72 36 168 88 Other income, net 17 11 56 11 Interest expense, net ( 6 ) ( 5 ) ( 19 ) ( 16 ) Income before income taxes 83 42 205 83 Income tax (expense) benefit ( 19 ) 31 ( 51 ) 21 Net income 64 73 154 104 Net income attributable to noncontrolling interest ( 1 ) ( 1 ) ( 3 ) ( 7 ) Net income attributable to GXO $ 63 $ 72 $ 151 $ 97 Earnings per share data Basic $ 0.53 $ 0.63 $ 1.30 $ 0.84 Diluted $ 0.53 $ 0.62 $ 1.29 $ 0.84 Weighted-average common shares outstanding Basic 118,621 114,629 116,508 114,627 Diluted 119,065 115,529 117,107 115,527 See accompanying notes to Condensed Consolidated Financial Statements. 2 GXO Logistics, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 Net income $ 64 $ 73 $ 154 $ 104 Other comprehensive loss, net of tax Foreign currency translation loss, net of tax (expense) benefit of $( 22 ), $( 4 ), $( 32 ) and $( 2 ), respectively $ ( 43 ) $ ( 12 ) $ ( 163 ) $ ( 30 ) Unrealized gain (loss) on cash flow hedges, net of tax (expense) benefit of $( 2 ), $ — , $( 2 ) and $( 1 ), respectively 9 — 9 ( 1 ) Other comprehensive loss, net of tax $ ( 34 ) $ ( 12 ) $ ( 154 ) $ ( 31 ) Comprehensive income $ 30 $ 61 $ — $ 73 Less: Comprehensive income (loss) attributable to noncontrolling interest ( 1 ) 1 ( 1 ) 7 Comprehensive income attributable to GXO $ 31 $ 60 $ 1 $ 66 See accompanying notes to Condensed Consolidated Financial Statements. 3 GXO Logistics, Inc. Condensed Consolidated Balance Sheets (Unaudited) (Dollars in millions, shares in thousands, except per share amounts) September 30, 2022 December 31, 2021 ASSETS Current assets Cash and cash equivalents $ 434 $ 333 Accounts receivable, net of allowances of $ 9 and $ 13 , respectively 1,507 1,507 Other current assets 301 259 Total current assets 2,242 2,099 Long-term assets Property and equipment, net of $ 1,196 and $ 1,128 in accumulated depreciation, respectively 914 863 Operating lease assets 2,058 1,772 Goodwill 2,603 2,017 Intangible assets, net of $ 418 and $ 407 in accumulated amortization, respectively 576 257 Other long-term assets 413 263 Total long-term assets 6,564 5,172 Total assets $ 8,806 $ 7,271 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 568 $ 624 Accrued expenses 952 998 Short-term borrowings and obligations under finance leases 94 34 Current operating lease liabilities 499 453 Other current liabilities 162 220 Total current liabilities 2,275 2,329 Long-term liabilities Long-term debt and obligations under finance leases 1,789 927 Long-term operating lease liabilities 1,699 1,391 Other long-term liabilities 444 234 Total long-term liabilities 3,932 2,552 Commitments and contingencies (Note 12) Stockholders’ Equity Common Stock, $ 0.01 par value per share; 300,000 shares authorized, 118,629 and 114,659 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively 1 1 Preferred Stock, $ 0.01 par value per share; 10,000 shares authorized, 0 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively — — Additional paid-in capital 2,569 2,354 Retained earnings 277 126 Accumulated other comprehensive loss ( 278 ) ( 130 ) Total stockholders’ equity before noncontrolling interest 2,569 2,351 Noncontrolling interest 30 39 Total equity 2,599 2,390 Total liabilities and equity $ 8,806 $ 7,271 See accompanying notes to Condensed Consolidated Financial Statements. 4 GXO Logistics, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (In millions) 2022 2021 Cash flows from operating activities: Net income $ 154 $ 104 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization expense 242 259 Stock-based compensation expense 24 22 Deferred tax benefit — ( 47 ) Other ( 4 ) ( 11 ) Changes in operating assets and liabilities Accounts receivable ( 22 ) ( 118 ) Other assets ( 28 ) ( 129 ) Accounts payable ( 68 ) ( 8 ) Accrued expenses and other liabilities 18 179 Net cash provided by operating activities 316 251 Cash flows from investing activities: Capital expenditures ( 239 ) ( 180 ) Proceeds from sales of property and equipment 22 8 Acquisition of businesses, net of cash acquired ( 874 ) 34 Proceeds from cross-currency swap agreements 26 — Other 9 ( 2 ) Net cash used in investing activities ( 1,056 ) ( 140 ) Cash flows from financing activities: Proceeds from issuance of debt, net 898 794 Repayment of debt related to securitization transactions and other — ( 21 ) Repayment of debt and finance leases ( 23 ) ( 64 ) Purchase of noncontrolling interest — ( 128 ) Net transfers to XPO Logistics, Inc. — ( 774 ) Taxes paid related to net share settlement of equity awards ( 12 ) — Other — 28 Net cash provided by (used in) financing activities 863 ( 165 ) Effect of exchange rates on cash and cash equivalents ( 22 ) 1 Net increase (decrease) in cash and cash equivalents 101 ( 53 ) Cash and cash equivalents, beginning of period 333 328 Cash and cash equivalents, end of period $ 434 $ 275 Supplemental disclosure of non-cash investing and financing activities: Common stock issued for acquisition $ 203 $ — See accompanying notes to Condensed Consolidated Financial Statements. 5 GXO Logistics, Inc. Condensed Consolidated Statements of Changes in Equity (Unaudited) Common Stock XPO Logistics, Inc. Investment Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Equity Before Noncontrolling Interest Noncontrolling Interest Total Equity (Shares in thousands, dollars in millions) Shares Amount Balance as of June 30, 2022 118,610 $ 1 $ — $ 2,561 $ 214 $ ( 246 ) $ 2,530 $ 31 $ 2,561 Net income — — — — 63 — 63 1 64 Other comprehensive loss — — — — — ( 32 ) ( 32 ) ( 2 ) ( 34 ) Stock-based compensation — — — 8 — — 8 — 8 Vesting of stock compensation awards 19 — — — — — — — — Balance as of September 30, 2022 118,629 $ 1 $ — $ 2,569 $ 277 $ ( 278 ) $ 2,569 $ 30 $ 2,599 Common Stock XPO Logistics, Inc. Investment Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Equity Before Noncontrolling Interest Noncontrolling Interest Total Equity (Shares in thousands, dollars in millions) Shares Amount Balance as of December 31, 2021 114,659 $ 1 $ — $ 2,354 $ 126 $ ( 130 ) $ 2,351 $ 39 $ 2,390 Net income — — — — 151 — 151 3 154 Other comprehensive loss — — — — — ( 150 ) ( 150 ) ( 4 ) ( 154 ) Stock-based compensation — — — 24 — — 24 — 24 Vesting of stock compensation awards 221 — — — — — — — — Tax withholding on vesting of stock compensation awards — — — ( 12 ) — — ( 12 ) — ( 12 ) Common stock issued for acquisition 3,749 — — 203 — — 203 — 203 Deconsolidation of variable interest entity — — — — — 2 2 ( 5 ) ( 3 ) Dividends — — — — — — — ( 3 ) ( 3 ) Balance as of September 30, 2022 118,629 $ 1 $ — $ 2,569 $ 277 $ ( 278 ) $ 2,569 $ 30 $ 2,599 6 GXO Logistics, Inc. Condensed Consolidated Statements of Changes in Equity (Unaudited) Common Stock XPO Logistics, Inc. Investment Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Equity Before Noncontrolling Interest Noncontrolling Interest Total Equity (Shares in thousands, dollars in millions) Shares Amount Balance as of June 30, 2021 — $ — $ 2,835 $ — $ — $ 39 $ 2,874 $ 40 $ 2,914 Net income — — 2 — 70 — 72 1 73 Other comprehensive loss — — — — — ( 12 ) ( 12 ) — ( 12 ) Stock-based compensation — — — 4 — — 4 — 4 Vesting of stock compensation awards 10 — — — — — — — — Net transfers (to) from XPO, including separation adjustments — — ( 492 ) — — ( 150 ) ( 642 ) — ( 642 ) Issuance of common stock and reclassification of XPO investment 114,626 1 ( 2,345 ) 2,344 — — — — — Balance as of September 30, 2021 114,636 $ 1 $ — $ 2,348 $ 70 $ ( 123 ) $ 2,296 $ 41 $ 2,337 (Shares in thousands, dollars in millions) Common Stock XPO Logistics, Inc. Investment Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Equity Before Noncontrolling Interest Noncontrolling Interest Total Equity Shares Amount Balance as of December 31, 2020 — $ — $ 2,765 $ — $ — $ 58 $ 2,823 $ 125 $ 2,948 Net income — — 27 — 70 — 97 7 104 Other comprehensive loss — — — — — ( 31 ) ( 31 ) — ( 31 ) Stock-based compensation — — — 4 — — 4 — 4 Vesting of stock compensation awards 10 — — — — — — — — Purchase of noncontrolling interest — — — — — — — ( 128 ) ( 128 ) Net transfers (to) from XPO, including separation adjustments — — ( 447 ) — — ( 150 ) ( 597 ) 40 ( 557 ) Issuance of common stock and reclassification of XPO investment 114,626 1 ( 2,345 ) 2,344 — — — — — Other — — — — — — — ( 3 ) ( 3 ) Balance as of September 30, 2021 114,636 $ 1 $ — $ 2,348 $ 70 $ ( 123 ) $ 2,296 $ 41 $ 2,337 See accompanying notes to Condensed Consolidated Financial Statements. 7 GXO Logistics, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements of GXO Logistics, Inc. (“GXO” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. On August 2, 2021, the Company 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 under 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. The Company presents its operations as one reportable segment. 8 Recently Adopted Accounting Pronouncements In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. On January 1, 2022, the Company adopted the guidance. The adoption of this new standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements. Accounting Pronouncements 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. The Company intends to apply this guidance when modifications of contracts that include LIBOR occur, which is not expected to have a material impact on the Company’s Condensed Consolidated Financial Statements. 2. Revenue Recognition Revenue disaggregated by geographical area was as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 United Kingdom $ 890 $ 680 $ 2,371 $ 1,847 United States 709 599 2,075 1,734 France 171 181 530 551 Netherlands 175 159 508 464 Spain 117 117 360 358 Other 225 238 682 724 Total $ 2,287 $ 1,974 $ 6,526 $ 5,678 The Company’s revenue can also be disaggregated by various verticals, reflecting our customers’ principal industry. Revenue disaggregated by industries was as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 Omnichannel retail $ 919 $ 769 $ 2,618 $ 2,240 Food and beverage 335 361 1,009 972 Technology and consumer electronics 338 270 963 749 Industrial and manufacturing 275 244 807 743 Consumer packaged goods 227 202 663 572 Other 193 128 466 402 Total $ 2,287 $ 1,974 $ 6,526 $ 5,678 9 Contract Balances (In millions) September 30, 2022 December 31, 2021 Contract assets (1) $ 177 $ 147 Contract liabilities (2) 273 220 (1) Contract assets are included within Other current assets and Other long-term assets in the Condensed Consolidated Balance Sheets. (2) Contract liabilities are included within Other current liabilities and Other long-term liabilities in the Condensed Consolidated Balance Sheets. Revenue recognized included the following: Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 Amounts included in the beginning of year contract liability balance $ 12 $ 3 $ 83 $ 68 Remaining Performance Obligations As of September 30, 2022, the fixed consideration component of the Company’s remaining performance obligations was approximately $ 3.0 billion, and the Company expects to recognize approximately 75 % of that amount over the next three years and the remainder thereafter. The Company estimates 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. 3. Acquisitions 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. The Company incurred acquisition and integration costs related to the Clipper Acquisition of $ 7 million and $ 41 million for the three and nine months ended September 30, 2022, respectively. These costs are included in Transaction and integration costs in the Condensed Consolidated Statements of Operations. 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. The Company accounted for the Clipper Acquisition as a business combination using the acquisition method of accounting. The fair value of assets acquired and liabilities assumed was based on management’s estimate of the fair values of the assets acquired and liabilities assumed using valuation techniques including income, cost and market approaches. 10 The following table summarizes the estimated fair value of identifiable assets acquired and liabilities assumed at the acquisition date: (In millions) ASSETS Current assets Cash and cash equivalents $ 26 Accounts receivable 146 Other current assets 63 Total current assets 235 Long-term assets Property and equipment 83 Operating lease assets 214 Intangible assets (1) 392 Other long-term assets 20 Total long-term assets 709 Total assets $ 944 LIABILITIES Current liabilities Accounts payable $ 87 Accrued expenses 104 Short-term borrowings and obligations under finance leases 54 Current operating lease liabilities 37 Other current liabilities 45 Total current liabilities 327 Long-term liabilities Long-term debt and obligations under finance leases 10 Long-term operating lease liabilities 170 Other long-term liabilities 118 Total long-term liabilities 298 Total liabilities $ 625 Net assets purchased $ 319 Cash paid $ 900 Common stock issued (2) 203 Purchase price paid $ 1,103 Goodwill recorded (3) $ 784 (1) The Company acquired $ 392 million of intangible assets comprised of customer relationships and trade names, with weighted-average useful lives of 15 years. (2) Represents the fair value of the Company’s common stock on the acquisition date. (3) Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the acquisition date. Goodwill acquired was recorded in the European reporting unit and was primarily attributed to anticipated synergies. The fair values of the assets acquired and liabilities assumed are considered preliminary and subject to adjustment as additional information is obtained and reviewed. The final allocation of the purchase price may differ from the preliminary allocation based on completion of the valuation. The Company expects to finalize the purchase price allocation within the measurement period, which will not exceed one year from the acquisition date. The primary areas of the purchase price allocation that are not yet finalized relate to lease assets and liabilities, intangible assets and goodwill. 11 The following unaudited pro forma information presents the Company’s results of operations as if the Clipper Acquisition occurred on January 1, 2021. The pro forma results reflect the impact of incremental interest expense, net of hedging instruments, to finance the acquisition and amortization expenses on acquired intangible assets. Adjustments have also been made to remove transaction related costs. The unaudited pro forma information is not necessarily indicative of what the results of operations of the combined company would have been if the acquisition had been completed as of January 1, 2021. Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 Revenue $ 2,287 $ 2,253 $ 6,982 $ 6,489 Income before income taxes 83 42 236 80 Kuehne + Nagel Acquisition In January 2021, the Company acquired the majority of Kuehne + Nagel’s contract logistics operations in the U.K. Kuehne + Nagel’s operations provide a range of logistics services, including inbound and outbound distribution, reverse logistics management and inventory management. The Company recorded assets and liabilities at fair value. Operating and finance lease assets and liabilities, goodwill and intangible assets acquired were approximately $ 300 million, $ 16 million and $ 26 million, respectively. 4. Restructuring and Other Restructuring The Company engages in restructuring actions as part of its ongoing efforts to best use its resources and infrastructure. These actions generally include severance and facility-related costs and are intended to improve efficiency and profitability. The restructuring liability rollforward was as follows: (In millions) Balance as of December 31, 2021 $ 3 Charges incurred 6 Payments ( 7 ) Balance as of September 30, 2022 $ 2 The remaining restructuring liability at September 30, 2022 was primarily related to severance payments and is expected to be substantially paid within the next twelve months. Other In the first quarter of 2022, the Company deconsolidated a 50 % owned joint venture. The deconsolidation resulted in an $ 8 million charge recorded in the first quarter of 2022. 12 5. Leases The Company has operating and finance leases for real estate, warehouse equipment, trucks, trailers, containers and material handling equipment. The following amounts related to leases were recorded in the Condensed Consolidated Balance Sheets: (In millions) September 30, 2022 December 31, 2021 Operating leases: Operating lease assets $ 2,058 $ 1,772 Current operating lease liabilities $ 499 $ 453 Long-term operating lease liabilities 1,699 1,391 Total operating lease liabilities $ 2,198 $ 1,844 Finance leases: Property and equipment, net $ 123 $ 155 Short-term obligations under finance leases $ 35 $ 34 Long-term obligations under finance leases 98 133 Total finance lease liabilities $ 133 $ 167 The components of lease cost recorded in the Condensed Consolidated Statements of Operations were as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 Operating leases: Operating lease cost $ 187 $ 161 $ 527 $ 490 Short-term lease cost 24 20 69 57 Variable lease cost 31 18 73 55 Total operating lease cost $ 242 $ 199 $ 669 $ 602 Finance leases: Amortization of leased assets $ 5 $ 8 $ 23 $ 25 Interest expense on lease liabilities 1 2 4 4 Total finance lease cost $ 6 $ 10 $ 27 $ 29 Total operating and finance lease cost $ 248 $ 209 $ 696 $ 631 Supplemental cash flow information was as follows: Nine Months Ended September 30, (In millions) 2022 2021 Leased assets obtained in exchange for new operating lease liabilities, including $ 207 and $ 281 from an acquisition in 2022 and 2021, respectively $ 911 $ 792 Leased assets obtained in exchange for new finance lease liabilities, including $ 16 and $ 23 from an acquisition in 2022 and 2021, respectively 18 39 13 6. Goodwill The following table presents the changes in goodwill for the period: (In millions) Balance as of December 31, 2021 $ 2,017 Acquisition (1) 784 Foreign exchange translation ( 198 ) Balance as of September 30, 2022 $ 2,603 (1) Any change in the goodwill amounts resulting from foreign currency translations are presented as “Foreign exchange translation.” 7. Debt and Financing Arrangements The following table summarizes the carrying value of our debt: (In millions) Rate (1) September 30, 2022 December 31, 2021 1.65 % Unsecured notes due 2026 (2) 1.65 % $ 397 $ 397 2.65 % Unsecured notes due 2031 (3) 2.65 % 396 396 Two-Year Term Loan due 2024 4.76 % 165 — Three-Year Term Loan due 2025 (4) 4.76 % 234 — Five-Year Term Loan due 2027 (4) 4.89 % 499 — Finance leases and other Various 192 168 Total debt and obligations under finance leases $ 1,883 $ 961 Less: Short-term borrowings and obligations under finance leases 94 34 Total long-term debt and obligations under finance leases $ 1,789 $ 927 (1) Interest rate as of September 30, 2022. (2) Net of unamortized debt issuance costs and discount of $ 3 million as of September 30, 2022 and December 31, 2021. (3) Net of unamortized debt issuance costs and discount of $ 4 million as of September 30, 2022 and December 31, 2021. (4) Net of unamortized debt issuance costs of $ 1 million as of September 30, 2022. Five-Year Term Loan On May 25, 2022, the Company 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, the Company borrowed $ 500 million that will mature on May 26, 2027. The loan bears interest at a fluctuating rate per annum equal to, at the Company’s 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, the Company 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 the Company in U.S. dollars or British pounds sterling. On May 26, 2022, the Company 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 the Company’s option, the alternate base rate or the adjusted SOFR, plus an applicable margin based on the Company’s credit ratings. 14 Bridge Term Loan On February 28, 2022, the Company 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. Revolving Credit Facility In 2021, the Company 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 or December 31, 2021. Sales of Certain Receivables The Company sells certain of its trade accounts receivables on a non-recourse basis to third-party financial institutions under various factoring agreements. The Company also sold certain European trade accounts receivables under a securitization program. In the first quarter of 2022, the Company terminated its securitization program. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. The Company uses the sale of certain receivables to help manage its 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 The covenants in the Revolving Credit Facility, the Five-Year Term Loan and the Delayed Draw Term Loan, which are customary for financings of this type, limit the Company’s ability to incur indebtedness and grant liens, among other restrictions. In addition, the facilities require the Company to maintain a consolidated leverage ratio below a specified maximum. As of September 30, 2022, the Company was in compliance with the covenants contained in its debt and financing arrangements. 8. Fair Value Measurements and Financial Instruments 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; 15 • 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. Assets and liabilities The Company bases its fair value estimates on market assumptions and available information. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and current maturities of long-term debt approximated their fair values as of September 30, 2022 and December 31, 2021, due to their short-term nature. Debt The fair value of debt was as follows: September 30, 2022 December 31, 2021 (In millions) Level Fair Value Carrying Value Fair Value Carrying Value 1.65 % Unsecured notes due 2026 2 $ 329 $ 397 $ 391 $ 397 2.65 % Unsecured notes due 2031 2 284 396 394 396 Two-Year Term Loan due 2024 2 165 165 — — Three-Year Term Loan due 2025 2 235 234 — — Five-Year Term Loan due 2027 2 500 499 — — Financial Instruments The Company directly manages its exposure to risks arising from business operations and economic factors, including fluctuations in interest rates and foreign currencies. The Company uses derivative instruments to manage the volatility related to these exposures. The objective of these derivative instruments is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. These financial instruments are not used for trading or other speculative purposes. The Company does not expect to incur any losses as a result of counterparty default. Net Investment Hedges The Company uses fixed-to-fixed or variable-to-variable cross-currency swap agreements to hedge its net investments in foreign operations against future volatility in the exchange rates between the U.S. dollar and the associated foreign currencies. The Company designated these cross-currency swap agreements as qualifying hedging instruments and accounts for them as net investment hedges. In the first quarter of 2022, the Company extended certain fixed-to-fixed cross-currency swap agreements scheduled to mature between 2022 to 2027, with an aggregate notional amount of $ 322 million. In the second quarter of 2022, the Company extended a fixed-to-fixed cross-currency swap agreement scheduled to mature in 2026 to 2027, with an aggregate notional amount of $ 165 million. Additionally, in the second quarter of 2022, the Company entered into multiple cross-currency swap agreements with maturity dates ranging from 2023 to 2027, with an aggregate notional amount of $ 900 million, of which $ 250 million and $ 165 million were amended during the second and third quarters of 2022, respectively. In connection with the extensions and amendments, the Company received cash of $ 16 million and $ 28 million representing the fair value of the swap plus interest accrued through the date of termination for the three and nine months ended September 30, 2022, respectively. In November 2022, the Company amended certain fixed-to-fixed cross-currency swap agreements scheduled to mature in 2027 to 2026, with an 16 aggregate notional amount of $ 322 million, the amendments were not material to the Condensed Consolidated Financial Statements. Interest Rate Swap Agreements The Company uses interest rate swap agreements to hedge the variability of cash flows resulting from floating interest rate borrowings. The Company designated these interest rate swap agreements as qualifying hedging instruments and accounts for them as cash flow hedges. When an interest rate swap agreement qualifies for hedge accounting as a cash flow hedge, the changes in the fair value are recorded in equity as a component of Accumulated Other Comprehensive Income (“AOCI”) and are reclassified into Interest expense, net over the life of the underlying debt, as interest on the Company’s floating rate debt is accrued. In the second quarter of 2022, the Company entered into multiple interest rate swap agreements with an aggregate notional amount of $ 250 million. Foreign Currency Exchange Rate Risk The Company is exposed to certain risks relating to its ongoing business operations including foreign currency exchange rate risk. The Company uses foreign currency option contracts to mitigate the risk of a reduction in the value of earnings from its operations that use the Euro or British pound sterling as their functional currency. Additionally, the Company uses foreign currency forward contracts to mitigate exposure from variability of cash flows related to the forecasted interest and principal payments on intercompany loans. The foreign currency forward contracts generally expire within 12 months. While these derivatives are hedging the fluctuations in foreign currencies, they do not meet the requirements to be accounted for as hedging instruments. Derivatives The fair values of derivative instruments and the related notional amounts were as follows: September 30, 2022 December 31, 2021 (In millions) Notional Amount Fair Value Notional Amount Fair Value Balance Sheet Caption Derivatives designated as hedges Assets: Cross-currency swap agreements $ 1,387 $ 103 $ — $ — Other long-term assets Interest rate swaps 250 11 — — Other long-term assets Liabilities: Cross-currency swap agreements $ — $ — $ 328 $ 4 Other current liabilities Cross-currency swap agreements — — 165 4 Other long-term liabilities Derivatives not designated as hedges Assets: Foreign currency option contracts $ 105 $ 18 $ 368 $ 11 Other current assets Foreign currency option contracts — — 37 1 Other long-term assets Liabilities: Foreign currency forward contracts $ 15 $ — $ — $ — Other current liabilities As of September 30, 2022 and December 31, 2021, the derivatives were classified as Level 2 within the fair value hierarchy. The derivatives are valued using inputs other than quoted prices such as foreign exchange rates and yield curves. 17 Derivatives designated as hedges The effect of hedges on AOCI and in the Condensed Consolidated Statements of Operations was as follows: Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 (In millions) Amount of Gain Recognized in Other Comprehensive Income on Derivatives Gain Reclassified from AOCI into Net Income (1) Gain Recognized in Net Income on Derivatives (Excluded from effectiveness testing) (1) Amount of Gain Recognized in Other Comprehensive Income on Derivatives Gain Reclassified from AOCI into Net Income (1) Gain Recognized in Net Income on Derivatives (Excluded from effectiveness testing) (1) Derivatives designated as net investment hedges Cross-currency swap agreements $ 90 $ — $ 1 $ 136 $ 2 $ 3 Derivatives designated as cash flow hedges Interest rate swaps $ 12 $ — $ — $ 11 $ — $ — (1) Amounts reclassified to Net income are reported within Interest expense, net in the Condensed Consolidated Statements of Operations. Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 (In millions) Amount of Gain Recognized in Other Comprehensive Income on Derivatives Gain Reclassified from AOCI into Net Income (1) Gain Recognized in Net Income on Derivatives (Excluded from effectiveness testing) (1) Amount of Gain Recognized in Other Comprehensive Income on Derivatives Gain Reclassified from AOCI into Net Income (1) Gain Recognized in Net Income on Derivatives (Excluded from effectiveness testing) (1) Derivatives designated as net investment hedges Cross-currency swap agreements $ 11 $ 1 $ 1 $ 11 $ 1 $ 1 (1) Amounts reclassified to Net income are reported within Interest expense, net in the Condensed Consolidated Statements of Operations. Derivatives not designated as hedges Gains and losses recognized in Other income, net in the Condensed Consolidated Statements of Operations for foreign currency options and forward contracts were as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 Realized gain $ 10 $ — $ 19 $ — Unrealized gain (loss) ( 1 ) 1 14 1 Total gain recognized in net income $ 9 $ 1 $ 33 $ 1 18 9. Employee Benefit Plans Defined Benefit Plans In July 2021, the Company became the plan sponsor for a retirement plan in the U.K. (the “U.K. Retirement Plan”). Components of the net periodic benefit cost under the U.K. Retirement Plan were as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 Interest cost $ ( 5 ) $ ( 5 ) $ ( 16 ) $ ( 5 ) Expected return on plan assets 12 15 41 15 Net periodic benefit income (1) $ 7 $ 10 $ 25 $ 10 (1) Net periodic benefit income is recorded within Other income, net in the Condensed Consolidated Statements of Operations. The Company also maintains defined benefit pension plans for other foreign subsidiaries that are excluded from the disclosures due to their immateriality. Defined Contribution Plans The Company’s costs for qualified defined contribution plans were $ 4 million for both the three months ended September 30, 2022 and 2021, and $ 12 million for both the nine months ended September 30, 2022 and 2021. Defined contribution costs were primarily recorded within Direct operating expenses in the Condensed Consolidated Statements of Operations. 10. Earnings Per Share The computations of basic and diluted earnings per share were as follows: Three Months Ended Nine Months Ended September 30, September 30, (Dollars in millions, shares in thousands, except per share data) 2022 2021 (1) 2022 2021 (1) Net income attributable to common shares $ 63 $ 72 $ 151 $ 97 Basic weighted-average common shares 118,621 114,629 116,508 114,627 Dilutive effect of stock-based awards 444 900 599 900 Diluted weighted-average common shares 119,065 115,529 117,107 115,527 Basic earnings per share $ 0.53 $ 0.63 $ 1.30 $ 0.84 Diluted earnings per share $ 0.53 $ 0.62 $ 1.29 $ 0.84 Antidilutive shares excluded from diluted weighted-average common shares 2,013 — 1,735 — (1) On August 2, 2021, 114,626,250 shares of common stock of the Company were distributed and began regular-way trading. This share amount is utilized for the calculation of basic and diluted earnings per share for three and nine months ended September 30, 2021. 19 11. Stockholders’ Equity The following table summarizes the changes in AOCI by component: (In millions) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Plan Less: AOCI attributable to noncontrolling interest AOCI attributable to GXO Balance as of June 30, 2022 $ ( 169 ) $ — $ ( 76 ) $ ( 1 ) $ ( 246 ) Foreign currency translation loss ( 111 ) — — 2 ( 109 ) Unrealized gain on hedges, net of tax 69 9 — — 78 Amounts reclassified from AOCI to net income ( 1 ) — — — ( 1 ) Other comprehensive income (loss), net of tax ( 43 ) 9 — 2 ( 32 ) Balance as of September 30, 2022 $ ( 212 ) $ 9 $ ( 76 ) $ 1 $ ( 278 ) (In millions) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Plan Less: AOCI attributable to noncontrolling interest AOCI attributable to GXO Balance as of December 31, 2021 $ ( 53 ) $ — $ ( 76 ) $ ( 1 ) $ ( 130 ) Foreign currency translation loss ( 260 ) — — 4 ( 256 ) Unrealized gain on hedges, net of tax 102 9 — — 111 Amounts reclassified from AOCI to net income ( 5 ) — — — ( 5 ) Other comprehensive income (loss), net of tax ( 163 ) 9 — 4 ( 150 ) Deconsolidation of variable interest entity 4 — — ( 2 ) 2 Balance as of September 30, 2022 $ ( 212 ) $ 9 $ ( 76 ) $ 1 $ ( 278 ) (In millions) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Plan Less: AOCI attributable to noncontrolling interest AOCI attributable to GXO Balance as of June 30, 2021 $ 42 $ ( 1 ) $ ( 1 ) $ ( 1 ) $ 39 Unrealized loss, net of tax ( 10 ) — — — ( 10 ) Amounts reclassified from AOCI to net income ( 2 ) — — — ( 2 ) Other comprehensive loss, net of tax ( 12 ) — — — ( 12 ) Transfers to XPO, net of tax ( 68 ) — ( 82 ) $ — $ ( 150 ) Balance as of September 30, 2021 $ ( 38 ) $ ( 1 ) $ ( 83 ) $ ( 1 ) $ ( 123 ) (In millions) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Plan Less: AOCI attributable to noncontrolling interest AOCI attributable to GXO Balance as of December 31, 2020 $ 61 $ — $ ( 1 ) $ ( 2 ) $ 58 Unrealized loss, net of tax ( 28 ) ( 1 ) — — ( 29 ) Amounts reclassified from AOCI to net income ( 2 ) — — — ( 2 ) Other comprehensive loss, net of tax ( 30 ) ( 1 ) — — ( 31 ) Transfers to (from) XPO, net of tax ( 69 ) — ( 82 ) 1 $ ( 150 ) Balance as of September 30, 2021 $ ( 38 ) $ ( 1 ) $ ( 83 ) $ ( 1 ) $ ( 123 ) 20 12. Commitments and Contingencies The Company is involved and will continue to be involved, in numerous legal proceedings arising out of the conduct of its business. These proceedings may include personal injury claims arising from the handling and transportation of goods, contractual disputes and employment-related claims, including alleged violations of wage and hour laws. The Company establishes 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. The Company reviews and adjusts 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, the Company assesses 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, the Company discloses the estimate of the possible loss or range of loss if it is material and an estimate can be made, or discloses 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 management’s assessment, together with legal counsel, regarding the ultimate outcome of the matter. Management of the Company believes that it has adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. Management of the Company does not believe that the ultimate resolution of any matters to which the Company is presently a party will have a material adverse effect on its 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 the Company’s financial condition, results of operations or cash flows. Legal costs incurred related to these matters are expensed as incurred. The Company carries liability and excess umbrella insurance policies that are deemed sufficient to cover potential legal claims arising in the normal course of conducting its operations. In the event the Company is required to satisfy a legal claim outside the scope of the coverage provided by insurance, its financial condition, results of operations or cash flows could be negatively impacted. 21