What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-16 compared with 2021-02-12 · 298 added, 265 removed, 167 unchanged (77% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

XPO Logistics provides cutting-edge supply chain solutions to the most successful companies in the world.

We have two reporting segments:

Transportation and Logistics.

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

We accomplish this by using our proprietary technology, third-party independent carriers and our transportation assets and service centers.

Our transportation services include less-than-truckload (“LTL”), truck brokerage and other transportation services.

In our Logistics segment, which we sometimes refer to as supply chain, we provide a wide range of services differentiated by our proprietary technology and our ability to customize solutions for individual customers.

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

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

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

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

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

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

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

XPO will be a global provider of primarily LTL transportation and truck brokerage services, and the spun-off company will be the second largest contract logistics provider in the world.

Both companies’ stocks are expected to trade on the New York Stock Exchange, and we plan to consider a dual listing on the London Stock Exchange for the spun-off company in due course.

The transaction is currently expected to be completed in the second half of 2021, subject to various conditions.

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

Separately, in March 2020, we announced that we had entered into an agreement to acquire the majority of Kuehne + Nagel’s contract logistics operations in the United Kingdom.

The operations, which include roughly 5,700 employees and provide a range of logistics services, including inbound and outbound distribution, reverse logistics management and inventory management, will be included in our Logistics segment.

The acquisition was completed in January 2021.

This discussion focuses on our 2020 results, compared with 2019 results.

The discussion of our 2019 results, compared with 2018 results, can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2019 Annual Report on Form 10-K.

Impacts of COVID-19

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

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

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

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

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

The COVID-19 pandemic and associated impacts on economic activity had an adverse effect on our results of operations and financial condition for the year ended December 31, 2020, as discussed below.

We experienced declines in demand for our services that began in the first quarter of 2020, had a substantial impact in the second quarter of 2020, and abated throughout the second half of 2020.

These declines in demand meaningfully affected our results in both North America and Europe.

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

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

We expect our results of operations will continue to be impacted by this pandemic in 2021.

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

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

We also implemented supplemental “appreciation pay” programs for thousands of frontline employees who continued to work during the pandemic.

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

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

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

While we could not fully offset the decrease in demand for our services arising from the economic disruption of the pandemic in 2020, the actions we have taken, 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.

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

Risk Factors.

Consolidated Summary Financial Table

Years Ended December 31, Percent of Revenue Change

XPO Logistics is a leading provider of freight transportation services.

We use our proprietary technology to move goods efficiently through our customers’ supply chains, primarily by providing less-than-truckload (“LTL”) and truck brokerage services.

These two core lines of business generated the majority of our 2021 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 leading provider in vast, fragmented transportation sectors with growing penetration.

We believe that our substantial 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 XPO and 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 GXO are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.

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.

The onset of the COVID-19 pandemic and associated impacts on economic activity had adverse effects on our results of operations and financial condition beginning in the second quarter of 2020 and continued throughout the year.

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 Annual Report.

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 year ended December 31, 2021, the constrained labor market resulted in higher third-party transportation and fuel costs to meet growing demand which were partially offset by increased pricing to our customers.

Consolidated Summary Financial Results

Years Ended December 31, Percent of Revenue

(Dollars in millions) 2021

2020 2019 2020 vs.

2019 2021 2020 2019

Revenue $ 12,806 $ 10,199 $ 10,681 100.0 % 100.0 % 100.0 %

Cost of transportation and services 7,852 8,303 48.3 % 49.9 % (5.4) %

Direct operating expense 5,837 5,679 35.9 % 34.1 % 2.8 %

Cost of transportation and services (exclusive

of depreciation and amortization)

8,945 6,950 7,359 69.9 % 68.1 % 68.9 %

Direct operating expense (exclusive

of depreciation and amortization)

1,391 1,235 1,186 10.9 % 12.1 % 11.1 %

Sales, general and administrative expense 1,322 1,210 1,068 10.3 % 11.9 % 10.0 %

Depreciation and amortization expense 476 470 467 3.7 % 4.6 % 4.4 %

Transaction and integration costs 37 75 5 0.3 % 0.7 % — %

Restructuring costs 19 31 35 0.1 % 0.3 % 0.3 %

Operating income 616 228 561 4.8 % 2.2 % 5.3 %

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Interest expense 211 307 268 1.6 % 3.0 % 2.5 %

Income before income tax provision 148 569 0.9 % 3.4 % (74.0) %

Income tax provision 31 129 0.2 % 0.8 % (76.0) %

Income (loss) from continuing operations

before income tax provision (benefit)

410 (35) 301 3.2 % (0.3) % 2.8 %

Income tax provision (benefit) 87 (22) 60 0.7 % (0.2) % 0.6 %

Income (loss) from continuing operations 323 (13) 241 2.5 % (0.1) % 2.3 %

Income from discontinued operations,

18 130 199 0.1 % 1.3 % 1.9 %

Net income $ 341 $ 117 $ 440 2.7 % 1.1 % 4.1 %

(1) Consolidated operating income for 2020 includes $100 million of transaction and integration costs, of which $21 million relates to our Transportation segment and $28 million relates to our Logistics segment, and $56 million of restructuring expense.

(2) Consolidated operating income for 2019 includes $5 million of transaction and integration costs and $49 million of restructuring expense.

The transaction and integration costs for 2020 are primarily related to our previously announced exploration of strategic alternatives that was terminated in March 2020 and costs related to our planned acquisition of the Kuehne + Nagel business.

For further information on our restructuring actions, see Note 6—Restructuring Charges to the

Consolidated Financial Statements.

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

Year Ended December 31, 2021 Compared with Year Ended December 31, 2020

Our consolidated revenue for 2021 increased by 25.6% to $12.8 billion, from $10.2 billion in 2020.

The increase primarily 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.

Foreign currency movement increased revenue by approximately 0.9 percentage points in 2021.

Cost of transportation and services (exclusive of depreciation and amortization) 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 (exclusive of depreciation and amortization) in 2021 was $8.9 billion, or 69.9% of revenue, compared with $7.0 billion, or 68.1% of revenue in 2020.

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

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

Direct operating expenses (exclusive of depreciation and amortization) are comprised of both fixed and variable expenses and consist of operating costs related to our LTL service centers.

Direct operating expenses (exclusive of depreciation and amortization) 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 (exclusive of depreciation and amortization) in 2021 was $1.4 billion, or 10.9% of revenue, compared with $1.2 billion, or 12.1% of revenue, in 2020.

The year-over-year decrease as a percentage of revenue was primarily driven by lower COVID-19 related costs as well as the leveraging of compensation and facilities costs

across a larger revenue base.

Additionally, 2021 and 2020 included $73 million and $90 million, respectively, from gains on sales of property and equipment.

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

SG&A was $1.3 billion in 2021, or 10.3% of revenue, compared with $1.2 billion, or 11.9% of revenue, in 2020.

The year-over-year decrease in SG&A as a percentage of revenue was primarily driven by lower self-insurance expense, compensation costs, bad debt expense and third-party professional fees, as well as lower COVID-19-related costs.

These impacts were partially offset by higher employee healthcare costs and legal costs, including $31 million incurred in 2021 related to settlements in connection with classification of independent contractors at our intermodal drayage business unit.

See Note 18—Commitments and Contingencies to our Consolidated Financial Statements for further information.

Depreciation and amortization expense in 2021 was $476 million, compared with $470 million in 2020.

Transaction and integration costs in 2021 were $37 million, compared with $75 million in 2020.

Transaction and integration costs for 2021 and 2020 are primarily comprised of third-party professional fees related to strategic initiatives, including the spin-off of the Logistics segment, as well as retention awards paid to certain employees.

Additionally, transaction and integration costs for 2020 included professional fees related to our previously announced exploration of strategic alternatives that was terminated in March 2020.

Restructuring costs in 2021 were $19 million, compared with $31 million 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 6—Restructuring Charges to our Consolidated Financial Statements.

Upon successful completion of the restructuring initiatives recorded in 2021, we expect to achieve annualized pre-tax run-rate savings of approximately $25 million by the end of 2022.

Other income primarily consists of pension income.

Other income for 2021 was $57 million, compared with $41 million in 2020.

The year-over-year increase reflects $15 million of higher net periodic pension income in 2021.

Foreign currency (gain) loss was a $2 million gain in 2021, compared with a $3 million gain in 2020.

Foreign currency (gain) loss in 2021 primarily reflected a realized gain on de-designated cross-currency contract.

Foreign currency gain in 2020 primarily reflected unrealized gains on foreign currency option and forward contracts and a realized gain on a terminated net investment hedge, partially offset by foreign currency transaction and measurement losses.

For additional information on our foreign currency option and forward contracts, see Note 11—Derivative Instruments to our Consolidated Financial Statements.

Debt extinguishment loss was $54 million in 2021.

In 2021, we redeemed our outstanding senior notes due 2022, 2023 and 2024 and wrote-off related debt issuance costs, incurred a pre-payment penalty on the redemption of the 2024 senior notes and incurred costs related to the amendment of our term loan credit agreement.

There were no debt extinguishment losses in 2020.

Interest expense for 2021 decreased 31.3% to $211 million, from $307 million in 2020.

The decrease in interest expense reflected the lower average debt balances, including the redemption of our senior notes and amendment of our term loan agreement.

Our consolidated income (loss) from continuing operations before income taxes in 2021 was income of $410 million, compared with a loss of $35 million in 2020.

The increase primarily was driven by higher operating income and lower interest expense, partially offset by the debt extinguishment loss recorded in 2021.

With respect to our U.S.

operations, income from continuing operations before income taxes was income of $420 million in 2021, compared with income of $45 million in 2020.

The increase was primarily due to higher revenue, in part from the negative impact of COVID-19 on our 2020 results, partially offset by higher third-party transportation, fuel and personnel costs.

Additionally impacting the increase was lower interest expense, partially offset by the debt extinguishment loss recorded in 2021.

With respect to our non-U.S.

operations, loss from continuing operations

before income taxes was $10 million in 2021, compared with a loss of $80 million in 2020.

The decrease in the loss was primarily due to higher revenues, in part from the negative impact of COVID-19 on our 2020 results, partially offset by higher third-party transportation, fuel and personnel costs.

Our effective income tax rates were 21.3% and 63.4% in 2021 and 2020, respectively.

The decrease in our effective income tax rate for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily driven by reduced contribution and margin-based taxes coupled with increased pre-tax book income and the impact of discrete items.

For the year ended December 31, 2021, our effective tax rate was impacted by discrete tax benefits of $45 million related to a tax planning initiative that resulted in the recognition of a long-term capital loss partially offset by discrete tax expenses of $39 million related to foreign valuation allowances, of which $34 million of the valuation allowances were transferred to GXO.

Additionally, impacting the year ended December 31, 2021, were $8 million of non-deductible compensation, discrete tax benefits of $8 million resulting from changes in reserves for uncertain tax positions and discrete tax benefits of $6 million related to stock-based compensation.

For the year ended December 31, 2020, our effective tax rate was impacted primarily by a pre-tax book loss, $8 million of contribution and margin-based taxes, foreign rate differential benefit of $3 million, discrete tax benefits of $15 million related to stock-based compensation and $6 million of discrete tax benefits related to provision to return adjustments, partially offset by a discrete tax expense of $4 million related to changes in reserves for uncertain tax positions.

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

Our consolidated revenue for 2020 decreased by 4.5% to $10.2 billion, from $10.7 billion in 2019.

The decrease primarily reflects the impact of COVID-19.

The decline in revenue primarily reflected the impact of COVID-19 and lower fuel revenue.

Foreign currency movement increased revenue by approximately 0.4 percentage points in 2020.

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

Cost of transportation and services in 2020 was $7.9 billion, or 48.3% of revenue, compared with $8.3 billion, or 49.9% of revenue in 2019.

The year-over-year decrease as a percentage of revenue was primarily driven by a higher mix of logistics revenue, lower fuel costs and lower third-party transportation costs in our transportation segment, partially offset by incremental PPE and other COVID-19-related costs.

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

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 in 2020 was $5.8 billion, or 35.9% of revenue, compared with $5.7 billion, or 34.1% of revenue, in 2019.

The year-over-year increase as a percentage of revenue was primarily driven by the decline in revenue due to COVID-19, a higher mix of logistics revenue, higher facility and payroll costs, and incremental PPE and other COVID-19-related costs.

Cost of transportation and services (exclusive of depreciation and amortization) in 2020 was $7.0 billion, or 68.1% of revenue, compared with $7.4 billion, or 68.9% of revenue in 2019.

The year-over-year decrease as a percentage of revenue reflects lower fuel costs, partially offset by higher third-party transportation costs and incremental PPE and other COVID-19-related costs.

Direct operating expense (exclusive of depreciation and amortization) in 2020 was $1.2 billion, or 12.1% of revenue, compared with $1.2 billion, or 11.1% of revenue, in 2019.

The year-over-year increase as a percentage of revenue was primarily driven by higher facility and payroll costs and incremental PPE and other COVID-19-related costs.

Additionally, 2020 and 2019 included $90 million and $101 million, respectively, from gains on sales of property and equipment.

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

SG&A was $1.2 billion in 2020, or 11.9% of revenue, compared with $1.1 billion, or 10.0% of revenue, in 2019.

The year-over-year increase in SG&A as a percentage of revenue primarily resulted from the decline in revenue due to COVID-19, higher compensation costs, increased self-insurance expense and incremental PPE and other COVID-19-related costs.

Compensation costs were higher for both the fourth quarter and the year ended December 31, 2020 in comparison to the prior-year periods due to the strength of our operating performance in a challenging macro-environment.

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

The year-over-year increase in SG&A as a percentage of revenue was primarily driven by higher compensation costs, increased self-insurance and bad debt expense and incremental PPE and other COVID-19-related costs.

Compensation costs were higher in 2020 compared to the prior year due to the strength of our operating performance in a challenging macro-environment.

Depreciation and amortization expense in 2020 was $470 million, compared with $467 million in 2019.

Transaction and integration costs in 2020 were $75 million, compared with $5 million in 2019.

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

Restructuring costs in 2020 were $31 million, compared with $35 million in 2019.

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.

Other income primarily consists of pension income.

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Foreign currency (gain) loss was a $3 million gain in 2020, compared with a $10 million loss in 2019.

Foreign currency (gain) loss in 2020 primarily reflected unrealized gains on foreign currency option and forward contracts and a realized gain on a terminated net investment hedge, partially offset by foreign currency transaction and measurement losses.

Foreign currency loss in 2019 primarily reflected unrealized losses on foreign currency option and forward contracts.

For additional information on our foreign currency option and forward contracts, see Note 11—Derivative Instruments to our Consolidated Financial Statements.

Debt extinguishment loss was $5 million in 2019 and related to the write-off of debt issuance costs for an unsecured credit facility (“Unsecured Credit Facility”) that was repaid in 2019.

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The increase in interest expense was primarily due to higher average total indebtedness, including the senior notes due 2025 (the “Senior Notes due 2025”) that were issued in the second quarter of 2020, partially offset by lower interest rates in 2020.

Our consolidated income before income taxes in 2020 was $148 million, compared with $569 million in 2019.

The decrease primarily was driven by lower operating income in our Transportation and Logistics segments, as discussed below, and higher interest expense, partially offset by higher other income.

Our consolidated income (loss) from continuing operations before income taxes in 2020 was a loss of $35 million, compared with income of $301 million in 2019.

The decrease primarily was driven by lower operating income and higher interest expense, partially offset by higher other income.

With respect to our U.S.

operations, income before income taxes decreased by $330 million in 2020, compared with the prior year, primarily due to the impact of COVID-19 and higher interest expense.

operations, income from continuing operations before income taxes was $45 million, compared with income of $286 million in 2019.

The decrease was primarily due to the impact of COVID-19 and higher interest expense.

With respect to our non-U.S.

operations, income before income taxes decreased by $91 million in 2020 compared with the prior year, primarily due to the impact of COVID-19.

operations, loss from continuing operations before income taxes was $80 million in 2020, compared to income of $15 million in 2019.

The decrease was primarily due to the impact of COVID-19.

Our effective income tax rates were 63.4% and 19.7% in 2020 and 2019, respectively.

The decrease in our effective income tax rate for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily driven by income tax benefits associated with stock-based compensation.

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

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

The increase in our effective income tax rate for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily driven by a significant reduction in pre-tax book income and discrete items.

Contribution and margin-based tax expense did not materially change for the year ended December 31, 2020 as compared to the prior year.

However, these items had a significant impact on the Company’s 2020 effective tax rate, primarily due to the pre-tax book loss in 2020 as compared to higher pre-tax book income in 2019.

For the year ended December 31, 2019, our effective tax rate was impacted by $8 million of contribution and margin-based taxes offset by discrete tax benefits of $5 million related to changes in reserves for uncertain tax positions.

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

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

Additionally, we benefited from the ability to defer the payment of certain payroll taxes that would otherwise have been required in 2020.

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

Restructuring Charges

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

Restructuring charges were recorded on our Consolidated Statements of Income as follows:

Segment Financial Results

Our chief operating decision maker (“CODM”) regularly reviews financial information at the operating segment level to allocate resources to the segments and to assess their performance.

Our CODM evaluates segment profit (loss) based on adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), which we define as income (loss) from continuing operations before debt extinguishment loss, interest expense, income tax, depreciation and amortization expense, litigation settlements for significant matters, transaction and integration costs, restructuring costs and other adjustments.

See Note 4—Segment Reporting and Geographic Information for further information and a reconciliation of Adjusted EBITDA to Income (loss) from continuing operations.

North American Less-Than-Truckload Segment

Years Ended December 31, Percent of Revenue

(Dollars in millions) 2021 2020 2019 2021 2020 2019

Revenue $ 4,118 $ 3,539 $ 3,791 100.0 % 100.0 % 100.0 %

Adjusted EBITDA 904 764 851 21.9 % 21.6 % 22.4 %

Depreciation and amortization expense 226 224 227 5.5 % 6.3 % 6.0 %

Year Ended December 31, 2021 Compared with Year Ended December 31, 2020

Revenue in our North American LTL segment increased 16.4% to $4.1 billion in 2021, compared with $3.5 billion in 2020.

Revenue included fuel surcharge revenue of $632 million and $433 million, respectively, for the years ended December 31, 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:

Years Ended December 31,

(In millions) 2020 2019

Cost of transportation and services $ 1 $ 2

Direct operating expense 7 1

Sales, general and administrative expense 48 46

Total $ 56 $ 49

For more information, see Note 6—Restructuring Charges to our Consolidated Financial Statements.

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

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

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

Transportation Segment

Years Ended December 31, Percent of Revenue Change

(Dollars in millions) 2020 2019 2020 2019 2020 vs.

2021 2020 Change %

Pounds per day (thousands) 71,739 67,725 5.9 %

Gross revenue per hundredweight, excluding fuel surcharges $ 19.80 $ 18.63 6.3 %

The year-over-year increase in revenue for 2021 reflects an increase in average weight per day and gross revenue per hundredweight.

The increase in weight per day for 2021 reflects higher shipments per day and weight per shipment.

Adjusted EBITDA was $904 million, or 21.9% of revenue, in 2021, compared with $764 million, or 21.6% of revenue, in 2020.

The increase in adjusted EBITDA was primarily driven by higher revenue and pension income, partially offset by higher personnel, third-party transportation and fuel costs.

Additionally, adjusted EBITDA for 2021 included lower year-over-year gains from real estate transactions, including a $62 million gain in 2021, compared with $77 million in 2020.

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

Revenue in our North American LTL segment decreased 6.6% to $3.5 billion in 2020, compared with $3.8 billion in 2019.

Revenue included fuel surcharge revenue of $433 million and $532 million, respectively, for the years ended December 31, 2020 and 2019.

The decline in revenue reflected the impact of COVID-19.

The following table summarizes our key revenue metrics:

Years Ended December 31,

2020 2019 Change %

Pounds per day (thousands) 67,725 73,059 (7.3) %

Gross revenue per hundredweight, excluding fuel surcharges $ 18.63 $ 18.27 2.0 %

The year-over-year decrease in revenue for 2020 reflects a decrease in average weight per day in part due to COVID-19, partially offset by an increase in gross revenue per hundredweight.

The decrease in weight per day reflects lower shipments per day and weight per shipment.

Adjusted EBITDA was $764 million, or 21.6% of revenue, in 2020, compared with $851 million, or 22.4% of revenue, in 2019.

The decrease in adjusted EBITDA was primarily driven by lower revenue and higher facility costs, partially offset by lower fuel, third-party transportation and personnel costs, as well as higher pension income.

Additionally, adjusted EBITDA included $77 million and $88 million in 2020 and 2019, respectively, of gains from real estate transactions.

Brokerage and Other Services Segment

Years Ended December 31, Percent of Revenue

(Dollars in millions) 2021 2020 2019 2021 2020 2019

Revenue $ 8,907 $ 6,800 $ 7,041 100.0 % 100.0 % 100.0 %

Operating income 507 752 5.0 % 7.0 % (32.6) %

Total depreciation and amortization 453 447 1.3 %

Revenue in our Transportation segment decreased 4.6% to $10.2 billion in 2020, compared with $10.7 billion in 2019.

Adjusted EBITDA 547 284 406 6.1 % 4.2 % 5.8 %

Depreciation and amortization expense 240 229 220 2.7 % 3.4 % 3.1 %

Year Ended December 31, 2021 Compared with Year Ended December 31, 2020

Revenue in our Brokerage and Other Services segment increased 31.0% to $8.9 billion in 2021, compared with $6.8 billion in 2020.

The increase in revenue compared to 2020 reflects an increase in North American truck brokerage loads per day facilitated by our digital platform, as well as strength in other brokerage services, in part due to 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.

Foreign currency movement increased revenue by approximately 1.4 percentage points in 2021.

Adjusted EBITDA was $547 million, or 6.1% of revenue in 2021, compared with $284 million, or 4.2% of revenue, in 2020.

The increase in adjusted EBITDA was primarily driven by higher revenue due to load growth and strong pricing in other brokerage services, partially offset by higher compensation and facilities costs.

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

Revenue in our Brokerage and Other Services segment decreased 3.4% to $6.8 billion in 2020, compared with $7.0 billion in 2019.

The decline in revenue primarily reflected the impact of COVID-19 and lower fuel revenue.

Foreign currency movement increased revenue by approximately 0.7 percentage points in 2020.

Operating income in our Transportation segment was $507 million, or 5.0% of revenue, in 2020, compared with $752 million, or 7.0% of revenue, in 2019.

The decrease in operating income was primarily driven by lower

revenue, higher facility costs, expenses related to our exploration of strategic alternatives and incremental PPE and other COVID-19-related costs.

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

Adjusted EBITDA was $284 million, or 4.2% of revenue in 2020, compared with $406 million, or 5.8% of revenue, in 2019.

The decrease in adjusted EBITDA was primarily driven by lower revenue, partially offset by lower third-party transportation, fuel and personnel costs.

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

Logistics Segment

Years Ended December 31, Percent of Revenue Change

(Dollars in millions) 2020 2019 2020 2019 2020 vs.

Revenue $ 6,182 $ 6,093 100.0 % 100.0 % 1.5 %

Operating income 140 241 2.3 % 3.9 % (41.9) %

Total depreciation and amortization 301 277 8.7 %

Revenue in our Logistics segment increased 1.5% to $6.2 billion in 2020, compared with $6.1 billion in 2019.

The increase in revenue compared to 2019 reflects growth in our European business, partially offset by the impact of COVID-19, our elimination of certain low-margin business and the downsizing of business by one of our largest customers in North America in 2019.

Foreign currency movement increased revenue by approximately 0.8 percentage points in 2020.

Operating income in our Logistics segment was $140 million, or 2.3% of revenue in 2020, compared with $241 million, or 3.9% of revenue, in 2019.

The decrease in operating income was primarily driven by the impact of COVID-19 on revenues, costs and margins, increased depreciation and amortization expense, expenses related to our exploration of strategic alternatives and higher personnel costs, partially offset by higher revenue.

Depreciation and amortization expense increased year-over-year due to the impact of prior capital investments, new contract startups and accelerated depreciation due to contract modifications.

Liquidity and Capital Resources

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

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

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

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

As of December 31, 2020, we have $883 million available to draw under our ABL Facility, based on a borrowing base of $1.1 billion, outstanding borrowings of $200 million and outstanding letters of credit of $17 million, as well as $150 million available to draw under the Senior Secured Term Loan Credit Agreement.

Our cash and cash equivalents balance was $2.1 billion as of December 31, 2020, compared to $377 million as of December 31, 2019.

The increase in cash and cash equivalents is largely due to the issuance of our Senior Notes due 2025 in 2020 and cash flows generated from operating activities in 2020.

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

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

We borrowed a net $200 million in revolving loans under our existing ABL Facility in 2020.

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

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

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

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

As of December 31, 2021, we have $995 million available to draw under our ABL Facility, based on a borrowing base of $1.0 billion and outstanding letters of credit of $5 million.

Additionally, under a 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 December 31, 2021.

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.

Our cash and cash equivalents balance was $260 million as of December 31, 2021, compared to $1.7 billion as of December 31, 2020.

The decrease in cash and cash equivalents is largely due to the repayment of debt in 2021 described below.

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.

In conjunction with the planned spin-off of our Logistics segment, we expect to further evaluate our liquidity needs, capital structure and sources of capital for the Transportation and Logistics businesses on a stand-alone basis.

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

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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”), one of our majority-owned subsidiaries, participates in a trade receivables securitization program co-arranged by three European banks (the “Purchasers”).

Under the program, a wholly-owned bankruptcy-remote special purpose entity of XPO Logistics Europe sells trade receivables that originate with wholly-owned subsidiaries of XPO Logistics Europe in the United Kingdom and France to unaffiliated entities managed by the Purchasers.

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 Consolidated Balance Sheets at the date of transfer.

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

The fair value of any servicing assets and liabilities is immaterial.

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

Under a securitization program that was terminated in July 2019, we accounted for transfers as either sales or secured borrowings based on an evaluation of whether control has transferred.

For the transfers that did not meet the criteria for surrender of control, the transaction was accounted for as a secured borrowing.

These secured borrowings were repaid when the program was terminated.

For transfers that were accounted for as sales, the consideration received included a simultaneous cash payment and a deferred purchase price receivable.

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

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

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

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

The maximum amount of net cash proceeds available at any one time under the new program, inclusive of any unsecured borrowings, is €400 million (approximately $489 million as of December 31, 2020).

As of December 31, 2020, €75 million (approximately $92 million) was available to us, subject to having sufficient receivables available to sell to the Purchasers.

The maximum amount of net cash proceeds available at any one time under the securitization program, inclusive of any unsecured borrowings, is €200 million (approximately $227 million as of December 31, 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 December 31, 2021, the maximum amount available under the program was utilized.

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

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Cash consideration

(1) Receivable transfers under the securitization programs are accounted for as either sales or secured borrowings.

In the prior program, a portion of the transfers were accounted for as secured borrowings while under the new program, all transfers are accounted for as sales.

This change had the effect of increasing the amount of trade receivables we reported as sold in 2019.

(1) Information for the years ended December 31, 2021, 2020 and 2019 exclude the impact of the Logistics segment.

In addition to the cash considerations referenced above, we received $75 million in the year ended December 31, 2019, for the realization of cash on the deferred purchase price receivable for our prior securitization program.

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

We did not draw on the term loan facility through its term, which ended in January 2021.

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

As of December 31, 2020, we have issued $200 million in aggregate face amount of letters of credit, and have not drawn on the term loan commitments.

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

Letters of Credit Facility

In 2020, we entered into a credit agreement that contained a $200 million uncommitted secured evergreen letter of credit facility.

The letter of credit facility had an initial one-year term, which automatically renewed for an additional year, and may automatically renew with one-year terms until the letter of credit facility terminates.

As of December 31, 2021, we have issued $198 million in aggregate face amount of letters of credit.

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

Term Loan Facilities

In March 2019, we entered into an amendment to our senior secured term loan credit agreement (the “Term Loan Credit Agreement”) and borrowed an additional $500 million of incremental loans under a new tranche of term loans.

For more information on the amendment, refer to Note 12—Debt to our Consolidated Financial Statements.

In 2021, we amended our senior secured term loan credit agreement (the “Term Loan Credit Agreement”) to consolidate our tranches and lower the interest rate.

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

In March 2019, we entered into an amendment to our Term Loan Credit Agreement and borrowed an additional $500 million of incremental loans under a new tranche of term loans.

Proceeds from the new tranche of loans were used for general corporate purposes, including funding purchases of our common stock as described in Note 14—Stockholders’ Equity.

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 invested in cash and cash equivalents.

In February 2019, we completed a private placement of $1.0 billion aggregate principal amount of senior notes (“Senior Notes due 2024”).

For more information on these amendments, refer to Note 12—Debt to our Consolidated Financial Statements.

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 Senior Notes due 2024 were originally issued in 2019 and the proceeds were used to repay our outstanding obligation under the Unsecured Credit Facility described below and to finance a portion of our share repurchases described in Note 14—Stockholders’ Equity.

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 14—Stockholders’ Equity and available cash.

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

In January 2021, we redeemed our outstanding 6.50% senior notes due 2022 (“Senior Notes due 2022”) that were originally issued in 2015.

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, including the net proceeds from the issuance of our 6.25% senior notes due 2025 (“Senior Notes due 2025”) as described below.

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

In 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 in 2021 to redeem our outstanding Senior Notes due 2022 as described above.

In February 2019, we completed a private placement of $1.0 billion aggregate principal amount of our Senior Notes due 2024.

We used the proceeds from the Senior Notes due 2024 to repay our outstanding obligation under the Unsecured Credit Facility described below and to finance a portion of our share repurchases described in Note 14—Stockholders’ Equity to our Consolidated Financial Statements.

In January 2021, we redeemed our outstanding Senior Notes due 2022 that were originally issued in 2015.

See Note 19—Subsequent Events.

Unsecured Credit Facility

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

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

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

The $22 million has been reflected as a preferred stock conversion charge in the accompanying consolidated financial statements.

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

Additional commitments were made with respect to 9.6 million warrants, which are expected to be converted into 9.1 million shares of common stock in the first quarter of 2021.

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

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

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

The $22 million was reflected as a preferred stock conversion charge in 2020 in the accompanying consolidated financial statements.

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 2021, the remaining 1,015 preferred shares were exchanged, and we issued 0.1 million shares of common stock.

With respect to the warrants, in 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 December 31, 2021, there were no shares of preferred stock or warrants outstanding.

Share Repurchases

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The share purchases under this program have been funded by our available cash and proceeds from our 2019 debt offerings.

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

There were no share repurchases in 2021.

Our remaining share repurchase authorization as of December 31, 2021 is $503 million.

Information regarding our shares repurchased, based on settlement date, in 2020 and 2019 were as follows:

Years Ended December 31,

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

Uncertainty related to the London Interbank Offered Rate (“LIBOR”) phase-out at the end of 2021 may adversely impact the value of, and our obligations under, our ABL and term loan facilities.

See the applicable discussion under Item 1A.

Risk Factors.

Uncertainty related to the London Interbank Offered Rate (“LIBOR”) phase-out by June 2023 for USD LIBOR with greater than two-month maturities may adversely impact the value of, and our obligations under, our ABL and term loan facilities.

See the applicable discussion under Item 1A, “Risk Factors.”

Sources and Uses of Cash

Our cash flows from operating, investing and financing activities, as reflected on our Consolidated Statements of Cash Flows, are summarized as follows:

Our cash flows from operating, investing and financing activities from continuing operations, as reflected on our Consolidated Statements of Cash Flows, are summarized as follows:

Years Ended December 31,

(In millions) 2021 2020 2019

Net cash provided by operating activities $ 885 $ 791

Net cash used in investing activities (357) (161)

Net cash provided by (used in) financing activities 1,136 (759)

Effect of exchange rates on cash, cash equivalents and restricted cash 14 2

Net increase (decrease) in cash, cash equivalents and restricted cash $ 1,678 $ (127)

Net cash provided by operating activities from continuing operations $ 656 $ 388 $ 629

Net cash used in investing activities from continuing operations (184) (116) (67)

Net cash provided by (used in) financing activities from continuing operations (1,932) 1,154 (201)

During 2021, we:

(i) generated cash from operating activities of $885 million;

(ii) generated proceeds from sales of property and equipment (primarily real estate) of $195 million and (iii) received net proceeds of $1.4 billion from our issuances of debt and short-term borrowings.

(i) generated cash from operating activities from continuing operations of $656 million;

(ii) generated proceeds from sales of property and equipment of $132 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 $313 million;

(ii) repurchase common stock of $114 million;

and (iii) make payments on debt and finance leases of $102 million.

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

(iii) repay our ABL Facility borrowings of $200 million and (iv) make payments on debt and finance leases of $80 million.

During 2020, we:

(i) generated cash from operating activities of $791 million;

(ii) generated proceeds from sales of property and equipment of $252 million;

(iii) collected $186 million on the deferred purchase price receivable as described above;

and (iv) received proceeds of $1.8 billion on our debt.

(i) generated cash from operating activities from continuing operations of $388 million;

(ii) generated proceeds from sales of property and equipment (primarily real estate) of $183 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 $303 million;

(ii) repurchase common stock of $1.3 billion;

(iii) make payments on debt and finance leases of $867 million and (iv) purchase noncontrolling interests of $258 million.

Cash flows from operating activities for 2020 increased by $94 million compared with 2019.

The increase reflects the impact of operating assets and liabilities generating $499 million more in cash in 2020, partially offset by lower net income.

(ii) repurchase common stock of $114 million and (iii) make payments on debt and finance leases of $65 million.

Cash flows from operating activities from continuing operations for 2021 increased by $268 million compared with 2020.

The increase reflects higher income from continuing operations of $336 million for 2021 compared with the same period in 2020, partially offset by greater use of cash for working capital in 2021 than in the prior-year period.

Additionally, cash paid for taxes was $44 million higher in 2021 compared to 2020.

Cash flows from operating activities from continuing operations for 2020 decreased by $241 million compared with 2019.

The decrease reflects lower income from continuing operations, partially offset by the impact of operating assets and liabilities utilizing $84 million less cash in 2020.

Within operating assets and liabilities, accrued expenses and other liabilities was a source of cash for 2020 as compared to a use of cash in 2019.

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Partially offsetting the impact of accrued expenses and other liabilities was the higher use of cash due to increased accounts receivable as a result of higher revenues in the fourth quarter of 2020 compared to 2019.

Investing activities used $357 million of cash in 2020 compared with $161 million used in 2019.

As of December 31, 2021, we had $1.1 billion of operating lease and related interest payment obligations, of which $206 million is due within the next twelve months.

Additionally, we had operating leases that have not yet commenced with future undiscounted lease payments of $11 million.

These operating leases will commence in 2022 with initial lease terms of 3 years to 7 years.

For further information on our operating leases and their maturities, see Note 8—Leases to our Consolidated Financial Statements.

Investing activities from continuing operations used $184 million of cash in 2021 compared with $116 million used in 2020 and $67 million used in 2019.

During 2021, we used $313 million of cash to purchase property and equipment and received $132 million from sales of property and equipment.

During 2019, we used $601 million of cash to purchase property and equipment, received $252 million of cash from sales of property and equipment and received proceeds of $186 million related to the realization of cash on deferred purchase price receivable.

Financing activities generated $1.1 billion of cash in 2020 and used $759 million of cash in 2019.

The primary sources of cash from financing activities in 2020 were $1.1 billion of net proceeds from the issuance of Senior Notes due 2025;

During 2020, we used $303 million of cash to purchase property and equipment and received $183 million of cash from sales of property and equipment.

During 2019, we used $379 million of cash to purchase property and equipment, received $237 million of cash from

sales of property and equipment and received proceeds of $75 million related to the realization of cash on deferred purchase price receivable.

We anticipate net capital expenditures to be between $425 million and $475 million in 2022, funded by cash on hand and available liquidity.

Financing activities from continuing operations used $1.9 billion of cash in 2021 compared with $1.2 billion of cash generated in 2020 and $201 million used in 2019.

The primary uses of cash from financing activities from continuing operations during 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 from continuing operations during 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.

The primary sources of cash from financing activities from continuing operations in 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, and $23 million from net borrowings related to our securitization program.

The primary uses of cash from financing activities in 2020 were $114 million used to purchase XPO common stock and $102 million used to repay debt and finance leases.

By comparison, the primary uses of cash from financing activities in 2019 were $1.3 billion to repurchase XPO common stock, $867 million used to repay debt and finance leases, and $258 million used to purchase a shareholder’s noncontrolling interest in XPO Logistics Europe SA.

The primary source of cash from financing activities in 2019 was $1.7 billion of net proceeds from the issuance of long-term debt, as described above.

The primary uses of cash from financing activities from continuing operations in 2020 were $114 million used to repurchase XPO common stock and $65 million used to repay debt and finance leases.

The primary uses of cash from financing activities from continuing operations in 2019 were $1.3 billion to repurchase XPO common stock and $569 million used to repay debt and finance leases.

The primary source of cash from financing activities from continuing operations in 2019 was $1.7 billion of net proceeds from the issuance of long-term debt.

As of December 31, 2021, we had $3.5 billion total outstanding principal amount of debt, excluding finance leases.

We have no significant debt maturities until 2025.

Interest on our ABL and Term Loan facilities are variable, while interest on our senior notes are at fixed rates.

Future interest payments associated with our debt total $623 million at December 31, 2021, with $130 million payable within 12 months, and are estimated based on the principal amount of debt and applicable interest rates as of December 31, 2021.

Additionally, as of December 31, 2021, we have $255 million of finance lease and related interest payment obligations, of which $61 million is due within the next twelve months.

For further information on our debt facilities and maturities, see Note 12—Debt to our Consolidated Financial Statements.

For further information on our finance lease maturities, see Note 8—Leases to our Consolidated Financial Statements.

Defined Benefit Pension Plans

We sponsor both funded and unfunded defined benefit plans for some employees in the U.S.

and internationally.

The largest of these plans include the funded U.S.

plan and the unfunded U.S.

plan and the funded U.K.

Historically, we have realized income, rather than expense, from these plans.

We generated aggregate income from our U.S.

plans of $83 million in 2020, $54 million in 2019 and $74 million in 2018.

We generated aggregate income from our plans of $61 million in 2021, $48 million in 2020 and $24 million in 2019.

The plans have been generating income due to their funded status and because they do not allow for new plan participants or additional benefit accruals.

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The discount rates used in determining the net periodic benefit costs and benefit obligations are as follows:

Qualified Plans U.S.

Non-Qualified Plans U.K.

2020 2019 2020 2019 2020 2019

Discount rate - net

periodic benefit costs 2.96 % 4.08 % 2.40% - 2.78% 3.65% - 3.95%

1.84 % 2.56 %

Discount rate - benefit

obligations 2.48 % 3.35 % 1.62% - 2.30% 2.72% - 3.20%

Qualified Plans Non-Qualified Plans

2021 2020 2021 2020

An increase or decrease of 25 basis points in the discount rate would decrease or increase our 2020 pre-tax pension income by $3 million for the U.S.

plans and $2 million for the U.K.

plan, respectively.

Discount rate - net periodic benefit costs 1.96 % 2.96 % 1.11% - 1.71% 2.40% - 2.78%

Discount rate - benefit obligations 2.84 % 2.48 % 2.19% - 2.72% 1.62% - 2.30%

An increase or decrease of 25 basis points in the discount rate would decrease or increase our 2021 pre-tax pension income by approximately $3 million.

We use a full yield curve approach to estimate the interest cost component of net periodic benefit cost by applying specific spot rates along the yield curve used to determine the benefit obligation to each of the underlying projected cash flows based on time until payment.

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This strategy was developed by analyzing a variety of diversified asset-class combinations in conjunction with the projected liabilities of the plans.

For the year ended December 31, 2020, our expected return on plan assets was $102 million for the U.S.

plans and $57 million for the U.K.

plan, compared to the actual return on plan assets of $274 million for the U.S.

plans and $120 million for the U.K.

The actual annualized return on plan assets for the U.S.

plans for 2020 was approximately 15%, which was above the expected return on asset assumption for the year due to positive performance in a strong long duration fixed income market environment, which represented over 82% of the portfolio, and positive performance from the domestic and international equity markets.

The actual annualized return on plan assets for the U.K.

plan for 2020 was approximately 11%, which was above the expected return on asset assumption for the year as a result of strong performances across equity and credit asset classes.

An increase or decrease of 25 basis points in the expected return on plan assets would increase or decrease our 2020 pre-tax pension income by $5 million for the U.S.

plans and $3 million for the U.K.

For the year ended December 31, 2021, our expected return on plan assets was $101 million, compared to the actual return on plan assets of $25 million.

The actual annualized return on plan assets for 2021 was approximately 1%, which was below the expected return on asset assumption for the year due to negative performance in a long duration fixed income market environment, which represented 86% of the portfolio, partially offset by positive performance from the domestic and international equity markets.

An increase or decrease of 25 basis points in the expected return on plan assets would increase or decrease our 2021 pre-tax pension income by approximately $5 million.

Actuarial Gains and Losses

Changes in the discount rate and/or differences between the expected and actual rate of return on plan assets results in unrecognized actuarial gains or losses.

For our defined benefit pension plans, accumulated unrecognized actuarial losses were $50 million for the U.S.

plans and $158 million for the U.K.

plan as of December 31, 2020.

For our defined benefit pension plans, accumulated unrecognized actuarial losses were $43 million as of December 31, 2021.

The portion of the unrecognized actuarial gain/loss that exceeds 10% of the greater of the projected benefit obligation or the fair value of plan assets at the beginning of the year is amortized and recognized as income/expense over the estimated average remaining life expectancy of plan participants.

We expect to recognize $1 million of amortization of actuarial gain in our net periodic benefit income for the U.K.

plan for 2021.

Effect on Results

The effects of the defined benefit pension plans on our results consist primarily of the net effect of the interest cost on plan obligations for the U.S.

plans and the U.K.

plan, and the expected return on plan assets.

We estimate that the defined benefit pension plans will contribute annual pre-tax income in 2021 of $61 million for the U.S.

plans and $41 million for the U.K.

In determining the amount and timing of pension contributions for the U.S.

plans, we consider our cash position, the funded status as measured by the Pension Protection Act of 2006 and generally accepted accounting principles, and the tax deductibility of contributions, among other factors.

We contributed $5 million to the U.S.

plans in 2020 and 2019, respectively, and we estimate that we will contribute $5 million to the U.S.

plans in 2021.

plan, the amount and timing of pension contributions are determined in accordance with U.K.

pension codes and trustee negotiations.

We contributed $3 million and $2 million to the U.K.

plan in 2020 and 2019, respectively.

We estimate that we will contribute $1 million to the U.K.

plan in 2021.

The effects of the defined benefit pension plans on our results consist primarily of the net effect of the interest cost on plan obligations and the expected return on plan assets.

We estimate that the defined benefit pension plans will contribute annual pre-tax income in 2022 of $60 million.

In determining the amount and timing of pension contributions, we consider our cash position, the funded status as measured by the Pension Protection Act of 2006 and generally accepted accounting principles, and the tax deductibility of contributions, among other factors.

We contributed $6 million in 2021 and 2020 to the non-qualified plans, respectively, and we estimate that we will contribute $5 million in 2022.

For additional information, see Note 13—Employee Benefit Plans to our Consolidated Financial Statements.

Contractual Obligations

Our contractual obligations as of December 31, 2020 were:

Payments Due by Period

(In millions) Total 2021 2022-2023 2024-2025 Thereafter

Contractual obligations

Finance leases $ 479 $ 97 $ 169 $ 107 $ 106

Operating leases (1)

2,718 579 957 547 635

Purchase commitments 109 73 31 5 —

Debt (excluding finance leases) 6,444 1,254 536 4,354 300

Interest on debt (2)

1,167 246 476 272 173

Total contractual cash obligations $ 10,917 $ 2,249 $ 2,169 $ 5,285 $ 1,214

(1) As of December 31, 2020, we had additional operating leases that have not yet commenced with future undiscounted lease payments of $202 million.

These operating leases will commence in 2021 through 2022 with initial lease terms of 2 years to 15 years.

(2) Estimated interest payments have been calculated based on the principal amount of debt and the applicable interest rates as of December 31, 2020.

As of December 31, 2020, our Consolidated Balance Sheet reflects a long-term liability of $371 million for deferred taxes.

Additionally, our Consolidated Balance Sheet reflects gross unrecognized tax benefits of $27 million, which are primarily included in long-term liabilities.

As the timing of future cash outflows for these liabilities is uncertain, they are excluded from the above table.

Actual amounts of contractual cash obligations may differ from estimated amounts due to changes in foreign currency exchange rates.

We anticipate net capital expenditures to be between

$475 million and $525 million in 2021 (without giving effect to the planned spin-off of our Logistics segment), funded by cash on hand and available liquidity.

Critical Accounting Policies

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with U.S.

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Application of the goodwill impairment test requires judgment, including the identification of reporting units, the assignment of assets and liabilities to reporting units, the assignment of goodwill to reporting units, and a determination of the fair value of each reporting unit.

For our 2020 and 2019 goodwill assessments, we performed a quantitative analysis for all five of our reporting units using a combination of income and market approaches, with the assistance of a third-party valuation appraiser.

As of August 31, 2020 and 2019, we completed our annual impairment tests for goodwill with all of our reporting units having fair values in excess of their carrying values, resulting in no impairment of goodwill.

Accounting guidance allows entities to perform a qualitative assessment (a “step-zero” test) before performing a quantitative analysis.

If an entity determines that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the entity does not need to perform a quantitative analysis for that reporting unit.

The qualitative assessment includes a review of macroeconomic conditions, industry and market considerations, internal cost factors, and overall financial performance, among other factors.

For our 2021 goodwill assessment, we performed a step-zero qualitative analysis for our three reporting units.

Based on the qualitative assessments performed, we concluded that it was not more-likely-than-not that the fair value of each of our reporting units was less than their carrying amounts and, therefore, further quantitative analysis was not performed, and we did not recognize any goodwill impairment.

For our 2020 goodwill assessment, we performed a quantitative analysis for the five reporting units that existed at the time of the assessment using a combination of income and market approaches with the assistance of a third-party valuation appraiser.

As of August 31, 2020, we completed our annual impairment test for goodwill with all of our reporting units having fair values in excess of their carrying values, resulting in no impairment of goodwill.

Our number of reporting units decreased from five in 2020 to three in 2021 as a result of the spin-off and other organizational changes.

The income approach of determining fair value is based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate.

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Self-Insurance Accruals

We use a combination of self-insurance programs and purchased insurance to provide for the costs of medical, casualty, liability, vehicular, cargo and workers’ compensation claims.

We use a combination of self-insurance programs and purchased insurance to provide for the costs of medical, casualty, liability, vehicular, cargo, workers’ compensation, cyber risk and property claims.

We periodically evaluate our level of insurance coverage and adjust our insurance levels based on risk tolerance and premium expense.

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Additionally, claims may emerge in future years for events that occurred in a prior year at a rate that differs from previous actuarial projections.

We believe the actuarial

methods are appropriate for measuring these self-insurance accruals.

We believe the actuarial methods are appropriate for measuring these self-insurance accruals.

However, based on the number of claims and the length of time from incurrence of the claims to ultimate settlement, the use of any estimation method is sensitive to the assumptions and factors described above.

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Judgment and estimates are required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties.

Evaluating our tax positions would include but not be limited to our tax positions on internal restructuring transactions as well as the spin-off of GXO.

We review our tax positions quarterly and as new information becomes available.

8 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis