GXO Logistics, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS GXO Logistics, Inc. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, (Dollars in millions, shares in thousands, except per share amounts) 2023 2022 Revenue $ 2,323 $ 2,083 Direct operating expense 1,906 1,748 Selling, general and administrative expense 258 190 Depreciation and amortization expense 83 76 Transaction and integration costs 13 19 Restructuring costs and other 21 13 Operating income 42 37 Other income, net — 16 Interest expense, net ( 13 ) ( 4 ) Income before income taxes 29 49 Income tax expense ( 3 ) ( 11 ) Net income 26 38 Net income attributable to noncontrolling interests ( 1 ) ( 1 ) Net income attributable to GXO $ 25 $ 37 Earnings per share data Basic $ 0.21 $ 0.32 Diluted $ 0.21 $ 0.32 Weighted-average common shares outstanding Basic 118,781 114,731 Diluted 119,231 115,569 See accompanying Notes to Condensed Consolidated Financial Statements. 2 GXO Logistics, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three Months Ended March 31, (In millions) 2023 2022 Net income $ 26 $ 38 Other comprehensive income (loss), net of tax Foreign currency translation gain (loss), net of tax of $ 3 and $ 0 13 ( 45 ) Unrealized loss on cash flow hedges, net of tax of $ 1 and $ 0 ( 3 ) — Other comprehensive income (loss), net of tax 10 ( 45 ) Comprehensive income (loss) 36 ( 7 ) Less: Comprehensive income attributable to noncontrolling interest 1 — Comprehensive income (loss) attributable to GXO $ 35 $ ( 7 ) See accompanying Notes to Condensed Consolidated Financial Statements. 3 GXO Logistics, Inc. Condensed Consolidated Balance Sheets (Unaudited) March 31, December 31, (Dollars in millions, shares in thousands, except per share amounts) 2023 2022 ASSETS Current assets Cash and cash equivalents $ 426 $ 495 Accounts receivable, net of allowance of $ 11 and $ 12 1,605 1,647 Other current assets 280 286 Total current assets 2,311 2,428 Long-term assets Property and equipment, net of accumulated depreciation of $ 1,361 and $ 1,297 964 960 Operating lease assets 2,168 2,227 Goodwill 2,765 2,728 Intangible assets, net of accumulated amortization of $ 477 and $ 456 555 570 Other long-term assets 327 306 Total long-term assets 6,779 6,791 Total assets $ 9,090 $ 9,219 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 652 $ 717 Accrued expenses 908 995 Current debt 84 67 Current operating lease liabilities 568 560 Other current liabilities 209 193 Total current liabilities 2,421 2,532 Long-term liabilities Long-term debt 1,697 1,739 Long-term operating lease liabilities 1,800 1,853 Other long-term liabilities 453 417 Total long-term liabilities 3,950 4,009 Commitments and contingencies (Note 11) Stockholders’ Equity Common Stock, $ 0.01 par value per share; 300,000 shares authorized, 118,889 and 118,728 issued and outstanding 1 1 Preferred Stock, $ 0.01 par value per share; 10,000 shares authorized, none issued and outstanding — — Additional paid-in capital 2,580 2,575 Retained earnings 348 323 Accumulated other comprehensive loss ( 244 ) ( 254 ) Total stockholders’ equity before noncontrolling interests 2,685 2,645 Noncontrolling interests 34 33 Total equity 2,719 2,678 Total liabilities and equity $ 9,090 $ 9,219 See accompanying Notes to Condensed Consolidated Financial Statements. 4 GXO Logistics, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, (In millions) 2023 2022 Cash flows from operating activities: Net income $ 26 $ 38 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization expense 83 76 Stock-based compensation expense 9 6 Deferred tax expense (benefit) ( 7 ) 3 Other 9 4 Changes in operating assets and liabilities Accounts receivable 57 ( 33 ) Other assets 11 ( 7 ) Accounts payable ( 49 ) ( 39 ) Accrued expenses and other liabilities ( 100 ) ( 2 ) Net cash provided by operating activities 39 46 Cash flows from investing activities: Capital expenditures ( 91 ) ( 65 ) Proceeds from sales of property and equipment 9 3 Other — 18 Net cash used in investing activities ( 82 ) ( 44 ) Cash flows from financing activities: Repayments of debt, net ( 21 ) — Repayments of finance lease obligations ( 8 ) ( 9 ) Taxes paid related to stock-based compensation awards ( 4 ) ( 11 ) Other 4 2 Net cash used in financing activities ( 29 ) ( 18 ) Effect of exchange rates on cash and cash equivalents 3 ( 5 ) Net decrease in cash and cash equivalents ( 69 ) ( 21 ) Cash and cash equivalents, beginning of period 495 333 Cash and cash equivalents, end of period $ 426 $ 312 See accompanying Notes to Condensed Consolidated Financial Statements. 5 GXO Logistics, Inc. Condensed Consolidated Statements of Changes in Equity (Unaudited) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Equity Before Noncontrolling Interests Noncontrolling Interests Total Equity (Shares in thousands, dollars in millions) Shares Amount Balance as of December 31, 2022 118,728 $ 1 $ 2,575 $ 323 $ ( 254 ) $ 2,645 $ 33 $ 2,678 Net income — — — 25 — 25 1 26 Other comprehensive income — — — — 10 10 — 10 Stock-based compensation — — 9 — — 9 — 9 Vesting of stock-based compensation awards 265 — — — — — — — Tax withholding on vesting of stock-based compensation awards ( 104 ) — ( 4 ) — — ( 4 ) — ( 4 ) Balance as of March 31, 2023 118,889 $ 1 $ 2,580 $ 348 $ ( 244 ) $ 2,685 $ 34 $ 2,719 (Shares in thousands, dollars in millions) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Equity Before Noncontrolling Interests Noncontrolling Interests Total Equity Shares Amount Balance as of December 31, 2021 114,659 $ 1 $ 2,354 $ 126 $ ( 130 ) $ 2,351 $ 39 $ 2,390 Net income — — — 37 — 37 1 38 Other comprehensive loss — — — — ( 44 ) ( 44 ) ( 1 ) ( 45 ) Stock-based compensation — — 6 — — 6 — 6 Vesting of stock-based compensation awards 318 — — — — — — — Tax withholding on vesting of stock-based compensation awards ( 137 ) — ( 11 ) — — ( 11 ) — ( 11 ) Deconsolidation of variable interest entity — — — — 2 2 ( 5 ) ( 3 ) Balance as of March 31, 2022 114,840 $ 1 $ 2,349 $ 163 $ ( 172 ) $ 2,341 $ 34 $ 2,375 See accompanying Notes to Condensed Consolidated Financial Statements. 6 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 notes required by GAAP for complete financial statements. 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 months ended March 31, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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 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, 2022 (the “2022 Form 10-K”). The Company presents its operations as one reportable segment. Recently Adopted Accounting Pronouncements In 2020, the Financial Accounting Standards Board (“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 if certain criteria are met. The ASU applies 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. In 2021, the FASB expanded the scope of the guidance to include derivatives. In 2022, the FASB deferred the expiration date for Topic 848 from December 31, 2022, until December 31, 2024. On March 9, 2023, the Company entered into Amendment No. 1 to its revolving credit facility replacing LIBOR-based benchmark rates with SOFR-based benchmark rates and other conforming changes (the “Revolving Credit Facility”). The Company has transitioned its existing contracts to a replacement index. ASU 2020-04 and its amendments did not have a material impact on the Company’s Condensed Consolidated Financial Statements. 7 2. Revenue Recognition Revenue disaggregated by geographical area was as follows: Three Months Ended March 31, (In millions) 2023 2022 United Kingdom $ 844 $ 704 United States 714 681 France 202 176 Netherlands 196 170 Spain 127 120 Italy 88 82 Other 152 150 Total $ 2,323 $ 2,083 The Company’s revenue can also be disaggregated by various verticals, reflecting the customer’s principal industry. Revenue disaggregated by industry was as follows: Three Months Ended March 31, (In millions) 2023 2022 Omnichannel retail $ 968 $ 825 Technology and consumer electronics 366 305 Food and beverage 307 338 Industrial and manufacturing 272 263 Consumer packaged goods 253 213 Other 157 139 Total $ 2,323 $ 2,083 Contract Assets and Liabilities Contract assets consist of two components, customer acquisition costs and costs to fulfill a contract. Contract assets are primarily amortized to Direct operating expense in the Condensed Consolidated Statements of Operations over the contract term. Contract liabilities represent the Company’s obligation to transfer services to a customer for which the Company has received consideration or the amount is due from the customer. The contract asset and contract liability balances from contracts with customers were as follows: (In millions) March 31, 2023 December 31, 2022 Contract assets included in: Other current assets $ 13 $ 25 Other long-term assets 163 165 Total contract assets $ 176 $ 190 Contract liabilities included in: Other current liabilities $ 169 $ 154 Other long-term liabilities 126 134 Total contract liabilities $ 295 $ 288 8 Revenue included the following: Three Months Ended March 31, (In millions) 2023 2022 Amounts included in the beginning-of-year contract liability balance $ 82 $ 63 Remaining Performance Obligations As of March 31, 2023, the fixed consideration component of the Company’s remaining performance obligation was approximately $ 3.3 billion, and the Company expects to recognize approximately 73 % 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. Leases The Company has operating leases primarily for real estate, warehouse equipment, trucks, trailers, containers and material handling equipment. In addition, the Company has finance leases for equipment. The following amounts related to leases were recorded in the Condensed Consolidated Balance Sheets: (In millions) March 31, 2023 December 31, 2022 Operating leases: Operating lease assets $ 2,168 $ 2,227 Current operating lease liabilities $ 568 $ 560 Long-term operating lease liabilities 1,800 1,853 Total operating lease liabilities $ 2,368 $ 2,413 Finance leases: Property and equipment, net $ 125 $ 123 Current debt $ 38 $ 35 Long-term debt 90 97 Total finance lease liabilities $ 128 $ 132 9 The components of lease expense recorded in the Condensed Consolidated Statements of Operations were as follows: Three Months Ended March 31, (In millions) 2023 2022 Operating leases: Operating lease cost $ 218 $ 169 Short-term lease cost 26 22 Variable lease cost 28 20 Total operating lease cost (1) $ 272 $ 211 Finance leases: Amortization of leases $ 7 $ 7 Interest expense on lease liabilities 1 1 Total finance lease cost $ 8 $ 8 Total operating and finance lease cost $ 280 $ 219 (1) Operating lease cost is primarily included in Direct operating expenses in the Condensed Consolidated Statements of Operations. Supplemental cash flow information was as follows: Three Months Ended March 31, (In millions) 2023 2022 Leased assets obtained in exchange for new operating lease liabilities $ 73 $ 154 Leased assets obtained in exchange for new finance lease liabilities 3 1 4. Debt and Financing Arrangements The following table summarizes the carrying value of debt: (In millions) Rate (1) March 31, 2023 December 31, 2022 1.65 % Unsecured notes due 2026 (2) 1.65 % $ 397 $ 397 2.65 % Unsecured notes due 2031 (2) 2.65 % 397 397 Two-Year Term Loan due 2024 (3) 6.02 % 115 115 Three-Year Term Loan due 2025 (4) 6.02 % 234 234 Five-Year Term Loan due 2027 (4) 6.14 % 499 499 Finance leases and other Various 139 164 Total debt $ 1,781 $ 1,806 Less: Current debt 84 67 Total Long-term debt $ 1,697 $ 1,739 (1) Interest rate as of March 31, 2023. (2) Net of unamortized debt issuance costs of $ 3 million as of March 31, 2023 and December 31, 2022. (3) As of March 31, 2023, $ 35 million is classified as current debt as it was repaid on April 7, 2023. (4) Net of unamortized debt issuance costs of $ 1 million as of March 31, 2023 and December 31, 2022. Factoring Programs 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 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. 10 Information related to the trade receivables sold was as follows: Three Months Ended March 31, (In millions) 2023 2022 Receivables sold in period $ 263 $ 229 Cash consideration 261 228 Net cash provided in operating cash flows (1) — 6 (1) The three months ended March 31, 2022 includes $ 124 million of cash provided by factoring programs, reduced by $ 118 million used in the securitization program that was terminated in the first quarter of 2022. Covenants and Compliance The covenants in the unsecured notes, term loans and revolving credit facilities, 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 March 31, 2023, the Company was in compliance with the covenants contained in its debt and financing arrangements. 5. 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; • 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 March 31, 2023, and December 31, 2022, due to their short-term nature. Debt The fair value of debt was as follows: March 31, 2023 December 31, 2022 (In millions) Level Fair Value Carrying Value Fair Value Carrying Value 1.65 % Unsecured notes due 2026 2 $ 347 $ 397 $ 342 $ 397 2.65 % Unsecured notes due 2031 2 312 397 294 397 Two-Year Term Loan due 2024 2 115 115 115 115 Three-Year Term Loan due 2025 2 235 234 234 234 Five-Year Term Loan due 2027 2 500 499 499 499 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 11 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. The fair value of the Company’s derivative instruments and the related notional amounts were as follows: March 31, 2023 Notional Derivative Assets (1) Derivative Liabilities (2) Designated as hedges Cross-currency swap agreements $ 1,337 $ 22 $ 27 Interest rate swaps 250 6 — Not designated as hedges Foreign currency option contracts $ 241 $ 1 $ 5 Foreign currency forward contracts 44 — — (1) Derivative assets are included in Other current assets and Other long-term assets in the Condensed Consolidated Balance Sheets. (2) Derivative liabilities are included in Other current liabilities and Other long-term liabilities in the Condensed Consolidated Balance Sheets. December 31, 2022 Notional Derivative Assets (1) Derivative Liabilities (2) Designated as hedges Cross-currency swap agreements $ 1,337 $ 22 $ 13 Interest rate swaps 250 9 — Not designated as hedges Foreign currency option contracts $ 354 $ — $ 5 Foreign currency forward contracts 3 — — (1) Derivative assets are included in Other current assets and Other long-term assets in the Condensed Consolidated Balance Sheets. (2) Derivative liabilities are included in Other current liabilities and Other long-term liabilities in the Condensed Consolidated Balance Sheets. As of March 31, 2023 and December 31, 2022, the derivatives are classified as Level 2 within the fair value hierarchy. The effect of hedges on AOCL and in the Condensed Consolidated Statements of Operations was as follows: Three Months Ended March 31, 2023 (In millions) Gain (Loss) Recognized in Other Comprehensive Income Gain (Loss) Reclassified from AOCL into Net Income (1) Gain (Loss) Recognized in Net Income on Derivatives (Excluded from effectiveness testing) (1) Derivatives designated as net investment hedges Cross-currency swap agreements $ ( 16 ) $ ( 3 ) $ 1 Derivatives designated as cash flow hedges Interest rate swaps $ ( 3 ) $ — $ — (1) Amounts reclassified to net income are reported within Interest expense, net in the Condensed Consolidated Statements of Operations. 12 Three Months Ended March 31, 2022 (In millions) Gain (Loss) Recognized in Other Comprehensive Income Gain (Loss) Reclassified from AOCL into Net Income (1) Gain (Loss) Recognized in Net Income on Derivatives (Excluded from effectiveness testing) (1) Derivatives designated as net investment hedges Cross-currency swap agreements $ 3 $ — $ 2 (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 March 31, (In millions) 2023 2022 Realized gain (loss) $ ( 2 ) $ 2 Unrealized gain 1 6 Total gain (loss) $ ( 1 ) $ 8 6. Stockholders’ Equity The following table summarizes the changes in AOCL by component: (In millions) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Plan Less: AOCL attributable to noncontrolling interest AOCL attributable to GXO As of December 31, 2022 $ ( 149 ) $ 7 $ ( 112 ) $ — $ ( 254 ) Unrealized gain (loss), net of tax 11 ( 3 ) — — 8 Amounts reclassified from AOCL to net income 2 — — — 2 Other comprehensive income (loss), net of tax 13 ( 3 ) — — 10 As of March 31, 2023 $ ( 136 ) $ 4 $ ( 112 ) $ — $ ( 244 ) (In millions) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Plan Less: AOCL attributable to noncontrolling interest AOCL attributable to GXO As of December 31, 2021 $ ( 53 ) $ — $ ( 76 ) $ ( 1 ) $ ( 130 ) Unrealized gain (loss), net of tax ( 43 ) — — 1 ( 42 ) Amounts reclassified from AOCL to net income ( 2 ) — — — ( 2 ) Other comprehensive income (loss), net of tax ( 45 ) — — 1 ( 44 ) Deconsolidation of variable interest entity 4 — ( 2 ) 2 As of March 31, 2022 $ ( 94 ) $ — $ ( 76 ) $ ( 2 ) $ ( 172 ) 13 7. Employee Benefit Plans Defined Benefit Plans The Company sponsors a retirement plan in the U.K. (the “U.K. Retirement Plan”). Components of the net periodic benefit cost recognized under the U.K. Retirement Plan were as follows: Three Months Ended March 31, (In millions) 2023 2022 Interest cost $ ( 10 ) $ ( 6 ) Expected return on plan assets 12 15 Net periodic pension income (1) $ 2 $ 9 (1) Net periodic pension income is recorded within Other income, net in the Condensed Consolidated Statements of Operations. The Company also maintains defined benefit pension plans for some of its foreign subsidiaries that are excluded from the disclosure due to their immateriality. Defined Contribution Plans The Company has defined contribution retirement plans for its U.S. employees and employees of certain foreign subsidiaries. The Company’s contributions for the three months ended March 31, 2023 and 2022, were $ 17 million and $ 14 million, respectively, and were primarily included in Direct operating expenses in the Condensed Consolidated Statements of Operations. 8. Restructuring Costs and Other Restructuring costs are primarily related to severance, including projects to optimize finance, human resource and information technology functions, and are not associated with customer attrition. For the three months ended March 31, 2023, restructuring costs and other totaled $ 21 million and included severance charges of $ 15 million and impairment charges of $ 6 million as a result of closing certain corporate and administrative offices. For the three months ended March 31, 2022, restructuring costs and other totaled $ 13 million and included severance charges of $ 5 million and $ 8 million related to the deconsolidation of a joint venture. The following is a roll forward of the restructuring liability, which is included in Other current liabilities in the Condensed Consolidated Balance Sheets: (In millions) Balance as of December 31, 2022 $ 13 Charges incurred 15 Payments ( 8 ) Balance as of March 31, 2023 $ 20 The remaining restructuring liability at March 31, 2023 primarily relates to severance payments and is expected to be substantially paid within the next twelve months. 9. Income Taxes The effective tax rate for the first quarter of 2023 was 11.0 percent, a decrease from 22.1 percent in the prior year. The change in our effective tax rate was primarily driven by discrete tax benefits from the release of valuation allowances as it is more likely than not that the deferred income tax assets will be realized. 14 As of March 31, 2023 and December 31, 2022, the Company had valuation allowances of $ 39 million and $ 44 million on its deferred income tax asset, respectively. 10. 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 $ 1,106 million, consisting of $ 902 million in cash and the issuance of 3,757,657 shares of GXO common stock having a value of $ 204 million. 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 value using valuation techniques including income, cost and market approaches. 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 143 Other current assets 67 Total current assets 236 Long-term assets Property and equipment 80 Operating lease assets 219 Intangible assets (1) 392 Other long-term assets 30 Total long-term assets 721 Total assets $ 957 LIABILITIES Current liabilities Accounts payable $ 81 Accrued expenses 97 Current debt 56 Current operating lease liabilities 43 Other current liabilities 50 Total current liabilities 327 Long-term liabilities Long-term debt 10 Long-term operating lease liabilities 175 Other long-term liabilities 161 Total long-term liabilities 346 Total liabilities $ 673 Net assets purchased $ 284 Cash paid $ 902 Common stock issued (2) 204 Purchase price paid $ 1,106 Goodwill recorded (3) $ 822 (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 issued. 15 (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 United Kingdom and Ireland reporting unit and was primarily attributed to anticipated synergies. The Company does not expect the goodwill recognized as a part of the acquisition of Clipper to be deductible for income tax purposes. The fair value 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 finalization of income taxes and goodwill. 11. 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 transportation and handling 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. 16