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Item 7. Management’s Discussion and Analysis

2024-02-15 compared with 2023-02-16 · 112 added, 145 removed, 103 unchanged (71% of the section changed)

3 unchanged sentences

Please see “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Also, the following discussion and analysis of our financial conditions and results of operations generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Annual Report and can be found in Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our Annual Report on Form 10-K for the year ended December 31, 2021.

Also, the following discussion and analysis of our financial condition and results of operations generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

Discussions of 2021 financial condition and year-to-year comparisons between 2022 and 2021 are not included in this Annual Report and can be found in Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Business Overview

GXO Logistics, Inc., together with its subsidiaries (“GXO,” the “Company” or “we”), is the largest pure-play contract logistics provider in the world and a foremost innovator in an industry.

We provide our customers with high-value-add warehousing and distribution, order fulfillment, e-commerce, reverse logistics and other supply chain services differentiated by our ability to deliver technology-enabled, customized solutions at scale.

Our customers rely on us to move their goods with high efficiency through their supply chains — from the moment inbound goods arrive at our logistics sites, through fulfillment and distribution and the management of returned products.

GXO Logistics, Inc., together with its subsidiaries (“GXO,” the “Company,” “our” or “we”), is the largest pure-play contract logistics provider in the world and a foremost innovator in the industry.

We provide our customers with high-value-added warehousing and distribution, order fulfillment, e-commerce, reverse logistics and other supply chain services differentiated by our ability to deliver technology-enabled, customized solutions at scale.

Our customers rely on us to move their goods with high efficiency through their supply chains — from the moment goods arrive at our warehouses through fulfillment and distribution, and the management of returned products.

Our customer base includes many blue-chip leaders in sectors that demonstrate high growth and/or durable demand, with significant growth potential through customer outsourcing of logistics services.

We strive to provide all of our customers with consistently high levels of service and cutting-edge automation.

We also collaborate with our largest customers on planning and forecasting and provide assistance with network optimization, working with these customers to design or redesign their supply chains to meet specific goals, such as sustainability metrics.

We strive to provide all customers with consistent quality service and cutting-edge automation.

We also collaborate with our largest customers on planning and forecasting and assist with network optimization, working with these customers to design or redesign their supply chains to meet specific goals, such as environmental, social and governance.

Our multidisciplinary, consultative approach has led to many of our key customer relationships extending for years and expanding in scope.

The most dramatic growth in secular demand in recent years has been in e-commerce and related sectors, including omnichannel retail and other direct-to-consumer channels.

We expect to attract new customers and expand the services we provide to existing customers through new projects, thus earning more of their external and internal logistics spend.

We use technology to manage advanced automation, labor productivity, safety and the complex flow of goods within sophisticated logistics environments.

The most dramatic growth in demand in recent years has been in e-commerce and related sectors, including omnichannel retail and other direct-to-consumer channels.

We expect to attract new customers and expand the services we provide to existing customers through new projects, thus earning more of their logistics spending.

We use technology to manage advanced automation, labor productivity, sustainability, safety and the complex flow of goods within sophisticated warehouse environments.

Our business model is asset-light and historically resilient in cycles, with high returns, strong free cash flow and visibility into revenue and earnings.

The vast majority of our contracts with customers are multi-year agreements, and our facility lease arrangements generally align with contract length.

The vast majority of our contracts with customers are long-term in nature, and our warehouse lease arrangements generally align with contract length.

The Company has both fixed-price contracts (closed book or hybrid contracts) and cost-plus contracts (open book contracts) .

Most of our customer contracts contain both fixed and variable components.

The fixed component is typically designed to cover facility, technology and equipment costs, while the variable component is determined based on expected volumes and associated labor costs.

The fixed component is typically designed to cover warehouse, technology and equipment costs, while the variable component is determined based on expected volumes and associated labor costs.

Under fixed-price contracts, the Company agrees to perform the specified work for a pre-determined price.

To the extent the Company’s actual costs vary from the estimates upon which the price was negotiated, the Company will generate more or less profit.

Cost-plus contracts provide for the payment of allowable costs incurred during the performance of the contract plus a specified margin.

Basis of Presentation

Prior to the separation (the “Separation”) from XPO, Inc.

(“XPO”), GXO historical 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 now prepared on a consolidated basis.

The combined consolidated financial statements for all periods presented prior to the Separation are now referred to as “Consolidated Financial Statements” and have been prepared under U.S generally accounting principles (“GAAP”).

Prior to the Separation, GXO historical assets and liabilities presented were wholly owned by XPO and were reflected on a historical cost basis.

In connection with the Separation, GXO assets and liabilities were transferred to the Company on a carry-over basis.

Prior to the Separation, GXO 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 are recorded within Selling, general and administrative expense (“SG&A”), Depreciation and amortization expense and Transaction and integration costs in the Consolidated Statements of Operations.

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”).

For the year ended December 31, 2022, the Company recorded $569 million and $4 million of revenue and income before income taxes, respectively.

On August 2, 2021, the Company became a standalone publicly traded company and its financial statements post the separation from XPO, Inc.

(the “Separation”) are now prepared on a consolidated basis.

Before the Separation, GXO’s historical financial statements were prepared on a standalone combined basis and were derived from the Consolidated Financial Statements and accounting records of XPO.

The combined Consolidated Financial Statements for all periods presented before the Separation are now referred to as “Consolidated Financial Statements” and have been prepared under the U.S.

generally accepted accounting principles (“GAAP”).

GXO has one reportable segment.

On October 23, 2023, the Company completed the acquisition of PFSweb, Inc.

(“PFS”), an e-commerce order fulfillment company based in Irving, Texas (the “PFS 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”).

Due to the acquisitions of Clipper and PFS, comparisons in our results of operations between 2023 and 2022 are less meaningful.

Results of Operations

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Transaction and integration costs 34 61 (27) (44) %

Restructuring costs and other 32 4 28 n/m

Restructuring costs and other 32 32 — — %

Operating income 318 242 76 31 %

Other income, net 51 23 28 n/m

Interest expense (29) (21) (8) 38 %

Other income, net 1 51 (50) (98) %

Interest expense, net (53) (29) (24) 83 %

Income before income taxes 266 264 2 1 %

Income tax (expense) benefit (64) 8 (72) n/m

Income tax expense (33) (64) 31 48 %

Net income $ 233 $ 200 $ 33 17 %

n/m - not meaningful

Revenue for 2022 increased by 13%, or $1.1 billion, to $9.0 billion compared with $7.9 billion for 2021.

The increase in 2022 compared to the prior year reflects an increase of $569 million due to the Clipper Acquisition, $391 million in our Americas and Asia-Pacific operations and $172 million from our United Kingdom and Ireland operations.

This increase was partially offset by a decrease of $79 million in our Continental Europe operations, primarily due to the deconsolidation of a 50% owned joint venture and foreign currency movement.

Foreign currency movement decreased revenue by $653 million in 2022.

Direct operating expenses comprise both fixed and variable expenses and consist of operating costs related to our logistics facilities, including personnel costs, facility and equipment expenses, such as rent, utilities, equipment maintenance and repair, transportation costs, costs of materials and supplies and information technology expenses.

Revenue for 2023 increased by 9%, or $785 million, to $9.8 billion compared with $9.0 billion for 2022.

The increase primarily reflects $378 million from the Clipper Acquisition (for the periods that were not comparable), $82 million from the PFS Acquisition, and growth in Continental Europe.

Foreign currency movements increased revenue by $140 million in 2023.

Direct operating expenses comprise both fixed and variable expenses and consist of operating costs related to our warehouse operations, including personnel costs, rent expenses, utility costs, equipment maintenance and repair costs, transportation costs, costs of materials and supplies and information technology expenses.

Direct operating expense for 2023 increased by 8%, or $592 million, to $8.0 billion compared with $7.4 billion for 2022.

As a percentage of revenue, direct operating expense was 82.2% and 82.8% in 2023 and 2022, respectively.

Direct operating expense increased primarily due to higher personnel and temporary labor expenses of $528 million, as well as higher third-party transportation costs and facilities expense of $224 million.

SG&A primarily consists of salary and benefit costs for executive and certain administration functions, professional fees, facility costs other than those related to our logistics facilities, bad debt expense and legal costs.

The increase primarily reflects $286 million from the Clipper Acquisition (for the periods that were not comparable), $67 million from the PFS Acquisition, and higher personnel and rent expenses.

Selling, general and administrative expense (“SG&A”) primarily consists of salary and benefit costs for executive and certain administration functions, professional fees, bad debt expense and legal costs.

SG&A for 2023 increased by 13%, or $112 million, to $998 million, compared with $886 million in 2022.

SG&A increased primarily due to higher personnel expenses.

Depreciation and amortization expense for 2022 decreased to $329 million compared with $335 million for 2021.

SG&A primarily increased due to the Clipper Acquisition, higher personnel costs for certain administrative functions and bad debt expense.

Depreciation and amortization expense for 2023 increased by $32 million to $361 million compared with $329 million for 2022.

Depreciation and amortization expense included amortization of intangible assets of $71 million and $68 million in 2023 and 2022, respectively.

The decrease in depreciation and amortization expense was primarily a result of $15 million allocated corporate charges from XPO before the Separation in the prior year, offset by higher amortization as a result of the Clipper Acquisition.

Depreciation and amortization expense increased primarily due to the Clipper Acquisition.

Transaction and integration costs were $34 million in 2023, compared with $61 million for 2022.

Transaction and integration costs in 2022 include $46 million related to the Clipper Acquisition, reflecting costs associated with financing arrangements, advisory fees and integration costs, and $15 million from the Separation, primarily reflecting rebranding costs.

Transaction and integration costs in 2021 primarily relate to the Separation and the acquisition of the majority of Kuehne + Nagel’s contract logistics operations in the U.K.

(the “K + N Acquisition”).

Transaction and integration costs in 2023 included $20 million related to the integration of Clipper and $12 million related to the PFS Acquisition, reflecting costs associated with advisory fees and severance costs.

Transaction and integration costs in 2022 primarily related to $46 million related to the Clipper Acquisition, reflecting costs associated with financing arrangements, advisory fees and integration costs, and $15 million from the Separation, primarily reflecting rebranding costs.

We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure.

These costs are primarily related to severance;

including projects to optimize human resources, finance and information technology activities;

and are not associated with customer attrition.

Restructuring costs and other for 2022 were $32 million compared with $4 million for 2021.

These costs are primarily related to severance, including projects to optimize human resources, finance and information technology activities, and are not associated with customer attrition.

Restructuring costs and other were $32 million for 2023 and 2022.

Restructuring costs and other for 2023 included $16 million related to a restructuring plan initiated in the fourth quarter of 2022 designed to centralize certain processes and standardize operating structures.

Restructuring costs and other in 2023 also included impairment charges of $11 million, primarily related to closing certain corporate and administrative offices, and $5 million associated with the exit of a non-core businesses in Asia.

Restructuring costs and other for 2022 included $24 million related to severance costs, primarily from the exit of non-core businesses and central efficiency projects, and $8 million related to the deconsolidation of a joint venture.

Other income, net decreased due to lower pension income and foreign currency movements.

Other income, net was as follows:

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Foreign currency gain (loss):

Realized foreign currency option and forward contracts gain

Unrealized foreign currency option and forward contracts gain (loss)

(11) 1 (12) n/m

Foreign currency transaction and remeasurement gain (loss)

Realized foreign currency option and forward contracts gain (loss)

(13) 29 (42) n/m

Total foreign currency gain 14 4 10 n/m

Unrealized foreign currency option and forward contracts gain (loss)

4 (11) 15 n/m

Foreign currency transaction and remeasurement loss

— (3) 3 (100) %

Total foreign currency gain (loss) (9) 15 (24) n/m

2 3 (1) (33) %

Other income, net

$ 1 $ 51 $ (50) (98) %

n/m - not meaningful

Interest expense primarily consists of interest related to indebtedness for money borrowed, capital lease obligations and cross currency swaps used in net investment hedges.

Interest expense for 2022 increased by 38%, or $8 million, to $29 million, compared to $21 million for 2021 as a result of higher outstanding debt.

Interest expense, net increased due to the debt from the Clipper Acquisition being outstanding for the full year in 2023 compared with seven months of the prior year and higher variable interest rates on our debt, partially offset by the accretion on cross-currency swaps and interest income in the current period.

Interest expense, net was as follows:

Year Ended December 31,

(In millions) 2023 2022 $ Change % Change

Debt and capital leases

$ 96 $ 59 $ 37 63 %

Cross-currency swaps

(33) (25) (8) 32 %

Interest income

(10) (5) (5) 100 %

Interest expense, net $ 53 $ 29 $ 24 83 %

Income before income taxes for 2023 increased by $2 million, to $266 million, compared with $264 million for 2022.

The increase was primarily due to growth in our business, lower transaction and integration costs, and other income from a pension plan and foreign currency contracts, partially offset by higher restructuring costs.

Income from continuing operations before income taxes for our domestic operations was $105 million for 2022, compared with a loss of $25 million in 2021.

The increase in income in our domestic operations for 2022 was driven by a 16% increase in revenue resulting primarily from the reduced impact of COVID-19 on our business in 2022 and lower depreciation and amortization expense of $20 million.

Income from continuing operations before income taxes for our foreign operations was $159 million for 2022, compared with income of $178 million in 2021.

The decrease in

income was primarily driven by the impact of foreign currency movement, offset by an increase of $4 million in additional income resulting from the Clipper Acquisition, as well as an increase in pension income of $14 million.

Income tax for 2022 was a $64 million expense compared to an $8 million benefit for 2021.

Our effective tax rate was 24.2% in 2022 and not meaningful in 2021.

The increase in our effective income tax rate was driven by contribution and margin-based taxes and offset by the benefit from changes to the valuation allowance and stock-based compensation.

The increase was primarily due to growth in our business and lower transaction and integration costs, offset by

higher interest expense and lower other income.

Income from continuing operations before income taxes for our domestic operations was $97 million for 2023, compared with $105 million in 2022.

The decrease was driven by a higher interest expense associated with our debt, partially offset by lower transaction and integration costs.

Income from continuing operations before income taxes for our foreign operations was $169 million for 2023 compared with $159 million in 2022.

The increase was primarily driven by growth in the business and lower transaction and integration costs, partially offset by lower pension income.

Income tax expense was $33 million in 2023, compared with $64 million in 2022.

Our effective tax rate was 12.4% in 2023 and 24.2% in 2022.

The decrease in our effective income tax rate in 2023 was driven by tax benefits from intangible assets and the release of valuation allowances.

Liquidity and Capital Resources

Our ability to fund our operations and anticipated capital needs are reliant upon the generation of cash from operations, supplemented as necessary by periodic utilization of our revolving credit facility.

Our ability to fund our operations and anticipated capital needs is reliant upon the generation of cash from operations, supplemented as necessary by periodic utilization of our revolving credit facility and factoring programs.

Our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures, repayment of borrowings and strategic business development transactions.

The timing and magnitude of our start-ups can vary and may positively or negatively impact our cash flows.

The timing and magnitude of our new contract start-ups can vary and may positively or negatively impact our cash flows.

We continually evaluate our liquidity requirements and capital structure in light of our operating needs, growth initiatives and capital resources.

We believe that our existing liquidity and sources of capital are sufficient to support our operations over the next 12 months.

As of December 31, 2023, we held cash and cash equivalents of $468 million and we had $799 million of borrowing capacity available, net of letters of credit under our revolving credit facility.

We believe that our cash and cash equivalents on hand, cash flows from operations, the revolving credit facility and the use of our factoring programs will provide sufficient liquidity to operate our business and fund our current and assumed obligations for at least the next 12 months.

For additional information regarding our cash requirement from contractual obligations, indebtedness and lease obligations, see Note 17.

“Commitments and Contingencies”, Note 9.

“Debt and Financing Arrangements” and Note 8.

“Leases” in Part II, Item 8 of this Annual Report on Form 10-K.

Capital Expenditures

Our 2023 capital expenditures include fulfillment costs and investments in technology and automation to improve the speed and accuracy of order fulfillment and the resiliency of supply chains.

Our future capital spending includes fulfillment costs and investments in technology and automation to improve the speed and accuracy of order fulfillment and the resiliency of our supply chains.

The level and the timing of the Company’s capital expenditures within these categories can vary as a result of a variety of factors outside our control, such as the timing of new contracts, availability of labor and materials and foreign currency fluctuations.

We believe that we have significant discretion over the amount and timing of our capital expenditures as we are not subject to any agreement that would require significant capital expenditures on a designated schedule or upon the occurrence of designated events.

Debt and Financing Arrangements

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 two-year term loan tranche (the “Two-Year Term Loan”) and a $235 million three-year term loan tranche (the “Three-Year Term Loan”) that will mature on May 26, 2024 and May 26, 2025, respectively.

The Two-Year Term Loan and Three-Year Term Loan 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.

In December 2022, the Company repaid $50 million against the Two-Year Term Loan.

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.

Unsecured Notes

In July 2021, prior to the Separation, the Company completed an offering of $800 million aggregate principal amount of notes, consisting of $400 million of notes due 2026 (the “2026 Notes”) and $400 million of notes due 2031 (the “2031 Notes”).

The 2026 Notes bear interest at a rate of 1.65% per annum payable semiannually in arrears on January 15 and July 15 of each year, beginning January 15, 2022, and maturing on July 15, 2026.

The 2031 Notes bear interest at a rate of 2.65% per annum payable semiannually in arrears on January 15 and July 15 of each year, beginning January 15, 2022, and maturing on July 15, 2031.

The Company recognized $6 million of debt discounts and $2 million of debt issuance costs that were recorded as a reduction to the related debt instrument and will be amortized to interest expense over the life of the 2026 Notes and 2031 Notes.

Revolving Credit Facilities

In June 2021, prior to the Separation, 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 will be available for the issuance of letters of credit.

Loans under the Revolving Credit Facility bear interest at a fluctuating rate equal to (i) with respect to borrowings in dollars, at the Company’s option, the alternate base rate or the reserve-adjusted LIBOR, (ii) with respect to borrowings in Canadian dollars, the reserve-adjusted Canadian Dollar Offered Rate, and (iii) with respect to borrowings in Euros, the reserve-adjusted Euro Interbank Offered Rate, in each case, plus an applicable margin calculated based on the Company’s credit ratings.

In addition, the Company is paying a commitment fee of 0.15% per annum on the unused portion of the commitments under the Revolving Credit Facility.

No amounts were outstanding under the Revolving Credit Facility as of December 31, 2022 or December 31, 2021.

In addition, pursuant to the Clipper Acquisition, the Company assumed a revolving credit facility agreement under which it may borrow up to approximately £45 million ($54 million as of December 31, 2022) in aggregate at any time, expiring in November 2023.

As of December 31, 2022, the Company had $18 million of borrowings outstanding under this agreement.

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 terminated in the first quarter of 2022.

The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the Consolidated Statements of Cash Flows.

The Company uses the sale of these receivables to help manage its working capital.

Information related to trade receivables sold was as follows:

Year Ended December 31,

(In millions) 2022 2021 2020

Factoring agreements

Receivables sold in period $ 992 $ 450 $ 612

Cash consideration 988 449 611

Securitization program

Receivables sold in period $ — $ 1,850 $ 1,491

Cash consideration — 1,850 1,491

Deferred purchase price — — 80

Covenants and Compliance

The covenants in the Five-Year Term Loan, the Delayed Draw Term Loan, the Unsecured Notes, and the 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 December 31, 2022, the Company complied with the covenants contained in its debt and financing arrangements.

Financial Condition

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Total long-term liabilities 3,935 4,009 (74) (2) %

The increase in our assets and liabilities from December 31, 2021 to December 31, 2022 primarily reflects the assets acquired and liabilities assumed, as well as various debt instruments entered into in connection with the Clipper Acquisition.

Total assets increased by $288 million from December 31, 2022 to December 31, 2023, primarily reflecting increases from the PFS Acquisition.

Total liabilities increased by $20 million from December 31, 2022 to December 31, 2023, reflecting the early repayment of debt, partially offset by increases from the PFS Acquisition.

Cash Flow Activity

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Net cash provided by operating activities $ 558 $ 542 $ 16 3 %

Net cash used in investing activities (1,149) (207) (942) n/m

Net cash provided by (used in) financing activities 787 (241) 1,028 n/m

Effect of exchange rates on cash and cash equivalents

(18) (2) (16) n/m

Net increase in cash and cash equivalents

$ 162 $ 5 $ 157 n/m

Net cash used in investing activities (410) (1,149) 739 (64) %

Net cash (used in) provided by financing activities (186) 787 (973) n/m

Effect of exchange rates 13 (18) 31 n/m

Net (decrease) increase in cash, restricted cash and cash equivalents $ (25) $ 162 $ (187) n/m

n/m - not meaningful

1 unchanged sentence

Cash flows provided by operating activities for 2023 increased by $16 million compared with 2022.

was primarily due to $39 million higher income in 2022, and $47 million in non-cash adjustments driven by a decrease in deferred tax benefit for 2021.

The increase was due to $33 million higher net income and $40 million non-cash adjustments, offset by $57 million of working capital used in 2023.

Investing Activities

Investing activities used $1,149 million of cash in 2022 compared with $207 million used in 2021.

During 2022, we used $876 million in connection with the Clipper Acquisition, $342 million of cash for capital expenditures, partially offset by $40 million received from the sales of property and equipment and $21 million in net proceeds from the settlement of cross-currency swap agreements, excluding accrued interest.

During 2021, we used $250 million of cash for capital expenditures, received $32 million in connection with the K + N Acquisition and received $11 million from sales of property and equipment.

Investing activities used $410 million of cash in 2023 compared with $1.1 billion in 2022.

During 2023, we used $274 million of cash for capital expenditures, $149 million in connection with the PFS Acquisition and $3 million in settlement of cross-currency swap agreements, excluding accrued interest, partially offset by $18 million of proceeds from the sales of property and equipment.

During 2022, we used $876 million of cash in connection with the Clipper Acquisition, $342 million for capital expenditures, partially offset by $40 million of proceeds from the sales of property and equipment and $21 million in settlement of cross-currency swap agreements, excluding accrued interest.

Financing Activities

Financing activities generated $787 million of cash in 2022 and used $241 million of cash in 2021.

The primary sources of cash from financing activities in 2022 were $917 million in proceeds from long-term debt and the revolving credit facility, net, partially offset by $115 million in repayment of debt and finance leases and $16 million in payments for employee taxes on net settlement of equity awards.

The primary uses of cash from financing activities in 2021 were $774 million of net transfers to XPO in connection with the Separation, $128 million to purchase the remaining noncontrolling interest in GXO Logistics Europe SAS, $72 million cash used to repay debt and finance leases and $26 million to repay borrowings related to our securitization program.

The source of cash from financing activities in 2021 was the issuance of long-term debt of $794 million.

Financing activities used $186 million of cash in 2023 and generated $787 million in 2022.

The primary use of cash from financing activities in 2023 was $169 million in repayment of debt and finance leases and $12 million in payments for employee taxes on net settlement of equity awards.

The primary source of cash from financing activities in 2022 was $917 million in proceeds from long-term debt, net, partially offset by $115 million in repayment of debt and finance leases and $16 million in payments for employee taxes on net settlement of equity awards.

Off-Balance Sheet Arrangements

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As of December 31, 2023, our outstanding obligations under operating and finance leases were $2.4 billion and $116 million, respectively.

See Note — 8 Leases to the Consolidated Financial Statements for additional information.

As of December 31, 2022, we have $800 million of unsecured notes outstanding with interest payable in arrears on January 15 and July 15 of each year, and $850 million of variable-rate term loans outstanding with interest payable in arrears at our option monthly, quarterly, or semiannually.

See Note — 9 Debt and Financing Arrangements to the Consolidated Financial Statements for additional information.

“Leases” to the Consolidated Financial Statements for additional information.

As of December 31, 2023, we had $800 million of unsecured notes outstanding with interest payable in arrears on January 15 and July 15 of each year and $735 million of variable-rate term loans outstanding with interest payable in arrears at our option monthly, quarterly or semiannually.

“Debt and Financing Arrangements” to the Consolidated Financial Statements for additional information.

In addition, we have obligations for agreements to purchase goods or services entered into in the ordinary course of business that are enforceable and legally binding and gross unrecognized tax benefits.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S.

generally accepted accounting principles (“GAAP”).

We prepare our Consolidated Financial Statements in accordance with GAAP.

We make assumptions, estimates and judgments that affect our reported amounts of assets, liabilities, revenues, expenses, gains and losses.

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We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.

Significant assumptions utilized in the allocation of the purchase price related to intangible assets include future expected cash flows from acquired customer relationships and trade names and discount rates.

Significant assumptions utilized in the allocation of the purchase price related to intangible assets include future expected cash flows from acquired intangibles and discount rates.

Our estimates of fair value are based upon reasonable assumptions but are inherently uncertain and unpredictable, and as a result, actual results may differ from these estimates.

1 unchanged sentence

Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

See Note — 4 Acquisitions to the Consolidated Financial Statements for additional information.

“Acquisitions” to the Consolidated Financial Statements for additional information.

Evaluation of Goodwill

2 unchanged sentences

We have three reporting units:

i) Americas and Asia-Pacific;

ii) United Kingdom and Ireland and iii) Continental Europe.

i) Americas and Asia-Pacific, ii) United Kingdom and Ireland and iii) Continental Europe.

For each reporting unit, we first assess qualitative factors that are specific to the reporting unit as well as industry and macroeconomic factors to determine whether it is necessary to perform a quantitative goodwill impairment test.

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Employee Benefit Plans

We sponsor an international defined benefit pension plan.

We sponsor various retirement plans, the most significant of which is in the U.K.

Retirement Plan”).

Assumptions used in the accounting for these employee benefit plans include the discount rate and expected return on plan assets.

Assumptions are determined based on company data and appropriate market indicators and are evaluated each year at December 31.

A change in any of these assumptions would have an effect on net periodic pension costs reported in the consolidated financial statements.

A change in any of these assumptions would have an effect on the net periodic pension cost reported in the Consolidated Financial Statements.

The discount rate is determined based on the yield on a portfolio of high-quality bonds, constructed to provide cash flows necessary to meet our pension plans’ expected future benefit payments, as determined for the accumulated benefit obligation.

A 25-basis-point decrease in the discount rate would result in an estimated increase in the accumulated benefit obligation of approximately $24 million.

A 50-basis-point decrease in the discount rate of the U.K.

Retirement Plan would result in an estimated increase in the accumulated benefit obligation of approximately $44 million.

The expected return on plan assets assumption is derived using the current and expected asset allocation of the pension plan assets and considering historical as well as expected returns on various classes of plan assets.

An increase or decrease of 50-basis-points in the expected long-term rate of return would have decreased or increased 2022 pension expense by approximately $4 million.

See Note — 15 Employee Benefit Plans to the Consolidated Financial Statements for additional information.

An increase or decrease of 50 basis points in the expected long-term rate of return of the U.K.

Retirement Plan would have decreased or increased 2023 net periodic pension cost by approximately $4 million.

“Employee Benefit Plans” to the Consolidated Financial Statements for additional information.

New Accounting Standards

Information related to new accounting standards is included in Note — 2 Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements.

Information related to new accounting standards is included in Note 2.

“Basis of Presentation and Significant Accounting Policies” to the Consolidated Financial Statements.

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What changed 10-K

Item 7. Management’s Discussion and Analysis