XPO, Inc. 10-Q

Item 1. Financial Statements. XPO Logistics, Inc. Condensed Consolidated Balance Sheets (Unaudited) September 30, December 31, (In millions, except per share data) 2020 2019 ASSETS Current assets Cash and cash equivalents $ 2,025 $ 377 Accounts receivable, net of allowances of $ 79 and $ 58 , respectively 2,624 2,500 Other current assets 435 465 Total current assets 5,084 3,342 Long-term assets Property and equipment, net of $ 2,435 and $ 2,054 in accumulated depreciation, respectively 2,573 2,704 Operating lease assets 2,221 2,245 Goodwill 4,506 4,450 Identifiable intangible assets, net of $ 914 and $ 850 in accumulated amortization, respectively 994 1,092 Other long-term assets 367 295 Total long-term assets 10,661 10,786 Total assets $ 15,745 $ 14,128 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 1,025 $ 1,157 Accrued expenses 1,855 1,414 Short-term borrowings and current maturities of long-term debt 130 84 Short-term operating lease liabilities 461 468 Other current liabilities 177 135 Total current liabilities 3,648 3,258 Long-term liabilities Long-term debt 6,545 5,182 Deferred tax liability 494 495 Employee benefit obligations 157 157 Long-term operating lease liabilities 1,763 1,776 Other long-term liabilities 353 364 Total long-term liabilities 9,312 7,974 Stockholders’ equity Convertible perpetual preferred stock, $ 0.001 par value; 10 shares authorized; 0.07 of Series A shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 41 41 Common stock, $ 0.001 par value; 300 shares authorized; 91 and 92 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively — — Additional paid-in capital 1,971 2,061 Retained earnings 766 786 Accumulated other comprehensive loss ( 129 ) ( 145 ) Total stockholders’ equity before noncontrolling interests 2,649 2,743 Noncontrolling interests 136 153 Total equity 2,785 2,896 Total liabilities and equity $ 15,745 $ 14,128 See accompanying notes to condensed consolidated financial statements. 1 Table of Contents XPO Logistics, Inc. Condensed Consolidated Statements of Income (Loss) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (In millions, except per share data) 2020 2019 2020 2019 Revenue $ 4,221 $ 4,154 $ 11,587 $ 12,512 Operating expenses Cost of transportation and services 2,038 2,068 5,577 6,272 Direct operating expense 1,461 1,401 4,191 4,224 Sales, general and administrative expense 499 456 1,656 1,397 Total operating expenses 3,998 3,925 11,424 11,893 Operating income 223 229 163 619 Other income ( 20 ) ( 11 ) ( 59 ) ( 41 ) Foreign currency (gain) loss — ( 5 ) ( 5 ) 5 Debt extinguishment loss — — — 5 Interest expense 86 75 240 218 Income (loss) before income tax provision (benefit) 157 170 ( 13 ) 432 Income tax provision (benefit) 59 34 ( 2 ) 99 Net income (loss) 98 136 ( 11 ) 333 Net income attributable to noncontrolling interests ( 5 ) ( 6 ) ( 4 ) ( 21 ) Net income (loss) attributable to XPO $ 93 $ 130 $ ( 15 ) $ 312 Earnings (loss) per share data Net income (loss) attributable to common shareholders $ 84 $ 117 $ ( 17 ) $ 282 Basic earnings (loss) per share $ 0.93 $ 1.27 $ ( 0.18 ) $ 2.91 Diluted earnings (loss) per share $ 0.83 $ 1.14 $ ( 0.18 ) $ 2.63 Weighted-average common shares outstanding Basic weighted-average common shares outstanding 91 92 91 97 Diluted weighted-average common shares outstanding 102 102 91 107 See accompanying notes to condensed consolidated financial statements. 2 Table of Contents XPO Logistics, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2020 2019 2020 2019 Net income (loss) $ 98 $ 136 $ ( 11 ) $ 333 Other comprehensive income (loss), net of tax Foreign currency translation gain (loss), net of tax effect of $ 13 , $( 11 ), $ 6 and $( 17 ) $ 71 $ ( 66 ) $ 27 $ ( 68 ) Unrealized gain (loss) on financial assets/liabilities designated as hedging instruments, net of tax effect of $ — , $ — , $ — and $ — ( 1 ) — ( 1 ) 1 Defined benefit plans adjustments, net of tax effect of $( 1 ), $ — , $ 1 and $ — ( 2 ) ( 1 ) ( 7 ) ( 1 ) Other comprehensive income (loss) 68 ( 67 ) 19 ( 68 ) Comprehensive income $ 166 $ 69 $ 8 $ 265 Less: Comprehensive income (loss) attributable to noncontrolling interests 10 ( 9 ) 7 4 Comprehensive income attributable to XPO $ 156 $ 78 $ 1 $ 261 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents XPO Logistics, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (In millions) 2020 2019 Operating activities Net income (loss) $ ( 11 ) $ 333 Adjustments to reconcile net income (loss) to net cash from operating activities Depreciation, amortization and net lease activity 572 546 Stock compensation expense 50 48 Accretion of debt 14 16 Deferred tax expense 4 26 Debt extinguishment loss — 5 Unrealized (gain) loss on foreign currency option and forward contracts ( 1 ) 5 Gains on sales of property and equipment ( 68 ) ( 73 ) Other 46 17 Changes in assets and liabilities Accounts receivable ( 152 ) ( 190 ) Other assets ( 52 ) ( 12 ) Accounts payable ( 105 ) ( 153 ) Accrued expenses and other liabilities 395 ( 126 ) Net cash provided by operating activities 692 442 Investing activities Payment for purchases of property and equipment ( 377 ) ( 413 ) Proceeds from sale of property and equipment 148 192 Cash collected on deferred purchase price receivable — 186 Other 5 — Net cash used in investing activities ( 224 ) ( 35 ) Financing activities Proceeds from issuance of debt 1,155 1,751 Proceeds from borrowings related to securitization program 48 — Proceeds from borrowings on ABL facility 820 1,690 Repayment of borrowings on ABL facility ( 620 ) ( 1,690 ) Repayment of debt and finance leases ( 65 ) ( 850 ) Payment for debt issuance costs ( 21 ) ( 28 ) Purchase of noncontrolling interests ( 21 ) — Repurchase of common stock ( 114 ) ( 1,347 ) Change in bank overdrafts 20 2 Payment for tax withholdings for restricted shares ( 21 ) ( 11 ) Other 1 4 Net cash provided by (used in) financing activities 1,182 ( 479 ) Effect of exchange rates on cash, cash equivalents and restricted cash ( 2 ) ( 7 ) Net increase (decrease) in cash, cash equivalents and restricted cash 1,648 ( 79 ) Cash, cash equivalents and restricted cash, beginning of period 387 514 Cash, cash equivalents and restricted cash, end of period $ 2,035 $ 435 Supplemental disclosure of cash flow information Leased assets obtained in exchange for new operating lease liabilities $ 481 $ 559 Leased assets obtained in exchange for new finance lease liabilities 32 35 Cash paid for interest 215 202 Cash paid for income taxes 20 89 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents XPO Logistics, Inc. Condensed Consolidated Statements of Changes in Equity (Unaudited) Series A Preferred Stock Common Stock (Shares in thousands, dollars in millions) Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total XPO Stockholders' Equity Non-controlling Interests Total Equity Balance as of June 30, 2020 72 $ 41 91,322 $ — $ 1,963 $ 672 $ ( 192 ) $ 2,484 $ 150 $ 2,634 Net income — — — — — 93 — 93 5 98 Other comprehensive income — — — — — — 63 63 5 68 Exercise and vesting of stock compensation awards — — 39 — — — — — — — Tax withholdings related to vesting of stock compensation awards — — — — ( 3 ) — — ( 3 ) — ( 3 ) Purchase of noncontrolling interests — — — — ( 1 ) — — ( 1 ) ( 20 ) ( 21 ) Dividend declared — — — — — — — — ( 4 ) ( 4 ) Stock compensation expense — — — — 10 — — 10 — 10 Other — — — — 2 1 — 3 — 3 Balance as of September 30, 2020 72 $ 41 91,361 $ — $ 1,971 $ 766 $ ( 129 ) $ 2,649 $ 136 $ 2,785 Series A Preferred Stock Common Stock (Shares in thousands, dollars in millions) Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total XPO Stockholders' Equity Non-controlling Interests Total Equity Balance as of December 31, 2019 72 $ 41 92,342 $ — $ 2,061 $ 786 $ ( 145 ) $ 2,743 $ 153 $ 2,896 Net (income) loss — — — — — ( 15 ) — ( 15 ) 4 ( 11 ) Other comprehensive income — — — — — — 16 16 3 19 Exercise and vesting of stock compensation awards — — 672 — — — — — — — Tax withholdings related to vesting of stock compensation awards — — — — ( 21 ) — — ( 21 ) — ( 21 ) Purchase of noncontrolling interests — — — — ( 1 ) — — ( 1 ) ( 20 ) ( 21 ) Retirement of common stock — — ( 1,715 ) — ( 114 ) — — ( 114 ) — ( 114 ) Dividend declared — — — — — ( 2 ) — ( 2 ) ( 4 ) ( 6 ) Stock compensation expense — — — — 42 — — 42 — 42 Adoption of new accounting standard and other — — 62 — 4 ( 3 ) — 1 — 1 Balance as of September 30, 2020 72 $ 41 91,361 $ — $ 1,971 $ 766 $ ( 129 ) $ 2,649 $ 136 $ 2,785 5 Table of Contents XPO Logistics, Inc. Condensed Consolidated Statements of Changes in Equity (continued) (Unaudited) Series A Preferred Stock Common Stock (Shares in thousands, dollars in millions) Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total XPO Stockholders' Equity Non-controlling Interests Total Equity Balance as of June 30, 2019 72 $ 41 91,992 $ — $ 2,054 $ 563 $ ( 153 ) $ 2,505 $ 407 $ 2,912 Net income — — — — — 130 — 130 6 136 Other comprehensive loss — — — — — — ( 52 ) ( 52 ) ( 15 ) ( 67 ) Exercise and vesting of stock compensation awards — — 242 — — — — — — — Tax withholdings related to vesting of stock compensation awards — — — — ( 7 ) — — ( 7 ) — ( 7 ) Dividend declared — — — — — ( 1 ) — ( 1 ) ( 3 ) ( 4 ) Stock compensation expense — — — — 8 — — 8 — 8 Other — — — — 1 ( 12 ) — ( 11 ) ( 2 ) ( 13 ) Balance as of September 30, 2019 72 $ 41 92,234 $ — $ 2,056 $ 680 $ ( 205 ) $ 2,572 $ 393 $ 2,965 Series A Preferred Stock Common Stock (Shares in thousands, dollars in millions) Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total XPO Stockholders' Equity Non-controlling Interests Total Equity Balance as of December 31, 2018 72 $ 41 115,683 $ — $ 3,311 $ 377 $ ( 154 ) $ 3,575 $ 395 $ 3,970 Net income — — — — — 312 — 312 21 333 Other comprehensive loss — — — — — — ( 51 ) ( 51 ) ( 17 ) ( 68 ) Exercise and vesting of stock compensation awards — — 423 — — — — — — — Tax withholdings related to vesting of stock compensation awards — — — — ( 11 ) — — ( 11 ) — ( 11 ) Retirement of common stock — — ( 23,932 ) — ( 1,275 ) — — ( 1,275 ) — ( 1,275 ) Dividend declared — — — — — ( 2 ) — ( 2 ) ( 4 ) ( 6 ) Stock compensation expense — — — — 27 — — 27 — 27 Adoption of new accounting standard and other — — 60 — 4 ( 7 ) — ( 3 ) ( 2 ) ( 5 ) Balance as of September 30, 2019 72 $ 41 92,234 $ — $ 2,056 $ 680 $ ( 205 ) $ 2,572 $ 393 $ 2,965 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents XPO Logistics, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Organization, Description of Business and Basis of Presentation XPO Logistics, Inc., together with its subsidiaries (“XPO” or “we”), is a top ten global provider of cutting-edge supply chain solutions to the most successful companies in the world. We use our integrated network of people, technology and physical assets to help customers manage their goods most efficiently throughout their supply chains. Our customers are multinational, national, mid-size and small enterprises. We run our business on a global basis, with two reportable segments: Transportation and Logistics. See Note 2—Segment Reporting for further information on our operations. We prepared our Condensed Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and on the same basis as the accounting policies described in our annual report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”), except for the effects of adopting Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” as of January 1, 2020, as described below. The interim reporting requirements of Form 10-Q allow certain information and note disclosures normally included in annual consolidated financial statements to be condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the 2019 Form 10-K. We have a controlling financial interest in entities generally when we own a majority of the voting interest. The noncontrolling interests reflected in our consolidated financial statements primarily relate to a minority interest in XPO Logistics Europe SA (“XPO Logistics Europe”), formerly known as Norbert Dentressangle SA, a business we acquired in 2015. In July 2020, we purchased a shareholder’s noncontrolling interest in XPO Logistics Europe for € 17 million (approximately $ 20 million). Following this acquisition, the noncontrolling interest was reduced to approximately 4 % of XPO Logistics Europe. The Condensed Consolidated Financial Statements are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair presentation of financial condition, operating results and cash flows for the interim periods presented. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020, particularly in light of the outbreak of a strain of coronavirus, COVID-19, in the first quarter of 2020. The rapid escalation of COVID-19 into a pandemic in the first quarter of 2020 has affected, and will continue to affect, economic activity broadly and customer sectors served by our industry. COVID-19 has had, and we expect will continue to have, significant effects on economic activity, on demand for our services, and on our results of operations in 2020. Restricted Cash As of September 30, 2020 and December 31, 2019, our restricted cash included in Other long-term assets on our Condensed Consolidated Balance Sheets was $ 10 million. Accounts Receivable and Allowance for Doubtful Accounts We record accounts receivable at the contractual amount and we record an allowance for doubtful accounts for the amount we estimate we may not collect. In determining the allowance for doubtful accounts, we consider historical collection experience, the age of the accounts receivable balances, the credit quality and risk of our customers, any specific customer collection issues, current economic conditions, and other factors that may impact our customers’ ability to pay. Commencing in the first quarter of 2020 and in accordance with ASU 2016-13, we also consider reasonable and supportable forecasts of future economic conditions and their expected impact on customer collections in determining our allowance for doubtful accounts. We write off accounts receivable balances once the receivables are no longer deemed collectible. 7 Table of Contents Trade Receivables Securitization and Factoring Programs We sell certain of our trade accounts receivable on a non-recourse basis to third-party financial institutions under factoring agreements. We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. We also sell trade accounts receivable under a securitization program described below. We use trade receivables securitization and factoring programs to help manage our cash flows and offset the impact of extended payment terms for some of our customers. XPO Logistics Europe, one of our majority-owned subsidiaries, participates in a trade receivables securitization program co-arranged by three European banks (the “Purchasers”). Under the program, a wholly-owned bankruptcy-remote special purpose entity of XPO Logistics Europe sells trade receivables that originate with wholly-owned subsidiaries of XPO Logistics Europe in the United Kingdom and France to unaffiliated entities managed by the Purchasers. The special purpose entity is a variable interest entity and is consolidated by XPO based on our control of the entity’s activities. We account for transfers under our securitization and factoring arrangements as sales because we sell full title and ownership in the underlying receivables and control of the receivables is considered transferred. For these transfers, the receivables are removed from our Condensed Consolidated Balance Sheets at the date of transfer. In the securitization and factoring arrangements, any continuing involvement with the receivables is limited to servicing the receivables. The fair value of any servicing assets and liabilities is immaterial. Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables, which we report within short-term debt on our Condensed Consolidated Balance Sheets. These borrowings amounted to € 43 million ($ 50 million) as of September 30, 2020. See Note 6—Debt for additional information on these borrowings. Under a securitization program that was terminated in July 2019, if transfers were accounted for as sales, the consideration received included a simultaneous cash payment and a deferred purchase price receivable. The deferred purchase price receivable was not a trade receivable and was recorded based on its fair value and reported within Other current assets on our Condensed Consolidated Balance Sheets. The cash payment which we received on the date of the transfer was reflected within Net cash provided by operating activities on our Condensed Consolidated Statements of Cash Flows. As we received cash payments on the deferred purchase price receivable, it was reflected as an investing activity. The new program does not include a deferred purchase price mechanism. The maximum amount of net cash proceeds available at any one time under the current securitization program is € 400 million (approximately $ 469 million as of September 30, 2020), and this amount includes any unsecured borrowings related to the program. As of September 30, 2020, € 294 million (approximately $ 345 million) of capacity was utilized under the program and € 106 million (approximately $ 124 million) was available to us. The weighted average interest rate was 0.64 % as of September 30, 2020. Charges for commitment fees, which are based on a percentage of available amounts, and charges for administrative fees were not material to our results of operations for the three and nine months ended September 30, 2020 and 2019. The securitization program expires in July 2022 and contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio. 8 Table of Contents Information related to the trade receivables sold was as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2020 2019 2020 2019 Securitization programs Receivables sold in period $ 750 $ 790 $ 2,039 $ 1,451 Cash consideration 750 787 2,039 1,316 Deferred purchase price — 3 — 135 Factoring programs Receivables sold in period $ 112 $ 196 $ 575 $ 615 Cash consideration 112 195 574 612 In addition to the cash considerations referenced above, we received $ 49 million and $ 186 million in the three and nine months ended September 30, 2019, respectively, for the realization of cash on the deferred purchase price receivable for our prior securitization program. Acquisition In March 2020, XPO Logistics Europe announced that it had entered into a definitive agreement to acquire the majority of Kuehne + Nagel’s contract logistics operations in the United Kingdom. The operations provide a range of logistics services, including inbound and outbound distribution, reverse logistics management and inventory management, and generated annual revenues in 2019 of approximately £ 500 million ($ 639 million). The transaction is subject to customary closing conditions and is currently being reviewed by the UK Competition and Markets Authority (the “CMA”). The deadline for a phase 1 decision from the CMA is November 20, 2020. The transaction is not expected to be material to our 2020 operating results. Fair Value Measurements 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. We base our fair value estimates on market assumptions and available information. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and current maturities of long-term debt approximated their fair values as of September 30, 2020 and December 31, 2019 due to their short-term nature and/or being receivable or payable on demand. The Level 1 cash equivalents included money market funds valued using quoted prices in active markets. The Level 2 cash equivalents included short-term investments valued using published interest rates for instruments with similar terms and maturities. For information on the fair value hierarchy of our derivative instruments, see Note 5—Derivative Instruments and for information on financial liabilities, see Note 6—Debt. The fair value hierarchy of cash equivalents was as follows: (In millions) Carrying Value Fair Value Level 1 Level 2 September 30, 2020 $ 1,657 $ 1,657 $ 1,657 $ — December 31, 2019 144 144 127 17 9 Table of Contents Cash equivalents at September 30, 2020 include a portion of the net proceeds from the issuance of senior notes due 2025 (the “Senior Notes due 2025”) which were invested in money market funds. For further information, see Note 6—Debt. Adoption of New Accounting Standards In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as subsequently modified, amends the incurred losses impairment method with a method that reflects expected credit losses on certain types of financial instruments, including trade receivables. We adopted this standard on January 1, 2020 and recorded an immaterial adjustment to total equity for the cumulative impact of adoption. In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Under the guidance, any capitalized implementation costs would be included in prepaid expenses, amortized over the term of the hosting arrangement on a straight-line basis and presented in the same line items in the Consolidated Statement of Income as the expense for fees of the associated hosting arrangements. We adopted this standard on January 1, 2020 on a prospective basis. The adoption did not have a material effect on our consolidated financial statements. Accounting Pronouncements Issued but Not Yet Effective In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes.” The ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to enhance consistency and comparability among reporting entities. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within that reporting period; however, early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Reference rate reform (Topic 848)—“Facilitation of the effects of reference rate reform on financial reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The amendments are elective and are effective upon issuance through December 31, 2022. We are currently evaluating the impact of the new guidance. 2. Segment Reporting We are organized into two reportable segments: Transportation and Logistics. We evaluate our performance in large part based on the various financial measures of our two reporting segments. In our Transportation segment, we provide multiple services to facilitate the movement of raw materials, parts and finished goods. We accomplish this by using our proprietary technology, third-party independent carriers and our transportation assets and service centers. Our transportation services include truck brokerage, less-than-truckload (“LTL”), truckload, expedite, last mile, intermodal and drayage, managed transportation, and global forwarding. Freight brokerage, last mile, global forwarding and managed transportation are non-asset or asset-light businesses while LTL and truckload are primarily asset-based operations. In our Logistics segment, which we also refer to as supply chain or contract logistics, we provide a wide range of services differentiated by our proprietary technology and our ability to customize solutions for individual customers. Our services include value-added warehousing and distribution, e-commerce and omnichannel fulfillment, cold-chain logistics, packaging and labeling, factory support, aftermarket support, inventory management, order personalization and supply chain optimization, such as product flow management. In addition, our Logistics segment provides reverse logistics, which is also called returns management. 10 Table of Contents Some of our operating units provide services to our other operating units outside of their reportable segment. Billings for such services are based on negotiated rates and are reflected as revenues of the billing segment. We adjust these rates from time to time based on market conditions. We eliminate intersegment revenues and expenses in our consolidated results. Corporate includes corporate headquarters costs for executive officers and certain legal and financial functions, and other costs and credits not attributed to our reporting segments. Our chief operating decision maker (“CODM”) regularly reviews financial information at the reporting segment level to allocate resources to the segments and to assess their performance. We include items directly attributable to a segment, and those that can be allocated on a reasonable basis, in segment results reported to the CODM. We do not provide asset information by segment to the CODM. Selected financial data for our segments is as follows: (In millions) Transportation Logistics Corporate Eliminations/Other Total Three months ended September 30, 2020 Revenue $ 2,675 $ 1,580 $ — $ ( 34 ) $ 4,221 Operating income (loss) (1) 202 77 ( 56 ) — 223 Depreciation and amortization 114 76 3 — 193 Three months ended September 30, 2019 Revenue $ 2,684 $ 1,510 $ — $ ( 40 ) $ 4,154 Operating income (loss) (2) 208 61 ( 40 ) — 229 Depreciation and amortization 110 73 3 — 186 Nine months ended September 30, 2020 Revenue $ 7,261 $ 4,421 $ — $ ( 95 ) $ 11,587 Operating income (loss) (3) 307 72 ( 216 ) — 163 Depreciation and amortization 337 225 10 — 572 Nine months ended September 30, 2019 Revenue $ 8,090 $ 4,530 $ — $ ( 108 ) $ 12,512 Operating income (loss) (4) 579 168 ( 128 ) — 619 Depreciation and amortization 334 201 11 — 546 (1) Consolidated operating income for the three months ended September 30, 2020 includes $ 3 million of transaction and integration costs. (2) Consolidated operating income for the three months ended September 30, 2019 includes $ 11 million of restructuring expense. (3) Consolidated operating income for the nine months ended September 30, 2020 includes $ 93 million of transaction and integration costs and $ 53 million of restructuring expense. (4) Consolidated operating income for the nine months ended September 30, 2019 includes $ 2 million of transaction and integration costs and $ 28 million of restructuring expense. The transaction and integration costs for the first nine months of 2020 are primarily related to our previously announced exploration of strategic alternatives. The review of strategic alternatives was terminated in March 2020. For further information on our restructuring actions, see Note 4—Restructuring Charges. We also incurred in the third quarter and first nine months of 2020, net incremental and direct costs as a result of the COVID-19 pandemic, including costs for personal protective equipment, site cleanings and enhanced employee benefits, such as appreciation pay. 11 Table of Contents 3. Revenue Recognition Disaggregation of Revenues We disaggregate our revenue by geographic area and service offering. Our revenue disaggregated by geographical area, based on sales office location, was as follows: Three Months Ended September 30, 2020 (In millions) Transportation Logistics Eliminations Total Revenue United States $ 1,904 $ 551 $ ( 14 ) $ 2,441 North America (excluding United States) 77 12 — 89 France 317 174 ( 3 ) 488 United Kingdom 175 402 ( 12 ) 565 Europe (excluding France and United Kingdom) 194 421 ( 5 ) 610 Other 8 20 — 28 Total $ 2,675 $ 1,580 $ ( 34 ) $ 4,221 Three Months Ended September 30, 2019 (In millions) Transportation Logistics Eliminations Total Revenue United States $ 1,891 $ 581 $ ( 12 ) $ 2,460 North America (excluding United States) 76 17 — 93 France 326 164 ( 6 ) 484 United Kingdom 192 335 ( 18 ) 509 Europe (excluding France and United Kingdom) 195 389 ( 3 ) 581 Other 4 24 ( 1 ) 27 Total $ 2,684 $ 1,510 $ ( 40 ) $ 4,154 Nine Months Ended September 30, 2020 (In millions) Transportation Logistics Eliminations Total Revenue United States $ 5,111 $ 1,596 $ ( 33 ) $ 6,674 North America (excluding United States) 219 36 — 255 France 883 466 ( 9 ) 1,340 United Kingdom 482 1,069 ( 39 ) 1,512 Europe (excluding France and United Kingdom) 528 1,190 ( 12 ) 1,706 Other 38 64 ( 2 ) 100 Total $ 7,261 $ 4,421 $ ( 95 ) $ 11,587 12 Table of Contents Nine Months Ended September 30, 2019 (In millions) Transportation Logistics Eliminations Total Revenue United States $ 5,651 $ 1,708 $ ( 24 ) $ 7,335 North America (excluding United States) 216 50 — 266 France 1,041 505 ( 17 ) 1,529 United Kingdom 566 1,020 ( 54 ) 1,532 Europe (excluding France and United Kingdom) 603 1,178 ( 11 ) 1,770 Other 13 69 ( 2 ) 80 Total $ 8,090 $ 4,530 $ ( 108 ) $ 12,512 Our revenue disaggregated by service offering was as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2020 2019 2020 2019 Transportation segment Freight brokerage and truckload $ 1,129 $ 1,083 $ 2,970 $ 3,269 LTL 1,175 1,227 3,289 3,667 Last mile (1) 243 219 662 655 Managed transportation 96 134 253 400 Global forwarding 75 74 212 229 Transportation eliminations ( 43 ) ( 53 ) ( 125 ) ( 130 ) Total Transportation segment revenue 2,675 2,684 7,261 8,090 Total Logistics segment revenue 1,580 1,510 4,421 4,530 Intersegment eliminations ( 34 ) ( 40 ) ( 95 ) ( 108 ) Total revenue $ 4,221 $ 4,154 $ 11,587 $ 12,512 (1) Comprised of our North American last mile operations. Performance Obligations Remaining performance obligations represent firm contracts for which services have not been performed and future revenue recognition is expected . As permitted in determining the remaining performance obligation, we omit obligations that: (i) have original expected durations of one year or less or (ii) contain variable consideration. On September 30, 2020, the fixed consideration component of our remaining performance obligation was approximately $ 1.7 billion, and we expect to recognize approximately 75 % of that amount over the next three years and the remainder thereafter. The majority of the remaining performance obligation relates to our Logistics reportable segment. We estimate 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. Restructuring Charges We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure, including actions in response to COVID-19. These actions generally include severance and facility-related costs, including impairment of right-of-use assets, and are intended to improve our efficiency and profitability. 13 Table of Contents Restructuring charges were recorded on our Condensed Consolidated Statements of Income (Loss) as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2020 2019 2020 2019 Cost of transportation and services $ — $ — $ 1 $ 3 Direct operating expense — 1 6 1 Sales, general and administrative expense — 10 46 24 Total $ — $ 11 $ 53 $ 28 Our restructuring activity was as follows: Nine Months Ended September 30, 2020 (In millions) Reserve Balance as of December 31, 2019 Charges Incurred Payments Foreign Exchange and Other Reserve Balance as of September 30, 2020 Severance Transportation $ 12 $ 17 $ ( 16 ) $ — $ 13 Logistics 11 20 ( 10 ) 1 22 Corporate 2 9 ( 8 ) ( 1 ) 2 Total severance 25 46 ( 34 ) — 37 Facilities Transportation — 6 — ( 1 ) 5 Logistics — 1 — ( 1 ) — Total facilities — 7 — ( 2 ) 5 Total $ 25 $ 53 $ ( 34 ) $ ( 2 ) $ 42 We expect to incur additional restructuring charges during the fourth quarter of fiscal 2020 of approximately $ 10 million under previously approved restructuring actions. We expect the majority of the cash outlays related to the charges incurred in 2020 will be complete within twelve months. 5. Derivative Instruments In the normal course of business, we are exposed to risks arising from business operations and economic factors, including fluctuations in interest rates and foreign currencies. We use derivative instruments to manage the volatility related to these exposures. The objective of these derivative instruments is to reduce fluctuations in our 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. Historically, we have not incurred, and do not expect to incur in the future, any losses as a result of counterparty default. 14 Table of Contents The fair value of our derivative instruments and the related notional amounts were as follows: September 30, 2020 Derivative Assets Derivative Liabilities (In millions) Notional Amount Balance Sheet Caption Fair Value Balance Sheet Caption Fair Value Derivatives designated as hedges Cross-currency swap agreements $ 450 Other current assets $ — Other current liabilities $ ( 22 ) Cross-currency swap agreements 749 Other long-term assets — Other long-term liabilities ( 28 ) Interest rate swaps 2,003 Other current assets — Other current liabilities ( 4 ) Derivatives not designated as hedges Foreign currency option contracts 108 Other current assets — Other current liabilities — Total $ — $ ( 54 ) December 31, 2019 Derivative Assets Derivative Liabilities (In millions) Notional Amount Balance Sheet Caption Fair Value Balance Sheet Caption Fair Value Derivatives designated as hedges Cross-currency swap agreements $ 1,233 Other long-term assets $ — Other long-term liabilities $ ( 18 ) Interest rate swap 2,003 Other current assets — Other current liabilities ( 7 ) Derivatives not designated as hedges Foreign currency option contracts 365 Other current assets 1 Other current liabilities — Total $ 1 $ ( 25 ) The derivatives are 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 derivative and nonderivative instruments designated as hedges on our Condensed Consolidated Statements of Income (Loss) was as follows: Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives Amount of Gain (Loss) Reclassified from AOCI into Net Income (Loss) Amount of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Three Months Ended September 30, (In millions) 2020 2019 2020 2019 2020 2019 Derivatives designated as cash flow hedges Cross-currency swap agreements $ ( 9 ) $ 7 $ ( 8 ) $ 9 $ — $ 1 Interest rate swaps — 1 — — — — Derivatives designated as net investment hedges Cross-currency swap agreements ( 48 ) 55 — — 4 5 Total $ ( 57 ) $ 63 $ ( 8 ) $ 9 $ 4 $ 6 15 Table of Contents Amount of Gain (Loss) Recognized in Other Comprehensive Loss on Derivatives Amount of Gain (Loss) Reclassified from AOCI into Net Income (Loss) Amount of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Nine Months Ended September 30, (In millions) 2020 2019 2020 2019 2020 2019 Derivatives designated as cash flow hedges Cross-currency swap agreements $ ( 4 ) $ 12 $ ( 8 ) $ 11 $ — $ 1 Interest rate swaps ( 5 ) — — — — — Derivatives designated as net investment hedges Cross-currency swap agreements ( 29 ) 83 — — 8 10 Total $ ( 38 ) $ 95 $ ( 8 ) $ 11 $ 8 $ 11 The pre-tax gain (loss) recognized in earnings for foreign currency option and forward contracts not designated as hedging instruments was a loss of $ 1 million and a gain of $ 1 million for the three and nine months ended September 30, 2020, respectively, and a gain of $ 5 million and a loss of $ 5 million for the three and nine months ended September 30, 2019, respectively. These amounts are recorded in Foreign currency (gain) loss on our Condensed Consolidated Statements of Income (Loss). Cross-Currency Swap Agreements We enter into cross-currency swap agreements to manage the foreign currency exchange risk related to our international operations by effectively converting our fixed-rate U.S. Dollar (“USD”)-denominated debt, including the associated interest payments, to fixed-rate, euro (“EUR”)-denominated debt. The risk management objective of these transactions is to manage foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies and reduce the variability in the functional currency equivalent cash flows of this debt. During the term of the swap contracts, we will receive interest, either on a quarterly or semi-annual basis, from the counterparties based on USD fixed interest rates, and we will pay interest, also on a quarterly or semi-annual basis, to the counterparties based on EUR fixed interest rates. At maturity, we will repay the original principal amount in EUR and receive the principal amount in USD. These agreements expire at various dates through 2024. We designated these cross-currency swaps as qualifying hedging instruments and account for them as net investment hedges. We apply the simplified method of assessing the effectiveness of our net investment hedging relationships. Under this method, for each reporting period, the change in the fair value of the cross-currency swaps is initially recognized in Accumulated other comprehensive income (“AOCI”). The change in the fair value due to foreign exchange remains in AOCI and the initial component excluded from effectiveness testing will initially remain in AOCI and then will be reclassified from AOCI to Interest expense each period in a systematic manner. For net investment hedges that were de-designated prior to their maturity, the amounts in AOCI will remain in AOCI until the subsidiary is sold or substantially liquidated. Cash flows related to the periodic exchange of interest payments for these net investment hedges are included in Operating activities on our Condensed Consolidated Statements of Cash Flows. We also enter into cross-currency swap agreements to manage the related foreign currency exposure from intercompany loans. We designated these cross-currency swaps as qualifying hedging instruments and account for them as cash flow hedges. Gains and losses resulting from the change in the fair value of the cross-currency swaps are initially recognized in AOCI and reclassified to Foreign currency (gain) loss to offset the foreign exchange impact in earnings created by the intercompany loans. Cash flows related to these cash flow hedges are included in Operating activities on our Condensed Consolidated Statements of Cash Flows. Interest Rate Hedging We execute short-term interest rate swaps to mitigate variability in forecasted interest payments on our Senior Secured Term Loan Credit Agreement (the “Term Loan Credit Agreement”). The interest rate swaps convert floating-rate interest payments into fixed rate interest payments. We designated the interest rate swaps as qualifying hedging instruments and account for these derivatives as cash flow hedges. The interest rate swaps mature in the fourth quarter of 2020. 16 Table of Contents We record gains and losses resulting from fair value adjustments to the designated portion of interest rate swaps in AOCI and reclassify them to Interest expense on the dates that interest payments accrue. Cash flows related to the interest rate swaps are included in Operating activities on our Condensed Consolidated Statements of Cash Flows. Foreign Currency Option and Forward Contracts We use foreign currency option contracts to mitigate the risk of a reduction in the value of earnings from our operations that use the EUR or the British pound sterling as their functional currency. Additionally, we use foreign currency forward contracts to mitigate exposure from intercompany loans that are not designated as permanent and can create volatility in earnings. The foreign currency contracts (both option and forward contracts) were not designated as qualifying hedging instruments as of September 30, 2020. The contracts are used to manage our exposure to foreign currency exchange rate fluctuations and are not speculative. The contracts generally expire in 12 months or less. Gains or losses on the contracts are recorded in Foreign currency (gain) loss on our Condensed Consolidated Statements of Income (Loss). Cash flows related to the foreign currency contracts are included in Investing activities on our Condensed Consolidated Statements of Cash Flows, consistent with the nature and purpose for which these derivatives were acquired. 6. Debt September 30, 2020 December 31, 2019 (In millions) Principal Balance Carrying Value Principal Balance Carrying Value ABL facility $ 200 $ 200 $ — $ — Term loan facilities 2,003 1,973 2,003 1,969 6.50 % Senior notes due 2022 1,200 1,195 1,200 1,192 6.125 % Senior notes due 2023 535 531 535 530 6.75 % Senior notes due 2024 1,000 989 1,000 987 6.25 % Senior notes due 2025 1,150 1,137 — — 6.70 % Senior debentures due 2034 300 210 300 208 Borrowings related to securitization program 50 50 — — Finance leases, asset financing and other 390 390 380 380 Total debt 6,828 6,675 5,418 5,266 Short-term borrowings and current maturities of long-term debt 130 130 84 84 Long-term debt $ 6,698 $ 6,545 $ 5,334 $ 5,182 The fair value of our debt and classification in the fair value hierarchy was as follows: (In millions) Fair Value Level 1 Level 2 September 30, 2020 $ 6,989 $ 4,373 $ 2,616 December 31, 2019 5,580 3,190 2,390 We valued Level 1 debt using quoted prices in active markets. We valued Level 2 debt using bid evaluation pricing models or quoted prices of securities with similar characteristics. The fair value of the asset financing arrangements approximates carrying value as the debt is primarily issued at a floating rate, the debt may be prepaid at any time at par without penalty, and the remaining life of the debt is short-term in nature. ABL Facility As of September 30, 2020, we had a borrowing base of $ 1.1 billion and availability under our revolving loan credit agreement (the “ABL Facility”) of $ 884 million after considering outstanding letters of credit on the ABL Facility of $ 16 million. The average interest rate on outstanding borrowings as of September 30, 2020 was 1.65 %. As of September 30, 2020, we were in compliance with the ABL Facility’s financial covenants. 17 Table of Contents Secured Debt In April 2020, we entered into a Senior Secured Term Loan Credit Agreement, comprised of a $ 150 million committed secured term loan facility and a $ 200 million uncommitted secured evergreen letter of credit facility. The term loan facility is available to be drawn upon, subject to customary conditions, in multiple borrowings within nine months of the closing date. Any term loans thereunder will bear interest at a rate equal to LIBOR or base rate, at our election, plus an applicable margin of 3.00 % to 4.50 %, for LIBOR loans, or 2.00 % to 3.50 %, for base rate loans, in each case depending upon the time elapsed since the closing date. The term loan facility matures in April 2021. Letters of credit under the letter of credit facility shall expire within one year of issuance and may contain automatic one-year renewals until the letter of credit facility terminates. As of September 30, 2020, we have issued $ 199 million in aggregate face amount of letters of credit, and have not drawn on the term loan commitments. The credit agreement governing the term loan and letter of credit facilities contains representations and warranties and affirmative and negative covenants customary for financings of this type as well as customary events of default. Term Loan Facilities In March 2019, we entered into an amendment to our Term Loan Credit Agreement and borrowed an additional $ 500 million of incremental loans under a new tranche of term loans (the “Incremental Term Loan Facility”), increasing our total borrowing under the Term Loan Credit Agreement to $ 2.0 billion. Proceeds from borrowings under the Incremental Term Loan Facility were used: (i) for general corporate purposes, including to fund purchases of our equity interests described in Note 7—Stockholders’ Equity; and (ii) to pay fees and expenses relating to, or in connection with, the transactions contemplated by the amendment. The incremental loans under the Incremental Term Loan Facility were issued at a price of 99.50 % of par. The interest rates on the term loan facility and the Incremental Term Loan Facility were 2.15 % and 2.65 %, respectively, as of September 30, 2020. Senior Notes due 2025 In the second quarter of 2020, we completed private placements of $ 1.15 billion aggregate principal amount of Senior Notes due 2025. The Senior Notes due 2025 mature on May 1, 2025 and bear interest at a rate of 6.25 % per annum. Interest on the notes is paid semi-annually. $ 850 million of the notes were issued at par, and $ 300 million of the notes were issued subsequently at 101.75 % of face value. Net proceeds from the notes were invested in cash and cash equivalents. The Senior Notes due 2025 are guaranteed by each of our direct and indirect wholly-owned restricted subsidiaries (other than some excluded subsidiaries) that are obligors under, or guarantee obligations under, our ABL Facility or existing term loan facilities or guarantee certain of our other indebtedness. The Senior Notes due 2025 and the related guarantees are unsecured, unsubordinated indebtedness for us and our guarantors. The Senior Notes due 2025 contain covenants customary for notes of this nature. Senior Notes due 2024 In February 2019, we completed a private placement of $ 1.0 billion aggregate principal amount of senior notes (“Senior Notes due 2024”), which bear interest at a rate of 6.75 % per annum. Proceeds from the Senior Notes due 2024 were used to repay our outstanding obligation under an unsecured credit facility and to finance a portion of our share repurchases described in Note 7—Stockholders’ Equity. Borrowings related to Securitization Program Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables. These borrowings are owed to the program’s Purchasers and are included in short-term debt until they are repaid in the following month’s settlement. The securitization program expires in July 2022 and contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio. For additional information on the securitization program, see Note 1—Organization, Description of Business and Basis of Presentation. 18 Table of Contents 7. Stockholders’ Equity Share Repurchases In December 2018, our Board of Directors authorized the repurchase of up to $ 1 billion of our common stock (the “2018 Program”), which was completed in the first quarter of 2019. The share repurchases under the 2018 Program were funded by an unsecured credit facility and our available cash. In February 2019, our Board of Directors authorized additional repurchases of up to $ 1.5 billion of our common stock (the “2019 Program”). The 2019 authorization permits us to purchase shares in both the open market and in private transactions, with the timing and number of shares dependent on a variety of factors, including price, general business conditions, market conditions, alternative investment opportunities and funding considerations. We are not obligated to repurchase any specific number of shares and may suspend or discontinue the program at any time. The share purchases under the 2019 Program were funded by our available cash and proceeds from our 2019 debt offerings. Information regarding our shares repurchased, based on settlement date, is as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions, except per share data) 2020 2019 2020 2019 Shares purchased and retired — — 2 25 Aggregate value $ — $ — $ 114 $ 1,347 Average price per share $ — $ — $ 66.58 $ 53.41 Remaining authorization $ 503 $ 617 $ 503 $ 617 Dividends The Series A Convertible Perpetual Preferred Stock pays quarterly cash dividends equal to the greater of: (i) the “as-converted” dividends on our underlying common stock for the relevant quarter; and (ii) 4 % of the then-applicable liquidation preference per annum. 19 Table of Contents 8. Earnings (Loss) per Share We compute basic and diluted earnings per share using the two-class method, which allocates earnings to participating securities. The participating securities consist of our Series A Convertible Perpetual Preferred Stock. The undistributed earnings are allocated between common shares and participating securities as if all earnings had been distributed during the period. Losses are not allocated to the preferred shares. The computations of basic and diluted earnings per share were as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions, except per share data) 2020 2019 2020 2019 Basic earnings (loss) per common share Net income (loss) attributable to XPO $ 93 $ 130 $ ( 15 ) $ 312 Series A preferred stock dividends — ( 1 ) ( 2 ) ( 2 ) Non-cash allocation of undistributed earnings ( 9 ) ( 12 ) — ( 28 ) Net income (loss) attributable to common shares, basic $ 84 $ 117 $ ( 17 ) $ 282 Basic weighted-average common shares 91 92 91 97 Basic earnings (loss) per share $ 0.93 $ 1.27 $ ( 0.18 ) $ 2.91 Diluted earnings (loss) per common share Net income (loss) attributable to common shares, diluted $ 84 $ 117 $ ( 17 ) $ 282 Basic weighted-average common shares 91 92 91 97 Dilutive effect of non-participating stock-based awards 11 10 — 10 Diluted weighted-average common shares 102 102 91 107 Diluted earnings (loss) per share $ 0.83 $ 1.14 $ ( 0.18 ) $ 2.63 Potential common shares excluded 10 10 21 10 Certain shares were not included in the computation of Diluted earnings (loss) per share because the effect was anti-dilutive. 20 Table of Contents 9. Legal and Regulatory Matters We are involved, and will continue to be involved, in numerous proceedings arising out of the conduct of our business. These proceedings may include claims for property damage or personal injury incurred in connection with the transportation of freight, claims regarding anti-competitive practices, and employment-related claims, including claims involving asserted breaches of employee restrictive covenants. These matters also include numerous putative class action, multi-plaintiff and individual lawsuits, and administrative proceedings involving claims that our owner-operators or contract carriers should be treated as employees, rather than independent contractors (“misclassification claims”). These lawsuits and proceedings may seek substantial monetary damages (including claims for unpaid wages, overtime, failure to provide meal and rest breaks, unreimbursed business expenses, penalties and other items), injunctive relief, or both. We establish 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. We review and adjust accruals for loss contingencies quarterly and as additional information becomes available. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount accrued, we assess 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, we disclose the estimate of the possible loss or range of loss if it is material and an estimate can be made, or disclose 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 our assessment, together with legal counsel, regarding the ultimate outcome of the matter. We believe that we have adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not believe that the ultimate resolution of any matters to which we are presently a party will have a material adverse effect on our 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 our financial condition, results of operations or cash flows. Legal costs incurred related to these matters are expensed as incurred. We carry liability and excess umbrella insurance policies that we deem sufficient to cover potential legal claims arising in the normal course of conducting our operations as a transportation and logistics company. The liability and excess umbrella insurance policies generally do not cover the misclassification claims described in this note. In the event we are required to satisfy a legal claim outside the scope of the coverage provided by insurance, our financial condition, results of operations or cash flows could be negatively impacted.