XPO, Inc. 10-K

ITEM 1. BUSINESS Company Overview XPO Logistics, Inc., together with its subsidiaries (“XPO” or “we”), provides cutting-edge supply chain solutions to the most successful companies in the world. The company is the second largest contract logistics provider and the second largest freight broker globally, and a top three less-than-truckload provider in North America. XPO was incorporated as a Delaware corporation in May 2000. As of December 31, 2020, we had approximately 102,000 employees and 1,523 locations in 30 countries, with substantially all of our services operating under the single brand of XPO Logistics. In January 2021, we acquired the majority of the logistics operations of Kuehne + Nagel in the U.K. and Ireland, which increased our location count to 1,629 and our number of employees to approximately 108,000. We use our highly integrated network to help more than 50,000 customers operate their supply chains most efficiently. We have two reporting segments, Transportation and Logistics, each with robust service offerings, leadership positions and growth prospects. In 2020, approximately 62% of our revenue came from Transportation, and the remaining 38% came from Logistics. Within each segment, we are positioned to capitalize on fast-growing areas of demand. We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it affects our employees, customers and business partners. See “Impacts of COVID-19” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. 4 Table of Contents Planned Spin-off of the Logistics Segment 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. The spin-off, which we intend to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes to XPO shareholders, 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 less-than-truckload (“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. See “Risk Factors” in Item 1A below for further information. Transportation Segment Overview Our Transportation segment primarily provides LTL and truck brokerage services in North America and Europe. Our largest service offering within the Transportation segment is LTL, which contributed 43% of 2020 segment revenue. We are a top three provider of LTL services in North America, and we have one of the largest LTL networks in Western Europe. Our other primary service offering within the Transportation segment is truck brokerage. We are the second largest brokerage provider globally and the third largest brokerage provider in North America. As of December 31, 2020, we had truck brokerage relationships with approximately 75,000 independent carriers representing over 1,000,000 trucks. The results of our truck brokerage operations are included as part of our freight brokerage services, which include additional, asset-light services for expedite, intermodal and drayage. For more information about our Transportation segment offerings, refer to the “Transportation Services” section below. Logistics Segment Overview Our Logistics segment, which we sometimes refer to as supply chain, provides order fulfillment and other distribution services differentiated by our ability to deliver technology-enabled, customized solutions. Our logistics customers include many preeminent companies that benefit from our scale, digital capabilities, expertise and range of solutions. Many of these customers have long-tenured relationships with us, and frequently expand the scope and scale of the services we provide to them. XPO is the second largest provider of contract logistics globally, with the largest outsourced e-commerce fulfillment platform in Europe, and a major platform for e-fulfillment in North America. As of December 31, 2020, we operated 205 million square feet (19 million square meters) of logistics warehouse space worldwide. Approximately 101 million square feet (9 million square meters) was located in North America; 96 million square feet (9 million square meters) was located in Europe; and 8 million square feet (1 million square meters) was located in Asia. Our January 2021 acquisition of Kuehne + Nagel logistics sites in the U.K. and Ireland increased our global facility space to 212 million square feet (20 million square meters). Our Logistics segment benefits from deep roots in the e-commerce sector, which continues to show strong, secular growth. Many of our e-commerce facilities also manage merchandise returns, also known as reverse logistics. Before COVID-19, e-commerce was already growing globally at a double-digit rate, and that growth has accelerated as more consumers opt to purchase goods online. This level of growth makes it difficult for many companies to handle fulfillment and returns in-house while providing high levels of service. We provide solutions for pure-play e-commerce companies, omnichannel retailers and manufacturers with aftermarket distribution channels, including the merchandise returns that have become a significant byproduct of order fulfillment. For more information about our Logistics segment offering, refer to the “Logistics Services” section below. 5 Table of Contents Operating Philosophy We believe that our rapid pace of innovation differentiates our services, enables us to better utilize our assets and makes the most of the talent within our organization. Our proprietary technology strengthens our relationships with customers by addressing their immediate supply chain needs and anticipating future needs. Technology allows us to be a true partner to our customers by helping them meet their objectives for efficiency, safety, customer service and growth. When developing our technology, we concentrate our efforts in four areas that can create value for our shareholders by serving our customers most efficiently: our digital freight marketplace, automation and intelligent machines, dynamic data science, and visibility and customer service, specifically in the e-commerce supply chain. See the “Transportation Services,” “Logistics Services” and “Technology and Intellectual Property” sections below for more information about our technology. Environmental sustainability is a significant priority for us. In the U.S., XPO has been named a Top 75 Green Supply Chain Partner by Inbound Logistics for five consecutive years. In France, we have renewed our commitment to the CO2 Charter for another three years. In Spain, all of our sites meet Leadership in Energy and Environmental Design (“LEED”) energy certification standards for 100% consumption of renewable energy. In the U.K., the Digital Distribution Warehouse of the Future we created with Nestlé became a reality in 2020, operating with environmentally friendly ammonia refrigeration systems, energy-saving lighting, air-source heat pumps for administration areas and rainwater harvesting. In our Logistics segment, a number of our warehouse facilities are ISO 14001-certified, which ensures environmental and other regulatory compliances. We monitor fuel emissions from forklifts, with protocols in place to take immediate corrective action if needed. Our packaging engineers ensure that the optimal carton size is used for each product slated for distribution, and when feasible, we purchase recycled packaging. As a byproduct of managing returned merchandise, we recycle millions of electronic components and batteries each year. In our Transportation segment, we have made substantial investments in fuel-efficient Freightliner Cascadia tractors in North America; these use Environmental Protection Agency (“EPA”) 2013-compliant and Greenhouse Gas 2014-compliant Selective Catalytic Reduction technology. Our North American LTL locations have energy-saving policies in place and are implementing a phased upgrade to LED lighting. Our modern road fleet in Europe is 98% compliant with Euro V, EEV and Euro VI standards. We also own a large fleet of natural gas trucks operating in France, the U.K., Spain and Portugal, and in 2020 we invested in 80 new tractors that use liquified natural gas (“LNG”). This increased our alternative-fuel road fleet in France to more than 250 LNG vehicles. In Spain, we own government-approved mega-trucks to transport freight with fewer trips, and our last mile operations in Europe use electric vehicles for deliveries in certain urban areas, reducing those emissions to zero. Transportation Services Less-Than-Truckload (LTL) Our LTL operations in North America are asset-based. We provide customers with geographic density and day-definite regional, inter-regional and transcontinental LTL freight services with one of the industry’s largest national networks of tractors, trailers, professional drivers and terminals. This includes cross-border U.S. service to and from Mexico and Canada, as well as intra-Canada service. In 2020, our LTL operations in North America offered more than 75,000 next-day and two-day lanes and had over 20,000 customers. Our customers value our scale and capacity and our network of 290 LTL terminals in the U.S. and Canada. We also have one of the largest, most modern and most safety-equipped LTL fleets in our industry. Our North American fleet contains approximately 7,800 tractors and 25,000 trailers, operated by approximately 12,000 employee drivers. 6 Table of Contents In Europe, our LTL offering utilizes a blend of operations that includes asset-based (XPO fleet) and asset-light (contracted carriers), supported by a network of terminals. We provide LTL services domestically in France, the U.K., Spain and Portugal, and we offer multinational LTL distribution throughout Europe. Our linehaul network is how we move LTL freight across the country. We use intelligent route-building to increase fleet utilization, optimize load factor and limit cargo damage. To improve pickup-and-delivery performance, we developed routing and visualization tools that help our dispatchers leverage route density and reduce cost per stop. To optimize pricing, we use elasticity models to adjust for current lane conditions. In addition, we use our XPO Smart™ labor management technology in our yard and dock operations to enhance productivity. For more information, see the “Technology and Intellectual Property” section below. While each application of our technology delivers its own benefits, we also expect a strong synergistic effect on our LTL business as a whole. For example, when we optimize truck routes, this benefits asset utilization, driver utilization, customer service and yield, and should reduce our carbon footprint. Truck Brokerage Our truck brokerage operations are non-asset-based — we place shippers’ freight with qualified carriers, primarily trucking companies. Truck brokerage services are priced on either a spot market or contract basis for shippers. Customers offer loads to us via electronic data interchange (“EDI”), email, telephone and our XPO Connect™ platform on a daily basis; we collect payments from our customers and pay carriers for transporting the loads. Our truck brokerage capabilities are differentiated by scale, expertise and the critical advantages of our propriety technology. As of December 31, 2020, we had approximately 75,000 independent carriers in our global brokerage network, giving us access to more than a million trucks. Our operating model enables us to reduce our costs when demand is soft and flex our resources to find trucks as demand returns. In the U.S., truck brokers have steadily penetrated the broader for-hire trucking industry over time, in part because of the reliable access to capacity brokers can provide and, more recently, digital access to truck capacity. Our platform has become one of the most rapidly adopted technologies in the brokerage industry. The marketplace dynamics, together with the vast potential of future applications, establish XPO Connect™ as a significant differentiator of our brokerage offering. For more information, see the “Technology and Intellectual Property” section below. In addition to truck brokerage, our freight brokerage services include intermodal and drayage operations that provide customers with container capacity, long-haul transportation brokered with railroads, road transportation of containers performed by independent contractors, and on-site operational services. We utilize containers and chassis we lease or own, together with access to supplemental equipment capacity, to meet our customers’ intermodal requirements. Our Transportation segment also includes an asset-light last mile logistics service for the home delivery of heavy goods — a sector that benefits from the rapid growth of e-commerce and omnichannel retail. XPO is the largest provider of last mile logistics for heavy goods in North America, with a growing last mile presence in Europe. Additionally, we may assist customers with ancillary services, such as urgent shipping, or freight forwarding, or customers may outsource the management of their freight transportation to us. As of December 31, 2020, we had approximately 10,000 independent contractors under contract to provide ancillary services to our customers. Logistics Services Our Logistics segment provides a wide range of services differentiated by our technology, including high-value-add warehousing and distribution, order fulfillment and personalization, cold-chain logistics, packaging and labeling, aftermarket support, inventory management and supply chain optimization. Our logistics customers primarily operate in industries with high-growth outsourcing opportunities, including e-commerce and retail, food and beverage, consumer packaged goods, technology, aerospace, telecommunications, industrial and manufacturing, chemicals, agribusiness, life sciences and healthcare. These are all verticals where we 7 Table of Contents have significant expertise and we understand the specific requirements, such as special handling, complex stock-keeping, time-assured deliveries and surge management. One of the most highly valued services across multiple customer verticals is reverse logistics. Depending on the merchandise being returned, this fast-growing area of logistics can include inspection, testing, repackaging, refurbishment, resale or product disposal, as well as refunding and warranty management. Reverse logistics services are mission-critical for companies with consumer end-markets, as shoppers are increasingly “test-driving” the merchandise they buy online. Logistics processes are ripe for transformation through technology. Order fulfillment times are compressing, most notably in the direct-to-consumer space. The most cost-effective way to meet the majority of customer expectations is through advanced automation and intelligent machines — robots and cobots (collaborative robots), automated sortation systems, automated guided vehicles (“AGVs”) and goods-to-person systems. In 2019, we integrated collaborative robotics and goods-to-person systems in a number of our warehouses to support our employees and improve efficiency; this integration substantially increased throughput in 2020. Additionally, we have developed analytics that predict future surges in demand based on data histories and forecasted customer spend. About 15% to 35% of consumer goods bought online are returned, based on the product category, and this creates reverse peaks at certain times of year. We have been able to shave several days off the reverse process through automation, which accelerates a customer’s ability to return goods to retail for sale. In addition to our investments in automation and analytics, we have differentiated XPO from other logistics providers through our ability to create a synchronized warehouse environment across automation solutions. Our proprietary warehouse management platform integrates robotics and other advanced automation into our operations with rigorous control, even when complex, third-party software is involved. Our XPO Smart™ labor management tools help us offset the higher cost of labor in our facilities by making the optimal use of workforce hours. As logistics volumes pick up, our site managers are able make rapid adjustments to labor levels in real time. XPO Smart™ self-adjusts site by site to drive productivity across our logistics network. For more information, see the “Technology and Intellectual Property” section below. Other technologies that differentiate our logistics offering are our proprietary warehouse module for order management, which gives customers deep visibility into fulfillment flows, and our analytics dashboard, which gives customers valuable business intelligence to manage their supply chains. Our connection management software module facilitates integration with SAP, Oracle and other external systems, enabling our customers to get the most benefit from our technology in areas such as visibility, demand planning and continuous improvement. XPO Direct™ XPO Direct™ is our shared-space distribution network for B2C and B2B customers in North America. This unique solution gives retailers and manufacturers a way to manage fulfillment using our scale, capacity and innovation without the need to add high-fixed-cost distribution centers. XPO Direct™ gives customers the flexibility to reposition inventory within one-day and two-day ground delivery range of approximately 99% of the U.S. population as demand patterns change, and in close proximity to retail stores for inventory replenishment. This responds directly to increasing demand for shorter fulfillment times. XPO Direct™ capitalizes on the strengths of our Transportation and Logistics segments in combination. Our technology links our facilities, which serve as strategically located stockholding sites and cross-docks that can be utilized by multiple customers at the same time. Transportation needs are supported by our brokered, contracted and owned capacity. Our Strategy Our strategy is to help customers manage their goods most efficiently throughout their supply chains, using our network of people, technology and physical assets. We deliver value to customers in the form of technological innovations, process efficiencies, cost efficiencies and reliable outcomes. Our services are both highly responsive to 8 Table of Contents customer goals, such as mitigating environmental impacts over time, and proactive in identifying potential improvements. Most important, we have instilled a culture that focuses our efforts on delivering mutually beneficial results for our customers and our company. As part of our strategy, we have positioned XPO to capitalize on secular trends in demand, such as the rapid growth of e-commerce and the heightened customer interest in outsourcing. Management’s growth and optimization strategy for the Transportation segment is to: • Market our solutions and vertical expertise to new and existing customers of all sizes; • Leverage the advantages of our proprietary XPO Connect™ digital marketplace, which synthesizes the shipper, carrier and consumer experiences using automation and real-time visibility; • Recruit and retain quality drivers for our fleets, and best utilize our driver and equipment capacities; • Attract and retain quality independent contracted carriers and independent brokered carriers for our transportation network; • Recruit and retain talented sales and customer service representatives and continuously improve their productivity with state-of-the-art training and technology; and • Integrate industry best practices into our operations, with a focus on automation and analytics that drive productivity and share gains. Management’s growth and optimization strategy for the Logistics segment is to: • Develop additional business in verticals where we already have deep expertise, enduring customer relationships and a strong track record of successful performance; • Capture more share of wallet with existing customers who could use our logistics solutions for more of their supply chain needs; • Market the advantages of our proprietary technology for warehouse operations, which we use to manage advanced automation, robotics, labor productivity, safety and changes in demand in complex logistics environments; • Partner with our customers in meeting their goals for supply chain performance, growth management and stakeholder satisfaction, and help them overcome challenges specific to their business; and • Integrate industry best practices into our operations, with a focus on automation and analytics that drive productivity and share gains. Technology and Intellectual Property One of the ways in which we strengthen our relationships with customers is by empowering our employees to deliver superior service through our technology. Our industry is evolving, and customers want to de-risk their supply chains through robust visibility and digitization. We are already well-positioned to provide this value to customers, because we prioritized visibility, control and automation early in the development of our proprietary technology. We have built a highly scalable platform on the cloud that speeds the deployment of new ways to increase efficiency, control costs and leverage our footprint. We can deploy innovations across multiple geographies in a relatively short time, and also take an innovation developed for one of our services and apply it to other services to differentiate the value we offer. This agility gives our larger accounts an added incentive to use us for multiple solutions. We believe that our investment in technology is among the highest in our industry at an annual average of approximately $500 million. The most significant impacts of our technology to date are in these areas: 9 Table of Contents XPO Smart ™ is our proprietary suite of intelligent tools and analytics that self-adjusts site by site to drive productivity across our operations. It incorporates dynamic data science, predictive analytics and machine learning to aid our managers in decision-making. We use XPO Smart™ to improve our labor and inventory management in a safe, disciplined and cost-effective manner. XPO Smart™ was implemented in 85% of our warehouses in North America and 50% of our warehouses in Europe as of December 31, 2020. Additional roll-outs are underway and we expect to see a significant increase in productivity as we fully utilize the tools in our operations going forward. Intelligent warehouse automation is a priority for our Logistics segment. This includes autonomous robots and collaborative robots, automated sortation systems, automated guided vehicles, goods-to-person systems and wearable smart devices. We integrate these technologies into our operations and control them in-house with our proprietary warehouse management system. Advanced automation, robotics and autonomous goods-to-person systems are particularly effective in delivering critical improvements in speed, accuracy and productivity. Importantly, automation also enhances worker safety and the overall quality of employment. For Nestlé, the world’s largest food and beverage company, we co-developed a fully automated Digital Distribution Warehouse of the Future in the U.K., which we opened in mid-2020. This distribution center has the capacity to process more than a million pallets per year — the highest throughput of any facility in Nestlé’s global network. Our European innovation lab is based on the premises, where it functions as both a think tank and a launch pad with the ability to test new technologies under real-life operating conditions. XPO Connect ™ is our proprietary digital freight marketplace; it encompasses our core Freight Optimizer system, shipper interface, pricing engine, carrier interface and our carrier mobile app, called Drive XPO™. This fully automated, self-learning digital platform gives us a scalable framework to continually improve our service, capture share and reduce costs. XPO Connect™ connects shippers with freight carriers, both virtually and through our transportation operations. We give shippers access to our transportation network and market data, while carriers transact to secure loads through the mobile app. As of December 31, 2020, globally, we had more than 70,000 truck carriers registered for XPO Connect™ and over 300,000 truck driver downloads of the app. In LTL , our technology focuses on optimizing the main components of the service we provide: linehaul, pickup-and-delivery and pricing. Our North American LTL linehaul network moved freight approximately 2.3 million miles a day on average in 2020, with approximately 15% of that volume traveling direct. With intelligent route-building, we can reduce empty miles in our linehaul network, improve load factor and mitigate cargo damage. Our proprietary bypass models assimilate massive amounts of data to arrive at recommendations based on volume and density, taking freight dimensions into account to identify gaps in trailer utilization. Other areas of LTL that are ripe for optimization through our technology include pickup-and-delivery routing, pricing management, trailer utilization, exception management and dock productivity. In September 2020, we extended our partnership with the Massachusetts Institute of Technology (“MIT”) Industrial Liaison Program. We are the first global logistics company to collaborate with MIT’s world-class research capabilities to advance supply chain innovation. This is an opportunity to realize new levels of productivity for our customers, and at the same time, we have the opportunity to provide input into future applications of robotics, machine learning and systems engineering. Customers and Markets We provide services to more than 50,000 customers, ranging in size from small, entrepreneurial organizations to Fortune 500 companies and global leaders. The diversification of our customer base minimizes concentration risk: in 2020, our top five customers combined accounted for approximately 8% of our revenue, with our largest customer accounting for approximately 2% of revenue. 10 Table of Contents Our markets are also highly diversified. The customers we serve span every major industry and touch every part of the economy. Our revenue derives from a mix of key verticals, such as retail and e-commerce, food and beverage, consumer packaged goods, technology and industrial. Our Transportation and Logistics segments market to domestic and international customers and primarily perform their services in North America and Europe. For the full year 2020, approximately 58% of our total revenue was generated in the U.S., 15% in Europe (excluding France and the U.K.), 13% in the U.K. and 11% in France. Competition Transportation and logistics are highly fragmented marketplaces with thousands of companies competing domestically and internationally. XPO competes on quality of service, reliability, scope and scale of operations, technological capabilities, expertise and price. Our competitors include local, regional, national and international companies that offer the same services we provide; some have larger customer bases, significantly more resources and more experience than we have. In logistics, some of our competitors include Clipper Logistics, Kuehne + Nagel and DSV. In transportation, some of our competitors include Old Dominion Freight Line, Saia, FedEx and C.H. Robinson. Additionally, some of our customers have sufficient internal resources to perform the services we offer. Due to the competitive nature of our marketplaces, we strive daily to strengthen existing business relationships and forge new relationships. The health of the transportation and logistics industries will continue to be a function of domestic and global economic growth. However, we believe that we have positioned XPO in fast-growing sectors to benefit from secular trends, such as the demand for e-commerce, omnichannel retail and supply chain outsourcing. Regulation Our operations are regulated and licensed by various governmental agencies in the U.S. and in other countries where we conduct business. These regulations impact us directly and also indirectly when they regulate third-party providers we arrange and/or contract with to transport freight for our customers. Regulations Affecting Motor Carriers, Owner-Operators and Transportation Brokers. In the U.S., our subsidiaries that operate as motor carriers, freight forwarders, and freight transportation brokers are licensed by the Federal Motor Carrier Safety Administration (“FMCSA”) of the U.S. Department of Transportation (“DOT”). Our motor carrier subsidiaries and the third-party motor carriers we contract with in the U.S. must comply with the safety and fitness regulations of the DOT, including those related to, without limitation, controlled substances and alcohol, hours-of-service compliance, vehicle maintenance, hazardous materials compliance, driver fitness, unsafe driving, and minimum insurance requirements, as well as the Compliance Safety Accountability (“CSA”) program, which uses a Safety Measurement System (“SMS”) to rank motor carriers on seven categories of safety-related data, known as Behavioral Analysis and Safety Improvement Categories (“BASICs”). Other federal agencies, such as the U.S. EPA, the U.S. Food and Drug Administration (“FDA”), the California Air Resources Board (“CARB”) and the U.S. Department of Homeland Security (“DHS”), also regulate our equipment, operations, cargo and independent contractor drivers. We are also subject to a variety of vehicle registration and licensing requirements in certain states and local jurisdictions where we operate, as are the third-party carriers with which we contract. In foreign jurisdictions where we operate, our operations are regulated by the appropriate governmental authorities. We may become subject to new or more restrictive regulations relating to emissions, drivers’ hours-of-service, independent contractor eligibility requirements, onboard reporting of operations, air cargo security and other matters affecting safety or operating methods. Regulations Affecting our Subsidiaries Providing Ocean and Air Transportation. One of our subsidiaries, XPO Customs Clearance Solutions, LLC (“XCCS”), is licensed as a U.S. Customs broker by the U.S. Customs and Border Protection (the “CBP”) of the DHS in each U.S. district where it performs services. All U.S. Customs brokers are required to maintain prescribed records and are subject to periodic audits by the CBP. In non-U.S. jurisdictions where we perform customs brokerage services, our operations are licensed, where necessary, by the appropriate governmental authorities. 11 Table of Contents Our subsidiaries that offer expedited air charter transportation are subject to regulation by the Transportation Security Administration (“TSA”) of the DHS governing air cargo security for all loads, regardless of origin or destination. Some of our subsidiaries are regulated as “indirect air carriers” by the TSA. The CBP, TSA and relevant non-U.S. governmental agencies provide requirements and guidance and, in some cases, administer licensing requirements and processes applicable to the freight forwarding industry. Regarding our international operations, XPO is a member of the International Air Transportation Association (“IATA”), a voluntary association of airlines and freight forwarders that outlines operating procedures for forwarders acting as agents or third-party intermediaries for IATA members. A substantial portion of our international air freight business is transacted with other IATA members. Additionally, some of our subsidiaries are licensed as an Ocean Transportation Intermediary (“OTI”), since they operate as a non-vessel-operating common carrier, or NVOCC, and/or as an Ocean Freight Forwarder (“OFF”) licensed by the U.S. Federal Maritime Commission (“FMC”), which establishes the qualifications, regulations, licensing and bonding requirements for arranging international transportation to or from the U.S. as an OTI. Our OTI operations, which include operating as both an NVOCC and an OFF, are subject to regulations of the U.S. Department of State, the U.S. Department of Commerce, the U.S. Department of Treasury, the U.S. Department of Justice, and the Securities and Exchange Commission and to various laws and regulations of the other countries where we operate. These laws and regulations govern what commodities may be shipped to certain destinations and end-users, unfair international trade practices, limitations on entities with which we may conduct business and related matters. Other Regulations. We are subject to a variety of other U.S. and foreign laws and regulations, including, but not limited to, the Foreign Corrupt Practices Act and other anti-bribery and anti-corruption statutes, and export sanction laws. We are also subject to state and U.S. federal laws and regulations addressing some types of cargo transported or stored by our subsidiaries, or transported pursuant to a government contract or subcontract. Classification of Independent Contractors. U.S. tax and other federal and state regulatory authorities, as well as private litigants, continue to assert that independent contractor drivers in the trucking industry are employees rather than independent contractors, while applying a variety of standards in their determinations of independent contractor status. Federal legislators have introduced legislation in the past to make it easier for tax and other authorities to reclassify independent contractors as employees, including legislation to increase the recordkeeping requirements and heighten the penalties for companies that misclassify workers and are found to have violated overtime or wage requirements. Additionally, federal legislators have sought to abolish the current safe harbor, which allows taxpayers that meet certain criteria to treat individuals as independent contractors if they are following a longstanding, recognized practice. Federal legislators also sought to expand the Fair Labor Standards Act to cover “non-employees” who perform labor or services for businesses, even if said non-employees are properly classified as independent contractors; require taxpayers to provide written notice to workers based upon their classification as either an employee or a non-employee; and impose penalties and fines for violations of the notice requirement or for misclassifications. Some states have launched initiatives to increase tax revenues from items such as unemployment, workers’ compensation and income taxes, and the reclassification of independent contractors as employees could help states increase these revenues. If the independent contractor drivers that provide services to XPO are determined to be our employees, we would incur additional exposure under some or all of the following: federal and state tax, workers’ compensation, unemployment benefits, and labor, employment and tort laws, including for prior periods, as well as potential liability for employee benefits and tax withholdings. Environmental Regulations. Our transportation and logistics operations and our independent contractors are subject to various environmental laws and regulations in the jurisdictions where we operate. In the U.S., these laws and regulations deal with the hauling, handling and disposal of hazardous materials, emissions from vehicles, engine-idling, fuel tanks and related fuel spillage and seepage, discharge and retention of storm water, and other environmental matters that involve inherent environmental risks. We may be responsible for the cleanup of any spill or other incident involving hazardous materials caused by our business. In the past, we have been responsible for the cost to clean up diesel fuel spills caused by traffic accidents or other events, and none of these incidents materially 12 Table of Contents affected our business or operations. We generally transport only hazardous materials rated as low-to-medium-risk, and only a small percentage of our total loads contain hazardous materials. We believe that our operations are in substantial compliance with current laws and regulations and we do not know of any existing environmental condition that reasonably would be expected to have a material adverse effect on our business or operating results. A number of our logistics sites are ISO 14001-certified to high standards for environmental management, and we have implemented numerous programs to manage environmental risks and maintain compliance. U.S. federal and state governments, as well as governments in certain foreign jurisdictions where we operate, have also proposed environmental legislation that could, among other things, potentially limit carbon, exhaust and greenhouse gas emissions. If enacted, such legislation could result in higher costs for new tractors and trailers, reduced productivity and efficiency, and increased operating expenses, all of which could adversely affect our results of operations. Risk Management and Insurance We maintain insurance for commercial automobile liability, truckers’ commercial automobile liability, commercial general liability, cargo/warehouse legal liability, workers’ compensation and employers’ liability, and umbrella and excess umbrella liability, with coverage limits, deductibles and self-insured retention levels that we believe are reasonable given the varying historical frequency, severity and timing of claims. Certain actuarial assumptions and managerial judgments are made for insurance reserves and are subject to a degree of variability. Seasonality Our revenue and profitability are typically lower for the first quarter of the calendar year relative to other quarters. We believe this is due in part to the post-holiday reduction in demand experienced by many of our customers, which leads to less use of transportation and logistics services. In our Logistics segment, which benefits from strong positioning in the e-commerce sector, demand is characterized by strong seasonal surges in activity, with the fourth quarter holiday peak typically being the most dramatic. In our Transportation segment, the productivity of our tractors and trailers, independent contractors and other transportation providers generally decreases during the winter season because inclement weather impedes operations. It is not possible to reliably predict whether our historical revenue and profitability trends will continue to occur in future periods. Human Capital Management Our success relies in large part on our strong governance structure and Code of Business Ethics, our good corporate citizenship and, importantly, engaged employees who embrace our values. As a customer-centric company with a strong service culture, we constantly work to maintain our position as an employer of choice. This requires an unwavering commitment to workplace inclusion and safety, as well as competitive total compensation that meets the needs of our employees and their families. Employee Profile We had approximately 102,000 employees worldwide as of December 31, 2020, with over 39,000 employees in Transportation and more than 61,000 employees in Logistics. In North America, 79% of our employees occupy hourly roles and 21% are in salaried positions. With locations spanning 30 countries, 45% of our employees are based in North America, 53% in Europe and 2% in Latin America and Asia, combined. Across our operations, 27% of our employees work as drivers and dockworkers, 46% as warehouse workers and 24% in field supervisory and management positions. In addition, our workforce is supplemented with approximately 18,000 temporary workers at our logistics sites in North America and an average of 17,500 temporary workers in our logistics network in Europe. As of December 31, 2020, 75.8% of our employees in Europe were represented by unions or other employee representative bodies, while almost all of our employees in the United States have chosen to remain union-free. 13 Table of Contents Throughout 2020, we made significant investments in the safety, well-being and satisfaction of our employees in these and other areas: Diversity and Inclusion We take pride in having an inclusive workplace that encourages a diversity of talents and perspectives. We welcome employees of every gender identity, sexual orientation, race, ethnicity, national origin, religion, life experience and disability. In 2020, we created the position of chief diversity officer and linked ESG performance targets and initiatives, including deliverables and targets for diversity and inclusion, to 25% of our top executives’ long-term incentive compensation, to further strengthen this aspect of our culture. In addition, we celebrated the values of Black history, women’s history, LBGTQ+ pride, Hispanic heritage and military veterans, and launched inclusivity courses through our XPO University e-learning portal. We also formed academic partnerships that advance diversity in higher education, and we supported eight inclusion programs that highlight women, veterans, the LGBTQ+ community, people with disabilities and other groups. Health and Safety Our frontline employees provide essential services to keep goods flowing to the people who need them. Their protection is always our foremost priority, and with the onset of COVID-19 in 2020, we began using a combination of protective measures, technology and virtual communications to maintain a safe workplace environment. There are many preventative measures and risk-mitigating actions we have taken to protect employees, including offering 100% paid pandemic sick leave for eligible employees, providing frontline employee appreciation pay to approximately 40,000 workers in the U.S. and Canada, procuring ample supplies of personal protective equipment for employees in all of our workplaces, instituting a contactless delivery policy for our customers, and providing expanded access to mental health counseling services for employees and their dependents. In addition to our COVID-19 response, we have numerous protocols in place to ensure a safe workplace environment. We aim to maintain an Occupational Safety and Health Administration (“OSHA”) total recordable incident rate (“TRIR”) that is less than half the published rate for the Warehousing and Storage sector, based on the “Industry Injury and Illness Data” of the U.S. Bureau of Labor Statistics (“BLS”). In 2020, we exceeded our target expectation with a TRIR that was 74.5% lower than the BLS national benchmark. Another way we work to decrease occupational injuries and illnesses is with our global Road to Zero program. Road to Zero instills safety and compliance awareness through education, mentoring, communication and on-the-job reinforcement. In addition to physical well-being, we also consider emotional well-being to be an important part of workplace safety — our Code of Business Ethics mandates zero tolerance of discrimination, harassment, retaliation, bullying and other unacceptable behaviors. Talent Development and Engagement Across our universe of customers, our employees are foundational to providing a best-in-class level of service. We ask our employees for feedback through engagement surveys, roundtables and town halls, and we use periodic engagement surveys to gauge our progress, assess satisfaction and ask for constructive suggestions. In this way, our employees help drive the continuous improvement of our business. We emphasize career development and the identification of top industry talent in all aspects of the recruitment, training and talent development process. Our talent development infrastructure includes these activities and programs, among others: Recruitment. We tailor our recruitment efforts by geography and job function using an array of channels to ensure a diverse candidate pool. We seek to identify untapped opportunities in the recruitment of military veterans, and we have partnered with WorkFit, the Down’s Syndrome Association’s employment program. Grow at XPO. This supportive program offers tailored skills development, training and mentoring for employees who aspire to grow into higher-paying positions with more responsibility. Grow at XPO is intended primarily to create opportunities for employees from minority populations or underrepresented communities. XPO Graduate Program (LTL) and Site Operations Manager Academy (Logistics). We maintain a robust “ready now” pipeline of future operations leaders by using structured sponsorships and incidental learning techniques. 14 Table of Contents These programs are designed to develop internal candidates who demonstrate high potential in supervisory roles, preparing them to become site leaders. The programs also serve to retain top talent by defining personalized development paths, and they attract new talent by differentiating XPO as an employer. XPO University. Our learning and development platform encompasses online and in-person programs, including JumpStart onboarding, management training and skills development. In 2020, approximately 2.8 million training hours were completed by our employees worldwide. Expansive Total Rewards We appreciate that our employees choose to work for XPO from among the many different options available to them inside and outside our industry. We offer a total compensation package that is both competitive and progressive to help attract and retain outstanding talent. Competitive Wages : In 2020, we continued to provide regular wage increases to almost 22,000 hourly field-based employees in North America across our LTL and logistics businesses, maintaining our strong competitive positioning in the market. Comprehensive Benefits : We offer a comprehensive suite of benefits to all our employees, many of which reflect employee feedback. In the U.S., examples include our pregnancy care policy, family bonding policy, tuition reimbursement program for continuing education, tuition-free commercial driver training and additional benefits such as diabetes management, supplemental insurance and short-term loans. In Europe, the benefits offered vary by country, tailored to the needs of the local markets. Examples include comprehensive healthcare and risk insurances, employee assistance programs covering mental, physical and financial wellbeing, commercial driver training, vocational coaching and training and a full flexible benefits program in the U.K. Community Involvement In 2020, there were hundreds of examples of our company and employees giving back, including our support of the Susan G. Komen Foundation, Soles4Souls, Girls With Impact, the Make-A-Wish Foundation, United in Giving (UK), and the FESBAL (Spain) and FareShare (UK) food charities. Information about our Executive Officers The following information relates to each of our executive officers: Name Age Position Brad Jacobs 64 Chairman of the Board and Chief Executive Officer Troy Cooper 51 President Mario Harik 40 Chief Information Officer David Wyshner 53 Chief Financial Officer Brad Jacobs has served as XPO’s chairman of the Board of Directors and chief executive officer since September 2011. He is also the managing member of Jacobs Private Equity, LLC, which is XPO’s largest stockholder. Mr. Jacobs led two other public companies prior to XPO: United Rentals, Inc., which he founded in 1997, and United Waste Systems, Inc., which he founded in 1989. Mr. Jacobs served as chairman of United Rentals from 1997 to 2007, and as chief executive officer from 1997 to 2003. He served as chairman and chief executive officer of United Waste Systems from 1989 to 1997. Troy Cooper has served as XPO’s president since April 2018, after formerly serving as XPO’s chief operating officer from 2014 to 2018. From September 2015 to September 2017, he also served as chief executive officer and chairman of XPO Logistics Europe. Mr. Cooper joined XPO in September 2011 as vice president of finance. Prior to XPO, he served as vice president and group controller with United Rentals, Inc., where he was responsible for field finance functions and helped to integrate over 200 acquisitions in the U.S., Canada and Mexico. Earlier, he held controller positions with United Waste Systems, Inc. and OSI Specialties, Inc. (formerly a division of Union Carbide, Inc.). Mr. Cooper began his career in public accounting with Arthur Andersen and Co. and holds a degree in accounting from Marietta College. 15 Table of Contents Mario Harik has served as XPO’s chief information officer since November 2011. Mr. Harik has built comprehensive technology organizations, overseen the implementation of extensive proprietary platforms, and consulted to Fortune 100 companies. His prior positions include chief information officer and senior vice president of research and development with Oakleaf Waste Management; chief technology officer with Tallan, Inc.; co-founder of G3 Analyst, where he served as chief architect of web and voice applications; and architect and consultant with Adea Solutions. Mr. Harik holds a master’s degree in engineering, information technology from Massachusetts Institute of Technology, and a degree in engineering - computer and communications from the American University of Beirut, Lebanon. David Wyshner has served as XPO’s chief financial officer since March 2020. Prior to XPO, Mr. Wyshner served as chief financial officer of Wyndham Hotels & Resorts, Inc. from May 2018 to December 2019, and as its senior advisor from December 2019 to March 2020. He served as executive vice president and chief financial officer of Wyndham Worldwide Corporation, from which Wyndham Hotels was spun-off, from August 2017 to May 2018. Earlier, Mr. Wyshner served as chief financial officer of Avis Budget Group from August 2006 to June 2017 and as Avis Budget Group’s president from January 2016 to June 2017. Mr. Wyshner received his bachelor’s degree from Yale University and his M.B.A. degree from the Wharton School of the University of Pennsylvania. Available Information Our corporate website is www.xpo.com . On this website, you can access, free of charge, our reports on Forms 10-K, 10-Q and 8-K, as well as specialized disclosure reports on Form SD, Proxy Statements on Schedule 14A and amendments to these materials. Materials are available online as soon as reasonably practicable after we electronically submit them to the SEC. You can also access materials regarding our corporate governance policies and practices, including our Corporate Governance Guidelines, Code of Business Ethics and the charters relating to the committees of our Board of Directors. You also may request a printed copy of these materials without charge by writing to: Investor Relations, XPO Logistics, Inc., Five American Lane, Greenwich, Connecticut 06831. 16 Table of Contents