What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-04 · 244 added, 247 removed, 116 unchanged (81% of the section changed)

12 unchanged sentences

Executive Summary

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, 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.

XPO Logistics, Inc., a Delaware corporation, together with its subsidiaries (“XPO,” or “we”), is a leading provider of freight transportation services, primarily less-than-truckload (“LTL”) and truck brokerage services.

We use our proprietary technology to move goods efficiently through our customers’ supply chains.

Our two core lines of business, LTL and truck brokerage, generated the vast majority of our 2020 revenue and operating income.

Our company has two reportable segments — (i) North American LTL and (ii) Brokerage and Other Services — and within each segment, we are a top-three provider in vast, fragmented transportation sectors with growing penetration.

As of September 30, 2021, we had approximately 42,000 employees and 756 locations in 20 countries serving over 50,000 multinational, national, regional and local customers.

In addition to our scale, we believe that our outsized exposure to secular industry growth trends, our first-mover advantage as an innovator and our blue-chip customer relationships are compelling competitive advantages.

On August 2, 2021, we completed the previously announced spin-off of our Logistics segment in a transaction intended to qualify as tax-free to our stockholders for U.S.

3 unchanged sentences

XPO does not beneficially own any shares of GXO’s common stock following the spin-off.

GXO, a global provider of contract logistics services, is an independent public company trading under the symbol “GXO” on the New York Stock Exchange.

The historical results of operations and the financial position of GXO are included in these condensed consolidated financial statements.

After the spin-off, we will no longer consolidate GXO, and all periods prior to the spin-off will reflect our Logistics segment as a discontinued operation.

In connection with the spin-off, we have entered into a separation and distribution agreement as well as various other agreements with GXO that provide a framework for the relationships between the parties going forward, including, among others, an employee matters agreement, a tax matters agreement, an intellectual property license agreement and a transition services agreement, through which XPO will continue to provide certain services to GXO following the spin-off.

With the completion of the spin-off, XPO is a leading provider of transportation services, primarily less-than-truckload (“LTL”) transportation and truck brokerage services.

As of June 30, 2021, we had approximately 141,000 team members (comprised of approximately 107,000 full-time and part-time employees and 34,000 third-party, temporary workers), and 1,623 locations in 30 countries.

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

We use our highly extensive 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 we are targeting for XPO to receive investment-grade credit ratings in the future.

As discussed in greater detail below, as of June 30, 2021, we had $1.9 billion of available liquidity, including $801 million of cash and cash equivalents.

Transportation Segment

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 June 30, 2021, we had truck brokerage relationships with approximately 85,000 independent carriers representing over 1,000,000 trucks.

Our truck brokerage operations are a central part of the freight brokerage services we provide, which also include additional, asset-light services for expedite, intermodal and drayage.

The owned capacity of our Transportation segment 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.

Logistics Segment

Our Logistics segment 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 as of June 30, 2021, 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 June 30, 2021, we operated 208 million square feet (19 million square meters) of logistics warehouse space worldwide.

Approximately 97 million square feet (8 million square meters) was located in North America;

104 million square feet (10 million square meters) was located in Europe;

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

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, 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 six consecutive years.

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

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

In the U.K., the Digital Distribution Warehouse of the Future we created with Nestlé 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 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.

GXO is an independent public company trading under the symbol “GXO” on the New York Stock Exchange.

The historical results of operations and the financial position of our Logistics segment for periods prior to the spin-off are presented as discontinued operations in these Condensed Consolidated Financial Statements.

For information on our discontinued operations, see Note 2—Discontinued Operations.

During the three and nine months ended September 30, 2021, we incurred approximately $68 million and $111 million, respectively, of costs related to the spin-off, of which $57 million and $96 million, respectively, are reflected within income (loss) from discontinued operations in our Condensed Consolidated Statements of Income (Loss).

In connection with the spin-off, we entered into a separation and distribution agreement as well as various other agreements with GXO that provide a framework for the relationships between the parties going forward, including, among others, an employee matters agreement, a tax matters agreement, an intellectual property license agreement and a transition services agreement, through which XPO will continue to provide certain services for a period of time specified in the applicable agreement to GXO following the spin-off.

The impact of these services on the condensed consolidated financial statements was immaterial.

On September 30, 2021, following the completion of spin-off-related and planned deleveraging activities, we had approximately $1.2 billion of total liquidity, including $254 million of cash and cash equivalents.

For more information on the third quarter 2021 redemption of our 2023 and 2024 Senior Notes, see Note 7—Debt.

We are committed to a target leverage of 1.0x to 2.0x by the first half of 2023 as a key step in our process to achieve an investment-grade credit rating for XPO.

North American Less-Than-Truckload Segment

XPO is a top three provider of LTL services in North America — we have one of the industry’s largest asset-based networks of tractors, trailers, drivers and terminals, and approximately 8% share of the $42 billion market as of December 31, 2020.

We provide our customers with geographic density and day-definite regional, inter-regional and transcontinental LTL freight services.

Our services include cross-border U.S.

freight movements to and from Mexico and Canada, as well as intra-Canada service.

We have relationships with over 25,000 LTL customers in North America, primarily local accounts, and we are further diversifying our base by selling our LTL services across more verticals.

For the trailing 12 months ended September 30, 2021, we delivered approximately 13 million LTL shipments.

In addition to reliable national capacity, the other key factors driving our LTL growth and margin expansion are our proprietary technology and the industry’s favorable fundamentals — limited commoditization, rational pricing dynamics, rising industrial demand and the continued growth of e-commerce, which is driving smaller, more frequent shipments.

Specific to XPO, we believe that we have a significant opportunity to leverage our technology to improve LTL profitability beyond the sizable margin gains we have already achieved.

We use intelligent route-building to move LTL freight across North America, and proprietary visualization tools to help reduce the cost of pickups and deliveries.

Currently, we are developing software to improve our ability to price in a dynamic market, and are deploying our XPO Smart® tools in LTL yards and cross-dock operations to enhance productivity.

Brokerage and Other Services Segment

XPO is the third largest truck brokerage service provider in North America, and the second largest truck broker globally, with approximately 3% share of the $64 billion North American market as of December 31, 2020.

Essentially, shippers create the truckload demand and we place their freight with qualified carriers, pricing our service on either a spot or contract basis.

Our truck brokerage business has an agile, non-asset model and variable labor structure that generate high return on investment (“ROI”) and free cash flow conversion.

The key factors driving growth and margin expansion in our truck brokerage business are massive capacity, cutting-edge technology and favorable industry tailwinds.

The demand for truckload capacity in the e-commerce and omnichannel retail sectors is growing rapidly.

At the same time, more and more shippers are outsourcing to brokers and increasingly preferring brokers like XPO that offer digital capabilities.

As of September 30, 2021, we had approximately 91,000 independent carriers in our global brokerage network, giving us access to more than a million trucks on our XPO Connect® digital platform.

This digital access to enormous capacity is a standout differentiator for our business.

We believe that XPO Connect®, together with our brokerage pricing technology, can unlock incremental profitable growth well beyond our current levels.

Our Brokerage and Other Services segment also includes exposure to one of the fastest-growing brokerage subsectors —last mile logistics for heavy goods sold through e-commerce, omnichannel retail and direct-to-consumer channels.

XPO is the largest provider of home delivery for heavy goods in North America.

Several other non-core brokered freight transportation modes are included in our Brokerage and Other Services segment, as well as our European service offering.

In Europe, XPO is the No.

1 truck broker and the No.

1 LTL provider in France and Iberia (Spain / Portugal), and the No.

3 truck broker in the UK, where we have the largest single-owner LTL network.

Innovation and Sustainability

A decade after making our first technology investment in 2011, we are now reaping the benefits of more than $3 billion spent on technology, including innovating how goods move through supply chains.

Our industry is evolving, and customers want to de-risk their supply chains with more automation and better visibility.

We are well-positioned to satisfy these demands.

We use technology to increase our ROI and build our competitive differentiation, to serve our customers better and to make the most of the talent and assets within our organization.

Our cloud-based platform speeds the deployment of new ways to increase efficiency, control costs and leverage our footprint.

We concentrate our efforts on creating “smart” supply chains as the most meaningful way to create value for our shareholders and our customers.

Environmental sustainability is another significant priority for us.

Our entire business model is based on transporting freight as efficiently as possible.

This facilitates our ability to improve our carbon footprint over time by reducing empty miles, maintaining a modern fleet and training our drivers in eco-friendly techniques, among other initiatives.

In North America, XPO has been named a Top 75 Green Supply Chain Partner by Inbound Logistics for six consecutive years.

We have made substantial investments in fuel-efficient Freightliner Cascadia tractors;

these use EPA 2013-compliant and Greenhouse Gas 2014-compliant selective catalytic reduction (“SCR”) technology.

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

Our Last Mile business is deploying electric box trucks in partnership with a client, supporting the client’s global climate initiatives.

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

We also own over 250 natural gas trucks operating in France, the UK, Spain and Portugal, including 80 tractors we purchased in 2020 that use liquified natural gas (“LNG”).

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 affected, and may 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 adverse effects on our results of operations and financial condition for the three and six months ended June 30, 2020, and to a lesser extent for the three and six months ended June 30, 2021, 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.

Our results of operations may 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.

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.

We publish an annual Sustainability Report, available online at sustainability.xpo.com, that provides details of our company’s global progress in key areas, including safety, employee engagement, diversity and inclusion, ethics and compliance, environmental protection and governance.

Impacts of COVID-19 and Supply Chain Challenges

As a leading provider of freight transportation services, our business can be impacted to varying degrees by factors beyond our control.

The COVID-19 pandemic that emerged in 2020 affected, and may continue to affect, economic activity broadly and customer sectors served by our industry.

We believe that the onset of the COVID-19 pandemic and associated impacts on economic activity had adverse effects on our results of operations and financial condition for the nine months ended September 30, 2020.

The rebound of our business began to occur midway through 2020;

however, as the economy recovers, demand has outpaced supply in certain sectors.

Additionally, labor shortages in the recovery – notably, a reduced supply of truck drivers – present challenges to many service industries, including freight transportation.

These dynamics, together with equipment shortages and pent-up demand for semiconductor chips used by some of our end markets, have created supply chain disruptions and increased our cost of transportation and services.

We cannot predict how long the current labor shortages and other disruptions will last, or whether future disruptions, if any, will adversely affect our results of operations.

We continue to incur 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, referred to as COVID-19 related costs in this Form 10-Q.

We are executing a company-specific action plan to enhance network efficiencies and drive growth in our LTL business, including:

• Improving network flow with selective freight embargoes, with the cost embedded in 2021 guidance;

• Driving pricing by pulling the January 2022 General Rate Increase forward to November and instituting accessorial charges for detained trailers, oversized freight and special handling;

• Expanding the 2022 graduate count at XPO’s U.S.

truck driver training schools to more than double the nearly 800 graduates the company will have in 2021;

• Significantly increasing production capacity at XPO’s manufacturing facility in Arkansas, with the expectation of nearly doubling the year-over-year number of units produced in 2022;

• Allocating capital to expand North American LTL door count by 900 doors, or approximately 6%, over the next 12 to 24 months to improve network-wide operating efficiency and support future revenue growth.

The totality of the actions we have taken during the pandemic, and continue to take, 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.

Impact of Inflation

Inflation can have a negative impact on our operating costs.

A prolonged period of inflation could cause interest rates, fuel, wages and other costs to increase, which would adversely affect our results of operations unless our pricing to our customers correspondingly increases.

For the third quarter and first nine months ended September 30, 2021, the constrained labor market resulted in higher third-party transportation costs to meet growing demand which were partially offset by increased pricing to our customers.

Consolidated Summary Financial Table

Three Months Ended June 30, Percent of Revenue Change Six Months Ended June 30, Percent of Revenue Change

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

(Dollars in millions) 2021

2021 2020 2021 vs.

2020 2021 (3)

2021 2020 2021 vs.

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Sales, general and administrative expense 339 294 10.4 % 11.0 % 15.3 % 1,001 915 10.6 % 12.6 % 9.4 %

Operating income (loss) 246 (141) 4.9 % (4.0) % NM 448 (60) 4.6 % (0.8) % NM

Depreciation and amortization expense 118 119 3.6 % 4.4 % (0.8) % 357 351 3.8 % 4.8 % 1.7 %

Transaction and integration costs 15 — 0.5 % — % 100.0 % 26 66 0.3 % 0.9 % (60.6) %

Restructuring costs 14 — 0.4 % — % 100.0 % 16 31 0.2 % 0.4 % (48.4) %

Operating income 112 138 3.4 % 5.2 % (18.8) % 442 75 4.7 % 1.0 % NM

Other income (15) (12) (0.5) % (0.4) % 25.0 % (43) (31) (0.5) % (0.4) % 38.7 %

Foreign currency (gain) loss 3 3 0.1 % 0.1 % — % 1 (5) — % (0.1) % (120.0) %

Debt extinguishment loss — — — % — % — % 8 — 0.1 % — % NM

Foreign currency (gain) loss (4) 1 (0.1) % — % NM (2) (5) — % (0.1) % (60.0) %

Debt extinguishment loss 46 — 1.4 % — % 100.0 % 54 — 0.6 % — % 100.0 %

Interest expense 53 81 1.6 % 3.0 % (34.6) % 176 226 1.9 % 3.1 % (22.1) %

Income (loss) before income tax provision (benefit) 204 (205) 4.1 % (5.9) % NM 357 (170) 3.6 % (2.3) % NM

Income tax provision (benefit) 46 (71) 0.9 % (2.0) % NM 81 (61) 0.8 % (0.8) % NM

Income (loss) from continuing operations before income tax provision (benefit) 32 68 1.0 % 2.5 % (52.9) % 257 (115) 2.7 % (1.6) % NM

Income tax provision (benefit) 11 31 0.3 % 1.2 % (64.5) % 60 (36) 0.6 % (0.5) % NM

Income (loss) from continuing operations 21 37 0.6 % 1.4 % (43.2) % 197 (79) 2.1 % (1.1) % NM

Income (loss) from discontinued operations, net of taxes (78) 61 (2.4) % 2.3 % NM 22 68 0.2 % 0.9 % (67.6) %

Net income (loss) $ (57) $ 98 (1.7) % 3.7 % NM $ 219 $ (11) 2.3 % (0.2) % NM

NM - Not meaningful

(1) Consolidated operating income for the three months ended June 30, 2021 includes $35 million of transaction and integration costs and $2 million of restructuring income.

$2 million of the transaction and integration costs relate to our Transportation segment, $7 million relate to our Logistics segment and $26 million relate to Corporate.

(2) Consolidated operating loss for the three months ended June 30, 2020 includes $46 million of transaction and integration costs and $50 million of restructuring expense.

$13 million of the transaction and integration costs relate to our Transportation segment, $18 million relate to our Logistics segment and $15 million relate to Corporate.

(3) Consolidated operating income for the six months ended June 30, 2021 includes $53 million of transaction and integration costs and $2 million of restructuring expense.

$3 million of the transaction and integration costs relate to our Transportation segment, $12 million relate to our Logistics segment and $38 million relate to Corporate.

(4) Consolidated operating loss for the six months ended June 30, 2020 includes $90 million of transaction and integration costs and $53 million of restructuring expense.

$20 million of the transaction and integration costs relate to our Transportation segment, $25 million relate to our Logistics segment and $45 million relate to Corporate.

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

The transaction and integration costs for the first six 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 net incremental and direct costs as a result of the COVID-19 pandemic in the second quarter and first six months of 2021 and 2020.

Three and Six Months Ended June 30, 2021 Compared with Three and Six Months Ended June 30, 2020

Revenue for the second quarter of 2021 increased 43.8% to $5.0 billion, compared with the same quarter in 2020.

Revenue for the first six months of 2021 increased 33.2% to $9.8 billion compared with the same period in 2020.

The increase in revenue in the second quarter and first six months of 2021 compared to the same periods in 2020 reflects the impact of COVID-19 on our results in 2020 and strong growth in both our transportation and logistics businesses, including the impact of the acquired Kuehne + Nagel business in January 2021.

The Kuehne + Nagel business contributed approximately 4.3 percentage points to revenue growth for the second quarter of 2021 and 3.6 percentage points for the first six months of 2021.

Additionally, foreign currency movement increased revenue by approximately 4.5 percentage points in the second quarter of 2021 and 3.8 percentage points in the first six months 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 second quarter of 2021 was $2.5 billion, or 49.9% of revenue, compared with $1.6 billion, or 46.9% of revenue, for the same period in 2020.

Cost of transportation and services for the first six months of 2021 was $4.8 billion, or 49.4% of revenue, compared with $3.5 billion or 48.0% of revenue, for the same period in 2020.

The year-over-year increase as a percentage of revenue in both periods reflects higher costs in both segments, as well as the impact of a higher proportion of revenue from our Transportation segment in 2021 as compared to prior year.

Three and Nine Months Ended September 30, 2021 Compared with Three and Nine Months Ended September 30, 2020

Revenue for the third quarter of 2021 increased 22.2% to $3.3 billion, compared with the same quarter in 2020.

Revenue for the first nine months of 2021 increased 30.1% to $9.4 billion compared with the same period in 2020.

The increase in revenue in the third quarter and first nine months of 2021 compared to the same periods in 2020 reflects growth in both our LTL and truck brokerage businesses and the negative impact of COVID-19 in 2020 which decreased demand for our services.

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 truck brokerage businesses.

Cost of transportation and services for the third quarter of 2021 was $2.3 billion, or 70.5% of revenue, compared with $1.8 billion, or 67.8% of revenue, for the same period in 2020.

Cost of transportation and services for the first nine months of 2021 was $6.5 billion, or 69.3% of revenue, compared with $4.9 billion or 67.7% of revenue, for the same period in 2020.

The year-over-year increase as a percentage of revenue in both periods reflects the constrained labor market, which resulted in higher third-party transportation costs.

These increases were partially offset by lower COVID-19-related costs.

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 second quarter of 2021 was $1.7 billion, or 33.4% of revenue, compared with $1.4 billion, or 39.1% of revenue, for the same quarter in 2020.

Direct operating expense for the first six months of 2021 was $3.3 billion, or 34.0% of revenue, compared with $2.7 billion, or 37.1% of revenue, for the same period in 2020.

The year-over-year decrease as a percentage of revenue in both periods was primarily driven by the impact of higher proportion of revenue from our Transportation segment in 2021 as compared to prior year as well as lower COVID-19-related, personnel and facilities costs as a percentage of revenue as we leveraged our fixed costs across increased revenues this quarter and six month period.

Direct operating expense for the second quarters of 2021 and 2020 included $7 million and $12 million, respectively, and the first six months of 2021 and 2020 included $31 million and $39 million, respectively, of 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 second quarter of 2021 was $594 million, or 11.8% of revenue, compared with $632 million, or 18.0% of revenue, for the same period in 2020.

SG&A for the first six months of 2021 was $1.18 billion, or 12.0% of revenue, compared with $1.16 billion, or 15.7% of revenue, for the same period in 2020.

SG&A for the second quarter and first six months of 2021 included approximately $31 million and $44 million, respectively, of expenses related to the spin-off of our Logistics segment, including professional service fees.

In comparison, SG&A for the second quarter and first six months of 2020 included approximately $33 million and $73 million, respectively, of expenses related to our exploration of strategic alternatives, including professional service fees and employee retention costs.

Further impacting the decrease in SG&A as a percentage of revenue were lower restructuring charges, COVID-19-related costs and bad debt expense in the second quarter and first six months of 2021.

Other income primarily consists of pension income.

Other income for the second quarter of 2021 was $24 million, compared with $21 million for the same period in 2020.

Other income for the first six months of 2021 was $50 million, compared with $39 million for the same period in 2020.

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

Foreign currency (gain) loss was a $3 million loss for both the second quarter of 2021 and 2020.

Foreign currency (gain) loss was a $1 million loss for the first six months of 2021, compared with an $5 million gain for the same period in 2020.

Foreign currency loss in the first six months of 2021 primarily reflected unrealized losses on foreign currency option and forward contracts.

Foreign currency gain in the first six 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 on foreign currency option and forward contracts.

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 $8 million for the first six 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 second quarter of 2021 or the first six months of 2020.

Interest expense decreased to $63 million for the second quarter of 2021 from $82 million for the second quarter of 2020.

Interest expense decreased to $132 million for the first six months of 2021 from $154 million for the first six months of 2020.

The declines in interest expense reflected the lower debt balances, including the redemption of our senior notes due 2022 in the first quarter of 2021.

Our effective income tax rates were 22.4% and 34.8% for the second quarter of 2021 and 2020, respectively, and 22.5% and 35.8% for the first six months of 2021 and 2020, respectively.

The effective tax rates for the second quarter and six-month periods 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 second 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 second quarter of 2021 was a tax benefit of $6 million from changes in reserves for uncertain tax positions.

The primary items impacting the effective tax rate for the first six months of 2021 included discrete tax benefits of $6 million from changes in reserves for uncertain tax positions and $4 million of excess tax benefit from stock-based compensation.

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

In July 2021, in connection with the spin-off of our Logistics segment, we amended our legal entity structure.

These changes will result in one-time cash and non-cash tax expenses in the second half of 2021.

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

Three Months Ended June 30, Six Months Ended June 30,

(In millions) 2021 2020 2021 2020

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

Direct operating expense — 6 — 6

Sales, general and administrative expense (2) 43 2 46

Total $ (2) $ 50 $ 2 $ 53

Direct operating expenses are comprised of both fixed and variable expenses and consist of operating costs related to our 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, and gains and losses on sales of property and equipment.

Direct operating expense for the third quarter of 2021 was $366 million, or 11.2% of revenue, compared with $310 million, or 11.6% of revenue, for the same quarter in 2020.

Direct operating expense for the first nine months of 2021 was $1.1 billion, or 11.2% of revenue, compared with $904 million, or 12.5% of revenue, for the same period in 2020.

The year-over-year decrease as a percentage of revenue in both periods was primarily driven by the leveraging of compensation and facilities costs across a larger revenue base.

Direct operating expense for the third quarters of 2021 and 2020 included $6 million and $29 million, respectively, and the first nine months of 2021 and 2020 included $36 million and $67 million, respectively, of 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, professional fees, facility costs, bad debt expense and legal costs.

SG&A for the third quarter of 2021 was $339 million, or 10.4% of revenue, compared with $294 million, or 11.0% of revenue, for the same period in 2020.

SG&A for the first nine months of 2021 was $1.0 billion, or 10.6% of revenue, compared with $915 million, or 12.6% of revenue, for the same period in 2020.

The year-over-year decrease as a percentage of revenue in both periods was primarily driven by lower self-insurance expense and third-party professional fees, as well as lower COVID-19-related costs.

Additionally impacting the third quarter of 2021 were lower incentive compensation expense.

These impacts were partially offset by legal costs of $29 million for the third quarter and first nine months of 2021 related to settlements in connection with classification of independent contractors at our Intermodal Drayage business unit.

See Note 10—Legal and Regulatory Matters to the Condensed Consolidated Financial Statements for further information.

Depreciation and amortization expense for the third quarter of 2021 was $118 million, compared with $119 million for the same period in 2020.

Depreciation and amortization expense for the first nine months of 2021 was $357 million, compared with $351 million for the same period in 2020.

Transaction and integration costs for the third quarter of 2021 were $15 million, compared with $— million for the same period in 2020.

Transaction and integration costs for the first nine months of 2021 were $26 million, compared with $66 million for the same period in 2020.

Transaction and integration costs for the third quarter and first nine months of 2021 are primarily related to the spin-off of the Logistics segment.

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

Restructuring costs for the third quarter of 2021 were $14 million, compared with $— million for the same period in 2020.

Restructuring costs for the first nine months of 2021 were $16 million, compared with $31 million for the same period in 2020.

We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure, including actions in connection with our spin-off and in response to COVID-19.

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

We may incur incremental restructuring costs in 2021 in connection with the 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 June 30, Percent of Revenue Change Six Months Ended June 30, Percent of Revenue Change

Upon successful completion of the restructuring initiatives recorded in the first nine months of 2021, we expect to achieve annualized pre-tax run-rate savings of approximately $20 million by mid-2022.

Other income primarily consists of pension income.

Other income for the third quarter of 2021 was $15 million, compared with $12 million for the same period in 2020.

Other income for the first nine months of 2021 was $43 million, compared with $31 million for the same period in 2020.

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

Foreign currency (gain) loss was a $4 million gain for the third quarter of 2021, compared with a $1 million loss for the same period in 2020.

Foreign currency (gain) loss was a $2 million gain for the first nine months of 2021, compared with a $5 million gain for the same period in 2020.

Foreign currency gain in the third quarter and first nine months of 2021 primarily reflected a realized gain on de-designated cross-currency contract.

Foreign currency loss in the third quarter of 2020 primarily reflected realized losses on foreign currency option and forward contracts.

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.

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 $46 million for the third quarter of 2021 and $54 million for the first nine months of 2021.

In the third quarter of 2021, we redeemed our outstanding senior notes due 2023 and 2024 and wrote-off related debt issuance costs, as well as incurred a pre-payment penalty.

Additionally, in the first quarter of 2021, we redeemed our outstanding senior notes due 2022 and wrote-off related debt issuance costs, as well as incurred costs related to the amendment of our term loan credit agreement.

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

Interest expense decreased to $53 million for the third quarter of 2021 from $81 million for the third quarter of 2020.

Interest expense decreased to $176 million for the first nine months of 2021 from $226 million for the first nine months of 2020.

The declines in interest expense reflected the lower average debt balances, including the redemption of our senior notes due 2022 and amendment of our term loan agreement both in the first quarter of 2021, and the redemption of our senior notes due 2023 and 2024 in the third quarter of 2021.

Our effective income tax rates were 33.5% and 45.5% for the third quarter of 2021 and 2020, respectively, and 23.1% and 31.3% for the first nine months of 2021 and 2020, respectively.

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

The reduction in our effective income tax rate for the third quarter and first nine months of 2021 compared to the same periods in 2020 was primarily driven by reduced contribution and margin-based taxes coupled with increased pre-tax book income and the impact of discrete items.

In the third quarter and first nine months of 2021, discrete tax benefits of $45 million related to a tax planning initiative that resulted in the recognition of a long-term capital loss were partially offset by discrete tax expenses of $41 million related to valuation allowances, of which $34 million were transferred to GXO.

Additionally, impacting the nine-month period was a discrete tax benefit of $8 million resulting from changes in reserves for uncertain tax positions.

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

North American Less-Than-Truckload Segment

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

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

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Revenue $ 1,071 $ 933 100.0 % 100.0 % 14.8 % $ 3,114 $ 2,623 100.0 % 100.0 % 18.7 %

Operating income (loss) 255 (15) 8.0 % (0.7) % NM 464 105 7.5 % 2.3 % 341.9 %

Adjusted EBITDA 222 238 20.8 % 25.3 % (6.7) % 694 562 22.3 % 21.4 % 23.5 %

Depreciation and amortization 57 55 3.6 % 169 169 — %

Revenue in our Transportation segment increased 49.8% to $3.2 billion for the second quarter of 2021, compared with $2.1 billion for the same quarter in 2020.

Revenue increased 34.6% to $6.2 billion for the first six months of 2021, compared with $4.6 billion for the same period in 2020.

The increase in revenue in the second quarter and first six months of 2021 reflected the impact of COVID-19 on our results in 2020 and strong growth in all of our

transportation businesses.

Additionally, foreign currency movement increased revenue by approximately 2.5 percentage points in the second quarter of 2021 and 2.1 percentage points in the first six months of 2021.

Operating income in our transportation segment was $255 million, or 8.0% of revenue, for the second quarter of 2021, compared with the operating loss of $15 million, or 0.7% of revenue, for the same quarter in 2020.

Operating income was $464 million, or 7.5% of revenue, for the first six months of 2021, compared with $105 million, or 2.3% of revenue, for the same period in 2020.

The increase in both periods was primarily driven by significantly higher revenue and lower restructuring charges and COVID-19-related costs.

Additionally, expenses related to our exploration of strategic alternatives were approximately $8 million in the second quarter of 2020 and $15 million in the first six months of 2020.

Logistics Segment

Three Months Ended June 30, Percent of Revenue Change Six Months Ended June 30, Percent of Revenue Change

Revenue in our North American LTL segment increased 14.8% to $1.1 billion for the third quarter of 2021, compared with $933 million for the same quarter in 2020.

Revenue increased 18.7% to $3.1 billion for the first nine months of 2021, compared with $2.6 billion for the same period in 2020.

Revenue included fuel surcharge revenue of $167 million and $108 million, respectively, for the third quarters of 2021 and 2020, and $466 million and $323 million, respectively, for the first nine months of 2021 and 2020.

We evaluate the revenue performance of our LTL business using several commonly used metrics, including volume (weight per day in pounds) and yield, which is a commonly used measure of LTL pricing trends.

We measure yield using gross revenue per hundredweight excluding fuel surcharges.

Impacts on yield can include weight per shipment and length of haul, among other factors.

The following table summarizes our key revenue metrics:

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

2021 2020 Change % 2021 2020 Change %

Pounds per day (thousands) 72,152 69,952 3.1 % 73,138 66,730 9.6 %

Gross revenue per hundredweight, excluding fuel surcharges $ 20.02 $ 18.90 6.0 % $ 19.47 $ 18.57 4.9 %

The year-over-year increases in revenue for both the third quarter and first nine months of 2021 reflect an increase in average weight per day and gross revenue per hundredweight.

The increase in weight per day for the third quarter reflects higher weight per shipment.

The increase in weight per day for the first nine months of 2021 reflects higher shipments per day and weight per shipment.

Adjusted EBITDA was $222 million, or 20.8% of revenue, for the third quarter of 2021, compared with $238 million, or 25.3% of revenue, for the same quarter in 2020.

Adjusted EBITDA was $694 million, or 22.3% of revenue, for the first nine months of 2021, compared with $562 million, or 21.4% of revenue, for the same period in 2020.

Adjusted EBITDA for 2021 included significantly lower year-over-year gains from LTL real estate transactions, including a $5 million gain in the third quarter of 2021, compared with $26 million in 2020;

and a $27 million gain in the first nine months of 2021, compared with $63 million in 2020.

Adjusted EBITDA in the third quarter of 2021 also reflects higher revenue and lower COVID-19-related expenses, partially offset by increased compensation costs and purchased transportation expense incurred to meet growing demand.

Brokerage and Other Services Segment

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

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

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Revenue $ 2,261 $ 1,778 100.0 % 100.0 % 27.2 % $ 6,493 $ 4,738 100.0 % 100.0 % 37.0 %

Operating income (loss) 71 (43) 3.8 % (3.1) % NM 139 (5) 3.8 % (0.2) % NM

Adjusted EBITDA 131 90 5.8 % 5.1 % 45.6 % 386 159 5.9 % 3.4 % 142.8 %

Depreciation and amortization 60 59 1.7 % 180 168 7.1 %

Revenue in our Logistics segment increased 34.0% to $1.9 billion for the second quarter of 2021, compared with $1.4 billion for the same quarter in 2020.

Revenue increased 30.2% to $3.7 billion for the first six months of 2021, compared with $2.8 billion for the same period in 2020.

The increases in revenue in the second quarter and first six months of 2021 compared to the same period in 2020 reflect the impact of COVID-19 on our results in 2020 and strong growth in our European business, including the impact of the acquired Kuehne + Nagel business in January 2021.

The Kuehne + Nagel business contributed approximately 10.7 percentage points to segment revenue growth in the second quarter of 2021 and 9.4 percentage points for the first six months of 2021.

Additionally, foreign currency movement increased revenue by approximately 7.6 percentage points in the second quarter of 2021 and 6.6 percentage points in the first six months of 2021.

Operating income in our Logistics segment was $71 million, or 3.8% of revenue, for the second quarter of 2021, compared with a loss of $43 million, or 3.1% of revenue, for the same quarter in 2020.

Operating income was $139 million, or 3.8% of revenue, for the first six months of 2021, compared with a loss of $5 million, or 0.2% of revenue, for the same period in 2020.

The increase in both periods was primarily driven by significantly higher revenue and lower restructuring charges and COVID-19-related costs.

Operating income for the second quarter and first six months of 2021 included $7 million and $12 million, respectively, of transaction and integration costs, including amounts related to our acquisition of the Kuehne + Nagel business.

In comparison, operating loss for the second quarter and first six months of 2020 included $11 million and $17 million, respectively, of expenses related to our exploration of strategic alternatives.

Revenue in our Brokerage and Other Services segment increased 27.2% to $2.3 billion for the third quarter of 2021, compared with $1.8 billion for the same quarter in 2020.

Revenue increased 37.0% to $6.5 billion for the first nine months of 2021, compared with $4.7 billion for the same period in 2020.

The year-over-year revenue increases for the third quarter and first nine months of 2021 reflect an increase in North American truck brokerage loads per day and improved pricing across segment services, enhanced by our digital platform, as well as improving market conditions in the economic recovery from the COVID-19 pandemic.

These gains were partially offset by the impact of the global semiconductor shortage, which constrained customer demand for freight transportation services in North America and Europe, and by a truck driver shortage in the U.K.

and North America.

Adjusted EBITDA was $131 million, or 5.8% of revenue, for the third quarter of 2021, compared with $90 million, or 5.1% of revenue, for the same quarter of 2020.

Adjusted EBITDA was $386 million, or 5.9% of revenue, for the first nine months of 2021, compared with $159 million, or 3.4% of revenue, for the same period in 2020.

The increases were primarily driven by higher revenue due to load growth and improved pricing, partially offset by higher compensation and facilities costs.

Liquidity and Capital Resources

As of June 30, 2021, we had cash and cash equivalents of $801 million.

As of September 30, 2021, we had cash and cash equivalents of $254 million.

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

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

As of June 30, 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 June 30, 2021.

As of September 30, 2021, we have $993 million available to draw under our ABL Facility, based on a borrowing base of $1.0 billion and outstanding letters of credit of $7 million.

In July 2021, we amended our existing ABL facility which matures in April 2024 to reduce the commitments from $1.1 billion to $1.0 billion.

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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 SA (“XPO Logistics Europe”) 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.

Our European business participates in a trade receivables securitization program co-arranged by two European banks (the “Purchasers”).

Under the program, a wholly-owned bankruptcy-remote special purpose entity of XPO sells trade receivables that originate with wholly-owned subsidiaries 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.

The program expires in July 2024.

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 Condensed Consolidated Balance Sheets at the date of transfer.

In the securitization and factoring arrangements, our continuing involvement is limited to servicing the receivables and, in the case of the securitization arrangements, providing recourse in certain defined circumstances.

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.

We had no such borrowings outstanding as of June 30, 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 $474 million as of June 30, 2021).

As of June 30, 2021, €59 million (approximately $70 million) was available to us, subject to having sufficient receivables available to sell to the Purchasers.

We had no such borrowings outstanding as of September 30, 2021 and €20 million ($24 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 €200 million (approximately $232 million as of September 30, 2021).

Prior to July 2021, when the securitization program was amended in connection with the spin-off, the maximum amount available was €400 million.

As of September 30, 2021, €19 million (approximately $22 million) was available under the program, subject to having sufficient receivables available to sell and with consideration to amounts previously purchased.

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 six months of 2021 and 2020, we collected cash as servicer of $1.7 billion and $1.3 billion, respectively.

In the first nine months of 2021 and 2020, we collected cash as servicer of $1.2 billion and $1.0 billion, respectively.

Information related to the trade receivables sold was as follows:

Three Months Ended June 30, Six Months Ended June 30,

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

(In millions) 2021 2020 2021 2020

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Cash consideration

112 199 228 462

In July 2021, in connection with the spin-off of our Logistics segment, the existing trade receivables securitization program was amended;

the existing €400 million program is now comprised of two separate €200 million programs, one of which will continue to be available to us and one of which will be part of GXO following the spin-off.

The new program expires in July 2024.

Term Loan Facilities

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December 31, 2020

(In millions) June 30, 2021 First Tranche Second Tranche

(In millions) September 30, 2021 First Tranche Second Tranche

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

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Maturity date February 2025 February 2025 February 2025

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

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

Senior Notes Due 2023 and 2024

In the third quarter of 2021, we redeemed our outstanding 6.125% senior notes due 2023 (“Senior Notes due 2023”) and our outstanding 6.75% senior notes due 2024 (“Senior Notes due 2024”).

The redemption price for the Senior Notes due 2023 was 100.0% of the principal amount, plus accrued and unpaid interest and the redemption price for the Senior Notes due 2024 was 103.375% of the principle amount, plus accrued and unpaid interest.

We paid for the redemption using cash received from GXO of approximately $794 million, proceeds from an equity offering described in Note 8—Stockholders’ Equity and available cash.

We recorded debt extinguishment losses in the third quarter of 2021 of $3 million and $43 million related to the redemption of the Senior Notes due 2023 and Senior Notes due 2024, respectively.

Senior Notes Due 2022

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We paid for the redemption with available cash.

We recorded a debt extinguishment loss of $5 million in the first six months of 2021 due to this redemption.

We recorded a debt extinguishment loss of $5 million in the first nine months of 2021 due to this redemption.

Senior Notes Due 2025

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Net proceeds from the notes were initially invested in cash and cash equivalents and were subsequently used to redeem our outstanding senior notes due 2022 in January 2021.

GXO Revolving Credit Facility

In June 2021, in preparation for the spin-off, GXO, which was our wholly-owned subsidiary at the time, entered into a five-year, unsecured, multi-currency revolving credit facility (the “GXO Facility”).

Initially, the GXO Facility provides commitments up to $800 million, of which $60 million will be available for the issuance of letters of credit.

Loans under the GXO Facility will bear interest at a fluctuating rate equal to:

(i) with respect to borrowings in dollars, at GXO’s option, the alternate base rate or the reserve-adjusted LIBOR, (ii) with respect to borrowings in Canadian dollars, the reserve-adjusted Canadian Dollar Offered Rate and (iii) with respect to borrowings in Euros, the reserve-adjusted Euro Interbank Offered Rate, in each case, plus an applicable margin calculated based on GXO’s credit ratings.

The availability of the GXO Facility was subject to the spin-off occurring.

The covenants in the GXO Facility, which are customary for financings of this type, can limit the ability to incur indebtedness and grant liens, among other restrictions.

In addition, the GXO Facility requires GXO to maintain a consolidated leverage ratio below a stated maximum consolidated leverage ratio.

There was no amount outstanding under the GXO Facility at June 30, 2021.

Following the spin-off, the GXO Facility is not available to us.

In preparation for the spin-off, in July 2021, GXO completed an offering of $800 million aggregate principal amount of notes, consisting of $400 million of notes due 2026 (the “GXO 2026 Notes”) and $400 million of notes due 2031 (the “GXO 2031 Notes”, and together with the GXO 2026 Notes, the “GXO Notes”).

The GXO 2026 Notes will bear interest at a rate of 1.65% per annum payable semiannually in cash in arrears on January 15 and July 15 of each year, beginning January 15, 2022, and will mature on July 15, 2026.

The GXO 2031 Notes will bear interest at a rate of 2.65% per annum payable semiannually in cash in arrears on January 15 and July 15 of each year, beginning January 15, 2022, and will mature on July 15, 2031.

The net proceeds from the sale of the GXO Notes were used to fund a cash payment from GXO to XPO of $794 million, which we intend to use to repay a portion of our outstanding borrowings as noted below.

Following the completion of the spin-off, the GXO Notes are no longer an obligation of XPO.

Equity Offering

Share Issuance

In July 2021, we completed a registered underwritten offering of 5.0 million shares of our common stock at a public offering price of $138.00 per share, plus an additional 750,000 shares of our common stock through an option granted to underwriters.

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The additional 750,000 purchased shares were also split equally between us and JPE.

We received approximately $385 million of proceeds, net of fees and expenses, from the sale of the shares and intend to use them to repay a portion of our outstanding borrowings as noted below and for general corporate purposes.

We received approximately $384 million of proceeds, net of fees and expenses, from the sale of the shares and used them to repay a portion of our outstanding borrowings and for general corporate purposes.

XPO did not receive any proceeds from the sale of shares by JPE.

Debt Redemption

In July 2021, we issued notice to redeem our outstanding 6.75% senior notes due 2024 that had a principal balance of $1.0 billion as of June 30, 2021.

Also, in August 2021, we issued notice to redeem our outstanding 6.125% senior notes due 2023 that had a principal balance of $535 million as of June 30, 2021.

The redemption price for our senior notes due 2024 was 103.375%, plus accrued and unpaid interest.

The redemption price for our senior notes due 2023 was 100.0% of the principal amount, plus accrued and unpaid interest.

We expect to pay for these redemptions using the cash payment of $794 million received from GXO, the proceeds from the July 2021 equity offering and available cash.

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 JPE, 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.

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.

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These exchanges were intended to simplify our equity capital structure, including in contemplation of the spin-off of our Logistics segment.

As of June 30, 2021, there were no shares of preferred stock or warrants outstanding.

As of September 30, 2021, there were no shares of preferred stock or warrants outstanding.

Share Repurchases

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

There were no share purchases in the first six months of 2021 or in the second quarter of 2020.

Our remaining share repurchase authorization was $503 million as of June 30, 2021.

There have been no share repurchases since the first quarter of 2020.

Our remaining share repurchase authorization was $503 million as of September 30, 2021.

Loan Covenants and Compliance

As of June 30, 2021, we were in compliance with the covenants and other provisions of our debt agreements.

As of September 30, 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

Six Months Ended June 30,

Nine Months Ended September 30,

(In millions) 2021 2020

Net cash provided by operating activities $ 539 $ 394

Net cash used in investing activities (154) (172)

Net cash provided by (used in) financing activities (1,639) 1,701

Effect of exchange rates on cash, cash equivalents and restricted cash 1 (15)

Net increase (decrease) in cash, cash equivalents and restricted cash $ (1,253) $ 1,908

During the six months ended June 30, 2021, we:

(i) generated cash from operating activities of $539 million and (ii) generated proceeds from sales of property and equipment of $62 million.

Net cash provided by operating activities from continuing operations $ 558 $ 292

Net cash used in investing activities from continuing operations (143) (78)

Net cash provided by (used in) financing activities from continuing operations (1,880) 1,195

During the nine months ended September 30, 2021, we:

(i) generated cash from operating activities from continuing operations of $558 million;

(ii) generated proceeds from sales of property and equipment of $72 million;

(iii) received a distribution from GXO of $794 million;

and (iv) generated proceeds of $384 million from the issuance of common stock.

We used cash during this period primarily to:

(i) purchase property and equipment of $212 million;

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

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

(iv) purchase noncontrolling interests of $128 million;

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

During the six months ended June 30, 2020, we:

(i) generated cash from operating activities of $394 million;

(ii) received net proceeds of $1.8 billion from our issuances of debt and short-term borrowings and (iii) generated proceeds from sales of property and equipment (primarily real estate) of $77 million.

(ii) redeem our senior notes due 2022, 2023 and 2024 for $2.8 billion;

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

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

(i) generated cash from operating activities from continuing operations of $292 million;

(ii) generated proceeds from sales of property and equipment (primarily real estate) of $137 million;

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

We used cash during this period primarily to:

(i) purchase property and equipment of $255 million and (ii) repurchase common stock of $114 million.

Cash flows from operating activities for the six months ended June 30, 2021 increased by $145 million, compared with the same period in 2020.

The increase reflects higher net income of $385 million for the six months ended June 30, 2021, compared with the same period in 2020 partially offset by a greater use of cash for working capital in the first half of 2021 than in the prior-year period.

Additionally, the first six months of 2021 included payments of approximately $10 million related to the spin-off, as compared to payments of approximately $75 million related to the exploration of strategic alternatives in the first six months of 2020.

Additionally, cash paid for taxes was $55 million higher in the six months ended June 30, 2021, compared with the same period in 2020.

Investing activities used $154 million and $172 million of cash in the six months ended June 30, 2021 and 2020, respectively.

During the six months ended June 30, 2021, we used $250 million of cash to purchase property and equipment and received $62 million from sales of property and equipment.

During the six months ended June 30, 2020, we used $255 million of cash to purchase property and equipment and received $77 million from sales of property and equipment.

Financing activities used $1.6 billion of cash in the six months ended June 30, 2021 and provided $1.7 billion of cash in the six months ended June 30, 2020.

The primary uses of cash from financing activities during the first six 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 program.

Additionally, we used $128 million to purchase the remaining non-controlling interest in XPO Logistics Europe SA that we did not own.

The primary sources and uses of cash from financing activities during the six months ended June 30, 2020 were $1.1 billion of net proceeds from the issuance of senior notes due 2025;

$600 million of

proceeds from borrowings on our ABL Facility, net of payments, and $109 million of net proceeds from borrowings related to our securitization program, partially offset by $114 million used to purchase XPO common stock.

(i) purchase property and equipment of $220 million;

and (ii) repurchase common stock of $114 million.

Cash flows from operating activities from continuing operations for the nine months ended September 30, 2021 increased by $266 million, compared with the same period in 2020.

The increase reflects higher income from continuing operations of $276 million for the nine months ended September 30, 2021, compared with the same period in 2020, partially offset by a greater use of cash for working capital in the first nine months of 2021 than in

the prior-year period.

Additionally, cash paid for taxes was $71 million higher in the nine months ended September 30, 2021, compared with the same period in 2020.

Investing activities from continuing operations used $143 million and $78 million of cash in the nine months ended September 30, 2021 and 2020, respectively.

During the nine months ended September 30, 2021, we used $212 million of cash to purchase property and equipment and received $72 million from sales of property and equipment.

During the nine months ended September 30, 2020, we used $220 million of cash to purchase property and equipment and received $137 million from sales of property and equipment.

Financing activities from continuing operations used $1.9 billion of cash in the nine months ended September 30, 2021 and generated $1.2 billion of cash in the nine months ended September 30, 2020.

The primary uses of cash from financing activities during the first nine months of 2021 were $2.8 billion used to redeem the senior notes due 2022, 2023 and 2024 and $200 million used to repay borrowings under our ABL Facility.

The primary sources of cash from financing activities during the first nine months of 2021 were $794 million of proceeds from a distribution from GXO and $384 million of net proceeds from our common offering.

In July 2021, GXO completed a debt offering and used the net proceeds to fund a cash payment from GXO to XPO of $794 million.

The primary sources and uses of cash from financing activities during the nine months ended September 30, 2020 were $1.1 billion of net proceeds from the issuance of senior notes due 2025;

$200 million of proceeds from borrowings on our ABL Facility, net of payments, partially offset by $114 million used to purchase XPO common stock and $50 million used to repay debt and finance leases.

Contractual Obligations

During the six months ended June 30, 2021, there were no material changes to our December 31, 2020 contractual obligations.

GXO’s debt and operating lease obligations of approximately $181 million and $1.8 billion as of June 30, 2021, respectively, will not be part of our contractual obligations following the spin-off.

We anticipate full year net capital expenditures to be between $250 million and $275 million in 2021 (excluding any net capital expenditures associated with our spun-off Logistics segment).

After completion of the spin, GXO’s borrowing arrangements and obligations under their finance and operating leases were no longer part of our contractual obligations.

Additionally, as described in more detail above, we redeemed our Senior Notes 2023 and Senior Notes 2024 in the third quarter of 2021.

We anticipate full year net capital expenditures to be between $250 million and $275 million in 2021.

New Accounting Standards

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What changed 10-Q

Item 2. Management’s Discussion and Analysis