GXO Logistics, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS GXO Logistics, Inc. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (Dollars in millions, shares in thousands, except per share amounts) 2023 2022 2023 2022 Revenue $ 2,471 $ 2,287 $ 7,188 $ 6,526 Direct operating expense 2,012 1,885 5,875 5,408 Selling, general and administrative expense 258 227 761 637 Depreciation and amortization expense 101 89 268 242 Transaction and integration costs 3 14 22 57 Restructuring costs and other 7 — 31 14 Operating income 90 72 231 168 Other income, net 7 17 8 56 Interest expense, net ( 14 ) ( 6 ) ( 41 ) ( 19 ) Income before income taxes 83 83 198 205 Income tax expense ( 15 ) ( 19 ) ( 38 ) ( 51 ) Net income 68 64 160 154 Net income attributable to noncontrolling interests ( 2 ) ( 1 ) ( 4 ) ( 3 ) Net income attributable to GXO $ 66 $ 63 $ 156 $ 151 Earnings per share Basic $ 0.55 $ 0.53 $ 1.31 $ 1.30 Diluted $ 0.55 $ 0.53 $ 1.31 $ 1.29 Weighted-average common shares outstanding Basic 118,941 118,621 118,883 116,508 Diluted 119,645 119,065 119,430 117,107 See accompanying Notes to Condensed Consolidated Financial Statements. 2 GXO Logistics, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2023 2022 2023 2022 Net income $ 68 $ 64 $ 160 $ 154 Other comprehensive income (loss), net of tax Foreign currency translation loss, net of tax expense of $( 9 ), $( 22 ), $ 0 and $( 32 ) ( 69 ) ( 43 ) ( 39 ) ( 163 ) Net unrealized gain on cash flow hedges, net of tax expense of $( 1 ), $( 2 ), $( 1 ) and $( 2 ) — 9 1 9 Defined benefit plans, amortization of net loss, net of tax of $ 0 , $ 0 , $ 0 and $ 0 1 — 2 — Other comprehensive loss, net of tax ( 68 ) ( 34 ) ( 36 ) ( 154 ) Comprehensive income — 30 124 — Less: Comprehensive income (loss) attributable to noncontrolling interest — ( 1 ) 3 ( 1 ) Comprehensive income attributable to GXO $ — $ 31 $ 121 $ 1 See accompanying Notes to Condensed Consolidated Financial Statements. 3 GXO Logistics, Inc. Condensed Consolidated Balance Sheets (Unaudited) September 30, December 31, (Dollars in millions, shares in thousands, except per share amounts) 2023 2022 ASSETS Current assets Cash and cash equivalents $ 473 $ 495 Accounts receivable, net of allowance of $ 18 and $ 12 1,661 1,647 Other current assets 332 286 Total current assets 2,466 2,428 Long-term assets Property and equipment, net of accumulated depreciation of $ 1,463 and $ 1,297 923 960 Operating lease assets 2,133 2,227 Goodwill 2,734 2,728 Intangible assets, net of accumulated amortization of $ 507 and $ 456 507 570 Other long-term assets 328 306 Total long-term assets 6,625 6,791 Total assets $ 9,091 $ 9,219 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 597 $ 717 Accrued expenses 975 995 Current debt 26 67 Current operating lease liabilities 561 560 Other current liabilities 275 193 Total current liabilities 2,434 2,532 Long-term liabilities Long-term debt 1,621 1,739 Long-term operating lease liabilities 1,800 1,853 Other long-term liabilities 419 417 Total long-term liabilities 3,840 4,009 Commitments and contingencies (Note 12) Stockholders’ Equity Common Stock, $ 0.01 par value per share; 300,000 shares authorized, 118,951 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 2,593 2,575 Retained earnings 479 323 Accumulated Other Comprehensive Income (Loss) (“AOCIL”) ( 289 ) ( 254 ) Total stockholders’ equity before noncontrolling interests 2,784 2,645 Noncontrolling interests 33 33 Total equity 2,817 2,678 Total liabilities and equity $ 9,091 $ 9,219 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) 2023 2022 Cash flows from operating activities: Net income $ 160 $ 154 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization expense 268 242 Stock-based compensation expense 25 24 Deferred tax expense (benefit) ( 29 ) — Other 16 ( 4 ) Changes in operating assets and liabilities Accounts receivable ( 23 ) ( 22 ) Other assets ( 39 ) ( 28 ) Accounts payable ( 69 ) ( 68 ) Accrued expenses and other liabilities 34 18 Net cash provided by operating activities 343 316 Cash flows from investing activities: Capital expenditures ( 205 ) ( 239 ) Proceeds from sales of property and equipment 13 22 Acquisition of businesses, net of cash acquired — ( 874 ) Net proceeds from cross-currency swap agreements — 26 Other — 9 Net cash used in investing activities ( 192 ) ( 1,056 ) Cash flows from financing activities: Proceeds from issuance of debt, net — 898 Repayments of debt, net ( 139 ) — Repayments of finance lease obligations ( 24 ) ( 23 ) Taxes paid related to stock-based compensation awards ( 7 ) ( 12 ) Net cash provided by (used in) financing activities ( 170 ) 863 Effect of exchange rates on cash, restricted cash and cash equivalents ( 2 ) ( 22 ) Net (decrease) increase in cash, restricted cash and cash equivalents ( 21 ) 101 Cash, restricted cash and cash equivalents, beginning of period 495 333 Cash, restricted cash and cash equivalents, end of period $ 474 $ 434 Cash and cash equivalents $ 473 $ 434 Restricted Cash (included in Other long-term assets) 1 — Total cash, restricted cash and cash equivalents $ 474 $ 434 Non-cash investing 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 Additional Paid-In Capital Retained Earnings AOCIL Equity Before Noncontrolling Interests Noncontrolling Interests Total Equity (Shares in thousands, dollars in millions) Shares Amount Balance as of June 30, 2023 118,932 $ 1 $ 2,587 $ 413 $ ( 223 ) $ 2,778 $ 33 $ 2,811 Net income — — — 66 — 66 2 68 Other comprehensive loss — — — — ( 66 ) ( 66 ) ( 2 ) ( 68 ) Stock-based compensation — — 7 — — 7 — 7 Vesting of stock-based compensation awards 30 — — — — — — — Tax withholding on vesting of stock-based compensation awards ( 11 ) — ( 1 ) — — ( 1 ) — ( 1 ) Balance as of September 30, 2023 118,951 $ 1 $ 2,593 $ 479 $ ( 289 ) $ 2,784 $ 33 $ 2,817 (Shares in thousands, dollars in millions) Common Stock Additional Paid-In Capital Retained Earnings AOCIL Equity Before Noncontrolling Interests Noncontrolling Interests Total Equity Shares Amount Balance as of December 31, 2022 118,728 $ 1 $ 2,575 $ 323 $ ( 254 ) $ 2,645 $ 33 $ 2,678 Net income — — — 156 — 156 4 160 Other comprehensive loss — — — — ( 35 ) ( 35 ) ( 1 ) ( 36 ) Stock-based compensation — — 25 — — 25 — 25 Vesting of stock-based compensation awards 366 — — — — — — — Tax withholding on vesting of stock-based compensation awards ( 143 ) — ( 7 ) — — ( 7 ) — ( 7 ) Dividends — — — — — — ( 3 ) ( 3 ) Balance as of September 30, 2023 118,951 $ 1 $ 2,593 $ 479 $ ( 289 ) $ 2,784 $ 33 $ 2,817 See accompanying Notes to Condensed Consolidated Financial Statements. 6 GXO Logistics, Inc. Condensed Consolidated Statements of Changes in Equity (Unaudited) Common Stock Additional Paid-In Capital Retained Earnings AOCIL Equity Before Noncontrolling Interests Noncontrolling Interests 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 33 — — — — — — — Tax withholding on vesting of stock compensation awards ( 14 ) — — — — — — — Balance as of September 30, 2022 118,629 $ 1 $ 2,569 $ 277 $ ( 278 ) $ 2,569 $ 30 $ 2,599 Common Stock Additional Paid-In Capital Retained Earnings AOCIL Equity Before Noncontrolling Interests Noncontrolling Interests 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 374 — — — — — — — Tax withholding on vesting of stock compensation awards ( 153 ) — ( 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 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 U.S. Securities and Exchange Commission (the “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 interim periods 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”). Certain amounts reported for prior periods have been reclassified to conform to the current period’s presentation. 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. 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. 8 2. Revenue Recognition Revenue disaggregated by geographical area was as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2023 2022 2023 2022 United Kingdom $ 958 $ 890 $ 2,695 $ 2,371 United States 711 709 2,117 2,075 France 207 171 626 530 Netherlands 216 175 610 508 Spain 133 117 396 360 Italy 97 81 279 243 Other 149 144 465 439 Total $ 2,471 $ 2,287 $ 7,188 $ 6,526 The Company’s revenue can also be disaggregated by the customer’s primary industry. Revenue disaggregated by industry was as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2023 2022 2023 2022 Omnichannel retail $ 1,051 $ 919 $ 3,041 $ 2,618 Technology and consumer electronics 360 338 1,081 963 Food and beverage 362 335 1,004 1,009 Industrial and manufacturing 263 275 803 807 Consumer packaged goods 231 227 689 663 Other 204 193 570 466 Total $ 2,471 $ 2,287 $ 7,188 $ 6,526 Contract Assets and Liabilities Contract assets consist of two components, customer acquisition costs and costs to fulfill a contract. Contract assets are 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. 9 The contract asset and contract liability balances from contracts with customers were as follows: September 30, December 31, (In millions) 2023 2022 Contract assets included in: Other current assets $ 13 $ 25 Other long-term assets 161 165 Total contract assets $ 174 $ 190 Contract liabilities included in: Other current liabilities $ 183 $ 154 Other long-term liabilities 114 134 Total contract liabilities $ 297 $ 288 Revenue included the following: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2023 2022 2023 2022 Amounts included in the beginning-of-year contract liability balance $ 11 $ 12 $ 109 $ 83 Remaining Performance Obligations As of September 30, 2023, the fixed consideration component of the Company’s remaining performance obligation was approximately $ 3.4 billion, and the Company expects to recognize approximately 72 % 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. 10 3. Leases The Company has operating leases for real estate, warehouse equipment, trucks, trailers, containers and material handling equipment. In addition, the Company has finance leases for warehouse equipment. The following amounts related to leases were recorded in the Condensed Consolidated Balance Sheets: September 30, December 31, (In millions) 2023 2022 Operating leases: Operating lease assets $ 2,133 $ 2,227 Current operating lease liabilities $ 561 $ 560 Long-term operating lease liabilities 1,800 1,853 Total operating lease liabilities $ 2,361 $ 2,413 Finance leases: Property and equipment, net $ 111 $ 123 Current debt $ 26 $ 35 Long-term debt 91 97 Total finance lease liabilities $ 117 $ 132 The components of lease expense recorded in the Condensed Consolidated Statements of Operations were as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2023 2022 2023 2022 Operating leases: Operating lease cost $ 163 $ 187 $ 561 $ 527 Short-term lease cost 78 24 170 69 Variable lease cost 36 31 93 73 Total operating lease cost (1) $ 277 $ 242 $ 824 $ 669 Finance leases: Amortization of leases $ 10 $ 5 $ 23 $ 23 Interest expense on lease liabilities 1 1 3 4 Total finance lease cost $ 11 $ 6 $ 26 $ 27 Total operating and finance lease cost $ 288 $ 248 $ 850 $ 696 (1) Operating lease cost is primarily included in Direct operating expense in the Condensed Consolidated Statements of Operations. Supplemental cash flow information was as follows: Nine Months Ended September 30, (In millions) 2023 2022 Leased assets obtained in exchange for new operating lease liabilities, including $ 207 from an acquisition in 2022 $ 389 $ 911 Leased assets obtained in exchange for new finance lease liabilities, including $ 16 from an acquisition in 2022 8 18 11 4. Debt and Financing Arrangements The following table summarizes the carrying value of debt: September 30, December 31, (In millions) Rate (1) 2023 2022 1.65 % Unsecured notes due 2026 (2) 1.65 % $ 398 $ 397 2.65 % Unsecured notes due 2031 (3) 2.65 % 397 397 Two-Year Term Loan due 2024 (4) — % — 115 Three-Year Term Loan due 2025 (5) 6.54 % 235 234 Five-Year Term Loan due 2027 (6) 6.67 % 499 499 Finance leases and other Various 118 164 Total debt 1,647 1,806 Less: Current debt 26 67 Total Long-term debt $ 1,621 $ 1,739 (1) Interest rate as of September 30, 2023. (2) Net of unamortized debt issuance costs of $ 2 million as of September 30, 2023, and $ 3 million as of December 31, 2022. (3) Net of unamortized debt issuance costs of $ 3 million as of September 30, 2023 and December 31, 2022. (4) Repaid in the second quarter of 2023. (5) Net of unamortized debt issuance costs of $ 1 million as of December 31, 2022. (6) Net of unamortized debt issuance costs of $ 1 million as of September 30, 2023 and December 31, 2022. Factoring Programs The Company sells certain of its trade 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. Information related to the trade receivables sold was as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2023 2022 2023 2022 Receivables sold in period $ 288 $ 259 $ 820 $ 716 Cash consideration 286 258 815 714 Net cash provided by operating cash flows (1) 27 18 27 16 (1) The nine months ended September 30, 2022, includes $ 134 million of cash provided by factoring program, reduced by $ 118 million of cash 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 September 30, 2023, the Company was in compliance with the covenants contained in its debt and financing arrangements. 12 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 September 30, 2023, and December 31, 2022, due to their short-term nature. Debt The fair value of debt was as follows: September 30, 2023 December 31, 2022 (In millions) Level Fair Value Carrying Value Fair Value Carrying Value 1.65 % Unsecured notes due 2026 2 $ 353 $ 398 $ 342 $ 397 2.65 % Unsecured notes due 2031 2 303 397 294 397 Two-Year Term Loan due 2024 2 — — 115 115 Three-Year Term Loan due 2025 2 233 235 234 234 Five-Year Term Loan due 2027 2 495 499 499 499 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 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 was as follows: September 30, 2023 (In millions) Notional Derivative Assets (1) Derivative Liabilities (2) Designated as hedges: Cross-currency swap agreements $ 1,337 $ 26 $ 14 Interest rate swaps (3) 250 9 — Not designated as hedges: Foreign currency option contracts $ 424 $ 16 $ — Foreign currency forward contracts 58 — — (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. (3) In June 2023, the Company amended one interest rate swap, with a notional amount of $ 125 million, scheduled to mature in 2027 to 2024. 13 December 31, 2022 (In millions) 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 September 30, 2023 and December 31, 2022, the derivatives were classified as Level 2 within the fair value hierarchy. The effect of hedges on AOCIL and in the Condensed Consolidated Statements of Operations was as follows: Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 (In millions) Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative Gain (Loss) Reclassified from AOCIL into Net Income (1) Gain (Loss) Recognized in Net Income on Derivative (Excluded from effectiveness testing) (1) Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative Gain (Loss) Reclassified from AOCIL into Net Income (1) Gain (Loss) Recognized in Net Income on Derivative (Excluded from effectiveness testing) (1) Derivatives designated as net investment hedges: Cross-currency swap agreements $ 36 $ ( 3 ) $ 1 $ 2 $ ( 3 ) $ 2 Derivatives designated as cash flow hedges: Interest rate swaps $ 1 $ — $ — $ 2 $ — $ — (1) Amounts reclassified to net income are reported in Interest expense, net in the Condensed Consolidated Statements of Operations. Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 (In millions) Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative Gain (Loss) Reclassified from AOCIL into Net Income (1) Gain (Loss) Recognized in Net Income on Derivative (Excluded from effectiveness testing) (1) Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative Gain (Loss) Reclassified from AOCIL into Net Income (1) Gain (Loss) Recognized in Net Income on Derivative (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 in Interest expense, net in the Condensed Consolidated Statements of Operations. 14 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 September 30, Nine Months Ended September 30, (In millions) 2023 2022 2023 2022 Realized foreign currency contracts gain (loss) $ ( 3 ) $ 10 $ ( 9 ) $ 19 Unrealized foreign currency contracts gain (loss) 8 ( 1 ) 12 14 Total foreign currency gain recognized in net income $ 5 $ 9 $ 3 $ 33 6. Stockholders’ Equity The following tables summarize the changes in AOCIL by component: (In millions) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Plan Less: AOCIL attributable to noncontrolling interest AOCIL attributable to GXO As of June 30, 2023 $ ( 119 ) $ 8 $ ( 111 ) $ ( 1 ) $ ( 223 ) Foreign currency translation loss ( 98 ) — — 2 ( 96 ) Unrealized gain on hedges, net of tax 27 — — — 27 Amounts reclassified from AOCIL to net income 2 — 1 — 3 Other comprehensive income (loss), net of tax ( 69 ) — 1 2 ( 66 ) As of September 30, 2023 $ ( 188 ) $ 8 $ ( 110 ) $ 1 $ ( 289 ) (In millions) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Plan Less: AOCIL attributable to noncontrolling interest AOCIL attributable to GXO As of December 31, 2022 $ ( 149 ) $ 7 $ ( 112 ) $ — $ ( 254 ) Foreign currency translation loss ( 41 ) — — 1 ( 40 ) Unrealized gain on hedges, net of tax 1 1 — — 2 Amounts reclassified from AOCIL to net income 1 — 2 — 3 Other comprehensive income (loss), net of tax ( 39 ) 1 2 1 ( 35 ) As of September 30, 2023 $ ( 188 ) $ 8 $ ( 110 ) $ 1 $ ( 289 ) (In millions) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Plan Less: AOCIL attributable to noncontrolling interest AOCIL attributable to GXO 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 AOCIL to net income ( 1 ) — — — ( 1 ) Other comprehensive income (loss), net of tax ( 43 ) 9 — 2 ( 32 ) As of September 30, 2022 $ ( 212 ) $ 9 $ ( 76 ) $ 1 $ ( 278 ) 15 (In millions) Foreign Currency Translation Adjustments Cash Flow Hedges Defined Benefit Plan Less: AOCIL attributable to noncontrolling interest AOCIL attributable to GXO 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 AOCIL to net income ( 5 ) — — — ( 5 ) Other comprehensive income (loss), net of tax ( 163 ) 9 — 4 ( 150 ) Deconsolidation of variable interest entity 4 — — ( 2 ) 2 As of September 30, 2022 $ ( 212 ) $ 9 $ ( 76 ) $ 1 $ ( 278 ) 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 September 30, Nine Months Ended September 30, (In millions) 2023 2022 2023 2022 Interest cost $ ( 11 ) $ ( 5 ) $ ( 30 ) $ ( 16 ) Expected return on plan assets 14 12 38 41 Amortization of net loss ( 1 ) — ( 2 ) — Net periodic pension income (1) $ 2 $ 7 $ 6 $ 25 (1) Net periodic pension income is recorded in 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 September 30, 2023 and 2022, were $ 15 million and $ 12 million, respectively, and for the nine months ended September 30, 2023 and 2022 were $ 47 million and $ 40 million, respectively. Defined contribution costs were primarily recorded in Direct operating expense in the Condensed Consolidated Statements of Operations. 8. Restructuring Costs and Other Restructuring costs and other are primarily related to severance, including projects to optimize finance, human resources and information technology functions, and are not associated with customer attrition. For the three months ended September 30, 2023, Restructuring costs and other totaled $ 7 million including $ 6 million related to severance charges, primarily from the exit of non-core businesses in Asia. For the nine months ended September 30, 2023, Restructuring costs and other totaled $ 31 million, including $ 24 million related to severance charges and $ 7 million related to non-cash impairment charges. 16 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 24 Payments ( 26 ) Balance as of September 30, 2023 $ 11 The remaining restructuring liability at September 30, 2023 primarily relates to severance payments and is expected to be substantially paid within the next 12 months. 9. Income Taxes The effective tax rate was 17.9 % for the three months ended September 30, 2023, compared with 22.5 % for the same period in 2022. The effective tax rate was 19.1 % for the nine months ended September 30, 2023, compared with 24.7 % for the same period in 2022. The decrease in our effective tax rate for the three months was primarily driven by a tax benefit related to return-to-provision true-up adjustments. The decrease in our effective tax rate for the nine months was primarily driven by a tax benefit related to valuation allowance release. As of September 30, 2023 and December 31, 2022, the Company had valuation allowances of $ 36 million and $ 44 million on its deferred income tax asset, respectively. 10. Goodwill The following table presents the changes in Goodwill for the nine months ended September 30, 2023: (In millions) Balance as of December 31, 2022 $ 2,728 Acquisition (1) 44 Impact of foreign exchange translation (2) ( 38 ) Balance as of September 30, 2023 $ 2,734 (1) Represents the finalization of the purchase price allocation for the Clipper acquisition. See Note 11 — Acquisition for additional information. (2) Changes to goodwill amounts resulting from foreign currency translation after the acquisition date are presented as the impact of foreign exchange translation. As of September 30, 2023, and December 31, 2022, there were no accumulated goodwill impairment losses. 11. 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 with 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. 17 The following table summarizes the final fair values 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 29 Total long-term assets 720 Total assets $ 956 LIABILITIES Current liabilities Accounts payable $ 81 Accrued expenses 96 Current debt 55 Current operating lease liabilities 43 Other current liabilities 56 Total current liabilities 331 Long-term liabilities Long-term debt 10 Long-term operating lease liabilities 176 Other long-term liabilities 173 Total long-term liabilities 359 Total liabilities $ 690 Net assets purchased $ 266 Cash paid $ 902 Common stock issued (2) 204 Purchase price paid $ 1,106 Goodwill recorded (3) $ 840 (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. (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 in connection with the Clipper Acquisition to be deductible for income tax purposes. 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 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 18 contingencies quarterly and as additional information becomes available. If a loss is not both probable and reasonably estimable, or if an exposure to a 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 related to these matters are expensed as they are 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. 13. Subsequent Events Financial Instruments - Net Investment Hedges In October 2023, the Company terminated a hedge with a notional amount of $ 115 million. Also, the Company amended a $ 235 million hedge to extend its maturity from 2024 to 2025. Additionally, the Company entered into various hedges for an aggregate notional amount of $ 313 million that will mature from 2025 to 2028. Acquisition On September 13, 2023, the Company entered into an Agreement and Plan of Merger to acquire PFSweb, Inc., a Delaware corporation headquartered in Irving, Texas (“PFS”), and on October 23, 2023, the Company completed its acquisition of PFS. PFS provides e-commerce order fulfillment services. The Company acquired the shares of PFSweb at a price per share of $ 7.50 in cash, totaling approximately $ 181 million. 19