XPO, Inc. 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our market risk disclosures involve forward-looking statements. Actual results could differ materially from those projected in such forward-looking statements. We are exposed to market risk related to changes in interest rates, foreign currency exchange rates and commodity price risk. Interest Rate Risk We have exposure to changes in interest rates on our debt, as follows: Term Loan Facilities . As of December 31, 2020, we had an aggregate principal amount outstanding of $2.0 billion on our Term Loan Facilities. The interest rate fluctuates based on LIBOR or a Base Rate, as defined in the agreement, plus an applicable margin. Assuming an average annual aggregate principal amount outstanding of $2.0 billion, a hypothetical 1% increase in the interest rate would have increased our annual interest expense by $20 million. Additionally, we utilize short-term interest rate swaps to mitigate variability in forecasted interest payments on our Term Loan Facilities. The interest rate swaps convert floating-rate interest payments into fixed rate interest payments. ABL Facility . The interest rates on our ABL Facility fluctuate based on LIBOR or a Base Rate, as defined in the agreement, plus an applicable margin. Assuming our $1.1 billion ABL Facility was fully drawn throughout 2020, a hypothetical 1% change in the interest rate would have increased our annual interest expense by $11 million. Fixed Rate Debt. As of December 31, 2020, we had an aggregate principal amount outstanding of $4.2 billion of indebtedness (excluding finance leases) that bears interest at fixed rates. A 1% decrease in market interest rates as of December 31, 2020 would increase the fair value of our fixed-rate indebtedness by approximately 3%. For additional information concerning our debt, see Note 12—Debt to our Consolidated Financial Statements. 50 Table of Contents We also have exposure to changes in interest rates as a result of our cash balances, which totaled $2.1 billion as of December 31, 2020 and generally earn interest income that approximates LIBOR. Assuming an annual average cash balance as of $2.1 billion, a hypothetical 1% increase in the interest rate would reduce our net interest expense by $21 million. Foreign Currency Exchange Risk A significant proportion of our net assets and income are in non-U.S. dollar (“USD”) currencies, primarily the euro (“EUR”) and British pound sterling (“GBP”). We are exposed to currency risk from potential changes in functional currency values of our foreign currency denominated assets, liabilities and cash flows. Consequently, a depreciation of the EUR or the GBP relative to the USD could have an adverse impact on our financial results. In connection with the issuances of our Senior Notes due 2023 and Senior Notes due 2022, we entered into cross-currency swap agreements to manage our foreign currency exchange risk by effectively converting a portion of the fixed-rate USD-denominated notes, including the interest payments, to fixed-rate, EUR-denominated debt. The risk management objective is to manage foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies. We use foreign currency option contracts to mitigate the risk of a reduction in the value of earnings from our operations that use the EUR or GBP as their functional currency. As of December 31, 2020, a uniform 10% strengthening in the value of the USD relative to the EUR would have resulted in a decrease in net assets of $63 million. As of December 31, 2020, a uniform 10% strengthening in the value of the USD relative to the GBP would have resulted in a decrease in net assets of $53 million. These theoretical calculations assume that an instantaneous, parallel shift in exchange rates occurs, which is not consistent with our actual experience in foreign currency transactions. Fluctuations in exchange rates also affect the volume of sales or the foreign currency sales price as competitors’ services become more or less attractive. The sensitivity analysis of the impact of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. Commodity Price Risk We are exposed to price fluctuations for diesel fuel purchased for use in our vehicles. During the year ended December 31, 2020, diesel prices fluctuated by as much as 12% in France, 8% in the United Kingdom, and 30% in the United States. However, we include price adjustment clauses or cost-recovery mechanisms in many of our customer contracts in the event of a change in the cost to purchase fuel. The clauses mean that substantially all fluctuations in the purchase price of diesel, except for short-term economic fluctuations, can be passed on to customers in the sales price. Therefore, a hypothetical 10% change in the price of diesel would not be expected to materially affect our financial performance over the long term. 51 Table of Contents