XPO, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q and other written reports and oral statements we make from time to time contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terms such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target,” “trajectory” or the negative of these terms or other comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. 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. Forward-looking statements set forth in this Quarterly Report speak only as of the date hereof, and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, changes in expectations or the occurrence of unanticipated events, except to the extent required by law. Executive Summary 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. federal income tax purposes, which was accomplished by the distribution of 100% of the outstanding common stock of GXO Logistics, Inc. (“GXO”) to XPO stockholders. XPO stockholders received one share of GXO common stock for every share of XPO common stock held at the close of business on July 23, 2021, the record date for the distribution. XPO does not beneficially own any shares of GXO’s common stock following the spin-off. 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. 26 Table of Contents 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. 27 Table of Contents 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. 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. 28 Table of Contents 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; and • 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. 29 Table of Contents Consolidated Summary Financial Table 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. 2020 2021 2020 2021 2020 2021 vs. 2020 Revenue $ 3,270 $ 2,675 100.0 % 100.0 % 22.2 % $ 9,445 $ 7,261 100.0 % 100.0 % 30.1 % Cost of transportation and services 2,306 1,814 70.5 % 67.8 % 27.1 % 6,545 4,919 69.3 % 67.7 % 33.1 % Direct operating expense 366 310 11.2 % 11.6 % 18.1 % 1,058 904 11.2 % 12.5 % 17.0 % Sales, general and administrative expense 339 294 10.4 % 11.0 % 15.3 % 1,001 915 10.6 % 12.6 % 9.4 % 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 (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) 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 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 LTL service centers. Direct operating expenses consist mainly of personnel costs, facility and equipment 30 Table of Contents 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. 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. For 31 Table of Contents 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. 2020 2021 2020 2021 2020 2021 vs. 2020 Revenue $ 1,071 $ 933 100.0 % 100.0 % 14.8 % $ 3,114 $ 2,623 100.0 % 100.0 % 18.7 % 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 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: 32 Table of Contents 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. 2020 2021 2020 2021 2020 2021 vs. 2020 Revenue $ 2,261 $ 1,778 100.0 % 100.0 % 27.2 % $ 6,493 $ 4,738 100.0 % 100.0 % 37.0 % 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 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 September 30, 2021, we had cash and cash equivalents of $254 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 (iii) proceeds from the issuance of other debt. 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. 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 September 30, 2021. 33 Table of Contents 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. There were no other significant changes made to the terms of the facility, including the maturity date, the interest rate margin, and financial covenants. We continually evaluate our liquidity requirements in light of our operating needs, growth initiatives and capital resources. We believe that our existing liquidity and sources of capital are sufficient to support our operations over the next 12 months. Trade Receivables Securitization and Factoring Programs We sell certain of our trade accounts receivable on a non-recourse basis to third-party financial institutions under factoring agreements. We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. We also sell trade accounts receivable under a securitization program described below. We use trade receivables securitization and factoring programs to help manage our cash flows and offset the impact of extended payment terms for some of our customers. 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. 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 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 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 September 30, Nine Months Ended September 30, (In millions) 2021 2020 2021 2020 Securitization programs Receivables sold in period $ 504 $ 355 $ 1,259 $ 1,008 Cash consideration 504 355 1,259 1,008 Factoring programs Receivables sold in period $ 17 $ 17 $ 46 $ 58 Cash consideration 17 16 46 57 34 Table of Contents Term Loan Facilities 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) September 30, 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 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 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 the first nine months of 2021 due to this redemption. 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. 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. 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. Of the 5.0 million shares, we offered 2.5 million shares directly and 2.5 million shares were offered by Jacobs Private Equity, LLC (“JPE”), an entity controlled by the Company’s chairman and Chief Executive Officer. The additional 750,000 purchased shares were also split equally between us and JPE. 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. 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 35 Table of Contents 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. In the second quarter of 2021, the remaining 40 preferred shares were exchanged, and we issued 5,714 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 were intended to simplify our equity capital structure, including in contemplation of the spin-off of our Logistics segment. As of September 30, 2021, there were no shares of preferred stock or warrants outstanding. Share Repurchases In February 2019, our Board of Directors authorized 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. 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 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 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 Nine Months Ended September 30, (In millions) 2021 2020 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, 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 $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 36 Table of Contents 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 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 Information related to new accounting standards is included in Note 1—Organization, Description of Business and Basis of Presentation to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.