GXO Logistics, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. Index to Financial Statements Page Report of Independent Registered Public Accounting Firm 29 Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022 and 2021 32 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 202 3 , 202 2 and 202 1 33 Consolidated Balance Sheets as of December 31, 202 3 and 202 2 34 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 3 , 202 2 and 202 1 35 Consolidated Statements of Changes in Equity for the Years Ended December 31, 202 3 , 202 2 and 202 1 37 Notes to Consolidated Financial Statements 38 Note 1 - Organization 38 Note 2 - Basis of Presentation and Significant Accounting Policies 38 Note 3 - Revenue Recognition 45 Note 4 - Acquisitions 46 Note 5 - Goodwill 48 Note 6 - Intangible Assets 48 Note 7 - Property and Equipment 49 Note 8 - Leases 49 Note 9 - Debt and Financing Arrangements 51 Note 10 - Fair Value Measurements and Financial Instruments 53 Note 11 - Accrued Expenses 56 Note 1 2 - Stockholders ’ Equity 57 Note 1 3 - Stock-Based Compensation 57 Note 1 4 - Employee Benefit Plans 59 Note 1 5 - Restructuring Charges and Other 62 Note 1 6 - Income Taxes 62 Note 1 7 - Commitments and Contingencies 66 28 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors GXO Logistics, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of GXO Logistics, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company acquired PFSweb, Inc. during 2023, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, PFSweb, Inc.’s internal control over financial reporting associated with approximately 1.8% of total assets, excluding associated goodwill and intangible assets, and approximately 0.8% of total revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2023. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over the financial reporting of PFSweb, Inc. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our 29 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Sufficiency of audit evidence over revenue from contracts with customers As discussed in Notes 2 and 3 to the consolidated financial statements, revenue is recognized over the period in which services are provided under the terms of the Company’s contractual relationship with its customers. For the year ended December 31, 2023, the Company reported $9.8 billion of revenue. We identified the evaluation of the sufficiency of audit evidence over revenue from contracts with customers (revenue) as a critical audit matter. Subjective auditor judgment and IT professionals with specialized skills and knowledge were required to evaluate the sufficiency of audit evidence obtained over revenue due to the number and dispersion of warehouse management and other IT systems used in the processing and recording of revenue. The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the processing and recording of revenue. We evaluated the design and tested the operating effectiveness of certain internal controls related to the processing and recording of revenue, including manual controls related to the examination of revenue contracts and detection of revenues recorded outside of expectations. We involved IT professionals with specialized skills and knowledge to test certain manual and automated controls, including general IT controls, over multiple relevant IT systems and information used in internal control. We compared certain revenue activity recorded during the year to cash received, adjusted for reconciling items. We evaluated the relevance and reliability of certain reconciling items to underlying documentation, including the changes in accounts receivable and deferred revenue. We examined a selection of revenue contracts and transactions to assess that revenue was recorded in accordance with the Company’s accounting policy. Additionally, for a sample of accrued revenue at year-end, we confirmed with the Company’s customers the amount of revenue billed subsequent to year-end and compared the result to the Company’s accounting records. We evaluated the sufficiency of audit evidence 30 obtained by assessing the results of procedures performed, including the appropriateness of the nature and extent of such evidence. /s/ KPMG LLP We have served as the Company’s auditor since 2021. Stamford, Connecticut February 15, 2024 31 GXO Logistics, Inc. Consolidated Statements of Operations Year Ended December 31, (Dollars in millions, shares in thousands, except per share amounts) 2023 2022 2021 Revenue $ 9,778 $ 8,993 $ 7,940 Direct operating expense 8,035 7,443 6,637 Selling, general and administrative expense 998 886 714 Depreciation and amortization expense 361 329 335 Transaction and integration costs 34 61 99 Restructuring costs and other 32 32 4 Operating income 318 242 151 Other income, net 1 51 23 Interest expense, net ( 53 ) ( 29 ) ( 21 ) Income before income taxes 266 264 153 Income tax (expense) benefit ( 33 ) ( 64 ) 8 Net income 233 200 161 Net income attributable to Noncontrolling Interests (“NCI”) ( 4 ) ( 3 ) ( 8 ) Net income attributable to GXO $ 229 $ 197 $ 153 Earnings per share Basic $ 1.93 $ 1.68 $ 1.33 Diluted $ 1.92 $ 1.67 $ 1.32 Weighted-average common shares outstanding Basic 118,908 117,050 114,632 Diluted 119,490 117,616 115,597 See accompanying Notes to the Consolidated Financial Statements. 32 GXO Logistics, Inc. Consolidated Statements of Comprehensive Income Year Ended December 31, (In millions) 2023 2022 2021 Net income $ 233 $ 200 $ 161 Other comprehensive income (loss), net of tax Foreign currency translation adjustments 19 ( 98 ) ( 46 ) Cash flow hedges ( 2 ) 7 — Pension plans ( 1 ) ( 36 ) 7 Other comprehensive income (loss), net of tax 16 ( 127 ) ( 39 ) Comprehensive income, net of tax 249 73 122 Less: Comprehensive income attributable to NCI 5 2 7 Comprehensive income attributable to GXO $ 244 $ 71 $ 115 See accompanying Notes to the Consolidated Financial Statements. 33 GXO Logistics, Inc. Consolidated Balance Sheets December 31, (Dollars in millions, shares in thousands, except per share amounts) 2023 2022 ASSETS Current assets Cash and cash equivalents $ 468 $ 495 Accounts receivable, net of allowance of $ 11 and $ 12 1,753 1,647 Other current assets 347 286 Total current assets 2,568 2,428 Long-term assets Property and equipment, net of accumulated depreciation of $ 1,545 and $ 1,297 953 960 Operating lease assets 2,201 2,227 Goodwill 2,891 2,728 Intangible assets, net of accumulated amortization of $ 528 and $ 456 567 570 Other long-term assets 327 306 Total long-term assets 6,939 6,791 Total assets $ 9,507 $ 9,219 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 709 $ 717 Accrued expenses 966 995 Current debt 27 67 Current operating lease liabilities 597 560 Other current liabilities 327 193 Total current liabilities 2,626 2,532 Long-term liabilities Long-term debt 1,620 1,739 Long-term operating lease liabilities 1,842 1,853 Other long-term liabilities 473 417 Total long-term liabilities 3,935 4,009 Commitments and Contingencies (Note 17) Stockholders’ Equity Common Stock, $ 0.01 par value per share; 300,000 shares authorized, 119,057 and 118,728 shares 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 (“APIC”) 2,598 2,575 Retained earnings 552 323 Accumulated Other Comprehensive Income (Loss) (“AOCIL”) ( 239 ) ( 254 ) Total stockholders’ equity before NCI 2,912 2,645 NCI 34 33 Total equity 2,946 2,678 Total liabilities and equity $ 9,507 $ 9,219 See accompanying Notes to the Consolidated Financial Statements. 34 GXO Logistics, Inc. Consolidated Statements of Cash Flows Year Ended December 31, (In millions) 2023 2022 2021 Cash flows from operating activities: Net income $ 233 $ 200 $ 161 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization expense 361 329 335 Stock-based compensation expense 35 33 28 Deferred tax benefit ( 41 ) ( 7 ) ( 48 ) Other 23 ( 17 ) ( 24 ) Changes in operating assets and liabilities Accounts receivable ( 17 ) ( 71 ) ( 243 ) Other assets 28 24 ( 57 ) Accounts payable ( 3 ) 45 114 Accrued expenses and other liabilities ( 61 ) 6 189 Net cash provided by operating activities 558 542 455 Cash flows from investing activities: Capital expenditures ( 274 ) ( 342 ) ( 250 ) Proceeds from sale of property and equipment 18 40 11 Acquisition of business, net of cash acquired ( 149 ) ( 876 ) 32 Cross-currency swap agreements settlement ( 3 ) 21 — Other ( 2 ) 8 — Net cash used in investing activities ( 410 ) ( 1,149 ) ( 207 ) Cash flows from financing activities: Proceeds from debt, net — 917 794 Repayments of debt, net ( 140 ) ( 82 ) ( 47 ) Repayment of finance lease obligations ( 29 ) ( 33 ) ( 25 ) Taxes paid related to net share settlement of equity awards ( 12 ) ( 16 ) ( 1 ) Repayments related to trade securitization program — — ( 26 ) Purchase of NCI — — ( 128 ) Net transfers to XPO — — ( 774 ) Other ( 5 ) 1 ( 34 ) Net cash (used in) provided by financing activities ( 186 ) 787 ( 241 ) Effect of exchange rates on cash and cash equivalents 13 ( 18 ) ( 2 ) Net (decrease) increase in cash, restricted cash and cash equivalents ( 25 ) 162 5 Cash, restricted cash and cash equivalents, beginning of year 495 333 328 Cash, restricted cash and cash equivalents, end of year $ 470 $ 495 $ 333 Reconciliation of cash, restricted cash and cash equivalents Cash and cash equivalents $ 468 $ 495 $ 333 Restricted cash (included in Other long-term assets) 2 — — Total cash, restricted cash and cash equivalents $ 470 $ 495 $ 333 See accompanying Notes to the Consolidated Financial Statements. 35 GXO Logistics, Inc. Consolidated Statements of Cash Flows Year Ended December 31, (In millions) 2023 2022 2021 Supplemental cash flow information: Cash paid for interest, net $ 57 $ 34 $ 22 Cash paid for income taxes, net 84 111 75 Noncash investing and financing activities: Common stock issued for acquisition $ — $ 204 $ — Settlement of related party debt due to the Separation — — 437 See accompanying Notes to the Consolidated Financial Statements. 36 GXO Logistics, Inc. Consolidated Statements of Changes in Equity Common Stock XPO, Inc. Invest ment APIC Retained Earnings AOCIL Equity Before NCI NCI Total Equity (Shares in thousands, dollars in millions) Shares Amount December 31, 2020 — $ — $ 2,765 $ — $ — $ 58 $ 2,823 $ 125 $ 2,948 Net income — — 27 — 126 — 153 8 161 Other comprehensive loss — — — — — ( 38 ) ( 38 ) ( 1 ) ( 39 ) Stock-based compensation — — — 11 — — 11 — 11 Vesting of stock compensation awards 33 — — — — — — — — Tax withholding related to vesting of stock compensation awards — — — ( 1 ) — — ( 1 ) — ( 1 ) Purchase of NCI — — — — — — — ( 128 ) ( 128 ) Net transfers from (to) XPO, including separation adjustments — — ( 447 ) — — ( 150 ) ( 597 ) 40 ( 557 ) Issuance of common stock and reclassification of XPO investment 114,626 1 ( 2,345 ) 2,344 — — — — — Other — — — — — — — ( 5 ) ( 5 ) December 31, 2021 114,659 $ 1 $ — $ 2,354 $ 126 $ ( 130 ) $ 2,351 $ 39 $ 2,390 Net income — — — — 197 — 197 3 200 Other comprehensive loss — — — — — ( 126 ) ( 126 ) ( 1 ) ( 127 ) Stock-based compensation — — — 33 — — 33 — 33 Vesting of stock compensation awards 557 — — — — — — — — Tax withholding on vesting of stock compensation awards ( 246 ) — — ( 16 ) — — ( 16 ) — ( 16 ) Common stock issued for acquisition 3,758 — — 204 — — 204 — 204 Other — — — — — 2 2 ( 8 ) ( 6 ) December 31, 2022 118,728 $ 1 $ — $ 2,575 $ 323 $ ( 254 ) $ 2,645 $ 33 $ 2,678 Net income — — — — 229 — 229 4 233 Other comprehensive income — — — — — 15 15 1 16 Stock-based compensation — — — 35 — — 35 — 35 Vesting of stock compensation awards 555 — — — — — — — — Tax withholding on vesting of stock compensation awards ( 226 ) — — ( 12 ) — — ( 12 ) — ( 12 ) Other — — — — — — — ( 4 ) ( 4 ) December 31, 2023 119,057 $ 1 $ — $ 2,598 $ 552 $ ( 239 ) $ 2,912 $ 34 $ 2,946 See accompanying Notes to the Consolidated Financial Statements. 37 GXO Logistics, Inc. Notes to Consolidated Financial Statements 1. Organization Nature of Operations GXO Logistics, Inc., together with its subsidiaries (“GXO” or the “Company”), is the largest pure-play contract logistics provider in the world. The Company provides its customers with high-value-added warehousing and distribution, order fulfillment, e-commerce, reverse logistics and other supply chain services differentiated by its ability to deliver technology-enabled, customized solutions at scale. The Company serves a broad range of customers across a range of industries, such as e-commerce, omnichannel retail, technology and consumer electronics, food and beverage, industrial and manufacturing, and consumer packaged goods, among others. The Company presents its operations in the Consolidated Financial Statements as one reportable segment. On August 2, 2021, the Company completed the separation (the “Separation”) from XPO, Inc. (“XPO”). The Separation was accomplished by the distribution of 100 % of the outstanding common stock of GXO to XPO stockholders as of the close of business on July 23, 2021, the record date for the distribution. XPO stockholders received one share of GXO common stock for every share of XPO common stock held at the close of business on the record date. On August 2, 2021, GXO became a standalone publicly-traded company and regular-way trading of GXO’s common stock commenced on the New York Stock Exchange under the ticker symbol “GXO.” GXO was incorporated as a Delaware corporation in February 2021. 2. Basis of Presentation and Significant Accounting Policies Basis of Presentation Before the Separation, the Company’s financial statements were prepared on a standalone combined basis and were derived from the Consolidated Financial Statements and accounting records of XPO (the “historical financial statements”). On August 2, 2021, the Company became a standalone publicly traded company, and its financial statements post-Separation are prepared on a consolidated basis. The combined Consolidated Financial Statements for all periods presented before the Separation are now also referred to as “Consolidated Financial Statements” and have been prepared under the U.S. generally accepted accounting principles (“GAAP”). Before the Separation, the Company’s historical assets and liabilities presented were wholly owned by XPO and were reflected on a historical cost basis. In connection with the Separation, the Company’s assets and liabilities were transferred to the Company on a carry-over basis. Before the Separation, the historical results of operations included allocations of XPO costs and expenses including XPO’s corporate function, which incurred a variety of expenses, including, but not limited to, information technology, human resources, accounting, sales and sales operations, procurement, executive services, legal, corporate finance and communications. An allocation of these expenses is included to burden all business units comprising XPO’s historical results of operations, including GXO. The charges reflected have been either specifically identified or allocated using drivers including adjusted earnings before interest, taxes, depreciation and amortization, which includes 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; Depreciation and amortization expense; and Transaction and integration costs in the Consolidated Statements of Operations. The Company’s Consolidated Financial Statements include the accounts of GXO Logistics, Inc. and its majority-owned subsidiaries and variable interest entities where the Company is the primary beneficiary. The Company has eliminated intercompany accounts and transactions. 38 Use of Estimates The preparation of Consolidated Financial Statements in conformity with GAAP requires the use of estimates, judgments and assumptions that affect the reported amounts in the Consolidated Financial Statements and accompanying notes. The Company bases its estimates and judgments on historical information and on various other assumptions that it believes are reasonable under the circumstances. GAAP requires the Company to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, income taxes, loss contingencies, defined benefit plans, valuation of long-lived assets including goodwill and intangible assets and their associated estimated useful lives, collectability of accounts receivable and the fair value of financial instruments. Actual results may vary from those estimates. Significant Accounting Policies Cash, Restricted Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less on the date of purchase to be cash equivalents. Bank overdraft positions occur when total outstanding issued checks exceed available cash balances at a single financial institution. Restricted cash is included within Other long-term assets on the Consolidated Balance sheets and consists primarily of cash that collateralizes certain operating obligations. Accounts Receivable and Allowance for Credit Losses Accounts receivable represents the Company’s unconditional right to receive consideration from its customers. The Company records accounts receivable at the contractual amount and records an allowance for doubtful accounts for the amount it estimates it may not collect. In determining the allowance for doubtful accounts, the Company considers historical collection experience, the age of the accounts receivable balances, the credit quality and risk of its customers, any specific customer collection issues, current economic conditions and other factors that may impact its customers’ ability to pay. The Company writes off accounts receivable balances once the receivables are no longer deemed collectible. The roll forward of the allowance for doubtful accounts was as follows: Year Ended December 31, (In millions) 2023 2022 2021 Beginning balance $ 12 $ 13 $ 18 Provisions charged to expense 10 5 4 Write-offs, less recoveries, and other adjustments ( 11 ) ( 6 ) ( 9 ) Ending balance $ 11 $ 12 $ 13 Property and Equipment Property and equipment, which includes assets recorded under finance leases, are stated at cost less accumulated depreciation or, in the case of property and equipment acquired in a business combination, at fair value at the date of acquisition. Maintenance and repair expenditures are charged to expenses as incurred. For internally developed computer software, all costs incurred during the planning and evaluation stages are expensed as incurred. Software development costs are capitalized once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the remaining lease term, whichever is shorter. Land and assets held within construction in progress are not depreciated. 39 The estimated useful lives of property and equipment are described below: Estimated Useful Life Buildings 40 years Leasehold improvements Shorter of useful life or term of lease Technology and automated systems 3 to 15 years Warehouse equipment and other 3 to 15 years Computer, software and equipment 1 to 5 years Lease Obligations The Company has operating leases primarily for real estate, warehouse equipment, material handling equipment, trucks, trailers and containers and finance leases for equipment. The Company determines if an arrangement is a lease at inception. For leases with terms greater than 12 months, the Company recognizes lease assets and liabilities at the lease commencement date based on the present value of the lease payments over the lease term. For most of the Company’s leases, the implicit rate cannot be readily determined and, as a result, the Company uses the incremental borrowing rates at the commencement date to determine the present value of future lease payments. For leases that include fixed rental payments for both the use of the asset (“lease costs”) as well as for other occupancy or service costs relating to the asset (“non-lease costs”), the Company generally includes both the lease costs and non-lease costs as a single lease component in the measurement of the lease asset and liability. Certain lease agreements include rental payments based on changes in the consumer price index (“CPI”). Lease liabilities are not remeasured as a result of changes in the CPI; instead, changes in the CPI are treated as variable lease payments and are excluded from the measurement of the right-of-use asset and lease liability. These payments are recognized in the period in which the related obligation is incurred. Lease agreements may contain rent escalation clauses, renewal or termination options, rent holidays or certain landlord incentives, including tenant improvement allowances. Lease expense is recognized on a straight-line basis over the non-cancelable lease term and renewal periods that are considered reasonably certain. Amounts received from a landlord are included as a reduction to the lease asset and are included within operating activities on the Consolidated Statement of Cash Flows. Long-lived assets geographic information The Company’s long-lived assets for this disclosure is defined as Property and equipment, net of accumulated depreciation, and operating lease assets. The Company’s long-lived assets by geographic region were as follows: December 31, (In millions) 2023 2022 United States $ 1,545 $ 1,532 United Kingdom 772 834 Other 837 821 Total $ 3,154 $ 3,187 Goodwill and Intangible Assets The Company records goodwill as the excess of the consideration transferred over the fair value of net assets acquired in business combinations. Goodwill is tested for impairment at the reporting unit level, which is an operating segment, or one level below. The Company has three reporting units: i) Americas and Asia-Pacific, ii) United Kingdom and Ireland and iii) Continental Europe. The Company measures goodwill impairment, if any, as the amount by which the carrying amount of the reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. 40 The Company performed its annual goodwill impairment test on November 1. The review of goodwill impairment consists of either using a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a one-step quantitative impairment test. In performing the qualitative assessment, the Company considers many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in the Company’s stock price, market capitalization of the Company and macroeconomic conditions. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed. The quantitative test requires that the carrying value of each reporting unit be compared with its estimated fair value. If the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill). The Company uses the income approach and/or a market-based approach to determine the reporting units’ fair values. The determination of discounted cash flows used in the income approach requires significant estimates and assumptions. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. The Company’s intangible assets consist of customer relationships, trade names, trademarks, and developed technology which are amortized on a straight-line basis or over the period the economic benefits are expected to be realized. The Company reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Impairment of Long-lived Assets The Company reviews long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If an impairment indicator is present, the Company evaluates recoverability by comparing the carrying amount of the asset group to the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group. If the assets are impaired, an impairment loss is measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. The Company estimates fair value using the expected future cash flows discounted at a rate consistent with the risks associated with the recovery of the asset. Segment Reporting The Company is comprised of three operating segments based on the operating results regularly reviewed by the chief operating decision-maker (“CODM”), who is the Chief Executive Officer (“CEO”), to make decisions about resource allocation and the performance of the business. These three operating segments have been aggregated into a single reporting segment. Revenue Recognition The Company generates revenue by providing logistics services for its customers, including warehousing and distribution, order fulfillment, reverse logistics, packaging and labeling, factory and aftermarket support and inventory management ranging from a few months to a few years. Generally, the Company’s contracts provide the customer an integrated service that includes two or more services, including but not limited to facility and equipment costs, construction, repair and maintenance services and labor. For these contracts, the Company does not consider the services to be distinct within the context of the contract when the separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly, the Company generally identifies one performance obligation in its contracts, which is a series of distinct services that remain substantially the same over time and possess the same pattern of transfer. Revenue is recognized using the series guidance over the period in which services are provided under the terms of the Company’s contractual relationships with its customers. The transaction price is based on the amount specified in the contract with the customer and contains fixed and variable consideration. In general, the fixed consideration in a contract represents reimbursement for warehouse, technology and equipment costs incurred to satisfy the performance obligation and is recognized on a straight-line basis over the term of the contract. The variable consideration is comprised of cost reimbursement based on the costs incurred, per-unit pricing is determined based 41 on units provided and time and materials pricing is based on the hours of services provided. The variable consideration component is recognized over time based on the level of activity. Generally, pricing can be adjusted based on contractual provisions related to achieving agreed-upon performance metrics, changes in volumes, services and market conditions. Revenue relating to these pricing adjustments is estimated and included in the consideration if it is probable that a significant revenue reversal will not occur in the future. The estimate of variable consideration is determined by the expected value or most likely amount method and factors in current, past and forecasted experience with the customer. Customers are billed based on terms specified in the revenue contract and they pay us according to approved payment terms. Contract Assets and Liabilities Contract assets consist of two components: customer acquisition costs and costs to fulfill a contract. The Company capitalizes direct and incremental costs incurred to obtain and to fulfill a contract in advance of revenue recognition, such as certain labor, third-party service and related product costs. These costs are recognized as an asset if the Company expects to recover them. Contract assets are recognized consistent with the transfer of the underlying performance obligations to the customer based on the specific contracts to which they relate. Contract assets are primarily amortized to Direct operating expense in the 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 that is due from the customer. Derivative Instruments The Company records all its derivative financial instruments on the Consolidated Balance Sheets as assets or liabilities measured at fair value. For derivatives designated as a hedge, and effective as part of a hedge transaction, the effective portion of the gain or loss on the hedging derivative instrument is reported as a component of other comprehensive income or as a basis adjustment to the underlying hedged item and reclassified to earnings in the year in which the hedged item affects earnings. The effective portion of the gain or loss on hedges of foreign net investments is generally not reclassified to earnings unless the net investment is disposed. To the extent derivatives do not qualify or are not designated as hedges, or are ineffective, their changes in fair value are recorded in earnings immediately, which may subject us to increased earnings volatility. Stock-Based Compensation The Company accounts for stock-based compensation based on the equity instrument’s grant date fair value. Stock compensation expense is recognized using the straight-line method, based on the grant date fair value, over the requisite service period of the award, which is generally the vesting term. For grants of restricted stock units (“RSU”) subject to service-based or performance-based vesting conditions only, the Company establishes the fair value based on the market price on the date of the grant. For grants of awards subject to market-based vesting conditions (“PSU”), the Company determines the fair value based on a Monte Carlo simulation model. The Company accounts for forfeitures as they occur. Earnings per Share Basic earnings per share (“EPS”) is based upon net earnings available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by giving effect to all potentially dilutive stock awards that were outstanding. The computation of diluted earnings per share excludes the effect of the potential exercise of stock-based awards when the effect of the potential exercise would be anti-dilutive. For the years ended December 31, 2023, 2022 and 2021, the number of common shares excluded from diluted shares outstanding was 1.5 million, 2.0 million and 0.1 million, respectively, because the effect of including those common shares in the calculation would have been anti-dilutive. 42 On August 2, 2021, the date of the Separation, 114.6 million shares of the Company’s common stock were distributed to XPO stockholders. These 114.6 million shares have been utilized for the calculation of basic and diluted earnings per share for all periods prior to the date of the Separation as no shares of common stock or equity-based awards of the Company were outstanding before that date. Defined Benefit Plans The Company calculates its employer-sponsored retirement plan obligations using various actuarial assumptions and methodologies. Assumptions include discount rates, expected long-term rate of return on plan assets, mortality rates and other factors. The assumptions used in recording the projected benefit obligation and fair value of plan assets represent the Company’s best estimates based on available information regarding historical experience and factors that may cause future expectations to differ. The Company’s obligation and future expense amounts could be materially impacted by differences in experience or changes in assumptions. The Company determines the net periodic benefit cost of the plans using assumptions regarding the projected benefit obligation and the fair value of the plan assets as of the beginning of the year. Net periodic benefit cost is recorded within Other income, net in the Consolidated Statement of Operations. The Company calculates the funded status of the defined benefit plan as the difference between the projected benefit obligation and the fair value of the plan assets. The impact of plan amendments, actuarial gains and losses and prior-service costs are recorded in AOCIL and are generally amortized as a component of net periodic benefit cost over the remaining service period of the active employees covered by the defined benefit pension plans. Cumulative gains and losses over 10% of the greater of the beginning of year benefit obligation or fair value of the plan assets are amortized over the expected average life expectancy. Income Taxes The Company accounts for income taxes using the asset and liability method on a legal entity and jurisdictional basis, under which the Company recognizes the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Consolidated Financial Statements or tax returns. The calculation of the annual effective tax rate relies on several factors including pre-tax earnings, various jurisdiction statutory tax rates, tax credits, uncertain tax positions, valuation allowances and differences between tax laws and accounting laws. The effective tax rate in any financial statement period may be materially impacted by changes in the blend and/or level of earnings by individual taxing jurisdictions. If the Company considers that a tax position is more likely than not to be sustained upon audit, based solely on the technical merits of the position, presuming an examination by a taxing authority with full knowledge of all relevant information, the Company recognizes all or a portion of the benefit. Valuation allowances are established when it is more likely than not that the Company’s deferred tax assets will not be realized based on all available evidence. The Company uses judgments and estimates in evaluating its tax positions. The Company’s tax returns are subject to examination by U.S. Federal, state and local and foreign taxing jurisdictions. The Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years. The Company recognizes tax benefits from uncertain tax positions only if based on the technical merits of the position it is more likely than not that the tax positions will be sustained upon audit. The Company adjusts these tax liabilities, including related interest and penalties, based on the current facts and circumstances. The Company reports tax-related interest and penalties as a component of income tax expense. 43 Foreign Currency Translation and Transactions The assets and liabilities of the Company’s foreign subsidiaries that use their local currency as their functional currency are translated to U.S. dollars (“USD”) using the exchange rate prevailing at each balance sheet date, with balance sheet currency translation adjustments recorded in AOCIL in the Consolidated Balance Sheets. The Company converts foreign currency transactions recognized in the Consolidated Statements of Operations to USD by applying the exchange rate prevailing on the date of the transaction. Gains and losses arising from foreign currency transactions and the effects of remeasuring monetary assets and liabilities are recorded in Other income, net in the Consolidated Statements of Operations. Adoption of New Accounting Standards 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. Accounting Pronouncements Issued But Not Yet Adopted In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an annual and interim basis. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective application to all prior periods presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which provides for expanded disclosures primarily related to income taxes paid and the rate reconciliation. The amendments are effective prospectively for annual periods beginning after December 15, 2024, and early adoption and retrospective application are permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements. 44 3. Revenue Recognition Revenue disaggregated by geographical area was as follows: Year Ended December 31, (In millions) 2023 2022 2021 United Kingdom $ 3,664 $ 3,293 $ 2,634 United States 2,909 2,861 2,469 Netherlands 831 699 651 France 830 729 734 Spain 529 488 479 Italy 382 331 339 Other 633 592 634 Total $ 9,778 $ 8,993 $ 7,940 The Company’s revenue can also be disaggregated by various verticals, reflecting the customers’ principal industry. Revenue disaggregated by industry was as follows: Year Ended December 31, (In millions) 2023 2022 2021 Omnichannel retail $ 4,100 $ 3,649 $ 3,116 Technology and consumer electronics 1,467 1,337 1,075 Food and beverage 1,331 1,327 1,328 Industrial and manufacturing 1,078 1,076 994 Consumer packaged goods 1,027 915 832 Other 775 689 595 Total $ 9,778 $ 8,993 $ 7,940 Contract Balances Year Ended December 31, (In millions) 2023 2022 Contract assets included in: Other current assets $ 21 $ 25 Other long-term assets 160 165 Total contract assets $ 181 $ 190 Contract liabilities included in: Other current liabilities $ 210 $ 154 Other long-term liabilities 115 134 Total contract liabilities $ 325 $ 288 Revenue recognized included the following: Year Ended December 31, (In millions) 2023 2022 Amounts included in the beginning of year contract liability balance $ 122 $ 93 45 Remaining Performance Obligations The remaining performance obligations relate to firm customer contracts for which services have not been performed and future revenue recognition is expected. As permitted in determining the remaining performance obligation, the Company omits obligations that have original expected durations of one year or less or contain variable consideration. As of December 31, 2023, the fixed consideration component of the Company’s remaining performance obligations was approximately $ 3.3 billion, and the Company expects to recognize approximately 74 % 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. 4. Acquisitions PFSweb 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 (the “PFS Acquisition”). The Company acquired the shares of PFS at a price per share of $ 7.50 in cash, totaling approximately $ 149 million, net of cash acquired. PFS is a global provider of omnichannel commerce solutions, including a broad range of technology, infrastructure and professional services, in the United States, Canada and Europe. PFS’s service offerings include order fulfillment, fulfillment-as-a-service, order management and customer care. The Company recorded the preliminary fair value of assets acquired and liabilities assumed on the date of acquisition, including intangible assets comprising customer relationships, trademarks, trade names and developed technology of $ 56 million with a weighted-average amortization period of 13 years. Goodwill acquired in connection with the acquisition was $ 76 million, recorded in the Americas and Asia-Pacific reporting unit, and was attributed to anticipated synergies. The Company expects to finalize the purchase price allocation within the measurement period, which will not exceed one year from the acquisition date. The Company does not expect the goodwill recognized in connection with the PFS Acquisition to be deductible for income tax purposes. For the year ended December 31, 2023, PFS generated revenues of $ 82 million and income before income taxes was not material. Pro forma results of operations for this acquisition have not been presented as they are not material to the Consolidated Financial Statements. Clipper Acquisition On May 24, 2022, the Company completed the acquisition of Clipper Logistics plc (“Clipper”), an omnichannel retail logistics specialist based in Leeds, England (the “Clipper Acquisition”). The Company acquired Clipper for $ 1,106 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 values of the assets acquired and liabilities assumed using valuation techniques including income, cost and market approaches. 46 The following table summarizes the fair values of 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 comprising 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. 47 5. Goodwill The following tables present the changes in goodwill for the years ended December 31, 2023 and 2022. (In millions) Balance as of December 31, 2021 $ 2,017 Acquisition 796 Impact of foreign exchange translation (1) ( 85 ) Balance as of December 31, 2022 2,728 Acquisitions (2) 120 Impact of foreign exchange translation (1) 43 Balance as of December 31, 2023 $ 2,891 (1) Changes to goodwill amounts resulting from foreign currency translation after the acquisition date are presented as the impact of foreign exchange translation. (2) Includes $ 44 million adjustment from the finalization of the purchase price allocation for the Clipper Acquisition. As of December 31, 2023 and 2022, there were no accumulated goodwill impairment losses. 6. Intangible Assets The following table summarizes identifiable intangible assets: December 31, 2023 December 31, 2022 (In millions) Gross Carrying Amount Accumulated Amortization Net Value Gross Carrying Amount Accumulated Amortization Net Value Customer relationships $ 1,046 $ ( 524 ) $ 522 $ 978 $ ( 451 ) $ 527 Trade names and trademarks 42 ( 4 ) 38 48 ( 5 ) 43 Developed technology 7 — 7 — — — Total $ 1,095 $ ( 528 ) $ 567 $ 1,026 $ ( 456 ) $ 570 Intangible asset amortization expense was $ 71 million, $ 68 million and $ 61 million for the years ended December 31, 2023, 2022 and 2021, respectively. Estimated amortization expense for each of the five succeeding fiscal years and thereafter is as follows: (In millions) 2024 2025 2026 2027 2028 Thereafter Estimated amortization expense $ 74 $ 68 $ 65 $ 62 $ 44 $ 254 48 7. Property and Equipment The following table summarizes property and equipment: December 31, (In millions) 2023 2022 Land, buildings and leasehold improvements $ 440 $ 364 Warehouse equipment and other 1,025 958 Computer, software and equipment (1) 660 588 Technology and automated systems 373 347 Total property and equipment, gross 2,498 2,257 Less: accumulated depreciation and amortization ( 1,545 ) ( 1,297 ) Total property and equipment, net $ 953 $ 960 (1) Includes internally developed software of $ 237 million and $ 223 million as of December 31, 2023 and 2022, respectively. Depreciation of property and equipment was $ 290 million, $ 261 million and $ 274 million for the years ended December 31, 2023, 2022 and 2021, respectively. 8. Leases The following amounts were recorded in the Consolidated Balance Sheets related to leases: December 31, (In millions) 2023 2022 Operating leases: Operating lease assets $ 2,201 $ 2,227 Current operating lease liabilities $ 597 $ 560 Long-term operating lease liabilities 1,842 1,853 Total operating lease liabilities $ 2,439 $ 2,413 Finance leases: Property and equipment, net $ 107 $ 123 Current debt $ 26 $ 35 Long-term debt 90 97 Total finance lease liabilities $ 116 $ 132 49 Supplemental weighted-average information for leases was as follows: December 31, 2023 2022 Weighted-average remaining lease term Operating leases 5.6 years 5.9 years Finance leases 11.7 years 10.4 years Weighted-average discount rate Operating leases 4.6 % 4.0 % Finance leases 4.4 % 3.4 % The components of lease expense were as follows: Year Ended December 31, (In millions) 2023 2022 2021 Operating leases: Operating lease cost $ 751 $ 697 $ 657 Short-term lease cost 225 118 80 Variable lease cost 129 106 75 Total operating lease cost (1) $ 1,105 $ 921 $ 812 Finance leases: Amortization of leased assets $ 30 $ 30 $ 32 Interest expense on lease liabilities 5 5 6 Total finance lease cost $ 35 $ 35 $ 38 Total operating and finance lease cost $ 1,140 $ 956 $ 850 (1) Operating lease cost is primarily included in Direct operating expense in the Consolidated Statements of Operations. Supplemental cash flow information related to leases was as follows: Year Ended December 31, (In millions) 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 696 $ 576 $ 578 Operating cash flows for finance leases 5 5 6 Financing cash flows for finance leases 29 33 25 Leased assets obtained in exchange for new lease obligations: Operating leases, including $ 52 , $ 233 , and $ 281 from an acquisition in 2023, 2022 and 2021 respectively $ 568 $ 1,154 $ 932 Finance leases, including $ 1 , $ 16 , and $ 23 from an acquisition in 2023, 2022 and 2021 respectively 10 20 39 50 Maturities of lease liabilities as of December 31, 2023 were as follows: (In millions) Finance Leases Operating Leases 2024 $ 30 $ 692 2025 24 577 2026 15 451 2027 12 339 2028 10 226 Thereafter 64 506 Total lease payments 155 2,791 Less: Interest ( 39 ) ( 352 ) Present value of lease liabilities $ 116 $ 2,439 As of December 31, 2023, the Company does not have any material leases that have been signed but have yet to commence. 9. Debt and Financing Arrangements The following table summarizes the carrying value of the Company’s debt: December 31, (In millions) Rate (1) 2023 2022 Unsecured notes due 2026 (2) 1.65 % $ 398 $ 397 Unsecured notes due 2031 (3) 2.65 % 397 397 Two-Year Term Loan due 2024 — % — 115 Three-Year Term Loan due 2025 (4) 6.58 % 235 234 Five-Year Term Loan due 2027 (5) 6.71 % 499 499 Finance leases and other debt Various 118 164 Total debt $ 1,647 $ 1,806 Less: Current debt 27 67 Total Long-term debt $ 1,620 $ 1,739 (1) Interest rates as of December 31, 2023. (2) Net of unamortized debt issuance costs of $ 2 million and $ 3 million, as of December 31, 2023 and 2022, respectively. (3) Net of unamortized debt issuance costs of $ 3 million as of December 31, 2023 and 2022. (4) Net of unamortized debt issuance costs of $ 1 million as of December 31, 2022. (5) Net of unamortized debt issuance costs of $ 1 million as of December 31, 2023 and 2022. Five-Year Term Loan In 2022, the Company entered into a $ 500 million five-year unsecured term loan (the “ Five-Year Term Loan”) 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 In 2022, the Company borrowed 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”). In 2022, $ 50 million of the Two-Year Term Loan was repaid, with the remaining $ 115 million repaid in the second quarter of 2023. The Three-Year Term Loan will mature on May 26, 2025. The Delayed Draw Term Loan bears 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. 51 Unsecured Notes In 2021, before 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. Revolving Credit Facilities In 2021, before 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 is 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 adjusted SOFR, (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, 2023, or December 31, 2022. In 2022, in connection with 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, which expired in November 2023. As of December 31, 2022, the Company had $ 18 million of borrowings outstanding under this agreement. Amounts drawn and repaid in 90 days or less under the revolving credit facilities are presented net in the Consolidated Statement of Cash Flows. Factoring Programs The Company sells certain of its trade receivables on a non-recourse basis to third-party financial institutions under various factoring programs. 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 accounts for these transactions as sales because the Company sells full title and ownership in the underlying receivables and control of the receivables is considered transferred. For these transfers, the receivables are removed from the Consolidated Balance Sheets at the date of transfer. 52 Information related to trade receivables sold was as follows: Year Ended December 31, (In millions) 2023 2022 2021 Factoring program Receivables sold in period $ 1,110 $ 992 $ 450 Cash consideration 1,103 988 449 Securitization program Receivables sold in period $ — $ — $ 1,850 Cash consideration — — 1,850 Net cash provided by (used in) operating cash flows 21 35 ( 5 ) 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, 2023, the Company complied with the covenants contained in its debt and financing arrangements. 10. 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 December 31, 2023 and 2022, due to their short-term nature. 53 Debt The fair value of debt was as follows: December 31, 2023 December 31, 2022 (In millions) Level Fair Value Carrying Value Fair Value Carrying Value Unsecured notes due 2026 2 $ 362 $ 398 $ 342 $ 397 Unsecured notes due 2031 2 326 397 294 397 Two-Year Term Loan due 2024 2 — — 115 115 Three-Year Term Loan due 2025 2 231 235 234 234 Five-Year Term Loan due 2027 2 493 499 499 499 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. Net Investment Hedges The Company uses fixed-to-fixed or variable-to-variable cross-currency swap agreements to hedge its net investments in foreign operations against future volatility in the exchange rates between the U.S. dollar and the associated foreign currencies. The Company designated these cross-currency swap agreements as qualifying hedging instruments and accounts for them as net investment hedges. In October 2023, the Company terminated a hedge with a notional amount of $ 115 million and amended a $ 235 million hedge to extend its maturity from 2024 to 2025. Also, the Company entered into various hedges for an aggregate notional amount of $ 313 million that will mature from 2025 to 2028. Interest Rate Swap Agreements The Company uses interest rate swap agreements to hedge the variability of cash flows resulting from floating interest rate borrowings. The Company designated these interest rate swap agreements as qualifying hedging instruments and accounts for them as cash flow hedges. When an interest rate swap agreement qualifies for hedge accounting as a cash flow hedge, the changes in the fair value are recorded in equity as a component of AOCIL and are reclassified into Interest expense, net over the life of the underlying debt, as interest on the Company’s floating rate debt is accrued. In January 2024, the Company entered into an interest rate swap schedule to mature in 2025, with a notional amount of $ 125 million. Foreign Currency Exchange Rate Risk The Company is exposed to certain risks relating to its ongoing business operations, including foreign currency exchange rate risk. The Company uses foreign currency option contracts to mitigate the risk of a reduction in the value of earnings from its operations that use the Euro or British pound sterling as their functional currency. Additionally, the Company uses foreign currency forward contracts to mitigate exposure from variability of cash flows related to the forecasted interest and principal payments on intercompany loans. The foreign currency forward contracts generally expire within 12 months. While these derivatives are hedging the fluctuations in foreign currencies, they do not meet the requirements to be accounted for as hedging instruments. 54 Derivatives The notional amount and fair value of derivative instruments were as follows: December 31, 2023 2022 (In millions) Notional Amount Fair Value Notional Amount Fair Value Balance Sheet Location Derivatives designated as hedges Assets: Interest rate swaps $ 125 $ 2 $ — $ — Other current assets Interest rate swaps 125 3 250 9 Other long-term assets Cross-currency swap agreements 487 3 1,222 22 Other long-term assets Liabilities: Cross-currency swap agreements $ 165 $ 7 $ 115 $ 13 Other current liabilities Cross-currency swap agreements 883 49 — — Other long-term liabilities Derivatives not designated as hedges Assets: Foreign currency option contracts $ 397 $ 8 $ — $ — Other current assets Foreign currency forward contracts 1 — — — Other current assets Liabilities: Foreign currency option contracts $ — $ — $ 354 $ 5 Other current liabilities Foreign currency forward contracts — — 3 — Other current liabilities As of December 31, 2023 and 2022, the derivatives were classified as Level 2 within the fair value hierarchy. The derivatives are valued using inputs other than quoted prices such as foreign exchange rates and yield curves. The effect of hedges on AOCIL and in the Consolidated Statements of Operations was as follows: Year Ended December 31, 2023 Year Ended December 31, 2022 (In millions) Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives Gain (Loss) Reclassified from AOCIL into Net Income (1) Gain (Loss) Recognized in Net Income on Derivatives (Excluded from effectiveness testing) (1) Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives Gain (Loss) Reclassified from AOCIL 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 $ ( 66 ) $ — $ 3 $ 36 $ 4 $ 3 Derivatives designated as cash flow hedges Interest rate swaps $ ( 3 ) $ — $ — $ 9 $ — $ — (1) Amounts reclassified to Net income are reported within Interest expense, net in the Consolidated Statements of Operations. 55 Derivatives not designated as hedges Gains and losses recognized in Other income, net in the Consolidated Statements of Operations for foreign currency options and forward contracts were as follows: Year Ended December 31, (In millions) 2023 2022 Realized gain (loss) $ ( 13 ) $ 29 Unrealized gain (loss) 4 ( 11 ) Foreign currency gain (loss) $ ( 9 ) $ 18 11. Accrued Expenses The components of accrued expenses were as follows: December 31, (In millions) 2023 2022 Salaries and wages $ 362 $ 350 Facility and transportation charges 346 360 Value-added tax and other taxes 136 135 Other 122 150 Total accrued expenses $ 966 $ 995 56 12. Stockholders’ Equity The following table summarizes the changes in AOCIL by component: Foreign Currency Adjustment (In millions) Foreign Currency Translation Adjustments Net Investment Hedges Cash Flow Hedges Defined Benefit Plans Less: AOCIL attributable to NCI AOCIL attributable to GXO As of December 31, 2020 $ 61 $ — $ — $ ( 1 ) $ ( 2 ) $ 58 Other comprehensive income (loss) before reclassifications ( 59 ) 19 — 9 1 ( 30 ) Amounts reclassified to net income — ( 3 ) — — — ( 3 ) Tax amounts — ( 3 ) — ( 2 ) — ( 5 ) Other comprehensive income (loss), net of tax ( 59 ) 13 — 7 1 ( 38 ) Transfers from XPO, net of tax ( 40 ) ( 28 ) — ( 82 ) — ( 150 ) As of December 31, 2021 $ ( 38 ) $ ( 15 ) $ — $ ( 76 ) $ ( 1 ) $ ( 130 ) Other comprehensive income (loss) before reclassifications ( 119 ) 36 9 ( 49 ) 1 ( 122 ) Amounts reclassified to net income — ( 7 ) — — — ( 7 ) Tax amounts ( 1 ) ( 7 ) ( 2 ) 13 — 3 Other comprehensive income (loss), net of tax ( 120 ) 22 7 ( 36 ) 1 ( 126 ) Other 2 — — — — 2 As of December 31, 2022 $ ( 156 ) $ 7 $ 7 $ ( 112 ) $ — $ ( 254 ) Other comprehensive income (loss) before reclassifications 72 ( 66 ) ( 3 ) ( 3 ) ( 1 ) ( 1 ) Amounts reclassified to net income — ( 3 ) — 2 — ( 1 ) Tax amounts 1 15 1 — — 17 Other comprehensive income (loss), net of tax 73 ( 54 ) ( 2 ) ( 1 ) ( 1 ) 15 As of December 31, 2023 $ ( 83 ) $ ( 47 ) $ 5 $ ( 113 ) $ ( 1 ) $ ( 239 ) 13. Stock-Based Compensation In 2021, the Company established the 2021 Omnibus Incentive Plan (the “2021 Incentive Plan”). The 2021 Incentive Plan authorizes the issuance of up to 11.6 million shares of common stock as awards. Under the 2021 Incentive Plan, directors, officers and employees may be granted various types of stock-based compensation awards. These awards include stock options, restricted stock awards, RSUs, PSUs and cash incentive awards. As of December 31, 2023, 7.5 million shares of common stock were available for the grant under the 2021 Incentive Plan. Before the Separation, the stock-based compensation expense recorded by the Company included the expense associated with the employees historically attributable to the Company’s operations, as well as the expense associated with the allocation of equity-based compensation expense for corporate employees. The amounts do not necessarily reflect the costs that the Company would have incurred as an independent company in 2021. 57 The following table summarizes stock-based compensation expense recorded in Selling, general and administrative expense in the Consolidated Statements of Income: Year Ended December 31, (In millions) 2023 2022 2021 Restricted stock units $ 22 $ 21 $ 20 Performance-based units 8 7 5 Stock options 5 5 3 Total stock-based compensation expense $ 35 $ 33 $ 28 Tax expense (benefit) on stock-based compensation $ 1 $ ( 1 ) $ 1 Stock Options The Company’s stock options vest over five years after the grant date and have a ten-year contractual term with an exercise price equal to the stock price on the grant date. The Black-Scholes option-pricing model was used to estimate the fair value of these awards. The Black-Scholes option-pricing model incorporates various subjective assumptions, including expected terms and expected volatility. Assumptions used in the Black-Scholes option-pricing model for the estimated fair value of options granted in 2021 were as follows: weighted-average risk-free rate of interest of 1.2 %, expected volatility of 30 %, weighted-average expected award life of 7 years and weighted-average fair value of $ 22.66 . A summary of stock option award activity for the year ended December 31, 2023, is presented in the following table: Stock Options (In thousands, except per share) Number of Stock Options Weighted-Average Exercise Price Weighted-Average Remaining Term Outstanding as of December 31, 2022 1,170 $ 64.72 8 years Forfeited ( 99 ) 64.91 Outstanding as of December 31, 2023 1,071 $ 64.71 7 years Exercisable as of December 31, 2023 272 $ 63.79 7 years There was no intrinsic value for options outstanding and exercisable at December 31, 2023. As of December 31, 2023, unrecognized compensation cost related to options of $ 12 million is anticipated to be recognized over a weighted-average period of approximately 2 years. Restricted Stock Units and Performance-Based Units The Company grants RSUs and PSUs to its key employees, officers and directors with various vesting requirements. The holders of the RSUs and PSUs do not have the rights of a stockholder and do not have voting rights until the shares are issued and delivered in settlement of the awards. RSUs generally vest over the service period, typically four years , and PSUs generally vest based on achieving certain predefined performance objectives along with service conditions. For PSUs the number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of these performance metrics in accordance with the terms established at the time of the award. 58 The Company granted a portion of PSUs subject to market-based vesting conditions. The Company determines the fair value of PSUs subject to market-based vesting conditions using a Monte Carlo simulation model that incorporates the probability of the performance conditions being met as of the grant date. Assumptions used in the Monte Carlo simulation model for the estimated fair value were as follows: Year Ended December 31, 2023 2022 2021 (1) Weighted-average risk-free interest rate 4.7 % 2.5 % — % Expected volatility 32 % 37 % — % (1) There were no PSUs issued by the Company in 2021. A summary of RSU and PSU award activity for the year ended December 31, 2023, is presented in the following table: RSUs PSUs (In thousands, except per share) Number of RSUs Weighted-Average Grant Date Fair Value Number of PSUs Weighted-Average Grant Date Fair Value Outstanding as of December 31, 2022 1,197 $ 53.46 235 $ 67.96 Granted 777 49.28 188 59.16 Vested (1) ( 440 ) 46.01 ( 115 ) 54.72 Forfeited and canceled ( 197 ) 68.18 ( 13 ) 70.76 Outstanding as of December 31, 2023 1,337 $ 51.31 295 $ 67.46 (1) The number of RSUs and PSUs vested includes common stock shares that the Company withheld on behalf of its employees to satisfy the minimum tax withholding. The total fair value of RSUs that vested during 2023 and 2022 was $ 22 million and $ 30 million, respectively. The total fair value of PSUs that vested during 2023 and 2022 was $ 7 million and $ 5 million, respectively. As of December 31, 2023, unrecognized compensation cost related to RSUs and PSUs of $ 60 million is anticipated to be recognized over a weighted-average period of approximately 3 years. 14. Employee Benefit Plans Pension Plans Certain eligible employees of the Company participated in various retirement plans in Europe. In connection with the Separation, the Company also became the sponsor of a retirement plan in the U.K. (the “U.K. Retirement Plan”). The U.K. Retirement Plan did not allow for new participants or additional benefit accruals. Other than the U.K. Retirement Plan, the Company deems other retirement plans to be immaterial to its Consolidated Financial Statements and are excluded from the disclosure below. U.K. Retirement Plan A reconciliation of the projected benefit obligation, fair value of the plan and the funded status, the amount recognized in financial statements, the assumptions used, the plan assets and funding requirements are shown below. 59 The change in the projected benefit obligation was as follows: December 31, (In millions) 2023 2022 Projected benefit obligation at beginning of year $ 788 $ 1,400 Interest cost 40 21 Actuarial (gain) loss (1) 9 ( 442 ) Benefits paid ( 48 ) ( 52 ) Foreign currency exchange rate changes 41 ( 139 ) Projected benefit obligation at end of year $ 830 $ 788 (1) Actuarial gains or losses are due to changes in the discount and mortality rates. The change in the fair value of the plan assets and funded status was as follows: December 31, (In millions) 2023 2022 Fair value of plan assets at beginning of year $ 826 $ 1,460 Actual return on plan assets 60 ( 438 ) Employer contributions 1 1 Benefits paid ( 48 ) ( 52 ) Foreign currency exchange rate changes 44 ( 145 ) Fair value of plan assets at end of year $ 883 $ 826 Funded status of the plan assets at end of year (1) $ 53 $ 38 (1) Funded status is recorded within Other long-term assets. The amounts included in AOCIL that have not yet been recognized in net periodic benefit were as follows: December 31, (In millions) 2023 2022 Net actuarial loss $ ( 156 ) $ ( 151 ) Prior-service credit 14 14 Net loss recognized in AOCIL $ ( 142 ) $ ( 137 ) The components of net benefit cost recognized were as follows: Year Ended December 31, (In millions) 2023 2022 Interest cost component $ ( 40 ) $ ( 21 ) Expected return on plan assets for the period 50 54 Amortization of prior-service credit 1 — Amortization of net loss ( 3 ) — Net benefit credit recognized (1) $ 8 $ 33 (1) Net benefit credit is recorded within Other income, net. The amount recognized in other comprehensive income was as follows: Year Ended December 31, (In millions) 2023 2022 Net gain (loss) $ 1 $ ( 51 ) Amortization prior-service credit and net loss 2 — Other comprehensive income (loss) $ 3 $ ( 51 ) 60 The weighted-average assumptions used to determine the projected benefit obligation and the net periodic costs were as follows: Year Ended December 31, 2023 2022 Weighted average assumptions used to determine benefit obligation at December 31: Discount rate 4.77 % 5.03 % Rate of compensation increase (1) — % — % Weighted average assumptions used to determine net periodic costs for the year ended December 31: Discount rate 5.03 % 1.82 % Rate of compensation increase (1) — % — % Expected long-term rate of return on plan assets 6.10 % 4.13 % (1) No rate of compensation increase was assumed as the plans are frozen to additional participant benefit accruals. The Company’s U.K. Retirement Plan’s assets are invested by a trustee, which include representatives of the Company, to meet the U.K. Retirement Plan’s projected future pension liabilities. During 2023, the Company changed the plan’s investment manager and appointed a fiduciary manager. The day-to-day management of the assets of the U.K. Retirement Plan has been delegated by the plan trustee to a fiduciary manager who decides the composition of the asset portfolio in line with the objectives of the plan’s trustee. The trustee’s investment objectives are to meet the performance target set by the trustee in a risk-controlled framework. The target strategic asset allocation for the U.K. Retirement Plan consists of approximately 65 % liability-driven investments, intended to minimize market and interest rate risks, and approximately 35 % growth and income assets. The actual asset allocations of the U.K. Retirement Plan are in line with the target asset allocations. The fair values of investments held in the pension plans by major asset category were as follows: December 31, (In millions) Level 2023 2022 Cash and cash equivalents Level 1 $ 11 $ 59 Fixed income securities Level 1 21 — Money Market Level 2 18 — Equities Level 2 134 — Fixed income securities Level 2 890 572 Derivatives Level 2 — ( 137 ) Other (1) Level 2 ( 266 ) — Total assets in fair value hierarchy $ 808 $ 494 Private Markets (2) 75 — Commingled funds (2) — 332 Investments, at fair value $ 883 $ 826 (1) Represents repurchase agreements in the UK. Represent the plans’ short-term borrowing to hedge against interest rate and inflation risks. The plans have an obligation to return the cash after the term of the agreements. Due to the short-term nature of the agreements, the outstanding balance of the obligation approximates fair value. (2) Investments that are measured using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total defined benefit pension plan assets. The expected benefit payments for the defined benefit pension plan are summarized below. These estimates are based on assumptions about future events. Actual benefit payments may vary from these estimates. 61 (In millions) 2024 2025 2026 2027 2028 2029-2034 Expected payments $ 49 $ 49 $ 53 $ 55 $ 55 $ 279 The Company’s funding practice is to evaluate the tax and cash position, and the funded status of the plan, in determining the planned contributions. The Company estimates that it will contribute approximately $ 1 million to the U.K. Retirement Plan in 2024. 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 years ended December 31, 2023, 2022 and 2021, were $ 66 million, $ 54 million and $ 45 million, respectively. Defined contribution costs were primarily recorded in Direct operating expense in the Consolidated Statements of Operations. 15. Restructuring Charges and Other Restructuring costs and other primarily related to severance, including projects to optimize the Company’s finance, human resources and information technology functions, and closing certain corporate and administrative offices, which were not associated with customer attrition. For the year ended December 31, 2023, Restructuring costs and other totaled $ 32 million, including $ 21 million related to severance and $ 11 million primarily related to closing certain corporate and administrative offices. The following table summarizes changes in the restructuring liability, which is included within Other current liabilities in the Consolidated Balance Sheets. (In millions) Severance Other Total Balance as of December 31, 2022 $ 13 $ — $ 13 Charges incurred (1) 21 11 32 Payments ( 27 ) — ( 27 ) Non-cash reductions — ( 11 ) ( 11 ) Balance as of December 31, 2023 $ 7 $ — $ 7 The remaining severance liability at December 31, 2023, is expected to be substantially paid within 12 months. 16. Income Taxes For the periods ended before the Separation, the Company was a member of XPO, and its U.S. taxable income was included in XPO’s consolidated U.S. federal income tax return as well as certain state and local taxing jurisdictions tax returns. For the periods ended after the Separation, the Company has filed a consolidated U.S. federal income tax return as well as state and local income tax returns. The Company’s foreign income tax returns are filed on a full-year basis. Income (loss) before taxes related to the Company’s domestic and foreign operations was as follows: Year Ended December 31, (In millions) 2023 2022 2021 U.S. $ 97 $ 105 $ ( 25 ) Foreign 169 159 178 Income before income taxes $ 266 $ 264 $ 153 62 The components of income tax expense (benefit) are presented in the following table: Year Ended December 31, (In millions) 2023 2022 2021 Current: U.S. federal $ 24 $ 40 $ 12 U.S state and local 7 2 2 Foreign 43 29 26 Total current income tax expense $ 74 $ 71 $ 40 Deferred: U.S. federal $ ( 3 ) $ ( 9 ) $ ( 13 ) U.S state and local ( 2 ) ( 3 ) ( 12 ) Foreign ( 36 ) 5 ( 23 ) Total deferred income tax benefit $ ( 41 ) $ ( 7 ) $ ( 48 ) Total income tax expense (benefit) $ 33 $ 64 $ ( 8 ) Income tax expense (benefit) for 2023, 2022 and 2021 varied from the amount computed by applying the statutory income tax rate to income (loss) before income taxes. The Company’s U.S. federal statutory tax rate was 21% for 2023, 2022 and 2021. A reconciliation of the expected U.S. federal income tax expense (benefit), calculated by applying the federal statutory rate to the Company’s actual income tax expense (benefit) is presented in the following table: Year Ended December 31, (In millions) 2023 2022 2021 Tax expense at U.S. federal statutory tax rate $ 56 $ 55 $ 32 State taxes, net of U.S. federal benefit 3 ( 1 ) ( 8 ) Foreign rate differential ( 14 ) ( 10 ) ( 2 ) Foreign operations (1) 4 11 5 Contribution- and margin-based taxes 5 5 4 Valuation allowances ( 4 ) ( 3 ) 1 Stock-based compensation 1 ( 1 ) 1 Intangible assets (2) ( 17 ) — ( 42 ) Transaction costs — 5 — Other ( 1 ) 3 1 Total income tax expense (benefit) $ 33 $ 64 $ ( 8 ) (1) Foreign operations include the net impact of changes to valuation allowances, the cost of inclusion of foreign income in the U.S. net of foreign taxes and permanent items related to foreign operations. (2) In 2023 and 2021, the Company recorded an income tax benefit related to the rights to use trade names, trademarks and other intellectual property. 63 Components of the Net Deferred Tax Asset or Liability The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented in the following table: December 31, (In millions) 2023 2022 Deferred tax assets Net operating loss and other tax attribute carryforwards $ 79 $ 71 Accrued expenses 84 54 Other 17 15 Gross deferred tax assets 180 140 Valuation allowances ( 50 ) ( 44 ) Total deferred tax assets, net of valuation allowance 130 96 Deferred tax liabilities Intangible assets ( 105 ) ( 128 ) Property and equipment ( 78 ) ( 70 ) Pension and other retirement obligations ( 6 ) ( 1 ) Other ( 8 ) ( 14 ) Gross deferred tax liabilities ( 197 ) ( 213 ) Net deferred tax liability $ ( 67 ) $ ( 117 ) The deferred tax asset and deferred tax liability above are reflected in the Consolidated Balance Sheets as follows: December 31, (In millions) 2023 2022 Other long-term assets $ 74 $ 43 Other long-term liabilities ( 141 ) ( 160 ) Net deferred tax liability $ ( 67 ) $ ( 117 ) Investments in Foreign Subsidiaries As of December 31, 2023, the Company maintained a partial indefinite reinvestment assertion on its post- 2017 undistributed foreign earnings 64 Operating Loss and Tax Credit Carryforwards The Company’s operating loss and tax credit carryforwards were as follows: December 31, (In millions) Expiration Date (1) 2023 2022 Federal net operating losses for all U.S. operations 2033 $ 32 $ 17 Tax effect (before federal benefit) of state net operating losses Various times starting in 2024 2 2 Federal tax credit carryforwards Various times starting in 2032 4 5 State tax credit carryforwards Various times starting in 2024 7 6 Foreign net operating losses available to offset future taxable income Various times starting in 2024 252 235 (1) Some credits and losses have unlimited carryforward periods. Valuation Allowances The Company established valuation allowances for some of its deferred tax assets, as it is more likely than not that these assets will not be realized in the foreseeable future. The Company concluded that the remaining deferred tax assets will more likely than not be realized, though this is not assured, and as such no valuation allowances have been provided on these assets. The balances and activity related to the Company’s valuation allowances were as follows: (In millions) Beginning Balance Additions Reductions Ending Balance 2023 (1) $ 44 16 ( 10 ) $ 50 2022 $ 45 3 ( 4 ) $ 44 2021 (2) $ 73 1 ( 29 ) $ 45 (1) In 2023, due to the PFS Acquisition, the Company acquired $ 8 million of valuation allowances. (2) In 2021, due to the Separation, the Company released $ 29 million of valuation allowances as the corresponding tax attributes reported by the Company on a combined basis were not transferred to the Company. Unrecognized Tax Benefits A reconciliation of the beginning unrecognized tax benefits balance to the ending balance is presented in the following table: Year Ended December 31, (In millions) 2023 2022 2021 Beginning balance $ 3 $ 3 $ 3 Increases related to positions taken during prior years 1 1 1 Reduction due to expiration of statutes of limitations — ( 1 ) ( 1 ) Gross unrecognized tax benefits $ 4 $ 3 $ 3 Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of the end of the year $ 4 $ 3 $ 3 The Company could reflect a reduction to unrecognized tax benefits of approximately $ 4 million over the next 12 months due to statutes of limitations expirations or because tax positions are sustained on audit. The Company is subject to taxation in the U.S. and foreign jurisdictions. As of December 31, 2023, the Company is under examination for its income tax filings in the states of North Carolina and Wisconsin. Various foreign tax returns for years after 2009 are open under relevant statutes of limitations and are subject to audit. 65 17. Commitments and Contingencies The Company is involved, and will continue to be involved, in numerous legal proceedings arising from 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 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. 66 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None.