What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-04 compared with 2020-11-06 · 187 added, 322 removed, 95 unchanged (84% of the section changed)

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Factors that might cause or contribute to a material difference include those discussed below and the risks discussed in the Company’s other filings with the Securities and Exchange Commission (the “SEC”).

All forward-looking statements set forth in this Quarterly Report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that

they will have the expected consequence to or effects on the Company or its business or operations.

The following discussion should be read in conjunction with the Company’s unaudited Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this Quarterly Report, and with the audited consolidated financial statements and related notes thereto included in the 2020 Annual Report on Form 10-K.

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Executive Summary

XPO Logistics, Inc., a Delaware corporation, together with its subsidiaries (“XPO,” or “we”), is a top ten global provider of cutting-edge supply chain solutions to the most successful companies in the world.

XPO Logistics, Inc., a Delaware corporation, together with its subsidiaries (“XPO,” or “we”), provides cutting-edge supply chain solutions to the most successful companies in the world.

We have two reporting segments:

Transportation and Logistics.

In 2019, approximately 64% of our revenue came from Transportation;

the other 36% came from Logistics.

Within each segment, we have robust service offerings that are positioned to capitalize on fast-growing areas of customer demand.

Our operations help our customers move their goods most efficiently throughout their supply chains.

Transportation and Logistics, each with robust service offerings, leadership positions and growth prospects.

In 2020, approximately 62% of our revenue came from Transportation, and the remaining 38% came from Logistics.

Within each segment, we are positioned to capitalize on fast-growing areas of demand.

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

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

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

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

XPO will be a global provider of primarily less-than-truckload (“LTL”) transportation and truck brokerage services, and GXO Logistics, Inc.

(“GXO”), the planned spin-off, 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 GXO in due course.

The transaction is currently expected to be completed in the second half of 2021, subject to various conditions, including the approval of XPO’s board of directors.

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

Separately, we acquired the majority of Kuehne + Nagel’s contract logistics operations in the United Kingdom and Ireland in January 2021.

The operations, which include roughly 5,700 employees and provide a range of logistics

services, including inbound and outbound distribution, reverse logistics management and inventory management, are included in our Logistics segment.

As of March 31, 2021, we had approximately 140,000 team members (comprised of approximately 108,000 full-time and part-time employees and 32,000 third-party, temporary workers), and 1,621 locations in 30 countries.

Substantially all of our services operate under the single brand of XPO Logistics.

As of September 30, 2020, we had approximately 97,000 employees and 1,499 locations in 30 countries, and over 50,000 customers.

We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it impacts our customers, employees and other business partners.

See “Effects of COVID-19” below.

We use our highly integrated network to help more than 50,000 customers operate their supply chains most efficiently.

Maintaining strong liquidity has been and will continue to be a top priority for XPO, and is consistent with our pursuit of investment-grade ratings for both XPO and GXO.

As discussed in greater detail below, as of March 31, 2021, we had $1.7 billion of available liquidity, including $629 million of cash and cash equivalents.

Transportation Segment

Our Transportation segment includes our services for truck brokerage, less-than-truckload (“LTL”), truckload, expedite, last mile, intermodal and drayage, managed transportation and global forwarding.

We offer these services in both North America and Europe with the exception of intermodal and drayage, which are North American services, and truckload, which is primarily in Europe.

Within each region, the complementary nature of our services is an opportunity to provide multiple solutions to our larger customers.

Globally, we are the second largest freight brokerage provider, and a top five provider of managed transportation.

Many of our other transportation services hold market-leading positions in their respective geographies.

In North America, we are the largest provider of last mile logistics for heavy goods, the largest manager of expedited shipments, a top three provider of LTL transportation and a top three provider of intermodal services, with a national drayage network.

We also offer ocean, air, ground and cross-border freight forwarding services domestically and internationally.

In Europe, we provide truckload transportation as a brokered service using independent carriers, and as dedicated and non-dedicated capacity using our owned fleet.

Our other transportation offerings in Europe are LTL trucking of palletized and partial loads, which we provide with one of the largest LTL networks in Western Europe, last mile logistics for heavy goods and freight forwarding.

Our Transportation segment uses a blended model of owned, contracted and brokered capacity that gives us extensive flexibility in providing shippers with optimal solutions.

The non-asset portion of our model is predominately variable-cost and includes our brokerage operations, as well as contracted capacity with independent providers.

As of September 30, 2020, globally, we had approximately 10,000 independent carriers and owner-operators under contract to provide drayage, expedite, last mile and LTL services to our customers, and more than 50,000 independent brokered carriers representing over 1,000,000 trucks on the road.

The asset portion of our transportation model encompasses approximately 15,000 tractors and 39,000 trailers operated by professional drivers employed by XPO.

These assets are primarily related to our LTL operations in North America and our truckload operations in Europe.

Our owned fleet also provides supplemental capacity for our brokerage operations as needed.

Our Transportation segment facilitates the movement of raw materials, parts and finished goods.

Our largest service offering within the Transportation segment is LTL, which contributed 43% of 2020 segment revenue.

We are a top three provider of LTL services in North America, and we have one of the largest LTL networks in Western Europe.

Our other primary service offering within the Transportation segment is truck brokerage.

We are the second largest brokerage provider globally and the third largest brokerage provider in North America.

As of March 31, 2021, we had truck brokerage relationships with approximately 81,000 independent carriers representing over 1,000,000 trucks.

The results of our truck brokerage operations are included as part of our freight brokerage services, which include additional, asset-light services for expedite, intermodal and drayage.

The owned capacity of our transportation model includes approximately 13,000 tractors and 35,000 trailers operated by professional drivers employed by XPO.

This equipment is related primarily to our LTL operations in North America.

Our fleet also supports our brokerage operations as needed.

Logistics Segment

Our Logistics segment, which we sometimes refer to as supply chain or contract logistics, provides order fulfillment and other distribution services differentiated by our ability to deliver technology-enabled, customized solutions.

XPO is the second largest provider of contract logistics globally.

We have the largest outsourced e-fulfillment platform in Europe and a major platform for e-fulfillment in North America.

Once we secure a logistics contract, the average customer tenure is approximately five years and can lead to more opportunities.

Our logistics services include high-value-add warehousing and distribution, e-commerce and omnichannel fulfillment, cold-chain logistics, packaging and labeling, factory support, aftermarket support, inventory management, order personalization and supply chain optimization, such as production flow management.

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

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

These services are highly valued by companies with consumer end-markets, as shoppers increasingly “test-drive” the products they buy online.

As of September 30, 2020, we operated 200 million square feet (19 million square meters) of contract logistics warehouse space worldwide.

Our Logistics segment, which we sometimes refer to as supply chain, provides order fulfillment and other distribution services differentiated by our ability to deliver technology-enabled, customized solutions.

XPO is the second largest provider of contract logistics globally, with one of the largest outsourced e-fulfillment platforms.

Our logistics services include high-value-add warehousing and distribution, order fulfillment and personalization, cold-chain logistics, packaging and labeling, aftermarket support, inventory management and supply chain optimization.

In addition, many of our e-commerce facilities manage merchandise returns, also known as reverse logistics.

Depending on the merchandise being returned, this fast-growing area of logistics can include inspection, testing, repackaging, refurbishment, resale or product disposal, as well as refunding and warranty management.

Reverse logistics services are mission-critical for companies with consumer end-markets, as shoppers increasingly “test-drive” the merchandise they buy online.

As of March 31, 2021, we operated 210 million square feet (20 million square meters) of logistics warehouse space worldwide.

Approximately 99 million square feet (9 million square meters) was located in North America;

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and 7 million square feet (1 million square meters) was located in Asia.

We are a market leader in logistics capacity in both North America and Europe.

Customers served by our global Logistics segment include many preeminent companies in e-commerce and retail, food and beverage, consumer packaged goods, technology, aerospace, telecommunications, industrial and manufacturing, chemicals, agribusiness, life sciences and healthcare.

These are all sectors where we have significant expertise.

Our logistics network benefits from deep roots in the e-commerce sector, which continues to show strong, secular growth.

Before COVID-19, e-commerce was already growing globally at a double-digit rate, and that growth has accelerated as more consumers opt to purchase goods online.

This level of growth makes it difficult for many companies to handle fulfillment and returns in-house while providing high levels of service.

We have the capabilities to provide solutions for pure-play e-commerce companies, omnichannel retailers, manufacturers with aftermarket distribution channels, and the reverse logistics inflows that have become a natural byproduct of order fulfillment.

In March 2020, we announced a definitive agreement to acquire the majority of Kuehne + Nagel’s contract logistics operations in the United Kingdom.

The acquisition will expand our platform in European e-commerce — where we are the largest outsourced e-fulfillment provider — and deepen our presence in the beverage, technology and food service sectors.

The transaction is subject to customary closing conditions and is currently being reviewed by the UK Competition and Markets Authority (the “CMA”).

The deadline for a phase 1 decision from the CMA is November 20, 2020.

The transaction is not expected to be material to our 2020 operating results.

Our experience with fast-growing product categories makes us a valuable partner to customers who need agile logistics processes.

Together with XPO Direct™, our shared-space distribution offering, our Logistics segment provides companies with superior control, flexible warehousing and staffing, advanced automation and predictive analytics that help manage peaks in demand.

Our logistics customers primarily operate in industries with high-growth outsourcing opportunities, including e-commerce and retail, food and beverage, consumer packaged goods, technology, aerospace, telecommunications, industrial and manufacturing, chemicals, agribusiness, life sciences and healthcare.

Operating Philosophy

We believe that our rapid pace of innovation differentiates our services, allows us to better utilize our assets and makes the most of the talent within our organization.

Our proprietary technology strengthens our relationships with customers by addressing their immediate supply chain needs and anticipating their future needs.

Technology allows us to be a true partner to our customers, helping them meet their objectives for efficiency, safety and customer service.

We concentrate our technology efforts in four areas:

our digital freight marketplace, automation and intelligent machines, dynamic data science, and visibility and customer service, specifically in the e-commerce supply chain.

Our 2019 investment in technology was among the highest in our industry at approximately $550 million.

Our global team of approximately 1,600 technology professionals works closely with our operations in North America and Europe and can deploy new software very rapidly on our cloud-based platform.

We prioritize innovations that can benefit our customers and create value for our shareholders.

For example, our XPO Smart™ analytics and planning tools use machine learning to drive productivity in our logistics and LTL operations.

Our XPO Connect™ digital marketplace gives our transportation customers a bird’s-eye view of available capacity and real-time market conditions, and strengthens our relationships with carriers.

The platform matches shippers and carriers with digital efficiency, benefitting both parties and contributing to our financial performance.

Environmental sustainability is another area where our commitment sets an example in the industry.

We believe that our rapid pace of innovation differentiates our services, enables us to better utilize our assets and makes the most of the talent within our organization.

Our proprietary technology strengthens our relationships with customers by addressing their immediate supply chain needs in ways that accommodate their strategic plans, such as entry into new markets.

Technology allows us to be a true partner to our customers by helping them meet their objectives for efficiency, safety, customer service and growth.

When developing our technology, we concentrate our efforts in four areas that can create value for our shareholders and our customers, primarily by creating “smart” supply chains:

our digital freight marketplace, automation and intelligent machines, dynamic data science, and visibility, particularly as it affects customer service in the e-commerce supply chain.

Environmental sustainability is a significant priority for us.

In the U.S., XPO has been named a Top 75 Green Supply Chain Partner by Inbound Logistics for five consecutive years.

In France, where XPO has been awarded the designation Objectif CO 2 for outstanding environmental performance by the Ministry of the Environment, we have renewed our commitment to the CO 2 Charter for another three years.

In France, we have renewed our commitment to the CO2 Charter for another three years.

In Spain, all of our sites meet Leadership in Energy and Environmental Design (“LEED”) energy certification standards for 100% consumption of renewable energy.

In the United Kingdom, the warehouse of the future we created with Nestlé is a reality, operating with environmentally friendly ammonia refrigeration systems, energy-saving lighting, air-source heat pumps for administration areas and rainwater harvesting.

A number of our logistics facilities are ISO 14001-certified, which ensures environmental and other regulatory compliances.

We monitor fuel emissions from forklifts in our warehouses, with protocols in place to take immediate corrective action if needed.

In the U.K., the Digital Distribution Warehouse of the Future we created with Nestlé operates with environmentally friendly ammonia refrigeration systems, energy-saving lighting, air-source heat pumps for administration areas and rainwater harvesting.

More broadly in our Logistics segment, a number of our facilities are ISO 14001-certified, which ensures environmental and other regulatory compliances.

We monitor fuel emissions from forklifts, with protocols in place to take immediate corrective action if needed.

Our packaging engineers ensure that the optimal carton size is used for each product slated for distribution, and when feasible, we purchase recycled packaging.

As a byproduct of our reverse logistics operations, we recycle millions of electronic components and batteries each year.

In transportation, we have made substantial investments in fuel-efficient Freightliner Cascadia tractors in North America;

these use Environmental Protection Agency (“EPA”) 2013-compliant and Greenhouse Gas 2014-compliant Selective Catalytic Reduction technology.

Our North American LTL locations have energy-saving policies in place and are implementing a phased upgrade to LED lighting.

In Europe, we own one of the industry’s most modern road fleets:

our tractors are 98% compliant with Euro V, EEV and Euro VI standards.

We also own a large fleet of natural gas trucks operating in France, the United Kingdom, Spain and Portugal and, in 2019, we invested in 100 new Stralis Natural Power Euro VI tractors for our LTL network in France.

These tractors use a combination of liquified and compressed natural gas to reduce NOx emissions below the Euro VI standard and lessen noise in densely populated areas.

In Spain, where we own government-approved mega-trucks, we are collaborating with the General State Administration to test a duo-trailer vehicle and help determine its viability for commercial freight use.

Our last mile operations in Europe are using electric vehicles for deliveries in certain urban areas, reducing those emissions to zero.

Effects of COVID-19

As a byproduct of managing returned merchandise, we recycle millions of electronic components and batteries each year.

In our Transportation segment, we have made substantial investments in fuel-efficient tractors that use Environmental Protection Agency 2013-compliant and Greenhouse Gas 2014- compliant Selective Catalytic Reduction technology for our LTL business in North America.

Our LTL drivers operate from terminals that have energy-saving policies in place and are implementing a phased upgrade to LED lighting.

In Europe, our modern road fleet is 98% compliant with Euro V, EEV and Euro VI standards.

We also own a large alternative-fuel road fleet that operates in France, the U.K., Spain and Portugal, including more than 250 natural gas vehicles.

In Spain, we own government-approved mega-trucks to transport freight with fewer trips, and our last mile operations in Europe use electric vehicles for deliveries in certain urban areas, reducing those emissions to zero.

Impacts of COVID-19

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

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

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

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

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

The COVID-19 pandemic and associated impacts on economic activity had an adverse effect on our results of operations and financial condition for the three and nine months ended September 30, 2020, as discussed below.

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

Impacts on our business generally began a few weeks earlier in Europe than in the U.S., but have meaningfully affected our year-to-date results in both regions.

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

Furthermore, the extent and pace of a

recovery remains uncertain and may differ significantly among the countries in which we operate.

We anticipate that our results of operations will continue to be impacted by this pandemic in the fourth quarter of 2020.

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

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

In the second quarter of 2020, we also implemented supplemental “appreciation pay” programs for thousands of frontline employees who continued to work during the pandemic.

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

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

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

We believe the COVID-19 pandemic and associated impacts on economic activity had an adverse effect on our results of operations and financial condition for the three months ended March 31, 2021 and 2020, as discussed below.

Due to the evolving nature of the pandemic, it remains difficult to predict the extent of the impact on our industry generally and our business in particular.

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

We expect that our results of operations will continue to be impacted by the pandemic throughout 2021.

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

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

The majority of our cost base is variable, and while we expect to continue to incur additional costs related to the pandemic, we also have the ability to continue to adjust our expenses to address significant changes in demand for our services, if necessary, as we did in 2020.

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

While we do not expect to be able to fully offset the decrease in demand for our services arising from the economic disruption of the pandemic in 2020, the actions we are taking and have taken, combined with the variable components of our cost structure, should help mitigate the impact on our profitability relative to the impact on our revenue and volumes.

Maintaining strong liquidity has been and will continue to be a top priority for XPO amid the current economic disruption.

As discussed in greater detail below, as of September 30, 2020, we had $3.1 billion of available liquidity, including $2.0 billion of cash and cash equivalents.

In the second quarter of 2020, we expanded our liquidity by $1.5 billion through the addition of a $350 million letter of credit and term loan facility and the issuance of $1.15 billion in senior notes.

We expect to incur incremental interest expense in 2020 as a result of issuing this new debt.

We reduced our planned capital expenditures for 2020, while continuing to invest in key growth initiatives.

In response to the pandemic, we are using a combination of rigorous protective measures, technology and virtual communications to keep our employees safe, including these and other actions:

• Globally, many of our employees have worked remotely if able to do so.

• For employees who need to work on site, we follow the guidance of the World Health Organization, the U.S.

Centers for Disease Control, local regulators, and our own health and safety protocols.

• We are providing PPE in all our workplaces, and social distancing is in effect.

• Our facilities worldwide engage in ongoing cleaning of high-touch areas, as well as deep cleaning in facilities likely to have been exposed to COVID-19.

• We added Pandemic Paid Sick Leave to provide U.S.

and Canadian employees an additional two weeks of fully-paid sick leave.

• We guarantee up to three additional paid days for employees of a facility that closes temporarily for deep cleaning.

• We instituted a contactless delivery policy to ensure that our drivers can maintain a safe distance from customers when delivering freight.

• We provided Frontline Employee Appreciation Pay to U.S.

and Canadian employees.

• We expanded access to mental health counseling services.

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

Risk Factors.

The totality of the actions we have taken during the pandemic, and continue to take, combined with the variable components of our cost structure, have mitigated the impact on our profitability relative to the impact on our revenue and volumes, while our strong liquidity and disciplined capital management enable us to continue to invest in key growth initiatives.

Consolidated Summary Financial Table

Three Months Ended September 30, Percent of Revenue Change Nine Months Ended September 30, Percent of Revenue Change

Three Months Ended March 31, Percent of Revenue Change

(Dollars in millions) 2021 (1)

2021 2020 2021 vs.

2019 2020 (3)

2020 2019 2020 vs.

Revenue $ 4,774 $ 3,864 100.0 % 100.0 % 23.6 %

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Other income (26) (18) (0.5) % (0.5) % 44.4 %

Foreign currency (gain) loss — (5) — % (0.1) % (100.0) % (5) 5 — % — % (200.0) %

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

Foreign currency gain (2) (8) — % (0.2) % (75.0) %

Debt extinguishment loss 8 — 0.2 % — % NM

Interest expense 69 72 1.4 % 1.9 % (4.2) %

Income (loss) before income tax provision (benefit) 157 170 3.7 % 4.1 % (7.6) % (13) 432 (0.1) % 3.5 % (103.0) %

Income tax provision (benefit) 59 34 1.4 % 0.8 % 73.5 % (2) 99 — % 0.8 % (102.0) %

Net income (loss) $ 98 $ 136 2.3 % 3.3 % (27.9) % $ (11) $ 333 (0.1) % 2.7 % (103.3) %

(1) Consolidated operating income for the three months ended September 30, 2020 includes $3 million of transaction and integration costs.

(2) Consolidated operating income for the three months ended September 30, 2019 includes $11 million of restructuring expense.

(3) Consolidated operating income for the nine months ended September 30, 2020 includes $93 million of transaction and integration costs and $53 million of restructuring expense.

(4) Consolidated operating income for the nine months ended September 30, 2019 includes $2 million of transaction and integration costs and $28 million of restructuring expense.

The transaction and integration costs for the first nine months of 2020 are primarily related to our previously announced exploration of strategic alternatives.

The review of strategic alternatives was terminated in March 2020.

Income before income tax provision 153 35 3.2 % 0.9 % 337.1 %

Income tax provision 35 10 0.7 % 0.3 % 250.0 %

Net income $ 118 $ 25 2.5 % 0.6 % 372.0 %

NM - Not meaningful

(1) Consolidated operating income for the three months ended March 31, 2021 includes $18 million of transaction and integration costs and $4 million of restructuring expense.

$1 million of the transaction and integration costs relate to our Transportation segment, $5 million relate to our Logistics segment and $12 million relate to Corporate.

(2) Consolidated operating income for the three months ended March 31, 2020 includes $44 million of transaction and integration costs and $3 million of restructuring expense.

$7 million of the transaction and integration costs relate to our Transportation segment, $7 million relate to our Logistics segment and $30 million relate to Corporate.

The transaction and integration costs for the first three months of 2021 are primarily related to the planned spin-off of the Logistics segment and our acquisition of the Kuehne + Nagel business.

The transaction and integration costs for the first three months of 2020 are primarily related to our previously announced exploration of strategic alternatives that was terminated in March 2020.

For further information on our restructuring actions, see Note 5—Restructuring Charges to the Condensed Consolidated Financial Statements.

We also incurred in the third quarter and first nine months of 2020, net incremental and direct costs as a result of the COVID-19 pandemic.

Three and Nine Months Ended September 30, 2020 Compared with Three and Nine Months Ended September 30, 2019

Revenue for the third quarter of 2020 increased 1.6% to $4.2 billion, compared with the same quarter in 2019.

Revenue for the first nine months of 2020 decreased 7.4% to $11.6 billion, compared with the same period in 2019.

The increase in revenue in the third quarter of 2020 compared to the same quarter in 2019 was primarily due to strong growth in our European logistics and North American transportation businesses, partially offset by the continued impact of COVID-19 and the elimination of certain low-margin business.

The decrease in revenue in the first nine months of 2020 compared to the same period in 2019 reflects the impact of COVID-19, the curtailment of our direct postal injection business in the first quarter of 2019 and the elimination of certain low-margin business.

Additionally, foreign currency movement increased revenue by approximately 1.8 percentage points in the third quarter of 2020.

Foreign currency movement had no impact on revenue for the first nine months of 2020.

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

Cost of transportation and services for the third quarter of 2020 was $2.0 billion, or 48.3% of revenue, compared with $2.1 billion, or 49.8% of revenue, for the same quarter in 2019.

Cost of transportation and services for the first nine months of 2020 was $5.6 billion, or 48.1% of revenue, compared with $6.3 billion, or 50.1% of revenue, for the

same period in 2019.

The year-over-year reduction as a percentage of revenue in both periods was primarily driven by a higher mix of contract logistics revenue and lower fuel costs.

Also impacting the year-over-year decrease as a percentage of revenue for the first nine months of 2020 were lower third-party transportation costs in our transportation segment, partially offset by incremental PPE and other COVID-19-related costs.

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

We also incurred in the first three months of 2021 and 2020, net incremental and direct costs as a result of the COVID-19 pandemic.

Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020

Revenue for the first quarter of 2021 increased 23.6% to $4.8 billion, compared with the same period in 2020.

The increase in revenue in the first three months of 2021 compared to the same period in 2020 reflects strong growth in both our transportation and logistics businesses, including the impact of the acquired Kuehne + Nagel business in January 2021, which contributed approximately 3.1 percentage points to revenue growth.

Additionally, foreign currency movement increased revenue by approximately 3.2 percentage points in the first quarter of 2021.

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

Cost of transportation and services for the first quarter of 2021 was $2.3 billion, or 48.8% of revenue, compared with $1.9 billion, or 49.1% of revenue, for the same period in 2020.

The year-over-year decrease as a percentage of revenue for the first three months of 2021 was primarily driven by a higher mix of logistics revenue, partially offset by increased third-party transportation costs in our transportation segment.

Direct operating expenses are comprised of both fixed and variable expenses and consist of operating costs related to our warehousing facilities and LTL service centers.

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

Direct operating expense for the third quarter of 2020 was $1.5 billion, or 34.6% of revenue, compared with $1.4 billion, or 33.7% of revenue, for the same quarter in 2019.

Direct operating expense for the first nine months of 2020 was $4.2 billion, or 36.2% of revenue, compared with $4.2 billion, or 33.8% of revenue, for the same period in 2019.

The year-over-year increases as a percentage of revenue were primarily driven by a higher mix of contract logistics revenue, higher facility and payroll costs, and incremental PPE and other COVID-19-related costs.

Also impacting the year-over-year increase as a percentage of revenue for the first nine months of 2020 was the significant decline in revenue due to COVID-19, partially offset by lower temporary labor costs.

The third quarters of 2020 and 2019 included $29 million and $33 million, respectively, and the first nine months of 2020 and 2019 included $68 million and $73 million, respectively, from gains on sales of property and equipment.

Direct operating expense for the first three months of 2021 was $1.7 billion, or 34.7% of revenue, compared with $1.4 billion, or 35.2% of revenue, for the same period in 2020.

The year-over-year decrease as a percentage of revenue was primarily driven by lower personnel and facilities costs as a percentage of revenue as we leveraged our fixed costs across increased revenues this quarter, partially offset by a higher mix of logistics revenue.

Additionally, the first quarters of 2021 and 2020 included $24 million and $27 million, respectively, from gains on sales of property and equipment.

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

SG&A for the third quarter of 2020 was $499 million, or 11.8% of revenue, compared with $456 million, or 11.0% of revenue, for the same quarter in 2019.

SG&A for the first nine months of 2020 was $1.7 billion, or 14.3% of revenue, compared with $1.4 billion, or 11.2% of revenue, for the same period in 2019.

The year-over-year increase as a percentage of revenue in the third quarter of 2020 primarily resulted from higher compensation, self-insurance, COVID-19-related and depreciation expenses, partially offset by lower restructuring costs.

The year-over-year increase as a percentage of revenue in the first nine months of 2020 primarily resulted from the significant decline in revenue due to COVID-19, higher compensation and restructuring costs, increased self-insurance and bad debt expenses, and incremental PPE and other COVID-19-related costs.

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

SG&A for the first quarter of 2021 was $588 million, or 12.3% of revenue, compared with $525 million, or 13.6% of revenue, for the same period in 2020.

SG&A for the first three months of 2021 included approximately $13 million of expenses related to the planned spin-off of our Logistics segment, including professional service fees.

In comparison, SG&A for the first three months of 2020 included approximately $40 million of expenses related to our exploration of strategic alternatives that was terminated in March 2020, including professional service fees and employee retention costs.

Other income primarily consists of pension income.

Other income for the third quarter of 2020 was $20 million of income, compared with $11 million of income for the same quarter in 2019.

Other income for the first nine months of 2020 was $59 million of income, compared with $41 million of income for the same period in 2019.

The year-over-year increases primarily reflect higher net periodic pension income of $7 million in the third quarter of 2020 and $20 million in the first nine months of 2020, compared with the same periods in 2019.

Foreign currency (gain) loss was a loss of under $1 million for the third quarter of 2020, compared with a $5 million gain for the same quarter in 2019.

Foreign currency gain in the third quarter of 2019 primarily reflected unrealized gains on foreign currency option and forward contracts.

Foreign currency (gain) loss was a $5 million gain for the first nine months of 2020, compared with a $5 million loss for the same period in 2019.

Foreign currency gain in the first nine months of 2020 primarily reflected realized gains on foreign currency option and forward contracts and other derivative contracts, including a gain on a terminated net investment hedge.

Foreign currency loss in the first nine months of 2019 primarily reflected unrealized losses on foreign currency option and forward contracts.

Other income for the first quarter of 2021 was $26 million of income, compared with $18 million of income for the same period in 2020.

The year-over-year increase primarily reflects higher net periodic pension income in the first quarter of 2021, compared with the same period in 2020.

Foreign currency gain was a $2 million gain for the first quarter of 2021, compared with an $8 million gain for the same period in 2020.

Foreign currency gain in the first quarter of 2021 primarily reflected foreign currency transaction and measurement gains.

Foreign currency gain in the first quarter of 2020 primarily reflected realized and unrealized gains on foreign currency option and forward contracts and other derivative contracts, including a gain on a terminated net investment hedge.

For additional information on our foreign currency option and forward contracts, see Note 6—Derivative Instruments to our Condensed Consolidated Financial Statements.

Debt extinguishment loss was $5 million for the first nine months of 2019 and related to the write-off of debt issuance costs for an unsecured credit facility that was repaid in the first quarter of 2019.

There were no debt extinguishment losses in the third quarter of 2019 or in the first nine months of 2020.

Interest expense increased to $86 million for the third quarter of 2020 from $75 million for the third quarter of 2019.

Interest expense increased to $240 million for the first nine months of 2020 from $218 million for the first nine

months of 2019.

The increases in interest expense in both the third quarter and the nine-month period were primarily due to higher average total indebtedness, including the senior notes due 2025 (the “Senior Notes due 2025”) that were issued in the second quarter of 2020, partially offset by lower interest rates in the third quarter and first nine months of 2020.

Our effective income tax rates were 37.6% and 20.0% for the third quarter of 2020 and 2019, respectively, and 12.8% and 22.9% for the first nine months of 2020 and 2019, respectively.

The effective tax rates for both the third quarter and nine-month periods of 2020 and 2019 were based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented.

There were no material discrete items impacting the effective tax rate for the third quarter and first nine months of 2020.

The primary item impacting the effective tax rate for the third quarter of 2019 was a discrete tax benefit of $8 million from foreign currency losses recognized.

The primary items impacting the effective tax rate for the first nine months of 2019 included discrete tax benefits of $8 million from foreign currency losses recognized and $6 million from changes in reserves for uncertain tax positions.

The changes in our effective income tax rate for the third quarter and first nine months of 2020 compared to the same periods in 2019 were primarily driven by contribution- and margin-based taxes, the mix of earnings among jurisdictions and the impact of discrete items in 2019.

These drivers caused an increase to our effective tax rate in the third quarter of 2020 and a decrease to our rate for the nine-month period because we generated positive pretax income in the third quarter and a pretax loss for the nine-month period.

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

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

Additionally, we are benefiting from the ability to defer the payment of certain payroll taxes that would otherwise be required in 2020.

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

Debt extinguishment loss was $8 million for the first three months of 2021 and related to the write-off of debt issuance costs for the redemption of our outstanding senior notes due 2022, as well as costs related to the amendment of our term loan credit agreement.

There were no debt extinguishment losses in the first quarter of 2020.

Interest expense decreased to $69 million for the first quarter of 2021 from $72 million for the first quarter of 2020.

Interest expense reflected the issuance of the senior notes due 2025 in the second quarter of 2020, partially offset by the redemption of the senior notes due 2022 in the first quarter of 2021.

Our effective income tax rates were 22.8% and 30.2% for the first three months of 2021 and 2020, respectively.

The effective tax rates for the first quarter of 2021 and 2020 were based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented.

The change in our effective tax rate for the first quarter of 2021 compared to the same quarter in 2020 was primarily driven by higher pre-tax book income which diluted the impact of contribution- and margin-based taxes.

The primary discrete item impacting the effective tax rate for the first quarter of 2021 was a tax benefit of $4 million from stock-based compensation.

There were no material discrete items impacting the effective tax rate for the first quarter of 2020.

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.

Restructuring charges were recorded on our Condensed Consolidated Statements of Income (Loss) as follows:

Three Months Ended September 30, Nine Months Ended September 30,

(In millions) 2020 2019 2020 2019

Cost of transportation and services $ — $ — $ 1 $ 3

Direct operating expense — 1 6 1

Sales, general and administrative expense — 10 46 24

Total $ — $ 11 $ 53 $ 28

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

We recorded restructuring charges of $4 million and $3 million in Sales, general and administrative expense on our Condensed Consolidated Statements of Income for the first three months of 2021 and 2020, respectively.

For more information, see Note 5—Restructuring Charges to the Condensed Consolidated Financial Statements.

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

We expect to incur additional restructuring charges during the fourth quarter of fiscal 2020 of approximately $10 million under previously approved restructuring actions.

In addition, we may incur incremental restructuring costs in 2020 as we modify and right-size our operations due to the business impacts of COVID-19;

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

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

Transportation Segment

Three Months Ended September 30, Percent of Revenue Change Nine Months Ended September 30, Percent of Revenue Change

Three Months Ended March 31, Percent of Revenue Change

(Dollars in millions) 2021 2020 2021 2020 2021 vs.

2019 2020 2019 2020 2019 2020 vs.

Revenue $ 2,989 $ 2,459 100.0 % 100.0 % 21.6 %

Operating income 209 120 7.0 % 4.9 % 74.2 %

Total depreciation and amortization 114 110 3.6 % 337 334 0.9 %

Transportation segment revenue decreased 0.3% to $2.7 billion for the third quarter of 2020, compared with $2.7 billion for the same quarter in 2019.

Revenue decreased 10.2% to $7.3 billion for the first nine months of 2020, compared with $8.1 billion for the same period in 2019.

The decline in revenue in both the third quarter and the nine-month period of 2020 reflected the impact of COVID-19.

Partially offsetting the decline in the third quarter of 2020 was growth in freight brokerage and last mile revenues compared to the same quarter in 2019.

The revenue decrease in the first nine months of 2020 also reflected the curtailment of our direct postal injection business in the first quarter of 2019.

Additionally, foreign currency movement increased revenue by approximately 1.2 percentage points in the third quarter of 2020.

Foreign currency movement had no impact on revenue for the first nine months of 2020.

Transportation segment operating income was $202 million, or 7.6% of revenue, for the third quarter of 2020, compared with operating income of $208 million, or 7.7% of revenue, for the same quarter in 2019.

Operating income for the first nine months of 2020 was $307 million, or 4.2% of revenue, compared with $579 million, or 7.2% of revenue, for the same period in 2019.

The decrease in operating income in the third quarter of 2020 reflects incremental PPE and other COVID-19 related costs.

The decrease in operating income in the first nine months of 2020 was primarily driven by lower revenue, higher facility costs, expenses related to our exploration of strategic alternatives, higher restructuring and bad debt expenses, and incremental PPE and other COVID-19-related costs.

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

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

Depreciation and amortization 115 110 4.5 %

Revenue in our Transportation segment increased 21.6% to $3.0 billion for the first quarter of 2021, compared with $2.5 billion for the same period in 2020.

The increase in revenue in the first quarter of 2021 reflected strong growth in freight brokerage and LTL revenues.

Additionally, foreign currency movement increased revenue by approximately 2.5 percentage points in the first quarter of 2021.

Operating income in our Transportation segment was $209 million, or 7.0% of revenue, for the first quarter of 2021, compared with $120 million, or 4.9% of revenue, for the same period in 2020.

The increase in operating income in the first three months of 2021 was primarily driven by higher revenue, partially offset by higher third-party transportation and personnel costs.

Additionally, the first quarter of 2020 included approximately $7 million of expenses related to our exploration of strategic alternatives.

Logistics Segment

Three Months Ended September 30, Percent of Revenue Change Nine Months Ended September 30, Percent of Revenue Change

Three Months Ended March 31, Percent of Revenue Change

(Dollars in millions) 2021 2020 2021 2020 2021 vs.

2019 2020 2019 2020 2019 2020 vs.

Revenue $ 1,818 $ 1,437 100.0 % 100.0 % 26.5 %

Operating income 68 38 3.7 % 2.6 % 78.9 %

Total depreciation and amortization 76 73 4.1 % 225 201 11.9 %

Logistics segment revenue increased 4.6% to $1.6 billion for the third quarter of 2020, compared with $1.5 billion for the same quarter in 2019.

Revenue decreased 2.4% to $4.4 billion for the first nine months of 2020, compared with $4.5 billion for the same period in 2019.

The increase in revenue in the third quarter of 2020 compared to the same quarter in 2019 reflects strong growth in our European business, particularly in the e-commerce and food and beverage sectors.

This increase was partially offset by the continued impact of COVID-19 and our elimination of certain low-margin business.

The decrease in revenue in the first nine months of 2020 compared to the same period in 2019 reflects the impact of COVID-19, our elimination of certain low-margin business and the downsizing of business by our largest customer in North America.

Additionally, foreign currency movement increased revenue by approximately 2.9 percentage points in the third quarter of 2020.

Foreign currency movement had no impact on revenue for the first nine months of 2020.

Logistics segment operating income was $77 million, or 4.9% of revenue, for the third quarter of 2020, compared with operating income of $61 million, or 4.0% of revenue, for the same quarter in 2019.

Operating income for the first nine months of 2020 was $72 million, or 1.6% of revenue, compared with operating income of $168 million, or

3.7% of revenue, for the same period in 2019.

The increase in operating income in the third quarter of 2020 compared to the same quarter in 2019 reflects higher revenue, partially offset by higher personnel and facility costs.

The decrease in operating income in the first nine months of 2020 compared to the same period in 2019 was primarily driven by lower revenue, increased depreciation and amortization expense, expenses related to our exploration of strategic alternatives, restructuring expenses and incremental PPE and other COVID-19-related costs, partially offset by lower temporary labor costs.

Depreciation and amortization expense was higher in the first nine months of 2020 compared to the prior-year period due to the impact of prior capital investments, new contract startups, and accelerated depreciation due to contract modifications.

Depreciation and amortization 74 69 7.2 %

Revenue in our Logistics segment increased 26.5% to $1.8 billion for the first quarter of 2021, compared with $1.4 billion for the same period in 2020.

The increase in revenue in the first quarter of 2021 compared to the same period in 2020 reflects strong growth in our European business, including the impact of the acquired Kuehne + Nagel business in January 2021, which contributed approximately 8.2 percentage points to segment revenue growth.

Additionally, foreign currency movement increased revenue by approximately 5.5 percentage points in the first quarter of 2021.

Operating income in our Logistics segment was $68 million, or 3.7% of revenue, for the first quarter of 2021, compared with operating income of $38 million, or 2.6% of revenue, for the same period in 2020.

The increase was primarily driven by higher revenue, partially offset by higher personnel and facilities costs.

Liquidity and Capital Resources

As of September 30, 2020, we had cash and cash equivalents of $2.0 billion.

As of March 31, 2021, we had cash and cash equivalents of $629 million.

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

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

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

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

As of September 30, 2020, we have $884 million available to draw under our ABL Facility, based on a borrowing base of $1.1 billion, outstanding borrowings of $200 million and outstanding letters of credit of $16 million.

We also have $150 million available to draw under the Senior Secured Term Loan Credit Agreement.

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

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

We borrowed a net $200 million in revolving loans under our existing ABL Facility during the nine months ended September 30, 2020.

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

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

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

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

As of March 31, 2021, we have $1.084 billion available to draw under our ABL Facility, based on a borrowing base of $1.1 billion and outstanding letters of credit of $16 million.

Additionally, under our Senior Secured Term Loan Credit Agreement, we have a $200 million uncommitted secured evergreen letter of credit facility, under which we have issued $198 million in aggregate face amount of letters of credit as of March 31, 2021.

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

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For these transfers, the receivables are removed from our Condensed Consolidated Balance Sheets at the date of transfer.

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

In the securitization and factoring arrangements, 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 Condensed Consolidated Balance Sheets.

These borrowings amounted to €43 million ($50 million) as of September 30, 2020.

See Note 6—Debt to our Condensed Consolidated Financial Statements for additional information on these borrowings.

Under a securitization program that was terminated in July 2019, if transfers were accounted for as sales, the consideration received included a simultaneous cash payment and a deferred purchase price receivable.

The deferred purchase price receivable was not a trade receivable and was recorded based on its fair value and reported within Other current assets on our Condensed Consolidated Balance Sheets.

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

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

The new program does not include a deferred purchase price mechanism.

The maximum amount of net cash proceeds available at any one time under the current securitization program is €400 million (approximately $469 million as of September 30, 2020), and this amount includes any unsecured borrowings related to the program.

As of September 30, 2020, €294 million (approximately $345 million) of capacity was utilized under the program and €106 million (approximately $124 million) was available to us.

The securitization program expires in July 2022 and contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio.

Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables, which we report within short-term debt on our Condensed Consolidated Balance Sheets.

We had no such borrowings outstanding as of March 31, 2021 and €41 million ($50 million) as of December 31, 2020.

The maximum amount of net cash proceeds available at any one time under the securitization program, inclusive of any unsecured borrowings, is €400 million (approximately $469 million as of March 31, 2021).

As of March 31, 2021, €82 million (approximately $96 million) was available to us, subject to having sufficient receivables available to sell to the Purchasers.

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

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

In the first quarter of 2021 and 2020, we collected cash as servicer of $770 million and $690 million, respectively.

Information related to the trade receivables sold was as follows:

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(In millions) 2021 2020

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Receivables sold in period

$ 750 $ 790 $ 2,039 $ 1,451

Cash consideration

750 787 2,039 1,316

Deferred purchase price

Factoring programs

Receivables sold in period

$ 112 $ 196 $ 575 $ 615

Cash consideration

112 195 574 612

In addition to the cash considerations referenced above, we received $49 million and $186 million in the three and nine months ended September 30, 2019, respectively, for the realization of cash on the deferred purchase price receivable for our prior securitization program.

In April 2020, we entered into the Senior Secured Term Loan Credit Agreement, comprised of a $150 million committed secured term loan facility and a $200 million uncommitted secured evergreen letter of credit facility.

The term loan facility is available to be drawn upon, subject to customary conditions, in multiple borrowings within nine months of the closing date.

Any term loans thereunder will bear interest at a rate equal to London Interbank Offered Rate (“LIBOR”) or base rate, at our election, plus an applicable margin of 3.00% to 4.50%, for LIBOR loans, or 2.00% to 3.50%, for base rate loans, in each case depending upon the time elapsed since the closing date.

The term loan facility matures in April 2021.

Letters of credit under the letter of credit facility shall expire within one year of issuance and may contain automatic one-year renewals until the letter of credit facility terminates.

As of September 30, 2020, we have issued $199 million in aggregate face amount of letters of credit, and have not drawn on the term loan commitments.

The credit agreement governing the term loan and letter of credit facilities contains representations and warranties and affirmative and negative covenants customary for financings of this type as well as customary events of default.

Term Loan Facilities

In March 2019, we entered into an amendment to our senior secured term loan credit agreement and borrowed an additional $500 million of incremental loans under a new tranche of term loans.

For more information on these amendments, refer to Note 6—Debt to our Condensed Consolidated Financial Statements.

Senior Notes due 2025

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

The Senior Notes due 2025 mature on May 1, 2025 and bear interest at a rate of 6.25% per annum.

Interest on the notes is paid semi-annually.

$850 million of the notes were issued at par, and $300 million of the notes were issued subsequently at 101.75% of face value.

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

The Senior Notes due 2025 are guaranteed by each of our direct and indirect wholly-owned restricted subsidiaries (other than some excluded subsidiaries) that are obligors under, or guarantee obligations under, our ABL Facility or existing term loan facilities or guarantee certain of our other indebtedness.

The Senior Notes due 2025 and the related guarantees are unsecured, unsubordinated indebtedness for us and our guarantors.

The Senior Notes due 2025 contain covenants customary for notes of this nature.

In the first quarter of 2021, we amended the Term Loan Credit Agreement to consolidate our tranches and lower the interest rate.

The applicable terms of the Term Loan Credit Agreement are as follows:

December 31, 2020

(In millions) March 31, 2021 First Tranche Second Tranche

Principal balance $ 2,003 $ 1,503 $ 500

Interest spread:

Base rate loans 0.75 % 1.00 % 1.50 %

LIBOR loans 1.75 % 2.00 % 2.50 %

Maturity date February 2025 February 2025 February 2025

We recorded a debt extinguishment loss of $3 million in the first quarter of 2021 due to this amendment.

Senior Notes due 2022

In February 2019, we completed a private placement of $1.0 billion aggregate principal amount of senior notes (“Senior Notes due 2024”), which bear interest at a rate of 6.75% per annum.

Proceeds from the Senior Notes due 2024 were used to repay our outstanding obligation under an unsecured credit facility and to finance a portion of our share repurchases described in Note 7—Stockholders’ Equity to our Condensed Consolidated Financial Statements.

Borrowings related to Securitization Program

Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables.

These borrowings, which amounted to $50 million as of September 30, 2020, are owed to the program’s Purchasers and are included in short-term debt until they are repaid in the following month’s settlement.

There were no borrowings related to the program at December 31, 2019.

The securitization program expires in July 2022 and contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio.

For additional information on the securitization program, see Note 1—Organization, Description of Business and Basis of Presentation to our Condensed Consolidated Financial Statements.

In January 2021, we redeemed our outstanding 6.50% senior notes due 2022.

The redemption price for the notes was 100.0% of the principal amount, plus accrued and unpaid interest.

We paid for the redemption with available cash.

We recorded a debt extinguishment loss of $5 million in our first quarter 2021 results of operations due to this redemption.

Preferred Stock and Warrant Exchanges

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

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

With respect to the preferred stock, through December 31, 2020, 69,445 shares were exchanged, and we issued 9.9 million shares of common stock and paid $22 million of cash.

With respect to the warrants, through December 31, 2020, 0.3 million warrants were exchanged, and we issued 0.3 million shares of common stock.

In the first quarter of 2021, 975 preferred shares were exchanged, and we issued 0.1 million shares of common stock.

With respect to the warrants, in the first quarter of 2021, 9.8 million warrants were exchanged, and we issued 9.2 million shares of common stock.

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

Share Repurchases

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

The share repurchases under the 2018 Program were funded by an unsecured credit facility and our available cash.

In February 2019, our Board of Directors authorized additional repurchases of up to $1.5 billion of our common stock (the “2019 Program”).

The 2019 authorization permits us to purchase shares in both the open market and in private transactions, with the timing and number of shares dependent on a variety of factors, including price, general business conditions, market conditions, alternative investment opportunities and funding considerations.

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

Our share repurchase authorization permits us to purchase shares in both the open market and in private transactions, with the timing and number of shares dependent on a variety of factors, including price, general business conditions, market conditions, alternative investment opportunities and funding considerations.

We are not obligated to repurchase any specific number of shares and may suspend or discontinue the program at any time.

The share purchases under the 2019 Program were funded by our available cash and proceeds from our 2019 debt offerings.

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

Three Months Ended September 30, Nine Months Ended September 30,

(In millions, except per share data) 2020 2019 2020 2019

Shares purchased and retired — — 2 25

Aggregate value $ — $ — $ 114 $ 1,347

Average price per share $ — $ — $ 66.58 $ 53.41

Remaining authorization $ 503 $ 617 $ 503 $ 617

In the first quarter of 2020, we purchased and retired 2 million shares at an aggregate value of $114 million.

The share purchases were funded by our available cash and proceeds from our 2019 debt offerings.

There were no share purchases in the first quarter of 2021.

Our remaining share repurchase authorization was $503 million as of March 31, 2021.

Loan Covenants and Compliance

As of September 30, 2020, we were in compliance with the covenants and other provisions of our debt agreements.

As of March 31, 2021, we were in compliance with the covenants and other provisions of our debt agreements.

Any failure to comply with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.

Sources and Uses of Cash

Nine Months Ended September 30,

Three Months Ended March 31,

(In millions) 2021 2020

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Net increase (decrease) in cash, cash equivalents and restricted cash $ (1,425) $ 750

During the nine months ended September 30, 2020, we:

(i) generated cash from operating activities of $692 million;

(ii) generated proceeds from sales of property and equipment (primarily real estate) of $148 million;

and (iii) received net proceeds of $1.4 billion from our issuances of debt and short-term borrowings.

During the three months ended March 31, 2021, we:

(i) generated cash from operating activities of $173 million and (ii) generated proceeds from sales of property and equipment of $36 million.

We used cash during this period primarily to:

(i) purchase property and equipment of $140 million;

(ii) repurchase common stock of $114 million;

and (iii) make payments on debt and finance leases of $65 million.

During the nine months ended September 30, 2019, we:

(ii) redeem our senior notes due 2022 for $1.2 billion;

(iii) repay our ABL Facility borrowings of $200 million;

and (iv) repay borrowings related to our securitization program of $49 million.

During the three months ended March 31, 2020, we:

(i) generated cash from operating activities of $180 million;

(ii) generated proceeds from sales of property and equipment of $192 million;

(iii) collected $186 million on a deferred purchase price receivable, and (iv) received proceeds of $1.8 billion from our issuances of long-term debt.

(ii) received net proceeds of $782 million from our issuances of debt and short-term borrowings and (iii) generated proceeds from sales of property and equipment (primarily real estate) of $54 million.

We used cash during this period primarily to:

(i) purchase property and equipment of $413 million, (ii) repurchase common stock of $1.3 billion, and (iii) make payments on long-term debt and capital leases of $850 million.

Cash flows from operating activities for the nine months ended September 30, 2020 increased by $250 million, compared with the same period in 2019.

The increase reflects the impact of lower cash usage of $567 million from operating assets and liabilities, partially offset by $317 million of lower cash-related net income for the nine months ended September 30, 2020, compared with the same period in 2019.

Cash-related net income represents total cash flows from operating activities less changes in assets and liabilities on the Condensed Consolidated Statements of Cash Flows.

The largest components of cash-related net income are generally Net income (loss) plus Depreciation, amortization and net lease activity.

Within operating assets and liabilities, accrued expenses and other liabilities was a significant source of cash for the nine months ended September 30, 2020 as compared to a use of cash in the prior period.

This fluctuation reflects the deferral of certain tax payments and an increase in compensation, insurance and severance accruals.

Investing activities used $224 million and $35 million of cash in the nine months ended September 30, 2020 and 2019, respectively.

During the nine months ended September 30, 2020, we used $377 million of cash to purchase property and equipment and received $148 million from sales of property and equipment.

During the nine months ended September 30, 2019, we used $413 million of cash to purchase property and equipment, received $192 million from sales of property and equipment and received proceeds of $186 million related to the realization of cash on deferred purchase price receivable.

Financing activities provided $1.2 billion of cash in the nine months ended September 30, 2020 and used $479 million of cash in the nine months ended September 30, 2019.

The primary sources of cash from financing activities during the nine months ended September 30, 2020 were:

(i) $1.1 billion of net proceeds from the issuance of Senior Notes due 2025;

(ii) $200 million of proceeds from borrowings on our ABL Facility, net of payments;

and (iii) $48 million from borrowings related to our securitization program.

The primary uses of cash from financing activities during the first nine months of 2020 were $114 million used to purchase XPO common stock, and $65 million used to repay debt and finance leases.

By comparison, the primary uses of cash during the nine months ended September 30, 2019 were the $1.3 billion repurchase of XPO common stock and $850 million used to repay debt and finance leases.

The primary sources of cash from financing activities during the nine months ended September 30, 2019 were $1.7 billion of net proceeds from the issuance of long-term debt, consisting of the incremental term loans, Senior Notes due 2024 and borrowings under an unsecured credit facility that terminated in February 2019.

(i) purchase property and equipment of $139 million and (ii) repurchase common stock of $114 million.

Cash flows from operating activities for the three months ended March 31, 2021 decreased by $7 million, compared with the same period in 2020.

Accounts receivable were a use of cash for the three months ended March 31, 2021, as compared to a source of cash in the prior period, reflecting higher revenues in the current period and a year-over-year decrease in proceeds from factoring.

Partially offsetting the impact of accounts receivable was higher net income of $93 million for the three months ended March 31, 2021, compared with the same period in 2020.

Investing activities used $95 million and $79 million of cash in the three months ended March 31, 2021 and 2020, respectively.

During the three months ended March 31, 2021, we used $140 million of cash to purchase property and equipment and received $36 million from sales of property and equipment.

During the three months ended March 31, 2020, we used $139 million of cash to purchase property and equipment and received $54 million from sales of property and equipment.

Financing activities used $1.5 billion of cash in the three months ended March 31, 2021 and provided $668 million of cash in the three months ended March 31, 2020.

The primary uses of cash from financing activities during the first three months of 2021 were $1.2 billion used to redeem the senior notes due 2022, $200 million used to repay borrowings under our ABL Facility and $49 million used to repay our borrowings related to our securitization

The primary sources and uses of cash from financing activities during the three months ended March 31, 2020 were $600 million of proceeds from borrowings on our ABL Facility, net of payments and $182 million of net proceeds from borrowings related to our securitization program, partially offset by $114 million used to purchase XPO common stock.

Contractual Obligations

As described in more detail above, we received proceeds of approximately $1.15 billion from our issuance of Senior Notes due 2025 in the second quarter of 2020.

Additional interest payments related to this debt of approximately $36 million are due in the fourth quarter of 2020, and additional annual interest payments of approximately $72 million are due in 2021 through 2024 and $36 million in 2025.

During the nine months ended September 30, 2020, there were no other material changes to our December 31, 2019 contractual obligations.

We anticipate net capital expenditures will be approximately $100 million to $120 million in the fourth quarter of 2020 and $330 million to $350 million for full-year 2020, which reflects a decrease of approximately $160 million from the estimate provided in our 2019 Form 10-K, primarily due to the impact of COVID-19, as discussed previously.

During the three months ended March 31, 2021, there were no material changes to our December 31, 2020 contractual obligations.

We anticipate net capital expenditures to be between $500 million and $550 million in 2021 (without giving effect to the planned spin-off of our Logistics segment), which reflects an increase of approximately $25 million from the estimate provided in our 2020 Form 10-K.

New Accounting Standards

1 unchanged sentence

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What changed 10-Q

Item 2. Management’s Discussion and Analysis