What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-12 compared with 2020-02-10 · 230 added, 231 removed, 202 unchanged (70% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

XPO Logistics is a top ten global provider of cutting-edge supply chain solutions to the most successful companies in the world.

We are organized as two reportable segments:

XPO Logistics provides cutting-edge supply chain solutions to the most successful companies in the world.

We have two reporting segments:

Transportation and Logistics.

1 unchanged sentence

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, expedite, intermodal, drayage, last mile, less-than-truckload (“LTL”), full truckload, global forwarding and managed transportation.

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 customers.

Our services include value-added warehousing, distribution and inventory management, omnichannel and e-commerce fulfillment, reverse logistics, cold chain solutions, packaging and labeling, factory support, aftermarket support and order personalization services.

In addition, our Logistics segment provides highly engineered, customized solutions and supply chain optimization services, including advanced automation and predictive volume flow management.

This discussion focuses on our fiscal 2019 results, compared with fiscal 2018 results.

The discussion of our fiscal 2018 results, compared with fiscal 2017 results, can be found in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2018 Annual Report on Form 10-K.

Potential Strategic Alternatives

In January 2020, we announced that XPO has commenced a review of strategic alternatives, including the possible sale or spin-off of one or more of our business units, in order to maximize shareholder value.

A timetable has not been set for the completion of the review process and we have not determined which, if any, business units would be sold or spun off.

However, we do not intend to sell or spin off our North American less-than-truckload unit.

Our transportation services include less-than-truckload (“LTL”), truck brokerage and other transportation services.

In our Logistics segment, which we sometimes refer to as supply chain, we provide a wide range of services differentiated by our proprietary technology and our ability to customize solutions for individual customers.

Our services include high-value-add 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 production flow management.

In addition, we are a major provider of reverse logistics, which is also called returns management.

Reverse logistics is a fast-growing area of logistics that includes the inspection, repackaging, refurbishment, resale or disposal of returned merchandise, as well as refunding and warranty management.

In December 2020, we announced that our Board of Directors unanimously approved a plan to pursue a spin-off of 100% of our Logistics segment as a separate publicly traded company.

We intend to structure the spin-off as a distribution that is generally tax-free for U.S.

federal income tax purposes to XPO shareholders (except with respect to any cash received in lieu of fractional shares) and would result in XPO shareholders owning stock in both companies.

If completed, the spin-off will result in separate public companies with clearly delineated service offerings.

XPO will be a global provider of primarily LTL transportation and truck brokerage services, and the spun-off company will be the second largest contract logistics provider in the world.

Both companies’ stocks are expected to trade on the New York Stock Exchange, and we plan to consider a dual listing on the London Stock Exchange for the spun-off company in due course.

The transaction is currently expected to be completed in the second half of 2021, subject to various conditions.

There can be no assurance that the spin-off will occur or, if it does occur, of its terms or timing.

Separately, in March 2020, we announced that we had entered into an agreement to acquire the majority of Kuehne + Nagel’s contract logistics operations in the United Kingdom.

The operations, which include roughly 5,700 employees and provide a range of logistics services, including inbound and outbound distribution, reverse logistics management and inventory management, will be included in our Logistics segment.

The acquisition was completed in January 2021.

This discussion focuses on our 2020 results, compared with 2019 results.

The discussion of our 2019 results, compared with 2018 results, can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2019 Annual Report on Form 10-K.

Impacts of COVID-19

As a global provider of supply chain solutions, our business can be impacted to varying degrees by factors beyond our control.

The rapid escalation of COVID-19 into a pandemic in 2020 has affected, and will continue to affect, economic activity broadly and customer sectors served by our industry.

In response to the COVID-19 pandemic, the governments of many countries, states, cities and other geographic regions have taken and are continuing to take preventative or reactive actions, such as imposing restrictions on travel and business operations and establishing guidelines for social distancing and occupational safety.

Due to the critical role we play in moving goods and equipment in the markets we serve, XPO is considered an “essential business,” providing supply chain solutions to crucial industries and delivering critical consumer goods.

As a result, our sites have generally remained open and operating, and we have continued to serve our customers while employing significant measures to protect our employees and keep them safe.

The COVID-19 pandemic and associated impacts on economic activity had an adverse effect on our results of operations and financial condition for the year ended December 31, 2020, as discussed below.

We experienced declines in demand for our services that began in the first quarter of 2020, had a substantial impact in the second quarter of 2020, and abated throughout the second half of 2020.

These declines in demand meaningfully affected our results in both North America and Europe.

Due to the largely unprecedented and evolving nature of the COVID-19 pandemic, it remains very difficult to predict the extent of the impact on our industry generally and our business in particular.

Furthermore, the extent and pace of a recovery remains uncertain and may differ significantly among the countries in which we operate.

We expect our results of operations will continue to be impacted by this pandemic in 2021.

We have incurred net incremental costs related to COVID-19 to ensure that we meet the needs of our customers and employees;

these include costs for personal protective equipment (“PPE”), temporary site closures, site cleanings and enhanced employee benefits.

We also implemented supplemental “appreciation pay” programs for thousands of frontline employees who continued to work during the pandemic.

We expect to continue to incur additional costs as we implement operational changes in response to the pandemic.

However, the majority of our cost base is variable, and we have taken and, if appropriate, will continue to take aggressive actions to adjust our expenses to reflect changes in demand for our services.

These actions include reduced use of contractors, reduced employee hours, furloughs, layoffs and required use of paid time off, consistent with applicable regulations.

While we could not fully offset the decrease in demand for our services arising from the economic disruption of the pandemic in 2020, the actions we have taken, combined with the variable components of our cost structure, have mitigated the impact on our profitability relative to the impact on our revenue and volumes.

A further discussion of the potential impact of the COVID-19 pandemic on our business is set forth above in Part I, Item 1A.

Risk Factors.

Consolidated Summary Financial Table

For the Years Ended December 31,

Percent of Revenue

Years Ended December 31, Percent of Revenue Change

(Dollars in millions) 2020 (1)

2020 2019 2020 vs.

Revenue $ 16,252 $ 16,648 100.0 % 100.0 % (2.4) %

Cost of transportation and services 7,852 8,303 48.3 % 49.9 % (5.4) %

Direct operating expense 5,837 5,679 35.9 % 34.1 % 2.8 %

Sales, general and administrative expense 2,172 1,845 13.4 % 11.1 % 17.7 %

Operating income 391 821 2.4 % 4.9 % (52.4) %

Other expense (income)

Foreign currency loss

Other income (79) (54) (0.5) % (0.3) % (46.3) %

Foreign currency (gain) loss (3) 9 — % 0.1 % (133.3) %

Debt extinguishment loss — 5 — % — % (100.0) %

2 unchanged sentences

Income tax provision 31 129 0.2 % 0.8 % (76.0) %

Net income $ 117 $ 440 0.7 % 2.6 % (73.4) %

(1) Consolidated operating income for 2020 includes $100 million of transaction and integration costs, of which $21 million relates to our Transportation segment and $28 million relates to our Logistics segment, and $56 million of restructuring expense.

(2) Consolidated operating income for 2019 includes $5 million of transaction and integration costs and $49 million of restructuring expense.

The transaction and integration costs for 2020 are primarily related to our previously announced exploration of strategic alternatives that was terminated in March 2020 and costs related to our planned acquisition of the Kuehne + Nagel business.

For further information on our restructuring actions, see Note 6—Restructuring Charges to the

Consolidated Financial Statements.

We also incurred net incremental and direct costs as a result of the COVID-19 pandemic in 2020.

Our consolidated revenue for 2020 decreased by 2.4% to $16.3 billion, from $16.6 billion in 2019.

The decrease was primarily impacted by a reduction in business from our largest customer, resulting in approximately $570 million less revenue in 2019 , primarily in the Transportation segment.

Foreign currency movement reduced revenue by approximately 2.0 percentage points in 2019 .

Cost of transportation and services includes the cost of providing or procuring freight transportation for XPO customers and salaries paid to employee drivers in our truckload and LTL businesses.

Cost of transportation and services in 2019 was $8,303 million , or 49.9% of revenue, compared with $9,013 million , or 52.2% of revenue in 2018 .

The year-over-year improvement as a percentage of revenue was primarily driven by:

(i) h igher mix of contract logistics revenue;

(ii) lower third-party transportation costs in freight brokerage and last mile largely due to reduction in business from our largest customer;

a nd (iii) lower fuel costs.

Direct operating expense s are both fixed and variable expenses and consist of operating costs related to our contract logistics facilities, last mile warehousing facilities, LTL service centers and European LTL network.

Direct operating costs consist mainly of personnel costs, facility and equipment expenses, such as rent, utilities, equipment maintenance and repair, costs of materials and supplies, information technology expenses, depreciation expense, and gains and losses on sales of property and equipment.

Direct operating expense in 2019 was $5,679 million , or 34.1% of revenue, compared with $5,725 million , or 33.1% of revenue, in 2018 .

The year-over-year increase as a percentage of revenue primarily was driven by higher personnel costs to support growth in our North American contract logistics, partially offset by lower temporary labor, and higher depreciation expense in our logistics segment.

Additionally, 2019 and 2018 included $110 million and $6 million , respectively, from gains on the sale of property and equipment.

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

SG&A was $1,845 million in 2019 , or 11.1% of revenue, compared with $1,837 million , or 10.6% of revenue, in 2018 .

The year-over-year increase in SG&A as a percentage of revenue was primarily related to higher payroll expense, including higher restructuring-related expenses, and higher insurance and depreciation expenses, partially offset by lower aggregate bonus and share-based compensation expenses, and lower discretionary spending, including professional and consulting fees.

Additionally, 2018 reflected litigation costs of $26 million for independent contractor matters.

Other income for 2019 was $54 million of income, compared with $109 million of income in 2018 .

The year-over-year decrease reflects lower net periodic pension income of $18 million in 2019 .

Additionally, 2018 included a gain of $24 million related to the sale of an equity investment in a private company and a gain of $9 million related to a terminated swap.

Foreign currency loss was $9 million in 2019 , compared with $3 million in 2018 .

The decrease primarily reflects the impact of COVID-19.

Foreign currency movement increased revenue by approximately 0.6 percentage points in 2020.

Cost of transportation and services includes the cost of providing or procuring freight transportation for XPO customers and salaries paid to employee drivers in our LTL and truckload businesses.

Cost of transportation and services in 2020 was $7.9 billion, or 48.3% of revenue, compared with $8.3 billion, or 49.9% of revenue in 2019.

The year-over-year decrease as a percentage of revenue was primarily driven by a higher mix of logistics revenue, lower fuel costs and lower third-party transportation costs in our transportation segment, partially offset by incremental PPE and other COVID-19-related costs.

Direct operating expenses are comprised of both fixed and variable expenses and consist of operating costs related to our logistics facilities, last mile warehousing facilities, LTL service centers and European LTL network.

Direct operating expenses consist mainly of personnel costs, facility and equipment expenses, such as rent, utilities, equipment maintenance and repair, costs of materials and supplies, information technology expenses, depreciation expense, and gains and losses on sales of property and equipment.

Direct operating expense in 2020 was $5.8 billion, or 35.9% of revenue, compared with $5.7 billion, or 34.1% of revenue, in 2019.

The year-over-year increase as a percentage of revenue was primarily driven by the decline in revenue due to COVID-19, a higher mix of logistics revenue, higher facility and payroll costs, and incremental PPE and other COVID-19-related costs.

Additionally, 2020 and 2019 included $92 million and $110 million, respectively, from gains on sales of property and equipment.

Sales, general and administrative expense (“SG&A”) primarily consists of salaries and commissions for the sales function, salary and benefit costs for executive and certain administration functions, depreciation and amortization expense, professional fees, facility costs, bad debt expense and legal costs.

SG&A was $2.2 billion in 2020, or 13.4% of revenue, compared with $1.8 billion, or 11.1% of revenue, in 2019.

The year-over-year increase in SG&A as a percentage of revenue primarily resulted from the decline in revenue due to COVID-19, higher compensation costs, increased self-insurance expense and incremental PPE and other COVID-19-related costs.

Compensation costs were higher for both the fourth quarter and the year ended December 31, 2020 in comparison to the prior-year periods due to the strength of our operating performance in a challenging macro-environment.

Additionally, SG&A for 2020 included approximately $74 million of expenses related to our exploration of strategic alternatives, including professional service fees and employee retention costs.

Other income primarily consists of pension income.

Other income for 2020 was $79 million, compared with $54 million in 2019.

The year-over-year increase reflects $27 million of higher net periodic pension income in 2020.

Foreign currency (gain) loss was a $3 million gain in 2020, compared with a $9 million loss in 2019.

Foreign currency (gain) loss in 2020 primarily reflected unrealized gains on foreign currency option and forward contracts and a realized gain on a terminated net investment hedge, partially offset by foreign currency transaction and measurement losses.

Foreign currency loss in 2019 primarily reflected unrealized losses on foreign currency option and forward contracts.

Foreign currency loss in 2018 primarily reflects realized losses on foreign currency option and forward contracts, as well as foreign currency transaction and remeasurement losses, almost entirely offset by unrealized gains on foreign currency option and forward contracts.

For additional information on our foreign currency option and forward contracts, see Note 11—Derivative Instruments to our Consolidated Financial Statements.

Debt extinguishment losses were $5 million and $27 million in 2019 and 2018 , respectively.

Debt extinguishment losses in 2019 related to the write-off of debt issuance costs for the unsecured credit facility (“ Unsecured Credit Facility ”) that was repaid in 2019.

Debt extinguishment losses in 2018 includes $17 million for the partial redemption of our 6.50% senior notes due 2022 (“ Senior Notes due 2022 ”) and $10 million for the refinancing of our senior secured term loan credit agreement, as amended (the “ Term Loan Facility ”).

See Liquidity and Capital Resources below for further information.

Debt extinguishment loss was $5 million in 2019 and related to the write-off of debt issuance costs for an unsecured credit facility (“Unsecured Credit Facility”) that was repaid in 2019.

There were no debt extinguishment losses in 2020.

Interest expense for 2020 increased 11.3% to $325 million, from $292 million in 2019.

The increase in interest expense was primarily related to higher average total indebtedness to fund share purchases.

The increase in interest expense was primarily due to higher average total indebtedness, including the senior notes due 2025 (the “Senior Notes due 2025”) that were issued in the second quarter of 2020, partially offset by lower interest rates in 2020.

Our consolidated income before income taxes in 2020 was $148 million, compared with $569 million in 2019.

The increase primarily was driven by higher operating income in our Transportation and Logistics segments, as discussed below, and lower debt extinguishment losses and lower litigation costs, partially offset by higher interest expense, lower pension income and the gain on sale of an equity investment in 2018.

The decrease primarily was driven by lower operating income in our Transportation and Logistics segments, as discussed below, and higher interest expense, partially offset by higher other income.

With respect to our U.S.

operations, income before taxes increased by $60 million in 2019 , compared with the prior year, primarily reflecting a $96 million increase in operating income, primarily due to gains on sale of property and equipment and cost savings initiatives, higher interest income on intercompany loans, $23 million in lower foreign currency losses, and $22 million lower debt extinguishment losses, partially offset by $74 million higher interest expense and a gain of

$24 million from the sale of an equity investment in 2018 .

operations, income before income taxes decreased by $330 million in 2020, compared with the prior year, primarily due to the impact of COVID-19 and higher interest expense.

With respect to our non-U.S.

operations, income before taxes decreased by $57 million , reflecting higher other expense of $41 million , due in part to interest on intercompany loans, lower foreign currency gain of $29 million , and lower pension income of $10 million , partially offset by higher operating income of $21 million .

The foreign currency gain realized by our non-U.S.

operations in 2019 was partially offset by the foreign currency loss in our U.S.

operations due to hedging strategies, and to naturally offsetting positions of intercompany loans between the entities.

Our effective income tax rates in 2019 and 2018 were 22.6% and 21.6% , respectively.

Our 2019 effective tax rate was primarily impacted by $8 million of tax benefit from foreign currency losses recognized and $5 million of tax benefit from changes in reserves for uncertain tax positions, including favorable resolution of certain income tax audits.

Our 2018 effective tax rate was primarily impacted by $26 million of excess tax benefit from stock-based compensation and a $4 million benefit associated with the deduction of foreign taxes paid in prior years.

operations, income before income taxes decreased by $91 million in 2020 compared with the prior year, primarily due to the impact of COVID-19.

Our effective income tax rates were 21.1% and 22.6% in 2020 and 2019, respectively.

The decrease in our effective income tax rate for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily driven by income tax benefits associated with stock-based compensation.

Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted in March 2020 provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property.

We have applied the provisions of the CARES Act relating to income taxes and realized a $4 million reduction in cash taxes as well as an immaterial income tax benefit on our Consolidated Statements of Income in 2020.

Additionally, we benefited from the ability to defer the payment of certain payroll taxes that would otherwise have been required in 2020.

We have not applied for any government loans under the CARES Act or similar laws.

Restructuring Charges

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

Our results for 2019 reflect restructuring charges of $49 million , of which $2 million was recorded in Cost of transportation and services , $1 million in Direct operating expense and $46 million in SG&A in our Consolidated Statements of Income .

A portion of our 2019 restructuring charge related to actions as a result of our largest customer downsizing its business with us.

Our results for 2018 reflect restructuring charges of $21 million , of which $1 million was recorded in Direct operating expense and $20 million in SG&A in our Consolidated Statements of Income .

For more information, see Note 6 —Restructuring Charges to our Consolidated Financial Statements.

Upon successful completion of these restructuring initiatives in 2020 , we expect to achieve annualized pre-tax savings of approximately $94 million .

Fourth Quarter Items

Key fourth quarter items include:

For the Quarters Ended December 31,

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.

Restructuring charges were recorded on our Consolidated Statements of Income as follows:

Years Ended December 31,

(In millions) 2020 2019

Restructuring charges

Gains on sales of property and equipment

Litigation costs for independent contractor matters

Gain on sale of equity investment

Additionally, the aggregate bonus and share-based compensation expenses were modestly higher in the fourth quarter of 2019 compared to the fourth quarter of 2018 .

The majority of the restructuring charges and all of the share-based compensation expense and litigation costs have been reflected in SG&A on our Consolidated Statements of Income .

Gains on sales of property and equipment are reflected in Direct operating expense .

Bonus expense is substantially included in Direct operating expense and SG&A.

Gain on sale of equity investment is included in Other expense (income) .

Cost of transportation and services $ 1 $ 2

Direct operating expense 7 1

Sales, general and administrative expense 48 46

Total $ 56 $ 49

For more information, see Note 6—Restructuring Charges to our Consolidated Financial Statements.

Upon successful completion of the restructuring initiatives recorded in 2020, we expect to achieve annualized pre-tax savings of approximately $100 million by the end of 2021.

In addition, we may incur incremental restructuring costs in 2021 in connection with the planned spin-off of our Logistics segment or for other reasons;

however, we are currently unable to reasonably estimate these costs.

Transportation Segment

Summary Financial Table

For the Years Ended December 31,

Percent of Transportation Revenue

(In millions)

Years Ended December 31, Percent of Revenue Change

(Dollars in millions) 2020 2019 2020 2019 2020 vs.

Revenue $ 10,199 $ 10,687 100.0 % 100.0 % (4.6) %

Operating income 507 752 5.0 % 7.0 % (32.6) %

1 unchanged sentence

Revenue in our Transportation segment decreased 4.6% to $10.2 billion in 2020, compared with $10.7 billion in 2019.

Revenue was primarily impacted by a reduction in business from our largest customer of approximately $510 million .

This revenue loss was largely related to our freight brokerage and direct postal injection businesses, the latter of which ceased operations in the first quarter of 2019.

Additionally, revenue in 2019 reflected lower truckload rates in freight brokerage, partially offset by growth in our managed transportation business.

Foreign currency movement reduced revenue by approximately 1.5 percentage points in 2019 .

Operating income in our Transportation segment increased to $752 million , or 7.0% of revenue, in 2019 , compared with $646 million , or 5.7% of revenue, in 2018 .

The improvement primarily reflected higher gains on sales of property and equipment of $97 million and higher net revenue, partially offset by higher personnel costs in SG&A .

Of the gains on sales of property and equipment, $87 million was in our LTL business, with a portion of the gain related to the sale and partial leaseback of our shared service facility in Portland, Oregon.

Additionally, 2018 reflected litigation costs of $26 million for independent contractor matters.

Depreciation and amortization expense in 2019 included $6 million related to the impairment of customer relationship intangibles associated with exiting the direct postal injection business.

Net revenue is defined as Revenue less Cost of transportation and services .

The decline in revenue primarily reflected the impact of COVID-19 and lower fuel revenue.

Foreign currency movement increased revenue by approximately 0.4 percentage points in 2020.

Operating income in our Transportation segment was $507 million, or 5.0% of revenue, in 2020, compared with $752 million, or 7.0% of revenue, in 2019.

The decrease in operating income was primarily driven by lower

revenue, higher facility costs, expenses related to our exploration of strategic alternatives and incremental PPE and other COVID-19-related costs.

These higher costs were partially offset by lower third-party transportation, fuel and personnel costs.

Depreciation and amortization expense in 2019 included $6 million related to the impairment of customer relationship intangible assets associated with exiting the direct postal injection business.

Logistics Segment

Summary Financial Table

For the Years Ended December 31,

Percent of Logistics Revenue

(In millions)

Years Ended December 31, Percent of Revenue Change

(Dollars in millions) 2020 2019 2020 2019 2020 vs.

Revenue $ 6,182 $ 6,093 100.0 % 100.0 % 1.5 %

Operating income 140 241 2.3 % 3.9 % (41.9) %

Total depreciation and amortization 301 277 8.7 %

Revenue in our Logistics segment increased by 0.5% to $6.09 billion in 2019 , compared with $6.07 billion in 2018 .

The increase in revenue compared to 2018 was primarily driven by growth of our North American contract logistics business, partially offset by a reduction in business from our largest customer and a decline in contract logistics revenue in Europe, primarily due to foreign currency movement.

The impact to our North American contract logistics’ revenue from the reduction in business by our largest customer was approximately $60 million less revenue in 2019 .

The growth of our North American contract logistics business was led by our food and beverage, consumer packaged goods and aerospace sectors, and by e-commerce in Europe.

Foreign currency movement reduced revenue growth by approximately 3.0 percentage points in 2019 .

Logistics segment revenue for 2019 was negatively impacted by approximately 4 percentage points from the combined impact of foreign exchange movement and the reduction in business from our largest customer.

Operating income in our Logistics segment increased in 2019 to $241 million , or 3.9% of revenue, compared with $216 million , or 3.5% of revenue, in 2018 .

The increase was primarily driven by higher revenue and lower costs of transportation and services and temporary labor costs, partially offset by new contract startups that required more personnel costs.

The lower costs of transportation and services and temporary labor costs reflect a reduction in business from our largest customer.

Depreciation and amortization expense increased year-over-year due to the impact of prior capital investments and new contract startups.

Revenue in our Logistics segment increased 1.5% to $6.2 billion in 2020, compared with $6.1 billion in 2019.

The increase in revenue compared to 2019 reflects growth in our European business, partially offset by the impact of COVID-19, our elimination of certain low-margin business and the downsizing of business by one of our largest customers in North America in 2019.

Foreign currency movement increased revenue by approximately 0.8 percentage points in 2020.

Operating income in our Logistics segment was $140 million, or 2.3% of revenue in 2020, compared with $241 million, or 3.9% of revenue, in 2019.

The decrease in operating income was primarily driven by the impact of COVID-19 on revenues, costs and margins, increased depreciation and amortization expense, expenses related to our exploration of strategic alternatives and higher personnel costs, partially offset by higher revenue.

Depreciation and amortization expense increased year-over-year due to the impact of prior capital investments, new contract startups and accelerated depreciation due to contract modifications.

Liquidity and Capital Resources

Our principal existing sources of cash are:

(i) cash generated from operations, (ii) borrowings available under our Second Amended and Restated Revolving Loan Credit Agreement, as amended (the “ ABL Facility ”) and (iii) proceeds from the issuance of other debt.

As of December 31, 2019 , we have $713 million available to draw under the ABL Facility , based on a borrowing base of $927 million , as well as outstanding letters of credit of $214 million .

(In millions)

Cash and cash equivalents

Working capital

The decrease in working capital of $291 million during 2019 was primarily due to recognition of short-term operating leases under the lease accounting standard adopted in 2019 and lower cash and cash equivalents, partially offset by the repayment of our unsecured credit facility in 2019.

Our principal existing sources of cash are (i) cash generated from operations;

(ii) borrowings available under our Second Amended and Restated Revolving Loan Credit Agreement, as amended (the “ABL Facility”) and a Senior Secured Term Loan Credit Agreement;

and (iii) proceeds from the issuance of other debt.

As of December 31, 2020, we have $883 million available to draw under our ABL Facility, based on a borrowing base of $1.1 billion, outstanding borrowings of $200 million and outstanding letters of credit of $17 million, as well as $150 million available to draw under the Senior Secured Term Loan Credit Agreement.

Our cash and cash equivalents balance was $2.1 billion as of December 31, 2020, compared to $377 million as of December 31, 2019.

The increase in cash and cash equivalents is largely due to the issuance of our Senior Notes due 2025 in 2020 and cash flows generated from operating activities in 2020.

Managing our balance sheet prudently and maintaining appropriate liquidity are high priorities during the disruption caused by COVID-19.

In order to best position us to navigate this uncertain period, we have taken a number of actions to further strengthen our liquidity.

We borrowed a net $200 million in revolving loans under our existing ABL Facility in 2020.

In addition, in April 2020, we entered into the Senior Secured Term Loan Credit Agreement which allows us to borrow up to $150 million in aggregate principal amount of committed secured term loans and request the issuance of up to $200 million in aggregate face amount of secured letters of credit under an evergreen letter of credit facility.

Also in the second quarter of 2020, we completed private placements of $1.15 billion aggregate principal amount of Senior Notes due 2025.

The Senior Secured Term Loan Credit Agreement and Senior Notes due 2025 are discussed further below.

In June 2020, we amended certain provisions of the ABL Facility to provide additional debt financing flexibility.

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

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

We believe that our existing liquidity and sources of capital are sufficient to support our operations over

the next 12 months.

In conjunction with the planned spin-off of our Logistics segment, we expect to further evaluate our liquidity needs, capital structure and sources of capital for the Transportation and Logistics businesses on a stand-alone basis.

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 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.

In July 2019, XPO Logistics Europe SA (“ XPO Logistics Europe ”) , one of our majority-owned subsidiaries, entered into a new, three -year trade receivables securitization program co-arranged by Crédit Agricole, BNP Paribas and HSBC (the “ Purchasers ”) and terminated its prior program.

Under the new 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.

The special purpose entity is a variable interest entity and is consolidated by XPO Logistics Europe based on its control of the entity’s activities.

Our subsidiary sells these trade receivables to unaffiliated entities managed by the Purchasers .

Under the terminated prior program, the receivables were originally funded by senior variable funding notes in the same currency as the corresponding receivables.

The receivables balance under the terminated program were originally reported as Accounts receivable on our Consolidated Balance Sheets and the related notes were included in our Long-term debt .

See Note 12 —Debt to our Consolidated Financial Statements f or additional information related to our receivables securitization secured borrowing program.

In connection with the termination of the prior program, XPO Logistics Europe paid off all of the notes which had been included in our debt balances.

The new three year program has lower financing costs and provides us with better liquidity through a higher advance rate.

We account for transfers under our factoring arrangements as sales because we sell full title and ownership in the underlying receivables and control of the receivables is considered transferred.

We account for transfers under our securitization programs as either sales or secured borrowings based on an evaluation of whether control has transferred.

In instances where we do not meet the criteria for surrender of control, the transaction was accounted for as a secured borrowing.

For these transactions, the receivables remained on our Consolidated Balance Sheets and the notes were reflected within debt.

For transfers in the securitization programs where we have surrendered control of the receivables, the transactions are accounted for as sales and the receivables are derecognized from our Consolidated Balance Sheets at the date of transfer.

XPO Logistics Europe SA (“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 Consolidated Balance Sheets at the date of transfer.

In the securitization and factoring arrangements, any of our continuing involvement is limited to servicing the receivables.

The fair value of any servicing assets and liabilities is immaterial.

Under the terminated securitization program, if transfers were accounted for as sales, the consideration received included a simultaneous cash payment and a deferred purchase price receivable.

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 Consolidated Balance Sheets.

Under a securitization program that was terminated in July 2019, we accounted for transfers as either sales or secured borrowings based on an evaluation of whether control has transferred.

For the transfers that did not meet the criteria for surrender of control, the transaction was accounted for as a secured borrowing.

These secured borrowings were repaid when the program was terminated.

For transfers that 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 Consolidated Balance Sheets.

The cash payment which we received on the date of the transfer was reflected within Net cash provided by operating activities .

The cash payment which we received on the date of the transfer was reflected within Net cash provided by operating activities on our Consolidated Statement of Cash Flows.

As we received cash payments on the deferred purchase price receivable, it was reflected as an investing activity.

As of December 31, 2018, the balance of deferred purchase

price receivable reflected within Other current assets was $52 million .

The new program does not include a deferred purchase price mechanism and all transfers of eligible receivables under the new program are accounted for as sales.

The maximum amount of net cash proceeds available at any one time under the new program is €400 million (approximately $448 million as of December 31, 2019 ).

As of December 31, 2019 , €65 million (approximately $73 million ) was available to us based on the level of receivables sold and outstanding as of that date.

Under the new program, sales of receivables transfer control to the Purchaser and therefore are accounted for as a reduction in accounts receivable.

We service the receivables we sell on behalf of the Purchasers , which gives us visibility into the timing of customer payments.

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 new program, inclusive of any unsecured borrowings, is €400 million (approximately $489 million as of December 31, 2020).

As of December 31, 2020, €75 million (approximately $92 million) was available to us, subject to having sufficient receivables available to sell to the Purchasers.

Under the current program, we service the receivables we sell on behalf of the Purchasers, which gives us visibility into the timing of customer payments.

The benefit to our cash flow includes the difference between the cash consideration in the table below and the amount we collected as a servicer on behalf of the Purchasers.

In 2019 and 2018 , we collected cash as servicer of $2.168 billion and $119 million , respectively.

In 2020 and 2019, we collected cash as servicer of $2.9 billion and $2.2 billion, respectively.

Information related to the trade receivables sold was as follows:

3 unchanged sentences

Receivables sold in period

$ 2,868 $ 2,231 $ 231

Cash consideration

2,868 2,095 179

Deferred purchase price

6 unchanged sentences

In addition to the cash considerations referenced above, we received $186 million in the year ended December 31, 2019, for the realization of cash on the deferred purchase price receivable for our prior securitization program.

In 2015, we entered into the ABL Facility that provided commitments of up to $1.0 billion with a maturity date of October 30, 2020.

In April 2019, we amended the ABL Facility including:

(i) increasing the commitments to $1.1 billion , (ii) extending the maturity date to April 30, 2024, subject to springing maturity if some of our senior notes reach specified levels set in the credit agreement and (iii) reducing the interest rate margin.

We can issue up to $350 million of letters of credit and up to $50 million for swing line loans under the ABL Facility .

Term Loan Facility

In 2015, we entered into our Senior Secured Term Loan Credit Agreement (the “ Term Loan Credit Agreement ”) that provided for a single borrowing of $1.6 billion .

The Term Loan Credit Agreement has been amended since its inception, including the execution of a new tranche of loans in 2019, reduction of interest rates and extension of maturity dates.

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.

We did not draw on the term loan facility through its term, which ended in January 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 December 31, 2020, we have issued $200 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 senior secured term loan credit agreement (the “Term Loan Credit Agreement”) and borrowed an additional $500 million of incremental loans under a new tranche of term loans.

For more information on the amendment, refer to Note 12—Debt to our Consolidated Financial Statements.

Proceeds from the new tranche of loans were used for general corporate purposes, including funding purchases of our common stock as described in Note 14—Stockholders’ Equity.

In 2018, we refinanced our term loans with substantially similar terms as the prior term loans, except with respect to the interest rate and maturity date, prepayment premiums and some other amendments to the restrictive covenants.

Proceeds from the refinancing were used primarily to repay the prior term loans and to pay interest, fees and expenses in connection with this refinancing.

We recorded a debt extinguishment loss of $10 million in 2018 due to this refinancing.

In February 2019, we completed our private placement of $1.0 billion aggregate principal amount of senior notes (“ Senior Notes due 2024 ”).

We used the proceeds from the Senior Notes due 2024 to repay our outstanding

obligation under the Unsecured Credit Facility described below and to finance a portion of our share repurchases described in Note 14 —Stockholders’ Equity to our Consolidated Financial Statements .

In July 2018, we redeemed $400 million of the then $1.6 billion outstanding Senior Notes due 2022 that were originally issued in 2015.

The redemption price for the Senior Notes due 2022 was 103.25% of the principal amount, plus accrued and unpaid interest.

We paid for the redemption primarily with funds from the settlement of our forward sale agreements, described below .

We recorded a debt extinguishment loss of $17 million in 2018 due to this redemption.

In the second quarter of 2020, we completed private placements of $1.15 billion aggregate principal amount of Senior Notes due 2025.

Net proceeds from the notes were invested in cash and cash equivalents.

In February 2019, we completed a private placement of $1.0 billion aggregate principal amount of senior notes (“Senior Notes due 2024”).

We used the proceeds from the Senior Notes due 2024 to repay our outstanding obligation under the Unsecured Credit Facility described below and to finance a portion of our share repurchases described in Note 14—Stockholders’ Equity to our Consolidated Financial Statements.

In January 2021, we redeemed our outstanding Senior Notes due 2022 that were originally issued in 2015.

See Note 19—Subsequent Events.

Unsecured Credit Facility

In December 2018, we entered into a $500 million Unsecured Credit Facility .

As of December 31, 2018, we had borrowed $250 million .

In December 2018, we entered into a $500 million Unsecured Credit Facility and borrowed $250 million.

We borrowed an additional $250 million in January 2019.

2 unchanged sentences

We recorded a debt extinguishment loss of $5 million in 2019 in connection with this repayment.

Preferred Stock and Warrant Exchanges

In December 2020, some holders of our convertible preferred stock exchanged their holdings for a combination of our common stock, based on the stated conversion price, and a lump-sum payment that represents an approximation of the net present value of the future dividends payable on the preferred stock.

Additionally, some holders of our warrants exchanged (or committed to exchange subject to the satisfaction of certain customary closing conditions) their holdings, including Jacobs Private Equity, LLC, an entity controlled by the Company’s chairman and chief executive officer, for a number of shares of our common stock equal to the number of shares of common stock that such holder would be entitled to receive upon an exercise of the warrants less the number of shares of common stock that have an approximate value equal to the exercise price of the warrants.

With respect to the preferred stock, 69,445 shares were exchanged, and we issued 9.9 million shares of common stock and paid $22 million of cash.

The $22 million has been reflected as a preferred stock conversion charge in the accompanying consolidated financial statements.

With respect to the warrants, 0.3 million warrants were exchanged, and we issued 0.3 million shares of common stock.

Additional commitments were made with respect to 9.6 million warrants, which are expected to be converted into 9.1 million shares of common stock in the first quarter of 2021.

These exchanges are intended to simplify our equity capital structure, including in contemplation of our previously announced plan to pursue a spin-off of our Logistics segment.

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 were funded by our 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”).

In December 2018, our Board of Directors authorized the repurchase of up to $1 billion of our common stock, which was completed in the first quarter of 2019.

The share repurchases were funded by our Unsecured Credit Facility and available cash.

In February 2019, our Board of Directors authorized additional repurchases of up to $1.5 billion of our common stock.

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 new debt offerings.

The share purchases under this program have been funded by our available cash and proceeds from our 2019 debt offerings.

Information regarding our shares repurchased, based on settlement date, were as follows:

5 unchanged sentences

Remaining authorization $ 503 $ 617 $ 464

Equity Offering and Forward Sale Agreements

In July 2017, we completed a registered underwritten offering of 11 million shares of our common stock at a public offering price of $60.50 per share (the “Offering”).

Of the 11 million shares of common stock, we offered five million shares directly and six million shares were offered in connection with forward sale agreements (the “Forward Sale Agreements”).

The Offering closed in July 2017 and we received $290 million of proceeds ( $288 million net of fees and expenses) from the sale of the five million shares.

We used the net proceeds for general corporate purposes.

In July 2018, we settled the forward sales in full by delivering six million shares of our common stock to the counterparties in the agreements and received $349 million of net cash proceeds.

We used these net cash proceeds to repay our Senior Notes due 2022 as described above.

Loan Covenants and Compliance

10 unchanged sentences

Net cash used in investing activities (357) (161)

Net cash used in financing activities

Net cash provided by (used in) financing activities 1,136 (759)

Effect of exchange rates on cash, cash equivalents and restricted cash 14 2

Net (decrease) increase in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash $ 1,678 $ (127)

During 2020, we:

(i) generated cash from operating activities of $885 million;

(ii) generated proceeds from sales of property and equipment of $252 million ;

(iii) collected $186 million on the deferred purchase price receivable;

and (iv) received proceeds of $1.8 billion on our debt.

(ii) generated proceeds from sales of property and equipment (primarily real estate) of $195 million and (iii) received net proceeds of $1.4 billion from our issuances of debt and short-term borrowings.

We used cash during this period primarily to:

(i) purchase property and equipment of $526 million;

(ii) repurchase common stock of $1.3 billion ;

(iii) make payments on debt and finance leases of $867 million ;

(iv) purchase noncontrolling interests of $258 million ;

and (v) pay debt issuance costs of $28 million .

(ii) repurchase common stock of $114 million;

and (iii) make payments on debt and finance leases of $102 million.

During 2019, we:

(i) generated cash from operating activities of $791 million;

(ii) received proceeds of $349 million from our forward sale settlement;

and (iii) generated proceeds from sales of property and equipment of $143 million.

We used cash during this period principally to:

(ii) generated proceeds from sales of property and equipment of $252 million;

(iii) collected $186 million on the deferred purchase price receivable as described above;

and (iv) received proceeds of $1.8 billion on our debt.

We used cash during this period primarily to:

(i) purchase property and equipment of $601 million;

(ii) repurchase common stock of $536 million ;

(iii) make repurchases, net of proceeds, of $151 million on our debt;

(iv) make payments on debt and finance leases of $119 million ;

(v) make payments, net of proceeds, of $100 million on our ABL Facility ;

and (vi) make payments for tax withholdings on restricted shares of $53 million.

Cash flows from operating activities for 2019 decreased by $311 million compared with 2018 .

The decrease reflects $14 million of lower cash generated from net income and $297 million of higher cash usage from operating assets and liabilities for 2019 compared with 2018 .

The changes in the balances of operating assets and liabilities in 2019 compared to 2018 resulted primarily from:

(i) a higher cash usage related to accounts payable reflecting the timing of payments;

(ii) $100 million of higher interest and tax payments in 2019;

(iii) higher severance payments in 2019 under our approved restructuring programs;

and (iv) a payment in 2019 of litigation costs for independent contractor matters.

(ii) repurchase common stock of $1.3 billion;

(iii) make payments on debt and finance leases of $867 million and (iv) purchase noncontrolling interests of $258 million.

Cash flows from operating activities for 2020 increased by $94 million compared with 2019.

The increase reflects the impact of operating assets and liabilities generating $499 million more in cash in 2020, partially offset by lower net income.

Within operating assets and liabilities, accrued expenses and other liabilities was a source of cash for 2020 as compared to a use of cash in 2019.

This fluctuation primarily reflects the deferral of certain tax payments and an increase in compensation and purchased transportation accruals in 2020.

Partially offsetting the impact of accrued expenses and other liabilities was the higher use of cash due to increased accounts receivable as a result of higher revenues in the fourth quarter of 2020 compared to 2019.

Investing activities used $357 million of cash in 2020 compared with $161 million used in 2019.

During 2019 , we:

(i) used $601 million of cash to purchase property and equipment;

(ii) received $252 million from sales of property and equipment;

and (iii) received proceeds of $186 million related to the realization of cash on the deferred purchase price receivable.

During 2018 , we used $551 million of cash to purchase property and equipment and received $143 million of cash from the sales of property and equipment.

Financing activities used $759 million of cash in 2019 compared with $620 million used in 2018 .

The primary uses of cash in 2019 were:

(i) $1.3 billion used to purchase our common stock;

(ii) $779 million used to repay borrowings under the Unsecured Credit Facility and the senior variable funding notes in connection with the termination of our

prior trade securitization program;

and (iii) $258 million used to purchase a shareholder’s noncontrolling interest in XPO Logistics Europe SA.

The primary sources of cash from financing activities in 2019 was $1.7 billion of net proceeds from the issuance of debt as described above.

By comparison, the primary uses of cash from financing activities in 2018 was $1,225 million repurchase of debt, $536 million repurchase of common stock and $119 million repayment of debt and finance leases.

The main source of cash from financing activities in 2018 was $1,064 million of net proceeds from the issuance of debt and $349 million of proceeds from our forward sale settlement.

During 2020, we used $526 million of cash to purchase property and equipment and received $195 million from sales of property and equipment.

During 2019, we used $601 million of cash to purchase property and equipment, received $252 million of cash from sales of property and equipment and received proceeds of $186 million related to the realization of cash on deferred purchase price receivable.

Financing activities generated $1.1 billion of cash in 2020 and used $759 million of cash in 2019.

The primary sources of cash from financing activities in 2020 were $1.1 billion of net proceeds from the issuance of Senior Notes due 2025;

$200 million of proceeds from borrowings on our ABL Facility, net of payments, and $47 million from net borrowings related to our securitization program.

The primary uses of cash from financing activities in 2020 were $114 million used to purchase XPO common stock and $102 million used to repay debt and finance leases.

By comparison, the primary uses of cash from financing activities in 2019 were $1.3 billion to repurchase XPO common stock, $867 million used to repay debt and finance leases, and $258 million used to purchase a shareholder’s noncontrolling interest in XPO Logistics Europe SA.

The primary source of cash from financing activities in 2019 was $1.7 billion of net proceeds from the issuance of long-term debt, as described above.

Defined Benefit Pension Plans

16 unchanged sentences

The discount rates used in determining the net periodic benefit costs and benefit obligations are as follows:

Qualified Plans

Non-Qualified Plans

Discount rate - net periodic benefit costs

3.14% - 3.38%

3.65% - 3.95%

2.84% - 3.21%

Discount rate - benefit obligations

Qualified Plans U.S.

Non-Qualified Plans U.K.

2020 2019 2020 2019 2020 2019

Discount rate - net

periodic benefit costs 2.96 % 4.08 % 2.40% - 2.78% 3.65% - 3.95%

1.84 % 2.56 %

Discount rate - benefit

obligations 2.48 % 3.35 % 1.62% - 2.30% 2.72% - 3.20%

1.37 % 2.04 %

An increase or decrease of 25 basis points in the discount rate would decrease or increase our 2019 pre-tax pension income by $2 million each for the U.S.

plans and U.K.

An increase or decrease of 25 basis points in the discount rate would decrease or increase our 2020 pre-tax pension income by $3 million for the U.S.

plans and $2 million for the U.K.

plan, respectively.

Beginning in 2018, we started using a full yield curve approach to estimate the interest cost component of net periodic benefit cost by applying specific spot rates along the yield curve used to determine the benefit obligation to each of the underlying projected cash flows based on time until payment.

Before 2018, we estimated the interest cost component by using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation.

Our new approach provides a more precise measurement of interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates.

The change did not impact the measurement of our U.S.

pension benefit obligation and has been accounted for as a change in accounting estimate and applied prospectively.

We use a full yield curve approach to estimate the interest cost component of net periodic benefit cost by applying specific spot rates along the yield curve used to determine the benefit obligation to each of the underlying projected cash flows based on time until payment.

Rate of Return on Plan Assets

1 unchanged sentence

The expected return on plan assets is based on estimates of long-term returns and considers the plans’ anticipated asset allocation over the course of the next year.

The plan assets are managed using a long-term liability-driven investment strategy that seeks to mitigate the funded status volatility by increasing participation in fixed-income investments over time.

This strategy was developed by analyzing a variety of diversified asset-class combinations in conjunction with the projected liabilities of the plans.

15 unchanged sentences

The portion of the unrecognized actuarial gain/loss that exceeds 10% of the greater of the projected benefit obligation or the fair value of plan assets at the beginning of the year is amortized and recognized as income/expense over the estimated average remaining life expectancy of plan participants.

We do not expect to recognize any amortization of actuarial gain or loss in our net periodic benefit expense (income) for 2020 .

We expect to recognize $1 million of amortization of actuarial gain in our net periodic benefit income for the U.K.

plan for 2021.

Effect on Results

19 unchanged sentences

Payments Due by Period

(In millions)

(In millions) Total 2021 2022-2023 2024-2025 Thereafter

Contractual obligations

1 unchanged sentence

Operating leases (1)

2,718 579 957 547 635

Purchase commitments 109 73 31 5 —

1 unchanged sentence

Interest on debt (2)

1,167 246 476 272 173

Total contractual cash obligations $ 10,917 $ 2,249 $ 2,169 $ 5,285 $ 1,214

(1) As of December 31, 2020, we had additional operating leases that have not yet commenced with future undiscounted lease payments of $202 million.

These operating leases will commence in fiscal year 2020 through fiscal year 2035 with initial lease terms of 4 years to 15 years .

These operating leases will commence in 2021 through 2022 with initial lease terms of 2 years to 15 years.

(2) Estimated interest payments have been calculated based on the principal amount of debt and the applicable interest rates as of December 31, 2020.

3 unchanged sentences

Actual amounts of contractual cash obligations may differ from estimated amounts due to changes in foreign currency exchange rates.

We anticipate net capital expenditures to be between $475 million and $525 million in 2020 , funded by cash on hand and available liquidity.

We anticipate net capital expenditures to be between

$475 million and $525 million in 2021 (without giving effect to the planned spin-off of our Logistics segment), funded by cash on hand and available liquidity.

Critical Accounting Policies

13 unchanged sentences

Application of the goodwill impairment test requires judgment, including the identification of reporting units, the assignment of assets and liabilities to reporting units, the assignment of goodwill to reporting units, and a determination of the fair value of each reporting unit.

For our 2019 goodwill assessment, we performed a quantitative analysis for all five of our reporting units using a combination of income and market approaches, with the assistance of a third-party valuation appraiser.

As of August 31, 2019, we completed our annual impairment tests for goodwill with all of our reporting units having fair values in excess of their carrying values.

Accounting guidance allows entities to perform a qualitative assessment (a “step-zero” test) before performing a quantitative analysis.

If an entity determines that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the entity does not need to perform a quantitative analysis for that reporting unit.

The qualitative assessment includes review of macroeconomic conditions, industry and market considerations, internal cost factors, and overall financial performance, among other factors.

For our 2018 goodwill assessment, we performed a step-zero qualitative analysis for all of our reporting units.

Based on the qualitative assessments performed, we concluded that it is not more-likely-than-not that the fair value of our reporting units was less than their carrying amounts, and therefore, further quantitative analysis was not performed.

For the years ended December 31, 2019 and 2018 , we did not recognize any goodwill impairment.

For our 2020 and 2019 goodwill assessments, we performed a quantitative analysis for all five of our reporting units using a combination of income and market approaches, with the assistance of a third-party valuation appraiser.

As of August 31, 2020 and 2019, we completed our annual impairment tests for goodwill with all of our reporting units having fair values in excess of their carrying values, resulting in no impairment of goodwill.

The income approach of determining fair value is based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate.

7 unchanged sentences

Self-Insurance Accruals

We use a combination of self-insurance programs and large-deductible purchased insurance to provide for the costs of medical, casualty, liability, vehicular, cargo and workers’ compensation claims.

We use a combination of self-insurance programs and purchased insurance to provide for the costs of medical, casualty, liability, vehicular, cargo and workers’ compensation claims.

We periodically evaluate our level of insurance coverage and adjust our insurance levels based on risk tolerance and premium expense.

1 unchanged sentence

Additionally, claims may emerge in future years for events that occurred in a prior year at a rate that differs from previous actuarial projections.

We believe the actuarial methods are appropriate for measuring these self-insurance accruals.

We believe the actuarial

methods are appropriate for measuring these self-insurance accruals.

However, based on the number of claims and the length of time from incurrence of the claims to ultimate settlement, the use of any estimation method is sensitive to the assumptions and factors described above.

6 unchanged sentences

Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating losses and tax credit carryforwards.

We evaluate the recoverability of these future tax deductions and credits by assessing all available evidence, including the reversal of deferred tax liabilities, carrybacks available, and historical and projected pre-tax profits generated by operations.

Valuation allowances are established when, in management’s judgment, it is more-likely-than-not that its deferred tax assets will not be realized.

Valuation allowances are established when, in management’s judgment, it is more likely than not that our deferred tax assets will not be realized.

In assessing the need for a valuation allowance, management weighs the available positive and negative evidence, including limitations on the use of tax losses and other carryforwards due to changes in ownership, historic information, and projections of future sources of taxable income that include and exclude future reversals of taxable temporary differences.

New Accounting Standards

Information related to new accounting standards is included in Note 2 —Basis of Presentation and Significant Accounting Policies and Note 8 —Leases to our Consolidated Financial Statements in this Annual Report on Form 10-K.

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis