XPO, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page No. Report of Independent Registered Public Accounting Firm 53 Consolidated Balance Sheets as of December 31, 2020 and 2019 56 Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018 57 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018 58 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 59 Consolidated Statements of Changes in Equity for the Years Ended December 31, 2020, 2019 and 2018 60 Notes to Consolidated Financial Statements 62 52 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors XPO Logistics, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of XPO Logistics, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Change in Accounting Principle As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standard Update (ASU) No. 2016-02, Leases and its related amendments (Topic 842). Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 53 Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Liabilities for self-insured claims As discussed in Note 2 to the consolidated financial statements, the Company uses a combination of self-insurance programs and purchased insurance to provide for the costs of liability, vehicular, and workers’ compensation claims (self-insured claims). The Company records estimates of the undiscounted liability associated with claims incurred as of the balance sheet date, including estimates of claims incurred but not reported, by considering historical cost experience, demographic and severity factors, and judgments about current and expected levels of cost per claim and retention levels. These liabilities are recorded within accrued liabilities and other long-term liabilities as of December 31, 2020. We identified the assessment of the estimated liabilities for self-insured claims as a critical audit matter. The evaluation of the uncertainty in the amounts that will ultimately be paid to settle these claims required subjective auditor judgment. Assumptions that may affect the estimated liability of claims include the consideration of historical cost experience, severity factors, and judgments about current and expected levels of cost per claims and retention levels that have uncertainty related to future occurrences or events and conditions. Additionally, the Company’s liabilities for self-insured claims included estimates for expenses of claims that have been incurred but have not been reported, and specialized skills were needed to evaluate the actuarial methods and assumptions used to assess these estimates. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s self-insurance process. This included controls over the assumptions used in estimating the liabilities for self-insured claims. In addition, we compared the Company’s estimates of liabilities for individual self-insured claims to current available information, which included legal claims, incident and case reports, current and historical cost experience, or other evidence. We involved an actuarial professional with specialized skills and knowledge, who assisted in: • comparing the Company’s actuarial reserving methodologies with accepted actuarial methods and procedures 54 Table of Contents • evaluating assumptions used in determining the liability, including expected level of cost per claim and retention levels, in relation to recent historical loss payment trends and severity factors • developing an independent expected range of liabilities, including liabilities for claims that have been incurred but have not been recorded, based on actuarial methodologies • comparing the Company’s recorded liability to the independently developed liability range. Assessment of the carrying value of goodwill As discussed in Notes 2 and 9 to the consolidated financial statements, the goodwill balance as of December 31, 2020 was $4,599 million. The Company performs goodwill impairment testing annually, or more frequently if events or circumstances indicate the carrying value of a reporting unit that includes goodwill might exceed the fair value of that reporting unit. In assessing the carrying value of goodwill, the Company uses a third-party appraiser, who uses a combination of an income approach and a market approach to estimate fair value. The income approach is based on the present value of estimated future cash flows, discounted at a risk-adjusted rate to estimate the fair value of the reporting units. The market approach is based on comparable market multiples for companies engaged in similar business, as well as recent transactions within the industry. We identified the assessment of the carrying value of goodwill for each of the Company’s reporting units as a critical audit matter. Assessment of certain assumptions used to estimate fair value under the income approach, including the fair value model, long-term future growth rates, and the risk-adjusted discount rate, had estimation uncertainty, which resulted in subjective auditor judgment and required specialized skills and knowledge. Additionally, assessment of the guideline public companies and transactions within the industry used to estimate fair value under the market approach required significant auditor judgment. Changes to these assumptions may have a significant effect on the Company’s assessment of the carrying value of the goodwill. The following are the primary procedures performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s goodwill impairment assessment process. This included controls related to the determination of the fair value of the reporting units, the estimate of long-term future growth rates, the assumptions used to develop the risk-adjusted discount rates, and the determination of the guideline public companies and transactions within the industry. We performed sensitivity analyses over the fair value model for long-term future growth rates to assess their impact on the Company’s determination of the fair value of each reporting unit. We compared the Company’s historical growth rate forecast to actual results to assess the Company’s ability to accurately forecast. We involved valuation professionals with specialized skill and knowledge, who assisted in: • comparing the valuation methodologies used by the Company to valuation standards • comparing the Company’s risk-adjusted discount rates to risk-adjusted discount rate ranges that were independently developed using publicly available third-party market data for comparable entities • comparing the long-term growth rates to industry data, economic growth data, and long-term growth rates used by the Company in prior years’ valuation analyses • evaluating the guideline public companies and transactions used by the Company by reading the business descriptions, examining financial metrics of the comparable public companies and transactions within the industry, and considering market participant guidance and perspective. /s/ KPMG LLP We have served as the Company’s auditor since 2011. Stamford, Connecticut February 12, 2021 55 Table of Contents XPO Logistics, Inc. Consolidated Balance Sheets December 31, (In millions, except per share data) 2020 2019 ASSETS Current assets Cash and cash equivalents $ 2,054 $ 377 Accounts receivable, net of allowances of $ 65 and $ 58 , respectively 2,886 2,500 Other current assets 430 465 Total current assets 5,370 3,342 Long-term assets Property and equipment, net of $ 2,568 and $ 2,054 in accumulated depreciation, respectively 2,661 2,704 Operating lease assets 2,278 2,245 Goodwill 4,599 4,450 Identifiable intangible assets, net of $ 909 and $ 784 in accumulated amortization, respectively 974 1,092 Other long-term assets 287 295 Total long-term assets 10,799 10,786 Total assets $ 16,169 $ 14,128 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 1,255 $ 1,157 Accrued expenses 1,814 1,414 Short-term borrowings and current maturities of long-term debt 1,338 84 Short-term operating lease liabilities 483 468 Other current liabilities 263 135 Total current liabilities 5,153 3,258 Long-term liabilities Long-term debt 5,369 5,182 Deferred tax liability 371 495 Employee benefit obligations 192 157 Long-term operating lease liabilities 1,795 1,776 Other long-term liabilities 440 364 Total long-term liabilities 8,167 7,974 Stockholders’ equity Convertible perpetual preferred stock, $ 0.001 par value; 10 shares authorized; 0.001 and 0.07 of Series A shares issued and outstanding as of December 31, 2020 and 2019, respectively 1 41 Common stock, $ 0.001 par value; 300 shares authorized; 102 and 92 shares issued and outstanding as of December 31, 2020 and 2019, respectively — — Additional paid-in capital 1,998 2,061 Retained earnings 868 786 Accumulated other comprehensive loss ( 158 ) ( 145 ) Total stockholders’ equity before noncontrolling interests 2,709 2,743 Noncontrolling interests 140 153 Total equity 2,849 2,896 Total liabilities and equity $ 16,169 $ 14,128 See accompanying notes to consolidated financial statements. 56 Table of Contents XPO Logistics, Inc. Consolidated Statements of Income Years Ended December 31, (In millions, except per share data) 2020 2019 2018 Revenue $ 16,252 $ 16,648 $ 17,279 Cost of transportation and services 7,852 8,303 9,013 Direct operating expense 5,837 5,679 5,725 Sales, general and administrative expense 2,172 1,845 1,837 Operating income 391 821 704 Other income ( 79 ) ( 54 ) ( 109 ) Foreign currency (gain) loss ( 3 ) 9 3 Debt extinguishment loss — 5 27 Interest expense 325 292 217 Income before income tax provision 148 569 566 Income tax provision 31 129 122 Net income 117 440 444 Net income attributable to noncontrolling interests ( 7 ) ( 21 ) ( 22 ) Net income attributable to XPO $ 110 $ 419 $ 422 Net income attributable to common shareholders $ 79 $ 379 $ 390 Earnings per share data Basic earnings per share $ 0.87 $ 3.95 $ 3.17 Diluted earnings per share $ 0.78 $ 3.57 $ 2.88 Weighted-average common shares outstanding Basic weighted-average common shares outstanding 92 96 123 Diluted weighted-average common shares outstanding 102 106 135 See accompanying notes to consolidated financial statements. 57 Table of Contents XPO Logistics, Inc. Consolidated Statements of Comprehensive Income Years Ended December 31, (In millions) 2020 2019 2018 Net income $ 117 $ 440 $ 444 Other comprehensive income (loss), net of tax Foreign currency translation gain (loss), net of tax effect of $ 17 , $( 7 ) and $( 6 ) $ 112 $ 23 $ ( 100 ) Unrealized gain (loss) on financial assets/liabilities designated as hedging instruments, net of tax effect of $ — , $( 1 ) and $( 1 ) ( 2 ) 4 ( 6 ) Defined benefit plans adjustment, net of tax effect of $ 30 , $ 1 and $ 23 ( 117 ) ( 19 ) ( 91 ) Other comprehensive income (loss) ( 7 ) 8 ( 197 ) Comprehensive income $ 110 $ 448 $ 247 Less: Comprehensive income (loss) attributable to noncontrolling interests 13 20 ( 5 ) Comprehensive income attributable to XPO $ 97 $ 428 $ 252 See accompanying notes to consolidated financial statements. 58 Table of Contents XPO Logistics, Inc. Consolidated Statements of Cash Flows Years Ended December 31, (In millions) 2020 2019 2018 Operating activities Net income $ 117 $ 440 $ 444 Adjustments to reconcile net income to net cash from operating activities Depreciation, amortization and net lease activity 766 739 716 Stock compensation expense 59 67 49 Accretion of debt 21 21 15 Deferred tax (benefit) expense ( 81 ) 46 45 Debt extinguishment loss — 5 27 Unrealized (gain) loss on foreign currency option and forward contracts ( 2 ) 9 ( 20 ) Gain on sale of equity investment — — ( 24 ) Gains on sales of property and equipment ( 92 ) ( 110 ) ( 8 ) Other 45 21 8 Changes in assets and liabilities Accounts receivable ( 382 ) ( 67 ) ( 13 ) Other assets 28 ( 47 ) ( 49 ) Accounts payable 69 ( 120 ) 35 Accrued expenses and other liabilities 337 ( 213 ) ( 123 ) Net cash provided by operating activities 885 791 1,102 Investing activities Payment for purchases of property and equipment ( 526 ) ( 601 ) ( 551 ) Proceeds from sale of property and equipment 195 252 143 Cash collected on deferred purchase price receivable — 186 — Other ( 26 ) 2 8 Net cash used in investing activities ( 357 ) ( 161 ) ( 400 ) Financing activities Proceeds from issuance of debt 1,155 1,754 1,074 Proceeds from borrowings related to securitization program 47 — — Repurchase of debt — — ( 1,225 ) Proceeds from borrowings on ABL facility 1,020 1,935 1,355 Repayment of borrowings on ABL facility ( 820 ) ( 1,935 ) ( 1,455 ) Repayment of debt and finance leases ( 102 ) ( 867 ) ( 119 ) Payment for debt issuance costs ( 22 ) ( 28 ) ( 10 ) Proceeds from forward sale settlement — — 349 Purchase of noncontrolling interests ( 21 ) ( 258 ) — Cash paid in connection with preferred stock conversion ( 22 ) — — Repurchase of common stock ( 114 ) ( 1,347 ) ( 536 ) Payment for tax withholdings for restricted shares ( 26 ) ( 14 ) ( 53 ) Other 41 1 — Net cash provided by (used in) financing activities 1,136 ( 759 ) ( 620 ) Effect of exchange rates on cash, cash equivalents and restricted cash 14 2 ( 17 ) Net increase (decrease) in cash, cash equivalents and restricted cash 1,678 ( 127 ) 65 Cash, cash equivalents and restricted cash, beginning of year 387 514 449 Cash, cash equivalents and restricted cash, end of year $ 2,065 $ 387 $ 514 Supplemental disclosure of cash flow information: Cash paid for interest $ 323 $ 282 $ 233 Cash paid for income taxes $ 65 $ 121 $ 70 See accompanying notes to consolidated financial statements. 59 Table of Contents XPO Logistics, Inc. Consolidated Statements of Changes in Equity For the Three Years Ended December 31, 2020, 2019 and 2018 Series A Preferred Stock Common Stock (Shares in thousands, dollars in millions) Shares Amount Shares Amount Additional Paid-In Capital (Accumulated Deficit) Retained Earnings Accumulated Other Comprehensive Income (Loss) Total XPO Stockholders’ Equity Non-controlling Interests Total Equity Balance as of December 31, 2017 72 $ 41 119,920 $ — $ 3,590 $ ( 43 ) $ 16 $ 3,604 $ 406 $ 4,010 Net income — — — — — 422 — 422 22 444 Other comprehensive loss — — — — — — ( 170 ) ( 170 ) ( 27 ) ( 197 ) Exercise and vesting of stock compensation awards — — 995 — 1 — — 1 — 1 Tax withholdings related to vesting of stock compensation awards — — — — ( 53 ) — — ( 53 ) — ( 53 ) Issuance of common stock from forward sale settlement — — 6,000 — 349 — — 349 — 349 Retirement of common stock — — ( 11,314 ) — ( 608 ) — — ( 608 ) — ( 608 ) Dividend declared — — — — — ( 3 ) — ( 3 ) ( 6 ) ( 9 ) Stock compensation expense — — — — 30 — — 30 — 30 Other — — 82 — 2 1 — 3 — 3 Balance as of December 31, 2018 72 $ 41 115,683 $ — $ 3,311 $ 377 $ ( 154 ) $ 3,575 $ 395 $ 3,970 Net income — — — — — 419 — 419 21 440 Other comprehensive income (loss) — — — — — — 9 9 ( 1 ) 8 Exercise and vesting of stock compensation awards — — 489 — 1 — — 1 — 1 Tax withholdings related to vesting of stock compensation awards — — — — ( 14 ) — — ( 14 ) — ( 14 ) Purchase of noncontrolling interests — — — — ( 3 ) — — ( 3 ) ( 255 ) ( 258 ) Retirement of common stock — — ( 23,932 ) — ( 1,275 ) — — ( 1,275 ) — ( 1,275 ) Dividend declared — — — — — ( 3 ) — ( 3 ) ( 5 ) ( 8 ) Stock compensation expense — — — — 36 — — 36 — 36 Adoption of new accounting standard and other — — 102 — 5 ( 7 ) — ( 2 ) ( 2 ) ( 4 ) Balance as of December 31, 2019 72 $ 41 92,342 $ — $ 2,061 $ 786 $ ( 145 ) $ 2,743 $ 153 $ 2,896 60 Table of Contents XPO Logistics, Inc. Consolidated Statements of Changes in Equity (continued) For the Three Years Ended December 31, 2020, 2019 and 2018 Series A Preferred Stock Common Stock (Shares in thousands, dollars in millions) Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total XPO Stockholders’ Equity Non-controlling Interests Total Equity Balance as of December 31, 2019 72 $ 41 92,342 $ — $ 2,061 $ 786 $ ( 145 ) $ 2,743 $ 153 $ 2,896 Net income — — — — — 110 — 110 7 117 Other comprehensive income (loss) — — — — — — ( 13 ) ( 13 ) 6 ( 7 ) Exercise and vesting of stock compensation awards — — 1,411 — — — — — — — Tax withholdings related to vesting of stock compensation awards — — — — ( 47 ) — — ( 47 ) — ( 47 ) Purchase of noncontrolling interests — — — — ( 1 ) — — ( 1 ) ( 20 ) ( 21 ) Conversion of preferred stock to common stock ( 71 ) ( 40 ) 10,014 — 40 — — — — — Preferred stock conversion — — — — — ( 22 ) — ( 22 ) — ( 22 ) Retirement of common stock — — ( 1,715 ) — ( 114 ) — — ( 114 ) — ( 114 ) Dividend declared — — — — — ( 2 ) — ( 2 ) ( 6 ) ( 8 ) Stock compensation expense — — — — 52 — — 52 — 52 Adoption of new accounting standard and other — — — — 7 ( 4 ) — 3 — 3 Balance as of December 31, 2020 1 $ 1 102,052 $ — $ 1,998 $ 868 $ ( 158 ) $ 2,709 $ 140 $ 2,849 See accompanying notes to consolidated financial statements. 61 Table of Contents XPO Logistics, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 2020, 2019 and 2018 1. Organization Nature of Operations We use our integrated network of people, technology and physical assets to help customers manage their goods most efficiently throughout their supply chains. Our customers are multinational, national, mid-size and small enterprises. We run our business on a global basis, with two reportable segments: Transportation and Logistics. See Note 4—Segment Reporting and Geographic Information for additional information on our operations. 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. 2. Basis of Presentation and Significant Accounting Policies Basis of Presentation We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), which requires us to make estimates and assumptions that impact the amounts reported and disclosed in our consolidated financial statements and the accompanying notes. We prepared these estimates based on the most current and best available information, but actual results could differ materially from these estimates and assumptions, particularly in light of the outbreak of a strain of coronavirus, COVID-19. COVID-19 has had, and we expect will continue to have, significant effects on economic activity, on demand for our services, and on our results of operations in 2021. Certain reclassifications have been made to prior year amounts to conform to the current year’s presentation. Consolidation Our consolidated financial statements include the accounts of XPO Logistics, Inc. (“XPO” or “we”) and our majority-owned subsidiaries and variable interest entities (“VIEs”) where we are the primary beneficiary. We have eliminated intercompany accounts and transactions. To determine if we are a primary beneficiary of a VIE, we evaluate whether we are able to direct the activities that significantly impact the VIE’s economic performance, including whether we control the operations of each VIE and whether we can operate the VIEs under our brand or policies. Investors in these VIEs only have recourse to the assets owned by the VIE and not to our general credit. We do not have implicit support arrangements with any VIE. Other than the special purpose entity related to the European Trade Securitization Program discussed below in this Note and in Note 12—Debt, which we consolidate, assets and liabilities of VIEs where we are the primary beneficiary are not significant to our consolidated financial statements. We have a controlling financial interest in entities generally when we own a majority of the voting interest. The noncontrolling interests reflected in our consolidated financial statements primarily relate to a minority interest in XPO Logistics Europe SA (“XPO Logistics Europe”), formerly known as Norbert Dentressangle SA, a business we 62 Table of Contents acquired in 2015. As described in Note 3—Purchases of Noncontrolling Interest, we purchased portions of the noncontrolling interests in both 2020 and 2019. Following these acquisitions, the noncontrolling interest was reduced to approximately 3 % of XPO Logistics Europe. Significant Accounting Policies Revenue Recognition We recognize revenue when we transfer control of promised products or services to customers in an amount equal to the consideration we expect to receive for those products or services. Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. A description of our performance obligations for our transportation and logistics reportable segments is below. Transportation Our transportation segment generates revenue by providing less-than-truckload, freight brokerage and other transportation services for our customers. Additional services may be provided to our customers under their transportation contracts, including unloading and other incidental services. The transaction price is based on the consideration specified in the customer’s contract. A performance obligation is created when a customer under a transportation contract submits a bill of lading for the transport of goods from origin to destination. These performance obligations are satisfied as the shipments move from origin to destination. We recognize transportation revenue proportionally as a shipment moves from origin to destination and the related costs are recognized as incurred. Some of our customer contracts contain our promise to stand ready to provide transportation services. For these contracts, we recognize revenue on a straight-line basis over the term of the contract because the pattern of benefit to the customer, and our efforts to fulfill the contract, are generally distributed evenly throughout the period. Performance obligations are generally short-term, with transit times usually less than one week. Generally, customers are billed on shipment of the freight or on a monthly basis and make payment according to approved payment terms. When we do not control the specific services, we recognize revenue as the difference between the amount the customer pays us for the service less the amount we are charged by third parties who provide the service. Logistics Our Logistics segment generates revenue by providing supply chain services for our customers, including warehousing and distribution, order fulfillment, reverse logistics, packaging and labeling, factory and aftermarket support and inventory management contracts ranging from a few months to a few years. Our performance obligations are satisfied over time as customers receive and consume the benefits of our services. The contracts generally contain a single performance obligation as the distinct services provided remain substantially the same over time and possess the same pattern of transfer. The transaction price is based on the consideration specified in the contract with the customer and contains fixed and variable consideration. In general, the fixed consideration component of a contract represents reimbursement for facility and equipment costs incurred to satisfy the performance obligation and is recognized on a straight-line basis over the term of the contract. The variable consideration component is comprised of cost reimbursement determined based on the costs incurred, while per-unit pricing is determined based on units provided and time and materials pricing is determined based on the hours of services provided. The variable consideration component is recognized over time based on the level of activity. Generally, we can adjust our pricing based on contractual provisions related to achieving agreed-upon performance metrics, changes in volumes, services and market conditions. Revenue relating to these pricing adjustments is estimated and included in the consideration if it is probable that a significant revenue reversal will not occur in the future. The estimate of variable consideration is determined by the expected value or most likely amount method and 63 Table of Contents factors in current, past and forecasted experience with the customer. Customers are billed based on terms specified in the revenue contract and they pay us according to approved payment terms. Contract Costs We expense the incremental costs of obtaining contracts when incurred if the amortization period of the assets is one year or less. These costs are included in Direct operating expense. Cash, Cash Equivalents and Restricted Cash We consider all highly liquid investments with an original maturity of three months or less on the date of purchase to be cash equivalents. As of December 31, 2020, 2019 and 2018, our restricted cash included in Other long-term assets on our Consolidated Balance Sheets was $ 11 million, $ 10 million and $ 12 million, respectively. Accounts Receivable and Allowance for Doubtful Accounts We record accounts receivable at the contractual amount and we record an allowance for doubtful accounts for the amount we estimate we may not collect. In determining the allowance for doubtful accounts, we consider historical collection experience, the age of the accounts receivable balances, the credit quality and risk of our customers, any specific customer collection issues, current economic conditions, and other factors that may impact our customers’ ability to pay. Commencing in 2020 and in accordance with Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” discussed further below, we also consider reasonable and supportable forecasts of future economic conditions and their expected impact on customer collections in determining our allowance for doubtful accounts. We write off accounts receivable balances once the receivables are no longer deemed collectible. The roll-forward of the allowance for doubtful accounts was as follows: Years Ended December 31, (In millions) 2020 2019 2018 Beginning balance $ 58 $ 52 $ 42 Cumulative effect adjustment for adoption of ASU 2016-13 4 — — Provision charged to expense 53 34 36 Write-offs, less recoveries, and other adjustments ( 50 ) ( 28 ) ( 26 ) Ending balance $ 65 $ 58 $ 52 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. 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 64 Table of Contents factoring arrangements, any of our continuing involvement is limited to servicing the receivables. The fair value of any servicing assets and liabilities is immaterial. Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables, which we report within short-term debt on our Consolidated Balance Sheets. These borrowings amounted to € 41 million ($ 50 million) as of December 31, 2020. See Note 12—Debt for additional information related to our receivables securitization secured borrowing program and these borrowings. 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 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. 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. The weighted average interest rate was 0.62 % as of December 31, 2020. Charges for commitment fees, which are based on a percentage of available amounts, and charges for administrative fees were not material to our results of operations for the years ended December 31, 2020, 2019 and 2018. Information related to the trade receivables sold was as follows: Years Ended December 31, (In millions) 2020 2019 2018 Securitization programs Receivables sold in period $ 2,868 $ 2,231 $ 231 Cash consideration 2,868 2,095 179 Deferred purchase price — 135 52 Factoring programs Receivables sold in period 687 858 663 Cash consideration 686 854 660 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. Property and Equipment We generally record property and equipment at cost, or in the case of acquired property and equipment, at fair value at the date of acquisition. Maintenance and repair expenditures are charged to expense as incurred. For internally-developed computer software, all costs incurred during planning and evaluation are expensed as incurred. Costs incurred during the application development stage are capitalized and included in property and equipment. Capitalized software also includes the fair value of acquired internally-developed technology. 65 Table of Contents We compute depreciation expense on a straight-line basis over the estimated useful lives of the assets as follows: Classification Estimated Useful Life Buildings and leasehold improvements Term of lease to 40 years Vehicles, containers, tractors, trailers and tankers 3 to 14 years Rail cars and chassis 15 to 30 years Machinery and equipment 3 to 15 years Computer software and equipment 1 to 6 years Leases We determine if an arrangement is a lease at inception. We recognize operating lease right-of-use assets and liabilities at the lease commencement date based on the estimated present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use incremental borrowing rates based on the information available at commencement date to determine the present value of future lease payments. This rate is determined from a hypothetical yield curve that takes into consideration market yield levels of our relevant debt outstanding as well as the index that matches our credit rating, and then adjusts as if the borrowings were collateralized. We include options to extend or terminate a lease in the lease term when we are reasonably certain to exercise such options. We exclude variable lease payments (such as payments based on an index or reimbursements of lessor costs) from our initial measurement of the lease liability. We recognize leases with an initial term of 12 months or less as lease expense over the lease term and those leases are not recorded on our Consolidated Balance Sheets. We account for lease and non-lease components within a contract as a single lease component for our real estate leases. For additional information on our leases, see Note 8—Leases. Asset Retirement Obligations A liability for an asset retirement obligation is recorded in the period in which it is incurred. When an asset retirement obligation liability is initially recorded, we capitalize the cost by increasing the carrying amount of the related long-lived asset. For each subsequent period, the liability is increased for accretion expense and the capitalized cost is depreciated over the useful life of the related asset. Goodwill We measure goodwill as the excess of consideration transferred over the fair value of net assets acquired in business combinations. We allocate goodwill to our reporting units for the purpose of impairment testing. We evaluate goodwill for impairment annually, or more frequently if an event or circumstance indicates an impairment loss may have been incurred. We measure goodwill impairment, if any, at the amount a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. Our reporting units are our operating segments or one level below our operating segments for which discrete financial information is prepared and regularly reviewed by segment management. 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. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for our business. The market approach of determining fair value is based on comparable market multiples for companies engaged in similar businesses, as well as recent transactions within our industry. 66 Table of Contents Intangible Assets Our intangible assets subject to amortization consist of customer relationships and non-compete agreements. We review long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An asset is considered to be impaired if the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. We estimate fair value using the expected future cash flows discounted at a rate comparable with the risks associated with the recovery of the asset. We amortize intangible assets on a straight-line basis or on a basis consistent with the pattern in which the economic benefits are realized. The range of estimated useful lives by type are as follows: Classification Estimated Useful Life Customer relationships 5 to 16 years Non-compete agreements Term of agreement Accrued Expenses The components of accrued expenses as of December 31, 2020 and 2019 are as follows: As of December 31, (In millions) 2020 2019 Accrued salaries and wages $ 708 $ 478 Accrued transportation and facility charges 559 454 Accrued value-added tax and other taxes 220 163 Other accrued expenses 327 319 Total accrued expenses $ 1,814 $ 1,414 Self-Insurance 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. Liabilities for the risks we retain, including estimates of claims incurred but not reported, are not discounted and are estimated, in part, by considering historical cost experience, demographic and severity factors, and judgments about current and expected levels of cost per claim and retention levels. Changes in these assumptions and factors can impact actual costs paid to settle the claims and those amounts may be different than estimates. Advertising Costs Advertising costs are expensed as incurred. Stockholders’ Equity We retire shares purchased under our share repurchase program and return them to authorized and unissued status. We charge any excess of cost over par value to Additional paid-in capital if a balance is present. If Additional paid-in capital is fully depleted, any remaining excess of cost over par value will be charged to Retained earnings. 67 Table of Contents Accumulated Other Comprehensive Income (Loss) The components of and changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the years ended December 31, 2020 and 2019, are as follows: (In millions) Foreign Currency Translation Adjustments Derivative Hedges Defined Benefit Plans Liability Less: AOCI Attributable to Noncontrolling Interests AOCI Attributable to XPO As of December 31, 2018 $ ( 143 ) $ 1 $ ( 12 ) $ — $ ( 154 ) Other comprehensive income (loss) 33 10 ( 18 ) 1 26 Amounts reclassified from AOCI ( 10 ) ( 6 ) ( 1 ) — ( 17 ) Net current period other comprehensive income (loss) 23 4 ( 19 ) 1 9 As of December 31, 2019 ( 120 ) 5 ( 31 ) 1 ( 145 ) Other comprehensive income (loss) 121 ( 17 ) ( 116 ) ( 6 ) ( 18 ) Amounts reclassified from AOCI ( 9 ) 15 ( 1 ) — 5 Net current period other comprehensive income (loss) 112 ( 2 ) ( 117 ) ( 6 ) ( 13 ) As of December 31, 2020 $ ( 8 ) $ 3 $ ( 148 ) $ ( 5 ) $ ( 158 ) Income Taxes We account for income taxes using the asset and liability method on a legal entity and jurisdictional basis, under which we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. Our calculation relies on several factors, including pre-tax earnings, differences between tax laws and accounting rules, statutory tax rates, tax credits, uncertain tax positions, and valuation allowances. We use judgment and estimates in evaluating our tax positions. Valuation allowances are established when, in our judgment, it is more likely than not that our deferred tax assets will not be realized based on all available evidence. We record Global Intangible Low-Taxed Income (“GILTI”) tax as a period cost. Our tax returns are subject to examination by U.S. Federal, state and foreign taxing jurisdictions. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years. We recognize tax benefits from uncertain tax positions only if (based on the technical merits of the position) it is more likely than not that the tax positions will be sustained on examination by the tax authority. We adjust these tax liabilities, including related interest and penalties, based on the current facts and circumstances. We report tax-related interest and penalties as a component of income tax expense. Foreign Currency Translation and Transactions The assets and liabilities of our foreign subsidiaries that use their local currency as their functional currency are translated to U.S. dollars (“USD”) using the exchange rate prevailing at each balance sheet date, with balance sheet currency translation adjustments recorded in AOCI on our Consolidated Balance Sheets. The assets and liabilities of our foreign subsidiaries whose local currency is not their functional currency are remeasured from their local currency to their functional currency and then translated to USD. The results of operations of our foreign subsidiaries are translated to USD using average exchange rates prevailing for each period presented. We convert foreign currency transactions recognized on our Consolidated Statements of Income to USD by applying the exchange rate prevailing on the date of the transaction. Gains and losses arising from foreign currency transactions and the effects of remeasuring monetary assets and liabilities are recorded in Foreign currency (gain) loss on our Consolidated Statements of Income. 68 Table of Contents Foreign currency (gain) loss included on our Consolidated Statements of Income consisted of the following: Years Ended December 31, (In millions) 2020 2019 2018 Unrealized foreign currency option and forward contracts (gains) losses $ ( 2 ) $ 9 $ ( 20 ) Realized foreign currency option, forward and other derivative contracts (gains) losses ( 4 ) — 16 Foreign currency transaction and remeasurement losses 3 — 7 Total foreign currency (gain) loss $ ( 3 ) $ 9 $ 3 Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The levels of inputs used to measure fair value are: • Level 1—Quoted prices for identical instruments in active markets; • Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and • Level 3—Valuations based on inputs that are unobservable, generally utilizing pricing models or other valuation techniques that reflect management’s judgment and estimates. We base our fair value estimates on market assumptions and available information. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and current maturities of long-term debt approximated their fair values as of December 31, 2020 and 2019 due to their short-term nature and/or being receivable or payable on demand. The Level 1 cash equivalents include money market funds valued using quoted prices in active markets. The Level 2 cash equivalents include short-term investments valued using published interest rates for instruments with similar terms and maturities. For information on the fair value hierarchy of our derivative instruments, see Note 11—Derivative Instruments and for information on financial liabilities, see Note 12—Debt. The fair value hierarchy of cash equivalents was as follows: (In millions) Carrying Value Fair Value Level 1 Level 2 December 31, 2020 $ 1,738 $ 1,738 $ 1,738 $ — December 31, 2019 144 144 127 17 Derivative Instruments We record all derivative instruments on our Consolidated Balance Sheets as assets or liabilities at fair value. Our accounting treatment for changes in the fair value of derivative instruments depends on whether the instruments have been designated and qualify as part of a hedging relationship and on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the derivative based on the exposure being hedged and assess, both at the hedge’s inception and on an ongoing basis, whether the designated derivative instruments are highly effective in offsetting changes in earnings and cash flows of the hedged items. When a derivative instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively. We link cash flow hedges to specific forecasted transactions or variability of cash flow to be paid. The gain or loss resulting from fair value adjustments on cash flow hedges are recorded in AOCI on our Consolidated Balance Sheets until the hedged item is recognized in earnings and is presented in the same income statement line item as the earnings effect of the hedged item. The gains and losses on the net investment hedges are recorded as cumulative translation adjustments in AOCI to the extent that the instruments are effective in hedging 69 Table of Contents the designated risk. Gains and losses on cash flow hedges and net investment hedges representing hedge components excluded from the assessment of effectiveness will be amortized into Interest expense on our Consolidated Statements of Income in a systematic manner. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings and are recorded in Foreign currency (gain) loss on our Consolidated Statements of Income. Defined Benefit Pension Plans We calculate defined benefit pension plan obligations using various actuarial assumptions and methodologies. Assumptions include discount rates, inflation rates, expected long-term rate of return on plan assets, mortality rates, and other factors. The assumptions used in recording the projected benefit obligation and fair value of plan assets represent our best estimates based on available information regarding historical experience and factors that may cause future expectations to differ. Our obligation and future expense amounts could be materially impacted by differences in actual experience or changes in assumptions. The impact of plan amendments, actuarial gains and losses and prior-service costs are recorded in AOCI and are generally amortized as a component of net periodic benefit cost over the remaining service period of the active employees covered by the defined benefit pension plans. Unamortized gains and losses are amortized only to the extent they exceed 10% of the higher of the fair value of plan assets or the projected benefit obligation of the respective plan. Stock-Based Compensation We account for stock-based compensation based on the equity instrument’s grant date fair value. For grants of restricted stock units (“RSUs”) subject to service-based or performance-based vesting conditions only, we establish the fair value based on the market price on the date of the grant. For grants of RSUs subject to market-based vesting conditions, we establish the fair value using the Monte Carlo simulation lattice model. We determined the fair value of our stock-based awards based on our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We account for forfeitures as they occur. We recognize the grant date fair value of equity awards as compensation cost over the requisite service period. We recognize expense for our performance-based restricted stock units (“PRSUs”) over the awards’ requisite service period based on the number of awards expected to vest with consideration to the actual and expected financial results. We do not recognize expense until achievement of the performance targets for a PRSU award is considered probable. Adoption of New Accounting Standards In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as subsequently modified, amends the incurred losses impairment method with a method that reflects expected credit losses on certain types of financial instruments, including trade receivables. We adopted this standard on January 1, 2020 and recorded an immaterial adjustment to total equity for the cumulative impact of adoption. In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Under the guidance, any capitalized implementation costs would be included in prepaid expenses, amortized over the term of the hosting arrangement on a straight-line basis and presented in the same line items in the Consolidated Statement of Income as the expense for fees of the associated hosting arrangements. We adopted this standard on January 1, 2020 on a prospective basis. The adoption did not have a material effect on our consolidated financial statements. 70 Table of Contents Accounting Pronouncements Issued but Not Yet Effective In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to enhance consistency and comparability among reporting entities. We adopted this standard on January 1, 2021 on a prospective basis. The adoption did not have a material effect on our consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The amendments are elective and are effective upon issuance through December 31, 2022. We are currently evaluating the impact of the new guidance. 3. Purchases of Noncontrolling Interest In the third quarter of 2020 and fourth quarter of 2019, we purchased shareholders’ noncontrolling interests in XPO Logistics Europe for € 17 million (approximately $ 21 million) and € 234 million (approximately $ 258 million), respectively. 4. Segment Reporting and Geographic Information We are organized into two reportable segments: Transportation and Logistics. We evaluate our performance in large part based on the various financial measures of our two reporting segments. In our Transportation segment, we provide multiple services to facilitate the movement of raw materials, parts and finished goods. We accomplish this by using our proprietary technology, third-party independent carriers and our transportation assets and service centers. Our transportation services include LTL, truck brokerage services 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 value-added warehousing and distribution, e-commerce and omnichannel fulfillment, cold-chain logistics, packaging and labeling, factory support, aftermarket support, inventory management, order personalization and supply chain optimization, such as product flow management. In addition, our Logistics segment provides reverse logistics, which is also called returns management. Some of our operating units provide services to our other operating units outside of their reportable segment. Billings for such services are based on negotiated rates and are reflected as revenues of the billing segment. We adjust these rates from time to time based on market conditions. We eliminate intersegment revenues and expenses in our consolidated results. Corporate includes corporate headquarters costs for executive officers and certain legal and financial functions, and other costs and credits not attributed to our reporting segments. Our chief operating decision maker (“CODM”) regularly reviews financial information at the operating segment level to allocate resources to the segments and to assess their performance. We include items directly attributable to a segment, and those that can be allocated on a reasonable basis, in segment results reported to the CODM. We do not provide asset information by segment to the CODM. 71 Table of Contents Selected financial data for our segments is as follows: (In millions) Transportation Logistics Corporate Eliminations/Other Total Year Ended December 31, 2020 Revenue $ 10,199 $ 6,182 $ — $ ( 129 ) $ 16,252 Operating income (loss) (1) 507 140 ( 256 ) — 391 Depreciation and amortization 453 301 12 — 766 Year Ended December 31, 2019 Revenue $ 10,687 $ 6,093 $ — $ ( 132 ) $ 16,648 Operating income (loss) (2) 752 241 ( 172 ) — 821 Depreciation and amortization 447 277 15 — 739 Year Ended December 31, 2018 Revenue $ 11,343 $ 6,065 $ — $ ( 129 ) $ 17,279 Operating income (loss) (3) 646 216 ( 158 ) — 704 Depreciation and amortization 461 244 11 — 716 (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. (3) Consolidated operating income for 2018 includes $ 33 million of transaction, integration and rebranding costs, $ 21 million of restructuring expense, $ 26 million of litigation costs and $ 24 million from gain on sale of equity investment. 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, as described in Note 19—Subsequent Events. 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, including costs for personal protective equipment, site cleanings and enhanced employee benefits, such as appreciation pay. As of December 31, 2020 and 2019, we held long-lived tangible assets outside of the U.S. of $ 825 million and $ 798 million, respectively. 5. Revenue Recognition Disaggregation of Revenues We disaggregate our revenue by geographic area and service offering. Our revenue disaggregated by geographical area, based on sales office location, was as follows: Year Ended December 31, 2020 (In millions) Transportation Logistics Eliminations Total Revenue United States $ 7,220 $ 2,220 $ ( 43 ) $ 9,397 North America (excluding United States) 311 50 — 361 France 1,205 643 ( 13 ) 1,835 United Kingdom 677 1,526 ( 53 ) 2,150 Europe (excluding France and United Kingdom) 739 1,654 ( 17 ) 2,376 Other 47 89 ( 3 ) 133 Total $ 10,199 $ 6,182 $ ( 129 ) $ 16,252 72 Table of Contents Year Ended December 31, 2019 (In millions) Transportation Logistics Eliminations Total Revenue United States $ 7,454 $ 2,338 $ ( 33 ) $ 9,759 North America (excluding United States) 286 37 — 323 France 1,358 659 ( 12 ) 2,005 United Kingdom 760 1,384 ( 68 ) 2,076 Europe (excluding France and United Kingdom) 810 1,582 ( 16 ) 2,376 Other 19 93 ( 3 ) 109 Total $ 10,687 $ 6,093 $ ( 132 ) $ 16,648 Year Ended December 31, 2018 (In millions) Transportation Logistics Eliminations Total Revenue United States $ 8,055 $ 2,196 $ ( 19 ) $ 10,232 North America (excluding United States) 274 67 — 341 France 1,496 687 ( 18 ) 2,165 United Kingdom 704 1,436 ( 70 ) 2,070 Europe (excluding France and United Kingdom) 793 1,584 ( 18 ) 2,359 Other 21 95 ( 4 ) 112 Total $ 11,343 $ 6,065 $ ( 129 ) $ 17,279 Our revenue disaggregated by service offering was as follows: Years Ended December 31, (In millions) 2020 2019 2018 Transportation segment: LTL $ 4,450 $ 4,815 $ 4,839 Freight brokerage and truckload 4,373 4,383 4,784 Last mile (1) 908 873 1,065 Managed transportation 344 496 462 Global forwarding 300 299 338 Transportation eliminations ( 176 ) ( 179 ) ( 145 ) Total Transportation segment revenue 10,199 10,687 11,343 Total Logistics segment revenue 6,182 6,093 6,065 Intersegment eliminations ( 129 ) ( 132 ) ( 129 ) Total revenue $ 16,252 $ 16,648 $ 17,279 (1) Comprised of our North American last mile operations. Performance Obligations Remaining performance obligations represent firm contracts for which services have not been performed and future revenue recognition is expected. As permitted in determining the remaining performance obligation, we omit obligations that: (i) have original expected durations of one year or less or (ii) contain variable consideration. On December 31, 2020, the fixed consideration component of our remaining performance obligation was approximately 73 Table of Contents $ 1.6 billion, and we expect to recognize approximately 75 % of that amount over the next three years and the remainder thereafter. The majority of the remaining performance obligation relates to our Logistics reportable segment. We estimate remaining performance obligations at a point in time and actual amounts may differ from these estimates due to changes in foreign currency exchange rates and contract revisions or terminations. 6. Restructuring Charges We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure, including actions in response to COVID-19. These actions generally include severance and facility-related costs, including impairment of right-of-use assets, and are intended to improve our efficiency and profitability. Restructuring charges were recorded on our Consolidated Statements of Income as follows: Years Ended December 31, (In millions) 2020 2019 2018 Cost of transportation and services $ 1 $ 2 $ — Direct operating expense 7 1 1 Sales, general and administrative expense 48 46 20 Total $ 56 $ 49 $ 21 We recognized $ 3 million, $ 21 million and $ 19 million of restructuring charges in the fourth quarter of 2020, 2019 and 2018, respectively. Our restructuring-related activity was as follows: Year Ended December 31, 2020 (In millions) Reserve Balance as of December 31, 2019 Charges Incurred Payments Foreign Exchange and Other Reserve Balance as of December 31, 2020 Severance Transportation $ 12 $ 17 $ ( 22 ) $ — $ 7 Logistics 11 21 ( 14 ) 1 19 Corporate 2 11 ( 10 ) ( 1 ) 2 Total severance 25 49 ( 46 ) — 28 Facilities Transportation — 6 — ( 1 ) 5 Logistics — 1 ( 1 ) — — Total facilities — 7 ( 1 ) ( 1 ) 5 Total $ 25 $ 56 $ ( 47 ) $ ( 1 ) $ 33 We expect the majority of the cash outlays related to the charges incurred in 2020 will be complete within twelve months. 74 Table of Contents Year Ended December 31, 2019 (In millions) Reserve Balance as of December 31, 2018 Charges Incurred Payments Foreign Exchange and Other Reserve Balance as of December 31, 2019 Severance Transportation $ 9 $ 30 $ ( 26 ) $ ( 1 ) $ 12 Logistics 5 14 ( 8 ) — 11 Corporate 2 3 ( 3 ) — 2 Total severance 16 47 ( 37 ) ( 1 ) 25 Facilities Transportation — 2 ( 2 ) — — Total facilities — 2 ( 2 ) — — Total $ 16 $ 49 $ ( 39 ) $ ( 1 ) $ 25 The majority of the cash outlays related to the charges incurred in 2019 were substantially complete by the end of 2020. 7. Property and Equipment December 31, (In millions) 2020 2019 Property and equipment Land $ 303 $ 334 Buildings and leasehold improvements 648 648 Vehicles, tractors, trailers and tankers 1,817 1,726 Machinery and equipment 1,152 949 Computer software and equipment 1,309 1,101 5,229 4,758 Less: accumulated depreciation and amortization ( 2,568 ) ( 2,054 ) Total property and equipment, net $ 2,661 $ 2,704 Net book value of capitalized internally-developed software included in property and equipment, net $ 332 $ 333 Depreciation of property and equipment and amortization of computer software was $ 616 million, $ 577 million and $ 546 million for the years ended December 31, 2020, 2019 and 2018, respectively. 8. Leases Adoption of Topic 842, “Leases” On January 1, 2019, we adopted ASU 2016-02, “Leases”, and its related amendments (Topic 842) prospectively through a cumulative-effect adjustment with no restatement of prior period financial statements. Beginning in 2019, net operating lease activity, including the reduction of the operating lease asset and the accretion of the operating lease liability, are reflected in Depreciation, amortization and net lease activity on our Consolidated Statements of Cash Flows. The adoption of Topic 842 did not have a material impact on our Consolidated Statements of Income and our Consolidated Statements of Cash Flows. 75 Table of Contents Nature of Leases Most of our leases are real estate leases. In addition, we lease trucks, trailers, containers and material handling equipment. The components of our lease expense and gain realized on sale-leaseback transactions were as follows: Years Ended December 31, (In millions) 2020 2019 Operating lease cost $ 748 $ 696 Short-term lease cost 141 144 Variable lease cost 94 90 Total operating lease cost $ 983 $ 930 Finance lease cost: Amortization of leased assets $ 67 $ 53 Interest on lease liabilities 9 7 Total finance lease cost $ 76 $ 60 Total lease cost $ 1,059 $ 990 Gain recognized on sale-leaseback transactions (1) $ 84 $ 99 (1) For the years ended December 31, 2020 and 2019, we completed multiple sale-leaseback transactions for land and buildings, including a sale and partial leaseback of our shared-services center in Portland, Oregon in 2019. We received aggregate cash proceeds of $ 143 million and $ 203 million in 2020 and 2019, respectively. Gains on sale-leaseback transactions are included in Direct operating expense in our Consolidated Statements of Income. Supplemental balance sheet information related to leases was as follows: December 31, (In millions) 2020 2019 Operating leases: Operating lease assets $ 2,278 $ 2,245 Short-term operating lease liabilities $ 483 $ 468 Operating lease liabilities 1,795 1,776 Total operating lease liabilities $ 2,278 $ 2,244 Finance leases: Property and equipment, gross $ 591 $ 483 Accumulated depreciation ( 184 ) ( 125 ) Property and equipment, net $ 407 $ 358 Short-term borrowings and current maturities of long-term debt $ 89 $ 58 Long-term debt 320 288 Total finance lease liabilities $ 409 $ 346 Weighted-average remaining lease term Operating leases 6 years 7 years Finance leases 8 years 7 years Weighted-average discount rate Operating leases 4.82 % 5.16 % Finance leases 3.10 % 2.69 % 76 Table of Contents Supplemental cash flow information related to leases was as follows: Years Ended December 31, (In millions) 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 774 $ 704 Operating cash flows for finance leases 9 7 Financing cash flows for finance leases 76 62 Leased assets obtained in exchange for new lease obligations: Operating leases 670 823 Finance leases 85 103 Property and equipment acquired through capital leases was $ 111 million for the year ended December 31, 2018. Additionally, non-cash investing activities for the years ended December 31, 2020 and 2019 included $ 30 million and $ 39 million of property and equipment additions for build-to-suit leases. Maturities of lease liabilities as of December 31, 2020 were as follows: (In millions) Finance Leases Operating Leases 2021 $ 97 $ 579 2022 88 530 2023 81 427 2024 64 316 2025 43 231 Thereafter 106 635 Total lease payments $ 479 $ 2,718 Less: interest ( 70 ) ( 440 ) Present value of lease liabilities $ 409 $ 2,278 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 2021 through 2022 with initial lease terms of 2 years to 15 years. Rent expense was $ 820 million for the year ended December 31, 2018. 9. Goodwill (In millions) Transportation Logistics Total Goodwill as of December 31, 2018 $ 2,520 $ 1,947 $ 4,467 Impact of foreign exchange translation and other ( 46 ) 29 ( 17 ) Goodwill as of December 31, 2019 2,474 1,976 4,450 Impact of foreign exchange translation and other 62 87 149 Goodwill as of December 31, 2020 $ 2,536 $ 2,063 $ 4,599 There are no cumulative goodwill impairments as of December 31, 2020. 77 Table of Contents 10. Intangible Assets December 31, 2020 December 31, 2019 (In millions) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Definite-lived intangibles Customer relationships $ 1,883 $ 909 $ 1,875 $ 784 We did not recognize any impairment of our identified intangible assets in 2020 and 2018. We recorded a non-cash, pre-tax charge of $ 6 million in 2019 related to the impairment of customer relationships intangibles associated with exiting our direct postal injection business. Estimated future amortization expense for amortizable intangible assets for the next five years is as follows: (In millions) 2021 2022 2023 2024 2025 Thereafter Estimated amortization expense $ 138 $ 128 $ 112 $ 108 $ 103 $ 385 Actual amounts of amortization expense may differ from estimated amounts due to changes in foreign currency exchange rates, additional intangible asset acquisitions, future impairment of intangible assets, accelerated amortization of intangible assets and other events. Intangible asset amortization expense recorded in Sales, general and administrative expense (“SG&A”) was $ 144 million, $ 156 million and $ 159 million for the years ended December 31, 2020, 2019 and 2018, respectively. 11. Derivative Instruments In the normal course of business, we are exposed to risks arising from business operations and economic factors, including fluctuations in interest rates and foreign currencies. We use derivative instruments to manage the volatility related to these exposures. The objective of these derivative instruments is to reduce fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. These financial instruments are not used for trading or other speculative purposes. Historically, we have not incurred, and do not expect to incur in the future, any losses as a result of counterparty default. The fair value of our derivative instruments and the related notional amounts were as follows: December 31, 2020 Derivative Assets Derivative Liabilities (In millions) Notional Amount Balance Sheet Caption Fair Value Balance Sheet Caption Fair Value Derivatives designated as hedges Cross-currency swap agreements $ 450 Other current assets $ — Other current liabilities $ ( 44 ) Cross-currency swap agreements 740 Other long-term assets — Other long-term liabilities ( 65 ) Interest rate swaps 2,003 Other current assets — Other current liabilities ( 4 ) Total $ — $ ( 113 ) 78 Table of Contents December 31, 2019 Derivative Assets Derivative Liabilities (In millions) Notional Amount Balance Sheet Caption Fair Value Balance Sheet Caption Fair Value Derivatives designated as hedges Cross-currency swap agreements $ 1,233 Other long-term assets $ — Other long-term liabilities $ ( 18 ) Interest rate swap 2,003 Other current assets — Other current liabilities ( 7 ) Derivatives not designated as hedges Foreign currency option contracts 365 Other current assets 1 Other current liabilities — Total $ 1 $ ( 25 ) The derivatives are classified as Level 2 within the fair value hierarchy. The derivatives are valued using inputs other than quoted prices such as foreign exchange rates and yield curves. The effect of derivative and nonderivative instruments designated as hedges on our Consolidated Statements of Income was as follows: Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives Amount of Gain (Loss) Reclassified from AOCI into Net Income Amount of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Years Ended December 31, (In millions) 2020 2019 2018 2020 2019 2018 2020 2019 2018 Derivatives designated as cash flow hedges Cross-currency swap agreements $ ( 12 ) $ 7 $ 13 $ ( 15 ) $ 5 $ 17 $ — $ 1 $ 1 Interest rate swaps ( 5 ) 5 — — — — — — — Derivatives designated as net investment hedges Cross-currency swap agreements ( 81 ) 55 52 — — — 9 10 4 Total $ ( 98 ) $ 67 $ 65 $ ( 15 ) $ 5 $ 17 $ 9 $ 11 $ 5 The pre-tax gain (loss) recognized in earnings for foreign currency option and forward contracts not designated as hedging instruments was a gain of $ 1 million, a loss of $ 9 million and a gain of $ 4 million for the years ended December 31, 2020, 2019 and 2018, respectively. These amounts are recorded in Foreign currency (gain) loss on our Consolidated Statements of Income. Cross-Currency Swap Agreements We enter into cross-currency swap agreements to manage the foreign currency exchange risk related to our international operations by effectively converting our fixed-rate USD-denominated debt, including the associated interest payments, to fixed-rate, euro (“EUR”)-denominated debt. The risk management objective of these transactions is to manage foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies and reduce the variability in the functional currency equivalent cash flows of this debt. During the term of the swap contracts, we will receive interest, either on a quarterly or semi-annual basis, from the counterparties based on USD fixed interest rates, and we will pay interest, also on a quarterly or semi-annual basis, to the counterparties based on EUR fixed interest rates. At maturity, we will repay the original principal amount in EUR and receive the principal amount in USD. These agreements expire at various dates through 2024. We designated these cross-currency swaps as qualifying hedging instruments and account for them as net investment hedges. We apply the simplified method of assessing the effectiveness of our net investment hedging relationships. Under this method, for each reporting period, the change in the fair value of the cross-currency swaps is initially recognized in AOCI. The change in the fair value due to foreign exchange remains in AOCI and the initial component excluded from effectiveness testing will initially remain in AOCI and then will be reclassified from 79 Table of Contents AOCI to Interest expense each period in a systematic manner. For net investment hedges that were de-designated prior to their maturity, the amounts in AOCI will remain in AOCI until the subsidiary is sold or substantially liquidated. Cash flows related to the periodic exchange of interest payments for these net investment hedges are included in Operating activities on our Consolidated Statements of Cash Flows. We also enter into cross-currency swap agreements to manage the related foreign currency exposure from intercompany loans. We designated these cross-currency swaps as qualifying hedging instruments and account for them as cash flow hedges. Gains and losses resulting from the change in the fair value of the cross-currency swaps are initially recognized in AOCI and reclassified to Foreign currency (gain) loss to offset the foreign exchange impact in earnings created by the intercompany loans. Cash flows related to these cash flow hedges are included in Operating activities on our Consolidated Statements of Cash Flows. Interest Rate Hedging We execute short-term interest rate swaps to mitigate variability in forecasted interest payments on our Senior Secured Term Loan Credit Agreement (the “Term Loan Credit Agreement”). The interest rate swaps convert floating-rate interest payments into fixed rate interest payments. We designated the interest rate swaps as qualifying hedging instruments and account for these derivatives as cash flow hedges. The interest rate swaps mature on various dates through 2021. We record gains and losses resulting from fair value adjustments to the designated portion of interest rate swaps in AOCI and reclassify them to Interest expense on the dates that interest payments accrue. Cash flows related to the interest rate swaps are included in Operating activities on our Consolidated Statements of Cash Flows. Foreign Currency Option and Forward Contracts We use foreign currency option contracts to mitigate the risk of a reduction in the value of earnings from our operations that use the EUR or the British pound sterling as their functional currency. Additionally, we use foreign currency forward contracts to mitigate exposure from intercompany loans that are not designated as permanent and can create volatility in earnings. The foreign currency contracts (both option and forward contracts) are used to manage our exposure to foreign currency exchange rate fluctuations and are not speculative. The contracts generally expire in 12 months or less. We had no outstanding contracts as of December 31, 2020. As of December 31, 2019, the contracts were not designated as qualifying hedging instruments. Gains or losses on the contracts are recorded in Foreign currency (gain) loss on our Consolidated Statements of Income. Cash flows related to the foreign currency contracts are included in Investing activities on our Consolidated Statements of Cash Flows, consistent with the nature and purpose for which these derivatives were acquired. 80 Table of Contents 12. Debt December 31, 2020 December 31, 2019 (In millions) Principal Balance Carrying Value Principal Balance Carrying Value ABL facility $ 200 $ 200 $ — $ — Term loan facilities 2,003 1,974 2,003 1,969 6.50 % Senior notes due 2022 1,200 1,195 1,200 1,192 6.125 % Senior notes due 2023 535 531 535 530 6.75 % Senior notes due 2024 1,000 989 1,000 987 6.25 % Senior notes due 2025 1,150 1,138 — — 6.70 % Senior debentures due 2034 300 210 300 208 Borrowings related to securitization program 50 50 — — Finance leases, asset financing and other 420 420 380 380 Total debt 6,858 6,707 5,418 5,266 Short-term borrowings and current maturities of long-term debt 1,343 1,338 84 84 Long-term debt $ 5,515 $ 5,369 $ 5,334 $ 5,182 The fair value of our debt and classification in the fair value hierarchy was as follows: (In millions) Fair Value Level 1 Level 2 December 31, 2020 $ 7,094 $ 4,431 $ 2,663 December 31, 2019 5,580 3,190 2,390 We valued Level 1 debt using quoted prices in active markets. We valued Level 2 debt using bid evaluation pricing models or quoted prices of securities with similar characteristics. The fair value of the asset financing arrangements approximates carrying value as the debt is primarily issued at a floating rate, the debt may be prepaid at any time at par without penalty, and the remaining life of the debt is short-term in nature. Our principal payment obligations on debt (excluding finance leases) for the next five years and thereafter was as follows: (In millions) 2021 (1) 2022 2023 2024 2025 Thereafter Principal payments on debt $ 1,254 $ 1 $ 535 $ 1,001 $ 3,353 $ 300 (1) In January 2021, we redeemed the outstanding balance of our senior notes due June 2022 (the “Senior Notes due 2022”). ABL Facility In 2015, we entered into a revolving loan credit agreement (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 under the ABL Facility. Our availability under the ABL Facility is equal to the borrowing base less advances and outstanding letters of credit. Our borrowing base includes a fixed percentage of: (i) our eligible U.S. and Canadian accounts receivable; plus (ii) any of our eligible U.S. and Canadian rolling stock and equipment. A maximum of 20 % of our borrowing base can be equipment and rolling stock in the aggregate. As of December 31, 2020, our borrowing base was $ 1.1 billion and our availability was $ 883 million, after considering outstanding borrowings of $ 200 million and outstanding letters of credit of $ 17 million. As of December 31, 2020, we were in compliance with the ABL Facility’s financial covenants. 81 Table of Contents Our loans under the ABL Facility bear interest at a rate equal to: LIBOR or base rate plus (i) an applicable margin of 1.25 % to 1.50 % for LIBOR loans or (ii) 0.25 % to 0.50 %, for base rate loans. The average interest rate on outstanding borrowings as of December 31, 2020 was 1.40 %. The ABL Facility is secured on a first lien basis by the assets of the credit parties as priority collateral and on a second lien basis by certain other assets. The priority collateral consists primarily of our U.S. and Canadian accounts receivable and any of our U.S. and Canadian rolling stock and equipment included in our borrowing base. The ABL Facility contains representations and warranties, affirmative and negative covenants and events of default customary for agreements of this nature. The covenants in the ABL Facility can limit our ability to incur indebtedness; grant liens; engage in certain mergers, consolidations, acquisitions and dispositions; make certain investments and restricted payments; and enter into certain transactions with affiliates. We may also be required to maintain a Fixed Charge Coverage Ratio (as defined in the ABL Facility) of not less than 1.00 if availability under the ABL Facility is below certain thresholds. As of December 31, 2020, we were compliant with this financial covenant. Secured Debt In April 2020, we entered into a Senior Secured Term Loan Credit Agreement, comprised of a $ 150 million committed secured term loan facility and a $ 200 million uncommitted secured evergreen letter of credit facility. 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 under the facility. 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 2015, we entered into a Term Loan Credit Agreement that provided for a single borrowing of $ 1.6 billion. The Term Loan Credit Agreement was issued at an original issue discount of $ 32 million. In 2018, we refinanced our term loans by replacing the outstanding $ 1.5 billion principal amount of term loans (the “Initial Term Loans”) with $ 1.5 billion in aggregate principal amount of new term loans (the “Present Term Loans”). Our Present Term Loans have substantially similar terms as our Initial Term Loans, except for the interest rate and maturity date, prepayment premiums and some other amendments to the restrictive covenants. We used the proceeds from the Present Term Loans to refinance the Initial 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. We amended the Term Loan Credit Agreement in 2019 to include a new tranche of term loans (the “Incremental Term Loan Facility”), to reduce the interest rates and to extend the maturity dates. Net proceeds from borrowings under the Incremental Term Loan Facility were used for general corporate purposes, including to fund purchases of our common stock described in Note 14—Stockholders’ Equity. The loans under the Incremental Term Loan Facility were issued at a price of 99.50 % of par. The interest rates on the Present Term Loans and the Incremental Term Loans were 2.15 % and 2.66 %, respectively, as of December 31, 2020. As of December 31, 2020 and 2019, the applicable terms of the Term Loan Credit Agreement, as amended, were as follows: (In millions) Present Term Loans Incremental Term Loans Amounts outstanding at December 31, 2020 and 2019: Facility $ 1,503 $ 500 Interest spread: Base rate loans 1.00 % 1.50 % LIBOR loans 2.00 % 2.50 % Maturity date February 2025 February 2025 82 Table of Contents We must prepay an aggregate principal amount of the term loan facility equal to (a) 50 % of any Excess Cash Flow, as defined in the agreement, for the most recent fiscal year ended, minus (b) the sum of (i) all voluntary prepayments of loans during the fiscal year and (ii) all voluntary prepayments of loans under the ABL Facility or any other revolving credit facilities during the fiscal year if accompanied by a corresponding permanent reduction in the commitments under the credit agreement or any other revolving credit facilities in the case of each of the immediately preceding clauses (i) and (ii), if such prepayments are funded with internally generated cash flow, as defined in the agreement. If our Consolidated Secured Net Leverage Ratio, as defined in the agreement, for the fiscal year was less than or equal to 3.00 :1.00 and greater than 2.50 :1.00, the Excess Cash Flow percentage will be 25 %. If our Consolidated Secured Net Leverage Ratio for the fiscal year was less than or equal to 2.50 :1.00, the Excess Cash Flow percentage will be 0 %. The remaining principal is due at maturity. As of December 31, 2020, our Consolidated Secured Net Leverage Ratio was less than 2.50 :1.00, and no excess cash payment was required. Senior Notes In the second quarter of 2020, we completed private placements of $ 1.15 billion aggregate principal amount of Senior Notes due 2025. The Senior Notes due 2025 mature on May 1, 2025 and bear interest at a rate of 6.25 % per annum. Interest on the notes is paid semi-annually. $ 850 million of the notes were issued at par, and $ 300 million of the notes were issued subsequently at 101.75 % of face value. Net proceeds from the notes were invested in cash and cash equivalents. 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. 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 in Note 14—Stockholders’ Equity. We recorded a debt extinguishment loss of $ 17 million in 2018 due to this redemption. In January 2021, we redeemed the remaining balance of the Senior Notes due 2022. For additional information, see Note 19—Subsequent Events. The senior notes bear interest payable semiannually, in cash in arrears. The Senior Notes due 2025 mature on May 1, 2025, the Senior Notes due 2024 mature on August 15, 2024, the Senior Notes due September 2023 mature on September 1, 2023 and the Senior Notes due 2022 mature on June 15, 2022. The senior notes are guaranteed by each of our direct and indirect wholly-owned restricted subsidiaries (other than some excluded subsidiaries) that are obligors under, or guarantee obligations under, our ABL Facility or existing term loan facilities or guarantee certain of our capital markets indebtedness or any guarantor of the senior notes. The senior notes and its guarantees are unsecured, unsubordinated indebtedness for us and our guarantors. The senior notes contain covenants customary for notes of this nature. Senior Debentures We assumed Con-way’s 6.70 % Senior Debentures due 2034 (the “Senior Debentures”) with an aggregate principal amount of $ 300 million when we acquired Con-way. The Senior Debentures bear interest payable semiannually, in cash in arrears, and mature on May 1, 2034. Including amortization of the fair value adjustment recorded on the acquisition date, interest expense on the Senior Debentures is recognized at an annual effective interest rate of 10.96 %. Trade Securitization Program As discussed in Note 2—Basis of Presentation and Significant Accounting Policies, XPO Logistics Europe participates in a trade receivables securitization program. 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 83 Table of Contents activities. The program will expire in July 2022 and contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio. In 2019, XPO Logistics Europe terminated a prior trade receivables securitization program and paid off the notes associated with the program, which had been included in our debt balances. Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables. These borrowings are owed to the program’s Purchasers and are included in short-term debt until they are repaid in the following month’s settlement. Unsecured Credit Facility In December 2018, we entered into a $ 500 million unsecured credit facility (“Unsecured Credit Facility”). As of December 31, 2018, we had borrowed $ 250 million under the facility. We borrowed an additional $ 250 million in January 2019. We used the proceeds of both borrowings to finance a portion of our share repurchases described in Note 14—Stockholders’ Equity. In connection with the issuance of the Senior Notes due 2024 described above, we repaid our outstanding obligations under the Unsecured Credit Facility and terminated it in February 2019. We recorded a debt extinguishment loss of $ 5 million in 2019 in connection with this repayment. Asset Financing We use unsecured asset financing arrangements to purchase trucks in Europe. These financing arrangements are denominated in EUR, generally with floating interest rates. As of December 31, 2020, interest rates on asset financing range from 0.85 % to 1.06 %, with a weighted average interest rate of 0.99 %, and initial terms range from 6 years to 10 years. 13. Employee Benefit Plans Defined Benefit Pension Plans We sponsor both funded and unfunded defined benefit pension plans for some employees in the United States. These pension plans include qualified plans that are eligible for beneficial treatment under the Internal Revenue Code and non-qualified plans that provide additional benefits for employees who are impacted by limitations on compensation eligible for benefits available under the qualified plans. We also sponsor a separate defined benefit pension plan for some employees in the United Kingdom. Both the U.S. plans and the U.K. plan do not allow for new plan participants or additional benefit accruals. We also maintain defined benefit pension plans for some of our foreign subsidiaries that are excluded from the disclosures below due to their immateriality. We measure defined benefit pension plan obligations based on the present value of projected future benefit payments for all participants for services rendered to date. The projected benefit obligation is a measure of benefits attributed to service to date, assuming that the plan continues in effect and that estimated future events (including turnover and mortality) occur. We determine the net periodic benefit costs using assumptions regarding the projected benefit obligation and the fair value of plan assets as of the beginning of the year. Net periodic benefit costs are recorded in Other income on our Consolidated Statements of Income. We calculate the funded status of the defined benefit pension plans, which represents the difference between the projected benefit obligation and the fair value of plan assets, on a plan-by-plan basis. 84 Table of Contents Funded Status of Defined Benefit Pension Plans The reconciliation of the changes in the plans’ projected benefit obligations as of December 31 was as follows: U.S. Plans U.K. Plan (In millions) 2020 2019 2020 2019 Projected benefit obligation at beginning of year $ 1,862 $ 1,659 $ 1,323 $ 1,164 Interest cost 54 66 23 29 Actuarial loss 216 214 159 136 Benefits paid ( 80 ) ( 77 ) ( 55 ) ( 56 ) Foreign currency exchange rate changes and other — — 50 50 Projected benefit obligation at end of year (1) $ 2,052 $ 1,862 $ 1,500 $ 1,323 (1) As of December 31, 2020 and 2019, the accumulated benefit obligations for the U.K. plan was equal to the projected benefit obligations. Actuarial losses were a result of assumption changes, including a decrease in the discount rate, updated mortality projection scales and other assumptions for plan participants, and an increase in assumed inflation for the U.K. plan. The reconciliation of the changes in the fair value of plan assets as of December 31 was as follows: U.S. Plans U.K. Plan (In millions) 2020 2019 2020 2019 Fair value of plan assets at beginning of year $ 1,863 $ 1,582 $ 1,362 $ 1,227 Actual return on plan assets 274 353 120 138 Employer contributions 5 5 3 2 Benefits paid ( 80 ) ( 77 ) ( 55 ) ( 56 ) Foreign currency exchange rate changes — — 46 51 Fair value of plan assets at end of year $ 2,062 $ 1,863 $ 1,476 $ 1,362 The funded status of the plans as of December 31 was as follows: U.S. Plans U.K. Plan (In millions) 2020 2019 2020 2019 Funded status at end of year $ 10 $ 1 $ ( 24 ) $ 39 Amount recognized in balance sheet: Long-term assets $ 88 $ 76 $ — $ 39 Current liabilities ( 5 ) ( 6 ) — — Long-term liabilities ( 73 ) ( 69 ) ( 24 ) — Net pension asset (liability) recognized $ 10 $ 1 $ ( 24 ) $ 39 Plans with projected and accumulated benefit obligation in excess of plan assets: Projected and accumulated benefit obligation $ 78 $ 75 $ 1,500 $ — Fair value of plan assets — — 1,476 — The funded status of our qualified plans and non-qualified plans was $ 88 million and $( 78 ) million, respectively, at December 31, 2020. Qualified plans are eligible for certain beneficial treatment under the Internal Revenue Code (“IRC”), while non-qualified plans do not meet the IRC criteria. 85 Table of Contents The amounts included in AOCI that have not yet been recognized in net periodic benefit expense as of December 31 were as follows: U.S. Plans U.K. Plan (In millions) 2020 2019 2020 2019 Actuarial loss $ ( 50 ) $ ( 5 ) $ ( 158 ) $ ( 54 ) Prior-service credit — — 17 18 AOCI $ ( 50 ) $ ( 5 ) $ ( 141 ) $ ( 36 ) The net periodic benefit cost and amounts recognized in Other comprehensive income (loss) for the years ended December 31 was as follows: U.S. Plans U.K. Plan (In millions) 2020 2019 2018 2020 2019 2018 Net periodic benefit (income) expense: Interest cost $ 54 $ 66 $ 59 $ 23 $ 29 $ 28 Expected return on plan assets ( 102 ) ( 90 ) ( 92 ) ( 57 ) ( 58 ) ( 67 ) Amortization of prior-service credit — — — ( 1 ) ( 1 ) ( 2 ) Net periodic benefit income $ ( 48 ) $ ( 24 ) $ ( 33 ) $ ( 35 ) $ ( 30 ) $ ( 41 ) Amounts recognized in Other comprehensive income (loss): Actuarial (gain) loss $ 45 $ ( 49 ) $ 58 $ 90 $ 57 $ 40 Prior-service cost — — — 1 — 19 Reclassification of prior-service credit to net periodic benefit income — — — 1 1 2 (Gain) loss recognized in Other comprehensive income (loss) $ 45 $ ( 49 ) $ 58 $ 92 $ 58 $ 61 The weighted-average assumptions used to determine the net periodic benefit costs and benefit obligations for the year ended December 31 were as follows: U.S. Qualified Plans U.S. Non-Qualified Plans U.K. Plan 2020 2019 2018 2020 2019 2018 2020 2019 2018 Discount rate - net periodic benefit costs 2.96 % 4.08 % 3.14 % - 3.38 % 2.40 % - 2.78 % 3.65 % - 3.95 % 2.84 % - 3.21 % 1.84 % 2.56 % 2.21 % Discount rate - benefit obligations 2.48 % 3.35 % 4.18 % - 4.39 % 1.62 % - 2.30 % 2.72 % - 3.20 % 3.93 % - 4.28 % 1.37 % 2.04 % 2.85 % Expected long-term rate of return on plan assets 5.60 % 5.80 % 3.00 % - 5.40 % 4.40 % 4.85 % 4.95 % No rate of compensation increase was assumed as the plans are frozen to additional participant benefit accruals. 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. 86 Table of Contents Expected benefit payments for the defined benefit pension plans are summarized below. These estimates are based on assumptions about future events. Actual benefit payments may vary from these estimates. (In millions) U.S. Plans U.K. Plan Year ending December 31: 2021 $ 92 $ 50 2022 95 52 2023 98 52 2024 100 55 2025 102 55 2026-2030 529 297 Plan Assets U.S. Plans We manage the assets in the U.S. plans using a long-term liability-driven investment strategy that seeks to mitigate the funded status volatility by increasing participation in fixed income investments as the plan’s funded status increases. We developed this strategy by analyzing a variety of diversified asset-class combinations with the projected liabilities. Our current investment strategy is to achieve an investment mix of approximately 85 % in fixed income securities and 15 % of investments in equity securities. The fixed income allocation consists primarily of domestic fixed income securities and targets to hedge more than 92 % of domestic projected liabilities. The target allocations for equity securities includes approximately 55 % in U.S. equities and approximately 45 % in non-U.S. equities. Investments in equity and fixed income securities consist of individual securities held in managed separate accounts and commingled investment funds. Generally, our investment strategy does not include an allocation to cash and cash equivalents but a cash allocation may arise periodically in response to timing considerations regarding contributions, investments, and the payment of benefits and eligible plan expenses. We periodically evaluate our defined benefit plans’ asset portfolios for significant concentrations of risk. Types of investment concentration risks that are evaluated include concentrations in a single issuer, specific security, asset class, credit rating, duration, industry/sector, currency, foreign country or individual fund manager. As of December 31, 2020, our defined benefit plan assets had no significant concentrations of risk. Our investment policy does not allow investment managers to use market-timing strategies or financial derivative instruments for speculative purposes but financial derivative instruments are used to manage risk and achieve stated investment objectives for duration, yield curve, credit, foreign exchange and equity exposures. Generally, our investment managers are prohibited from short selling, trading on margin, and trading commodities, warrants or other options, except when acquired as a result of the purchase of another security, or in the case of options, when sold as part of a covered position. The assumption of 5.60 % for the overall expected long-term rate of return on plan assets in 2020 was developed using asset allocation and return expectations. The return expectations are created using long-term historical and expected returns and current market expectations for inflation, interest rates and economic growth. U.K. Plan Our U.K. Plan’s assets are separated from our assets and invested by trustees, which include our representatives, with the goal of meeting the U.K. Plan’s projected future pension liabilities. The trustees’ investment objectives are to meet the performance target set in the deficit recovery plan of the U.K. Plan in a risk-controlled framework. The actual asset allocations of the U.K. Plan are in line with the target asset allocations. The trustees have approved a transition in 2021 to a new target strategic asset allocation for the U.K. Plan that consists of approximately 40 % matching assets (U.K. gilts and cash) and approximately 60 % growth and income assets (consisting of a range of 87 Table of Contents pooled funds investing in structured equities, investment grade and high yield bonds and asset-backed securities). The target asset allocations of the U.K. Plan include acceptable ranges for each asset class. Collateral assets consist of U.K. fixed-interest gilts, index-linked gilts and cash, which are used to back derivative positions that hedge the sensitivity of the liabilities to changes in interest rates and inflation. On the U.K. Plan Actuary’s Technical Provisions funding basis, approximately 95 % of the liability interest rate sensitivity and 105 % of the liability inflation sensitivity were hedged as of December 31, 2020. The expected long-term rate of return on plan assets in 2020 was 4.40 %. Our approach to determine the expected long-term rate of return on plan assets is consistent with the one we used for the U.S. Plans. The fair values of investments held in the pension plans by major asset category as of December 31, 2020 and 2019, and the percentage that each asset category comprises of total plan assets were as follows: December 31, 2020 (Dollars in millions) Level 1 Level 2 Not Subject to Leveling (1) Total Percentage of Plan Assets Asset category (U.S. Qualified Plans) Cash and cash equivalents: Short-term investment fund $ — $ — $ 37 $ 37 1.8 % Equity: U.S. large companies — — 136 136 6.6 % U.S. small companies — — 33 33 1.6 % International 53 — 102 155 7.5 % Fixed income securities 425 1,274 1 1,700 82.5 % Derivatives — 1 — 1 — % Total U.S. Plan assets $ 478 $ 1,275 $ 309 $ 2,062 100.0 % Asset category (U.K. Plan) Cash and cash equivalents $ 17 $ — $ — $ 17 1.2 % Fixed income securities — 883 495 1,378 93.3 % Derivatives — 4 77 81 5.5 % Total U.K. Plan assets $ 17 $ 887 $ 572 $ 1,476 100.0 % (1) Investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total defined benefit pension plan assets. 88 Table of Contents December 31, 2019 (Dollars in millions) Level 1 Level 2 Not Subject to Leveling (1) Total Percentage of Plan Assets Asset category (U.S. Qualified Plans) Cash and cash equivalents: Short-term investment fund $ — $ — $ 24 $ 24 1.3 % Equity: U.S. large companies — — 140 140 7.5 % U.S. small companies 30 — — 30 1.6 % International 72 — 75 147 7.9 % Fixed income securities 405 1,108 5 1,518 81.5 % Derivatives — 4 — 4 0.2 % Total U.S. Plan assets $ 507 $ 1,112 $ 244 $ 1,863 100.0 % Asset category (U.K. Plan) Cash and cash equivalents $ 34 $ — $ — $ 34 2.5 % Fixed income securities — 773 474 1,247 91.6 % Derivatives — ( 8 ) 89 81 5.9 % Total U.K. Plan assets $ 34 $ 765 $ 563 $ 1,362 100.0 % (1) Investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total defined benefit pension plan assets. For the periods ended December 31, 2020 and 2019, we had no investments held in the pension plans within Level 3 of the fair value hierarchy. Our common stock was not a plan asset as of December 31, 2020 or 2019. The U.S. Non-Qualified Pension Plans are unfunded. Funding Our funding practice is to evaluate our tax and cash position, and the funded status of our plans, in determining our planned contributions. We estimate that we will contribute $ 5 million to our U.S. non-qualified plans and $ 1 million to our U.K. plan in 2021 but this could change based on variations in interest rates, asset returns and other factors. Defined Contribution Retirement Plans Our costs for defined contribution retirement plans were $ 71 million, $ 70 million and $ 66 million for the years ended December 31, 2020, 2019 and 2018, respectively. Postretirement Medical Plan We provide health benefits through a postretirement medical plan for eligible employees hired before 1993 (the “Postretirement Plan”). 89 Table of Contents Funded Status of Postretirement Medical Plan The reconciliation of the changes in the plan’s benefit obligation and the determination of the amounts recognized on our Consolidated Balance Sheets were as follows: As of December 31, (In millions) 2020 2019 Projected benefit obligation at beginning of year $ 41 $ 34 Interest cost on projected benefit obligation 1 1 Actuarial loss (gain) 4 9 Participant contributions 1 1 Benefits paid ( 3 ) ( 4 ) Projected and accumulated benefit obligation at end of year $ 44 $ 41 Funded status of the plan $ ( 44 ) $ ( 41 ) Amounts recognized in the balance sheet consist of: Current liabilities $ ( 3 ) $ ( 3 ) Long-term liabilities ( 41 ) ( 38 ) Net amount recognized $ ( 44 ) $ ( 41 ) Discount rate assumption as of December 31 2.20 % 3.09 % The amounts included in AOCI that have not yet been recognized in net periodic benefit income (expense) and the net periodic benefit income (expense) for the postretirement plan were not material in any of the periods presented. The discount rates assumptions used to calculate the interest cost were 2.66 % - 3.22 %, 3.87 % - 4.36 % and 3.11 % - 3.67 % for the years ended December 31, 2020, 2019 and 2018, respectively. Expected benefit payments, which reflect expected future service, as appropriate, are summarized below. These estimates are based on assumptions about future events. Actual benefit payments may vary from these estimates. (In millions) Benefit Payments Year ending December 31: 2021 $ 3 2022 3 2023 3 2024 4 2025 4 2026-2030 14 14. Stockholders’ Equity Our Board of Directors is authorized to establish one or more series of preferred stock. At December 31, 2020 and 2019, only our Series A Convertible Perpetual Preferred Stock is outstanding. Series A Convertible Perpetual Preferred Stock and Warrants We issued 75,000 shares of the Series A Preferred Stock with an initial liquidation preference of $ 1,000 per share which are convertible into shares of our common stock at a conversion price of $ 7.00 per common share (subject to customary anti-dilution adjustments). We also issued warrants exercisable for shares of our common stock at an initial exercise price of $ 7.00 per common share (subject to customary anti-dilution adjustments). Our preferred stock ranks senior to our common stock with respect to dividend and liquidation rights. Our preferred stock pays 90 Table of Contents quarterly cash dividends equal to the greater of: (i) the “as-converted” dividends on our underlying common stock for the relevant quarter and (ii) 4 % of the then-applicable liquidation preference per annum. Our preferred stock is not redeemable. 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. As of December 31, 2020, our remaining outstanding preferred stock is convertible into 0.1 million shares of our common stock, and our outstanding warrants are exercisable for an aggregate of 9.8 million shares of our common stock. Forward Sales In 2018, we settled forward sales in full that were included in a 2017 registered underwritten offering 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. Share Repurchases 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 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: Years Ended December 31, (In millions, except per share data) 2020 2019 2018 Shares purchased and retired 2 25 10 Aggregate value $ 114 $ 1,347 $ 536 Average price per share $ 66.58 $ 53.41 $ 53.46 Remaining authorization $ 503 $ 617 $ 464 91 Table of Contents 15. Stock-Based Compensation We grant various types of stock-based compensation awards to directors, officers and key employees under our 2016 incentive plan. These awards include stock options, restricted stock, restricted stock units, performance-based units, cash incentive awards and other equity-related awards (collectively, “Awards”). The 2016 plan authorizes the issuance of up to 6.6 million shares of our common stock as Awards. Shares awarded may consist of authorized and unissued shares or treasury shares. The 2016 plan will terminate on May 15, 2029, unless terminated earlier by our Board of Directors. As of December 31, 2020, 1.8 million shares of our common stock were available for the grant of Awards under the 2016 plan. Our employee stock purchase plan offers eligible employees, excluding our executive officers and directors, the right to purchase our common stock up to 10 % of each employee’s compensation. Shares are purchased at 5 % below fair market value on the last trading day of each six-month offering period. The plan authorizes the purchase of up to two million shares of our common stock. The plan will terminate in October 2027, unless terminated earlier by our Board of Directors. We do not recognize stock-based compensation expense as the plan is non-compensatory. At December 31, 2020, two million shares of our common stock were available for purchase under the plan. Our stock-based compensation expense is recorded in SG&A on our Consolidated Statements of Income: Years ended December 31, (In millions) 2020 2019 2018 Restricted stock and restricted stock units $ 49 $ 30 $ 21 Performance-based restricted stock units 2 6 9 Cash-settled performance-based restricted stock units 8 31 19 Total stock-based compensation expense $ 59 $ 67 $ 49 Tax benefit on stock-based compensation $ ( 12 ) $ ( 2 ) $ ( 22 ) Stock Options Our stock options typically vest over three to five years after the grant date for our employees and officers and one year after the grant date for our Board of Directors. The stock options have a 10 -year contractual term and the exercise price equals our stock price on the grant date. We have no t granted stock options since 2016. A summary of stock option award activity for the year ended December 31, 2020 is presented below: Stock Options Number of Stock Options Weighted-Average Exercise Price Weighted-Average Remaining Term Outstanding as of December 31, 2019 575,755 $ 12.29 2.47 Granted — — Exercised ( 533,000 ) 11.60 Forfeited — — Outstanding as of December 31, 2020 42,755 $ 21.01 3.36 Options exercisable as of December 31, 2020 42,755 $ 21.01 3.36 The intrinsic value of options outstanding and exercisable as of December 31, 2020 was $ 4 million. The total intrinsic value of options exercised during 2020, 2019 and 2018 was $ 56 million, $ 6 million and $ 11 million, respectively. The total cash received from options exercised during 2020, 2019 and 2018 was less than $ 1 million, $ 1 million and $ 1 million, respectively. 92 Table of Contents Restricted Stock, Restricted Stock Units and Performance-Based Restricted Stock Units We grant RSUs and PRSUs to our key employees, officers and directors with various vesting requirements. RSUs generally vest based on the passage of time (service conditions) and PRSUs generally vest based on the achievement of our financial targets (performance conditions). PRSUs may also be subject to stock price (market conditions), employment conditions and other non-financial conditions. The holders of the RSUs and PRSUs do not have the rights of a stockholder and do not have voting rights until the shares are issued and delivered in settlement of the awards. In 2020, we granted approximately 0.2 million shares of fully vested restricted stock to some of our employees that have sale and transfer restrictions for two years from grant date. The restricted stock had a weighted-average grant date fair value of $ 48.05 and was determined based on the fair market value of the shares at the grant date less a discount associated with transferability restrictions. The assumptions used to fair value the restricted stock included a risk-free interest rate of 0.20 % and volatility of 61.0 %. The number of RSUs and PRSUs vested includes shares of our common stock that we withheld on behalf of our employees to satisfy the minimum tax withholdings. Non-cash financing activities for the year ended December 31, 2020 included $ 21 million related to tax withholdings for restricted shares that were paid in 2021. We estimate the fair value of PRSUs subject to market-based vesting conditions using a Monte Carlo simulation lattice model, with the following weighted-average assumptions: 2020 Risk-free interest rate 0.6 % Volatility 50.3 % Dividend yield — Expected term (in years) 4.6 A summary of RSU and PRSU award activity for the year ended December 31, 2020 is presented below: RSUs PRSUs Number of RSUs Weighted-Average Grant Date Fair Value Number of PRSUs Weighted-Average Grant Date Fair Value Outstanding as of December 31, 2019 1,729,415 $ 56.17 1,584,265 $ 29.35 Granted 1,053,211 77.49 504,951 96.91 Vested ( 920,590 ) 57.70 ( 103,734 ) 35.68 Forfeited and canceled ( 246,224 ) 65.52 ( 128,921 ) 57.79 Outstanding as of December 31, 2020 1,615,812 $ 67.43 1,856,561 $ 45.39 The total fair value of RSUs that vested during 2020, 2019 and 2018 was $ 64 million, $ 13 million and $ 30 million, respectively. All of the outstanding RSUs as of December 31, 2020 vest subject to service conditions. The total fair value of PRSUs that vested during 2020, 2019 and 2018 was $ 8 million, $ 23 million and $ 96 million, respectively. Of the outstanding PRSUs as of December 31, 2020, 1,447,359 vest subject to service and a combination of market and performance conditions, 395,891 vest subject to service and performance conditions and 13,311 vest subject to service and market conditions. As of December 31, 2020, unrecognized compensation cost related to non-vested RSUs and PRSUs of $ 78 million is anticipated to be recognized over a weighted-average period of approximately 2.34 years. Cash-Settled Performance-Based Restricted Stock Units We previously granted cash-settled PRSUs to some key employees and executive officers. The PRSUs vested based on the passage of time and are settled in cash either ratably over a two to four year period or cliff vest at the end of three to four years . The awards were also subject to the achievement of performance targets and employment 93 Table of Contents conditions. The awards were classified as liabilities and the fair value was based on the closing price of our common stock at grant date and was re-measured each reporting date until settlement. We recognized compensation expense for cash-settled PRSUs over the performance periods based on the probability of achieving the performance conditions and the closing price of our common stock. As of December 31, 2019, we had recognized accrued liabilities of $ 30 million using a fair value per PRSU of $ 79.70 . A summary of cash-settled PRSU award activity for the year ended December 31, 2020 is presented below: Number of Cash-Settled PRSUs Outstanding as of December 31, 2019 435,327 Granted — Vested ( 419,942 ) Forfeited and canceled — Outstanding as of December 31, 2020 15,385 16. Income Taxes Income before taxes related to our U.S. and foreign operations was as follows: Years Ended December 31, (In millions) 2020 2019 2018 U.S. $ 49 $ 379 $ 319 Foreign 99 190 247 Income before income tax provision $ 148 $ 569 $ 566 The income tax provision (benefit) is comprised of the following: Years Ended December 31, (In millions) 2020 2019 2018 Current: U.S. Federal $ 36 $ 18 $ 2 State 8 3 6 Foreign 68 62 69 Total current income tax provision $ 112 $ 83 $ 77 Deferred: U.S. Federal $ ( 47 ) $ 52 $ 57 State ( 5 ) — 2 Foreign ( 29 ) ( 6 ) ( 14 ) Total deferred income tax provision (benefit) ( 81 ) 46 45 Total income tax provision $ 31 $ 129 $ 122 94 Table of Contents The effective tax rate reconciliations were as follows: Years Ended December 31, 2020 2019 2018 U.S. federal statutory tax rate 21.0 % 21.0 % 21.0 % State taxes, net of U.S. federal benefit 0.6 0.5 0.8 Foreign rate differential ( 5.9 ) ( 0.3 ) ( 1.1 ) Foreign operations (1) 7.7 1.3 6.1 Contribution- and margin-based taxes 9.2 2.4 2.5 Valuation allowances ( 0.6 ) 0.1 ( 3.7 ) Changes in uncertain tax positions 2.8 ( 0.9 ) — Stock-based compensation ( 8.1 ) ( 0.3 ) ( 3.8 ) Other ( 5.6 ) ( 1.2 ) ( 0.2 ) Effective tax rate 21.1 % 22.6 % 21.6 % (1) Foreign operations include the net impact of changes to valuation allowances, the cost of inclusion of foreign income in the U.S. net of foreign taxes, and permanent items related to foreign operations. Components of the Net Deferred Tax Asset or Liability The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability were as follows: Years Ended December 31, (In millions) 2020 2019 Deferred tax asset Net operating loss and other tax attribute carryforwards $ 140 $ 119 Accrued expenses 90 45 Pension and other retirement obligations 27 17 Other 84 59 Total deferred tax asset 341 240 Valuation allowance ( 69 ) ( 59 ) Total deferred tax asset, net 272 181 Deferred tax liability Intangible assets ( 283 ) ( 297 ) Property and equipment ( 299 ) ( 324 ) Other ( 49 ) ( 46 ) Total deferred tax liability ( 631 ) ( 667 ) Net deferred tax liability $ ( 359 ) $ ( 486 ) The deferred tax asset and deferred tax liability above are reflected on our Consolidated Balance Sheets as follows: December 31, (In millions) 2020 2019 Other long-term assets $ 12 $ 9 Deferred tax liability ( 371 ) ( 495 ) Net deferred tax liability $ ( 359 ) $ ( 486 ) 95 Table of Contents Investments in Foreign Subsidiaries We apply a partial indefinite reversal assertion to pre-2018 earnings and profits that have been invested back into the foreign businesses. We do not apply an indefinite reversal assertion on all 2018 and future years’ earnings and profits. Operating Loss and Tax Credit Carryforwards Our operating loss and tax credit carryforwards were as follows: December 31, (In millions) Expiration Date 2020 2019 Federal net operating losses for all U.S. operations (including those of minority owned subsidiaries) 2033 - 2037 (1) $ 81 $ 72 Tax effect (before federal benefit) of state net operating losses Various times starting in 2021 (1) 29 26 Federal tax credit carryforwards Various times starting in 2033 (1) 4 4 State tax credit carryforward Various times starting in 2021 (1) 11 10 Foreign net operating losses available to offset future taxable income Various times starting in 2021 (1) 357 319 (1) Some credits and losses have unlimited carryforward periods . Valuation Allowance We established a valuation allowance for some of our deferred tax assets, as it is more likely than not that these assets will not be realized in the foreseeable future. We concluded that the remaining deferred tax assets will more likely than not be realized, though this is not assured, and as such no valuation allowance has been provided on these assets. The balances and activity related to our valuation allowance were as follows: (In millions) Beginning Balance Additions Reductions Ending Balance Year Ended December 31, 2020 $ 59 $ 10 $ — $ 69 Year Ended December 31, 2019 64 — ( 5 ) 59 Year Ended December 31, 2018 89 — ( 25 ) 64 96 Table of Contents Unrecognized Tax Benefits A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Years Ended December 31, (In millions) 2020 2019 2018 Beginning balance $ 17 $ 23 $ 25 Additions for tax positions of the current period — — 1 Additions for tax positions of prior years 7 3 2 Reductions for tax positions of prior years ( 1 ) ( 7 ) ( 3 ) Settlements with tax authorities ( 1 ) ( 1 ) — Reductions due to the statute of limitations ( 2 ) ( 1 ) ( 1 ) Currency translation adjustment — — ( 1 ) Ending balance $ 20 $ 17 $ 23 Interest and penalties 7 7 6 Gross unrecognized tax benefits $ 27 $ 24 $ 29 Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of the end of the year $ 20 $ 16 $ 22 We could reflect a reduction to unrecognized tax benefits of up to $ 15 million over the next 12 months due to the statute of limitations lapsing on positions or because tax positions are sustained on audit. We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2020, we have no tax years under examination by the IRS. We have various U.S. state and local examinations and non-U.S. examinations in process. The U.S. federal tax returns after 2008, state and local returns after 2012, and non-U.S. returns after 2009 are open under relevant statutes of limitations and are subject to audit. 17. Earnings per Share We compute basic and diluted earnings per share using the two-class method, which allocates earnings to participating securities. The participating securities consist of our Series A Convertible Perpetual Preferred Stock. The undistributed earnings are allocated between common shares and participating securities as if all earnings had been distributed during the period. Losses are not allocated to the preferred shares. As discussed in Note 14—Stockholders’ Equity, we recorded a preferred stock conversion charge in December 2020 in connection with the conversion of our Series A preferred stock. 97 Table of Contents The computations of basic and diluted earnings per share were as follows: Years Ended December 31, (In millions, except per share data) 2020 2019 2018 Basic earnings per common share Net income attributable to XPO $ 110 $ 419 $ 422 Preferred stock conversion charge ( 22 ) — — Series A preferred stock dividends ( 3 ) ( 3 ) ( 3 ) Non-cash allocation of undistributed earnings ( 6 ) ( 37 ) ( 29 ) Net income attributable to common shares, basic $ 79 $ 379 $ 390 Basic weighted-average common shares 92 96 123 Basic earnings per share $ 0.87 $ 3.95 $ 3.17 Diluted earnings per common share Net income attributable to common shares, diluted $ 79 $ 379 $ 390 Basic weighted-average common shares 92 96 123 Dilutive effect of warrants and stock-based awards 10 10 12 Diluted weighted-average common shares 102 106 135 Diluted earnings per share $ 0.78 $ 3.57 $ 2.88 Potential common shares excluded 10 10 10 Certain shares were not included in the computation of diluted earnings per share because the effect was anti-dilutive. 18. Commitments and Contingencies We are involved, and will continue to be involved, in numerous proceedings arising out of the conduct of our business. These proceedings may include claims for property damage or personal injury incurred in connection with the transportation of freight, claims regarding anti-competitive practices, and employment-related claims, including claims involving asserted breaches of employee restrictive covenants. These matters also include numerous putative class action, multi-plaintiff and individual lawsuits, and administrative proceedings involving claims that our owner-operators or contract carriers should be treated as employees, rather than independent contractors (“misclassification claims”). These lawsuits and proceedings may seek substantial monetary damages (including claims for unpaid wages, overtime, failure to provide meal and rest breaks, unreimbursed business expenses penalties and other items), injunctive relief, or both. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We review and adjust accruals for loss contingencies quarterly and as additional information becomes available. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount accrued, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred. If there is a reasonable possibility that a loss, or additional loss, may have been incurred, we disclose the estimate of the possible loss or range of loss if it is material and an estimate can be made, or disclose that such an estimate cannot be made. The determination as to whether a loss can reasonably be considered to be possible or probable is based on our assessment, together with legal counsel, regarding the ultimate outcome of the matter. 98 Table of Contents We believe that we have adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not believe that the ultimate resolution of any matters to which we are presently a party will have a material adverse effect on our results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our financial condition, results of operations or cash flows. Legal costs incurred related to these matters are expensed as incurred. We carry liability and excess umbrella insurance policies that we deem sufficient to cover potential legal claims arising in the normal course of conducting our operations as a transportation and logistics company. The liability and excess umbrella insurance policies generally do not cover the misclassification claims described in this note. In the event we are required to satisfy a legal claim outside the scope of the coverage provided by insurance, our financial condition, results of operations or cash flows could be negatively impacted. 19. Subsequent Events Acquisition In January 2021, our XPO Logistics Europe subsidiary acquired the majority of Kuehne + Nagel’s contract logistics operations in the United Kingdom, which generated annual revenues in 2020 of approximately £ 450 million ($ 585 million). The operations, which provide a range of logistics services, including inbound and outbound distribution, reverse logistics management and inventory management, will be included in our Logistics segment. Debt Redemption Also in January 2021, we redeemed our outstanding Senior Notes due 2022. The redemption price for the Senior Notes due 2022 was 100.0 % of the principal amount, plus accrued and unpaid interest. We paid for the redemption with available cash. We expect to record a debt extinguishment loss of approximately $ 5 million in our first quarter of 2021 results of operations due to this redemption. 99 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.