XPO, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page No. Report of Independent Registered Public Accounting Firm 51 Consolidated Balance Sheets as of December 31, 202 1 and 20 20 54 Consolidated Statements of Income for the Years Ended December 31, 202 1 , 20 2 0 and 2019 55 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 202 1 , 20 20 and 20 1 9 56 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 1 , 20 20 and 20 19 57 Consolidated Statements of Changes in Equity for the Years Ended December 31, 202 1 , 20 20 and 20 19 59 Notes to Consolidated Financial Statements 61 50 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors XPO Logistics, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of XPO Logistics, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance 51 Table of Contents with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate . Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of the tax-free determination of the spin-off of the Company’s Logistics segment As discussed in Note 1 to the consolidated financial statements, on August 2, 2021, the Company completed the previously announced spin-off of its Logistics segment into an independent public company. The spin-off was accomplished by the distribution of 100% of the outstanding common stock of GXO Logistics, Inc. to the Company’s stockholders and was intended to qualify as tax-free to the Company and its stockholders for U.S. federal income tax purposes. We identified the evaluation of the spin-off as a tax-free transaction for U.S. federal income tax purposes to be a critical audit matter. The evaluation of the Company’s interpretation and application of the Internal Revenue Code (Code) required complex auditor judgment and the need to involve tax professionals with specialized skills and knowledge to evaluate the U.S. federal taxability of the spin-off. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s income tax process, including a control related to Company’s evaluation of the spin-off as tax-free for U.S. federal income tax purposes. We involved tax professionals with specialized skills and knowledge, who assisted in: • inspecting the tax opinions from the Company’s external tax advisors that management utilized in forming their conclusions on U.S. federal income taxability of the spin-off, including certain interpretations of the Code • assessing the key facts, assumptions and representations provided by management and used by the Company’s external tax advisors when evaluating the U.S. federal income taxability Liabilities for self-insured claims As discussed in Note 2 to the consolidated financial statements, the Company uses a combination of self-insurance programs and purchased insurance to provide for the costs of liability, vehicular, and workers’ compensation claims (self-insured claims). The Company records estimates of the undiscounted liability associated with claims incurred as of the balance sheet date, including estimates of claims incurred but not reported, by considering historical cost experience, demographic and severity factors, and judgments about current and expected levels of cost per claim and retention levels. These liabilities are recorded within accrued liabilities and other long-term liabilities as of December 31, 2021. We identified the assessment of the estimated liabilities for self-insured claims as a critical audit matter. The evaluation of the uncertainty in the amounts that will ultimately be paid to settle these claims required subjective auditor judgment. Assumptions that may affect the estimated liability of claims include the consideration of 52 Table of Contents historical cost experience, severity factors, and judgments about current and expected levels of cost per claims and retention levels that have uncertainty related to future occurrences or events and conditions. Additionally, the Company’s liabilities for self-insured claims included estimates for expenses of claims that have been incurred but have not been reported, and specialized skills were needed to evaluate the actuarial methods and assumptions used to assess these estimates. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s self-insurance process. This included controls over the assumptions used in estimating the liabilities for self-insured claims. In addition, we compared the Company’s estimates of liabilities for individual self-insured claims to current available information, which included legal claims, incident and case reports, current and historical cost experience, or other evidence. We involved an actuarial professional with specialized skills and knowledge, who assisted in: • comparing the Company’s actuarial reserving methodologies with accepted actuarial methods and procedures • evaluating assumptions used in determining the liability, including expected level of cost per claim and retention levels, in relation to recent historical loss payment trends and severity factors • developing an independent expected range of liabilities, including liabilities for claims that have been incurred but have not been recorded, based on actuarial methodologies • comparing the Company’s recorded liability to the independently developed liability range. /s/ KPMG LLP We have served as the Company’s auditor since 2011. Stamford, Connecticut February 16, 2022 53 Table of Contents XPO Logistics, Inc. Consolidated Balance Sheets December 31, (In millions, except per share data) 2021 2020 ASSETS Current assets Cash and cash equivalents $ 260 $ 1,731 Accounts receivable, net of allowances of $ 47 and $ 46 , respectively 2,105 1,680 Other current assets 286 303 Current assets of discontinued operations 26 1,664 Total current assets 2,677 5,378 Long-term assets Property and equipment, net of $ 1,828 and $ 1,646 in accumulated depreciation, respectively 1,808 1,891 Operating lease assets 908 844 Goodwill 2,479 2,536 Identifiable intangible assets, net of $ 612 and $ 536 in accumulated amortization, respectively 580 675 Other long-term assets 255 187 Long-term assets of discontinued operations — 4,666 Total long-term assets 6,030 10,799 Total assets $ 8,707 $ 16,177 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 1,110 $ 854 Accrued expenses 1,107 1,044 Short-term borrowings and current maturities of long-term debt 58 1,281 Short-term operating lease liabilities 170 152 Other current liabilities 69 102 Current liabilities of discontinued operations 24 1,728 Total current liabilities 2,538 5,161 Long-term liabilities Long-term debt 3,514 5,240 Deferred tax liability 316 286 Employee benefit obligations 122 131 Long-term operating lease liabilities 752 696 Other long-term liabilities 327 384 Long-term liabilities of discontinued operations — 1,430 Total long-term liabilities 5,031 8,167 Stockholders’ equity Convertible perpetual preferred stock, $ 0.001 par value; 10 shares authorized; — and 0.001 of Series A shares issued and outstanding as of December 31, 2021 and 2020, respectively — 1 Common stock, $ 0.001 par value; 300 shares authorized; 115 and 102 shares issued and outstanding as of December 31, 2021 and 2020, respectively — — Additional paid-in capital 1,179 1,998 Retained earnings 43 868 Accumulated other comprehensive loss ( 84 ) ( 158 ) Total stockholders’ equity before noncontrolling interests 1,138 2,709 Noncontrolling interests — 140 Total equity 1,138 2,849 Total liabilities and equity $ 8,707 $ 16,177 See accompanying notes to consolidated financial statements. 54 Table of Contents XPO Logistics, Inc. Consolidated Statements of Income Years Ended December 31, (In millions, except per share data) 2021 2020 2019 Revenue $ 12,806 $ 10,199 $ 10,681 Cost of transportation and services (exclusive of depreciation and amortization) 8,945 6,950 7,359 Direct operating expense (exclusive of depreciation and amortization) 1,391 1,235 1,186 Sales, general and administrative expense 1,322 1,210 1,068 Depreciation and amortization expense 476 470 467 Transaction and integration costs 37 75 5 Restructuring costs 19 31 35 Operating income 616 228 561 Other income ( 57 ) ( 41 ) ( 23 ) Foreign currency (gain) loss ( 2 ) ( 3 ) 10 Debt extinguishment loss 54 — 5 Interest expense 211 307 268 Income (loss) from continuing operations before income tax provision (benefit) 410 ( 35 ) 301 Income tax provision (benefit) 87 ( 22 ) 60 Income (loss) from continuing operations 323 ( 13 ) 241 Income from discontinued operations, net of taxes 18 130 199 Net income 341 117 440 Net loss from continuing operations attributable to noncontrolling interests — 3 — Net income from discontinued operations attributable to noncontrolling interests ( 5 ) ( 10 ) ( 21 ) Net income attributable to XPO $ 336 $ 110 $ 419 Net income (loss) attributable to common shareholders Continuing operations $ 323 $ ( 41 ) $ 201 Discontinued operations 13 120 178 Net income attributable to common shareholders $ 336 $ 79 $ 379 Earnings (loss) per share data Basic earnings (loss) per share from continuing operations $ 2.88 $ ( 0.45 ) $ 2.09 Basic earnings per share from discontinued operations 0.11 1.32 1.86 Basic earnings per share attributable to common shareholders $ 2.99 $ 0.87 $ 3.95 Diluted earnings (loss) per share from continuing operations $ 2.82 $ ( 0.45 ) $ 1.89 Diluted earnings per share from discontinued operations 0.11 1.32 1.68 Diluted earnings per share attributable to common shareholders $ 2.93 $ 0.87 $ 3.57 Weighted-average common shares outstanding Basic weighted-average common shares outstanding 112 92 96 Diluted weighted-average common shares outstanding 114 92 106 See accompanying notes to consolidated financial statements. 55 Table of Contents XPO Logistics, Inc. Consolidated Statements of Comprehensive Income Years Ended December 31, (In millions) 2021 2020 2019 Net income $ 341 $ 117 $ 440 Other comprehensive income (loss), net of tax Foreign currency translation gain (loss), net of tax effect of $ — , $ 17 and $( 7 ) $ ( 85 ) $ 112 $ 23 Unrealized gain (loss) on financial assets/liabilities designated as hedging instruments, net of tax effect of $ 1 , $ — and $( 1 ) ( 3 ) ( 2 ) 4 Defined benefit plans adjustment, net of tax effect of $( 11 ), $ 30 and $ 1 34 ( 117 ) ( 19 ) Other comprehensive income (loss) ( 54 ) ( 7 ) 8 Comprehensive income $ 287 $ 110 $ 448 Less: Comprehensive income attributable to noncontrolling interests 3 13 20 Comprehensive income attributable to XPO $ 284 $ 97 $ 428 See accompanying notes to consolidated financial statements. 56 Table of Contents XPO Logistics, Inc. Consolidated Statements of Cash Flows Years Ended December 31, (In millions) 2021 2020 2019 Cash flows from operating activities of continuing operations Net income $ 341 $ 117 $ 440 Income from discontinued operations, net of taxes 18 130 199 Income (loss) from continuing operations 323 ( 13 ) 241 Adjustments to reconcile income (loss) from continuing operations to net cash from operating activities Depreciation, amortization and net lease activity 476 470 467 Stock compensation expense 37 41 56 Accretion of debt 18 20 16 Deferred tax expense (benefit) 5 ( 75 ) 40 Debt extinguishment loss 54 — 5 Unrealized (gain) loss on foreign currency option and forward contracts 1 ( 1 ) 9 Gains on sales of property and equipment ( 73 ) ( 91 ) ( 101 ) Other 4 49 ( 8 ) Changes in assets and liabilities Accounts receivable ( 502 ) ( 265 ) 101 Other assets ( 1 ) ( 41 ) 82 Accounts payable 240 96 ( 99 ) Accrued expenses and other liabilities 74 198 ( 180 ) Net cash provided by operating activities from continuing operations 656 388 629 Cash flows from investing activities of continuing operations Payment for purchases of property and equipment ( 313 ) ( 303 ) ( 379 ) Proceeds from sale of property and equipment 132 183 237 Cash collected on deferred purchase price receivable — — 75 Other ( 3 ) 4 — Net cash used in investing activities from continuing operations ( 184 ) ( 116 ) ( 67 ) Cash flows from financing activities of continuing operations Proceeds from issuance of debt — 1,155 1,752 Proceeds from (repayment of) borrowings related to securitization program ( 24 ) 23 — Repurchase of debt ( 2,769 ) — — Proceeds from borrowings on ABL facility — 1,020 1,935 Repayment of borrowings on ABL facility ( 200 ) ( 820 ) ( 1,935 ) Repayment of debt and finance leases ( 80 ) ( 65 ) ( 569 ) Payment of debt issuance costs ( 5 ) ( 22 ) ( 28 ) Cash paid in connection with preferred stock conversion — ( 22 ) — Issuance (repurchase) of common stock 384 ( 114 ) ( 1,347 ) Change in bank overdrafts — 21 ( 3 ) Payment for tax withholdings for restricted shares ( 28 ) ( 26 ) ( 14 ) Distribution from GXO 794 — — Other ( 4 ) 4 8 Net cash provided by (used in) financing activities from continuing operations ( 1,932 ) 1,154 ( 201 ) 57 Table of Contents XPO Logistics, Inc. Consolidated Statements of Cash Flows (continued) Years Ended December 31, (In millions) 2021 2020 2019 Cash flows from discontinued operations Operating activities of discontinued operations $ 65 $ 497 $ 162 Investing activities of discontinued operations ( 93 ) ( 241 ) ( 94 ) Financing activities of discontinued operations ( 302 ) ( 18 ) ( 558 ) Net cash provided by (used in) discontinued operations ( 330 ) 238 ( 490 ) Effect of exchange rates on cash, cash equivalents and restricted cash ( 2 ) 14 2 Net increase (decrease) in cash, cash equivalents and restricted cash ( 1,792 ) 1,678 ( 127 ) Cash, cash equivalents and restricted cash, beginning of year 2,065 387 514 Cash, cash equivalents and restricted cash, end of year 273 2,065 387 Less: Cash, cash equivalents and restricted cash of discontinued operations, end of year 3 323 195 Cash, cash equivalents and restricted cash of continuing operations, end of year $ 270 $ 1,742 $ 192 Supplemental disclosure of cash flow information: Cash paid for interest 253 314 281 Cash paid for income taxes 84 40 82 See accompanying notes to consolidated financial statements. 58 Table of Contents XPO Logistics, Inc. Consolidated Statements of Changes in Equity For the Years Ended December 31, 2021, 2020 and 2019 Series A Preferred Stock Common Stock (Shares in thousands, dollars in millions) Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total XPO Stockholders’ Equity Non-controlling Interests Total Equity Balance as of December 31, 2018 72 $ 41 115,683 $ — $ 3,311 $ 377 $ ( 154 ) $ 3,575 $ 395 $ 3,970 Net income — — — — — 419 — 419 21 440 Other comprehensive income (loss) — — — — — — 9 9 ( 1 ) 8 Exercise and vesting of stock compensation awards — — 489 — 1 — — 1 — 1 Tax withholdings related to vesting of stock compensation awards — — — — ( 14 ) — — ( 14 ) — ( 14 ) Purchase of noncontrolling interest — — — — ( 3 ) — — ( 3 ) ( 255 ) ( 258 ) Retirement of common stock — — ( 23,932 ) — ( 1,275 ) — — ( 1,275 ) — ( 1,275 ) Dividend declared — — — — — ( 3 ) — ( 3 ) ( 5 ) ( 8 ) Stock compensation expense — — — — 36 — — 36 — 36 Adoption of new accounting standard and other — — 102 — 5 ( 7 ) — ( 2 ) ( 2 ) ( 4 ) Balance as of December 31, 2019 72 $ 41 92,342 $ — $ 2,061 $ 786 $ ( 145 ) $ 2,743 $ 153 $ 2,896 Net income — — — — — 110 — 110 7 117 Other comprehensive income (loss) — — — — — — ( 13 ) ( 13 ) 6 ( 7 ) Exercise and vesting of stock compensation awards — — 1,411 — — — — — — — Tax withholdings related to vesting of stock compensation awards — — — — ( 47 ) — — ( 47 ) — ( 47 ) Purchase of noncontrolling interests — — — — ( 1 ) — — ( 1 ) ( 20 ) ( 21 ) Conversion of preferred stock to common stock ( 71 ) ( 40 ) 10,014 — 40 — — — — — Preferred stock conversion — — — — — ( 22 ) — ( 22 ) — ( 22 ) Retirement of common stock — — ( 1,715 ) — ( 114 ) — — ( 114 ) — ( 114 ) Dividend declared — — — — — ( 2 ) — ( 2 ) ( 6 ) ( 8 ) Stock compensation expense — — — — 52 — — 52 — 52 Adoption of new accounting standard and other — — — — 7 ( 4 ) — 3 — 3 Balance as of December 31, 2020 1 $ 1 102,052 $ — $ 1,998 $ 868 $ ( 158 ) $ 2,709 $ 140 $ 2,849 59 Table of Contents XPO Logistics, Inc. Consolidated Statements of Changes in Equity (continued) For the Years Ended December 31, 2021, 2020 and 2019 Series A Preferred Stock Common Stock (Shares in thousands, dollars in millions) Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total XPO Stockholders’ Equity Non-controlling Interests Total Equity Balance as of December 31, 2020 1 $ 1 102,052 $ — $ 1,998 $ 868 $ ( 158 ) $ 2,709 $ 140 $ 2,849 Net income — — — — — 336 — 336 5 341 Other comprehensive loss — — — — — — ( 52 ) ( 52 ) ( 2 ) ( 54 ) Spin-off of GXO — — — — ( 1,199 ) ( 1,161 ) 126 ( 2,234 ) ( 40 ) ( 2,274 ) Exercise and vesting of stock compensation awards — — 392 — 2 — — 2 — 2 Tax withholdings related to vesting of stock compensation awards — — — — ( 28 ) — — ( 28 ) — ( 28 ) Issuance of common stock — — 2,875 — 384 — — 384 — 384 Conversion of preferred stock to common stock ( 1 ) ( 1 ) 145 — 1 — — — — — Purchase of noncontrolling interests — — — — ( 34 ) — — ( 34 ) ( 100 ) ( 134 ) Dividend declared — — — — — — — — ( 3 ) ( 3 ) Exercise of warrants — — 9,215 — — — — — — — Stock compensation expense — — — — 52 — — 52 — 52 Other — — 58 — 3 — — 3 — 3 Balance as of December 31, 2021 — $ — 114,737 $ — $ 1,179 $ 43 $ ( 84 ) $ 1,138 $ — $ 1,138 See accompanying notes to consolidated financial statements. 60 Table of Contents XPO Logistics, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 2021, 2020 and 2019 1. Organization Nature of Operations XPO Logistics, Inc., together with its subsidiaries (“XPO” or “we”), 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. See Note 4—Segment Reporting and Geographic Information for additional information on our operations. 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 operations and the financial position of our Logistics segment for periods prior to the spin-off are presented as discontinued operations in these consolidated financial statements. For information on our discontinued operations, see Note 3—Discontinued Operations. 2. Basis of Presentation and Significant Accounting Policies Basis of Presentation We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), which requires us to make estimates and assumptions that impact the amounts reported and disclosed in our consolidated financial statements and the accompanying notes. We prepared these estimates based on the most current and best available information, but actual results could differ materially from these estimates and assumptions. Following the spin-off, we adopted a new format for our Consolidated Statements of Income to separately present depreciation and amortization expense, transaction and integration costs and restructuring costs from other operating expenses. We have recast prior year amounts to conform to the current year’s presentation. Consolidation Our consolidated financial statements include the accounts of XPO, our wholly-owned subsidiaries, and our majority-owned subsidiaries and variable interest entity (“VIE”) where we are the primary beneficiary. We have eliminated intercompany accounts and transactions. To determine if we are a primary beneficiary of a VIE, we evaluate whether we are able to direct the activities that significantly impact the VIE’s economic performance, including whether we control the operations of each VIE and whether we can operate the VIE under our brand or policies. Investors in the VIE only have recourse to the assets owned by the VIE and not to our general credit. We do not have implicit support arrangements with the VIE. We consolidate the VIE, which is comprised of the special purpose entity related to the European Trade Securitization Program discussed below in this Note and in Note 12—Debt. We have a controlling financial interest in entities generally when we own a majority of the voting interest. The noncontrolling interests reflected in our consolidated financial statements primarily related to a minority interest in XPO Logistics Europe SA (“XPO Logistics Europe”), a business we acquired majority ownership of in 2015. In 61 Table of Contents 2021, we completed a buy-out offer and squeeze-out for the remaining 3 % of XPO Logistics Europe that we did not already own at a cost of $ 128 million plus expenses. Previously, in 2020 and 2019, we purchased shareholders’ noncontrolling interests in XPO Logistics Europe for € 17 million (approximately $ 21 million) and € 234 million (approximately $ 258 million), respectively. Significant Accounting Policies Revenue Recognition We recognize revenue when we transfer control of promised products or services to customers in an amount equal to the consideration we expect to receive for those products or services. Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. We generate revenue by providing less-than-truckload, truck brokerage and other transportation services for our customers. Additional services may be provided to our customers under their transportation contracts, including unloading and other incidental services. The transaction price is based on the consideration specified in the customer’s contract. A performance obligation is created when a customer under a transportation contract submits a bill of lading for the transport of goods from origin to destination. These performance obligations are satisfied as the shipments move from origin to destination. We recognize transportation revenue proportionally as a shipment moves from origin to destination and the related costs are recognized as incurred. Some of our customer contracts contain our promise to stand ready to provide transportation services. For these contracts, we recognize revenue on a straight-line basis over the term of the contract because the pattern of benefit to the customer, and our efforts to fulfill the contract, are generally distributed evenly throughout the period. Performance obligations are generally short-term, with transit times usually less than one week. Generally, customers are billed on shipment of the freight or on a monthly basis and make payment according to approved payment terms. When we do not control the specific services, we recognize revenue as the difference between the amount the customer pays us for the service less the amount we are charged by third parties who provide the service. Generally, we can adjust our pricing based on contractual provisions related to achieving agreed-upon performance metrics, changes in volumes, services and market conditions. Revenue relating to these pricing adjustments is estimated and included in the consideration if it is probable that a significant revenue reversal will not occur in the future. The estimate of variable consideration is determined by the expected value or most likely amount method and factors in current, past and forecasted experience with the customer. Customers are billed based on terms specified in the revenue contract and they pay us according to approved payment terms. Contract Costs We expense the incremental costs of obtaining contracts when incurred if the amortization period of the assets is one year or less. These costs are included in Direct operating expense (exclusive of depreciation and amortization). Cash, Cash Equivalents and Restricted Cash We consider all highly liquid investments with an original maturity of three months or less on the date of purchase to be cash equivalents. As of December 31, 2021, 2020 and 2019, our restricted cash included in Other long-term assets on our Consolidated Balance Sheets was $ 10 million, $ 11 million and $ 10 million, respectively. 62 Table of Contents Accounts Receivable and Allowance for Credit Losses We record accounts receivable at the contractual amount and we record an allowance for credit losses for the amount we estimate we may not collect. In determining the allowance for credit losses, we consider historical collection experience, the age of the accounts receivable balances, the credit quality and risk of our customers, any specific customer collection issues, current economic conditions, and other factors that may impact our customers’ ability to pay. Commencing in 2020 and in accordance with Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, we also consider reasonable and supportable forecasts of future economic conditions and their expected impact on customer collections in determining our allowance for credit losses. We write off accounts receivable balances once the receivables are no longer deemed collectible. The roll-forward of the allowance for credit losses was as follows: Years Ended December 31, (In millions) 2021 2020 2019 Beginning balance $ 46 $ 38 $ 41 Provision charged to expense 28 45 20 Write-offs, less recoveries, and other adjustments ( 27 ) ( 41 ) ( 23 ) Cumulative effect adjustment for adoption of ASU 2016-13 — 4 — Ending balance $ 47 $ 46 $ 38 Trade Receivables Securitization and Factoring Programs We sell certain of our trade accounts receivable on a non-recourse basis to third-party financial institutions under factoring agreements. We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Consolidated Statements of Cash Flows. We also sell trade accounts receivable under a securitization program described below. We use trade receivables securitization and factoring programs to help manage our cash flows and offset the impact of extended payment terms for some of our customers. 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. 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. See Note 12—Debt for additional information on these borrowings. 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. The weighted average interest rate was 0.50 % as of December 31, 2021. Charges for commitment fees, which are based on a percentage of available amounts, and charges for administrative fees were not material to our results of operations for the years ended December 31, 2021, 2020 and 2019. 63 Table of Contents Information related to the trade receivables sold was as follows: Years Ended December 31, (In millions) 2021 (1) 2020 (1) 2019 (1) Securitization programs Receivables sold in period $ 1,726 $ 1,377 $ 1,217 Cash consideration 1,726 1,377 1,161 Deferred purchase price — — 57 Factoring programs Receivables sold in period 72 76 64 Cash consideration 72 75 65 (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. Property and Equipment We generally record property and equipment at cost, or in the case of acquired property and equipment, at fair value at the date of acquisition. Maintenance and repair expenditures are charged to expense as incurred. For internally-developed computer software, all costs incurred during planning and evaluation are expensed as incurred. Costs incurred during the application development stage are capitalized and included in property and equipment. Capitalized software also includes the fair value of acquired internally-developed technology. We compute depreciation expense on a straight-line basis over the estimated useful lives of the assets as follows: Classification Estimated Useful Life Buildings and leasehold improvements Term of lease to 40 years Vehicles, containers, tractors, trailers and tankers 3 to 15 years Rail cars and chassis 15 to 30 years Machinery and equipment 3 to 10 years Computer software and equipment 1 to 6 years Leases We determine if an arrangement is a lease at inception. We recognize operating lease right-of-use assets and liabilities at the lease commencement date based on the estimated present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use incremental borrowing rates based on the information available at commencement date to determine the present value of future lease payments. This rate is determined from a hypothetical yield curve that takes into consideration market yield levels of our relevant debt outstanding as well as the index that matches our credit rating, and then adjusts as if the borrowings were collateralized. We include options to extend or terminate a lease in the lease term when we are reasonably certain to exercise such options. We exclude variable lease payments (such as payments based on an index or reimbursements of lessor costs) from our initial measurement of the lease liability. We recognize leases with an initial term of 12 months or less as lease expense over the lease term and those leases are not recorded on our Consolidated Balance Sheets. We account for lease and non-lease components within a contract as a single lease component for our real estate leases. For additional information on our leases, see Note 8—Leases. 64 Table of Contents Asset Retirement Obligations A liability for an asset retirement obligation is recorded in the period in which it is incurred. When an asset retirement obligation liability is initially recorded, we capitalize the cost by increasing the carrying amount of the related long-lived asset. For each subsequent period, the liability is increased for accretion expense and the capitalized cost is depreciated over the useful life of the related asset. Goodwill We measure goodwill as the excess of consideration transferred over the fair value of net assets acquired in business combinations. We allocate goodwill to our reporting units for the purpose of impairment testing. We evaluate goodwill for impairment annually, or more frequently if an event or circumstance indicates an impairment loss may have been incurred. We measure goodwill impairment, if any, at the amount a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. Our reporting units are our operating segments or one level below our operating segments for which discrete financial information is prepared and regularly reviewed by segment management. 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. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for our business. The market approach of determining fair value is based on comparable market multiples for companies engaged in similar businesses, as well as recent transactions within our industry. Intangible Assets Our intangible assets subject to amortization consist primarily of customer relationships. We review long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An asset is considered to be impaired if the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. We estimate fair value using the expected future cash flows discounted at a rate comparable with the risks associated with the recovery of the asset. We amortize intangible assets on a straight-line basis or on a basis consistent with the pattern in which the economic benefits are realized. The estimated useful life for customer relationships is 5 to 16 years. 65 Table of Contents Accrued Expenses The components of accrued expenses as of December 31, 2021 and 2020 are as follows: As of December 31, (In millions) 2021 2020 Accrued salaries and wages $ 375 $ 392 Accrued transportation and facility charges 390 303 Other accrued expenses 342 349 Total accrued expenses $ 1,107 $ 1,044 Self-Insurance 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. Liabilities for the risks we retain, including estimates of claims incurred but not reported, are not discounted and are estimated, in part, by considering historical cost experience, demographic and severity factors, and judgments about current and expected levels of cost per claim and retention levels. Changes in these assumptions and factors can impact actual costs paid to settle the claims and those amounts may be different than estimates. Advertising Costs Advertising costs are expensed as incurred. Stockholders’ Equity We retire shares purchased under our share repurchase program and return them to authorized and unissued status. We charge any excess of cost over par value to Additional paid-in capital if a balance is present. If Additional paid-in capital is fully depleted, any remaining excess of cost over par value will be charged to Retained earnings. 66 Table of Contents Accumulated Other Comprehensive Income (Loss) The components of and changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the years ended December 31, 2021 and 2020, are as follows: (In millions) Foreign Currency Translation Adjustments Derivative Hedges Defined Benefit Plans Liability Less: AOCI Attributable to Noncontrolling Interests AOCI Attributable to XPO As of December 31, 2019 $ ( 120 ) $ 5 $ ( 31 ) $ 1 $ ( 145 ) Other comprehensive income (loss) 121 ( 17 ) ( 116 ) ( 6 ) ( 18 ) Amounts reclassified from AOCI ( 9 ) 15 ( 1 ) — 5 Net current period other comprehensive income (loss) 112 ( 2 ) ( 117 ) ( 6 ) ( 13 ) As of December 31, 2020 ( 8 ) 3 ( 148 ) ( 5 ) ( 158 ) Other comprehensive income (loss) ( 79 ) 4 34 2 ( 39 ) Amounts reclassified from AOCI ( 6 ) ( 7 ) — — ( 13 ) Net current period other comprehensive income (loss) ( 85 ) ( 3 ) 34 2 ( 52 ) Spin-off of GXO 41 — 82 3 126 As of December 31, 2021 $ ( 52 ) $ — $ ( 32 ) $ — $ ( 84 ) Income Taxes We account for income taxes using the asset and liability method on a legal entity and jurisdictional basis, under which we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. Our calculation relies on several factors, including pre-tax earnings, differences between tax laws and accounting rules, statutory tax rates, tax credits, uncertain tax positions, and valuation allowances. We use judgment and estimates in evaluating our tax positions. 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. Valuation allowances are established when, in our judgment, it is more likely than not that our deferred tax assets will not be realized based on all available evidence. We record Global Intangible Low-Taxed Income (“GILTI”) tax as a period cost. Our tax returns are subject to examination by U.S. Federal, state and foreign taxing jurisdictions. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years. We recognize tax benefits from uncertain tax positions only if (based on the technical merits of the position) it is more likely than not that the tax positions will be sustained on examination by the tax authority. We adjust these tax liabilities, including related interest and penalties, based on the current facts and circumstances. We report tax-related interest and penalties as a component of income tax expense. Foreign Currency Translation and Transactions The assets and liabilities of our foreign subsidiaries that use their local currency as their functional currency are translated to U.S. dollars (“USD”) using the exchange rate prevailing at each balance sheet date, with balance sheet currency translation adjustments recorded in AOCI on our Consolidated Balance Sheets. The assets and liabilities of our foreign subsidiaries whose local currency is not their functional currency are remeasured from their local currency to their functional currency and then translated to USD. The results of operations of our foreign subsidiaries are translated to USD using average exchange rates prevailing for each period presented. We convert foreign currency transactions recognized on our Consolidated Statements of Income to USD by applying the exchange rate prevailing on the date of the transaction. Gains and losses arising from foreign currency transactions and the effects of remeasuring monetary assets and liabilities are recorded in Foreign currency (gain) loss on our Consolidated Statements of Income. 67 Table of Contents Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The levels of inputs used to measure fair value are: • Level 1—Quoted prices for identical instruments in active markets; • Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and • Level 3—Valuations based on inputs that are unobservable, generally utilizing pricing models or other valuation techniques that reflect management’s judgment and estimates. We base our fair value estimates on market assumptions and available information. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and current maturities of long-term debt approximated their fair values as of December 31, 2021 and 2020 due to their short-term nature and/or being receivable or payable on demand. The Level 1 cash equivalents include money market funds valued using quoted prices in active markets and a cash deposit for the securitization program. For information on the fair value hierarchy of our derivative instruments, see Note 11—Derivative Instruments and for information on financial liabilities, see Note 12—Debt. The fair value hierarchy of cash equivalents was as follows: (In millions) Carrying Value Fair Value Level 1 December 31, 2021 $ 181 $ 181 $ 181 December 31, 2020 1,685 1,685 1,685 The decrease in cash equivalents from December 31, 2020 to December 31, 2021 was primarily due to the redemption of our senior notes due 2022, 2023 and 2024 and the repayment of borrowings under our revolving loan credit agreement (the “ABL Facility”) in 2021. For further information, see Note 12—Debt. Derivative Instruments We record all derivative instruments on our Consolidated Balance Sheets as assets or liabilities at fair value. Our accounting treatment for changes in the fair value of derivative instruments depends on whether the instruments have been designated and qualify as part of a hedging relationship and on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the derivative based on the exposure being hedged and assess, both at the hedge’s inception and on an ongoing basis, whether the designated derivative instruments are highly effective in offsetting changes in earnings and cash flows of the hedged items. When a derivative instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively. We link cash flow hedges to specific forecasted transactions or variability of cash flow to be paid. The gain or loss resulting from fair value adjustments on cash flow hedges are recorded in AOCI on our Consolidated Balance Sheets until the hedged item is recognized in earnings and is presented in the same income statement line item as the earnings effect of the hedged item. The gains and losses on the net investment hedges are recorded as cumulative translation adjustments in AOCI to the extent that the instruments are effective in hedging the designated risk. Gains and losses on cash flow hedges and net investment hedges representing hedge components excluded from the assessment of effectiveness will be amortized into Interest expense on our Consolidated Statements of Income in a systematic manner. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings and are recorded in Foreign currency (gain) loss on our Consolidated Statements of Income. 68 Table of Contents Defined Benefit Pension Plans We calculate defined benefit pension plan obligations using various actuarial assumptions and methodologies. Assumptions include discount rates, inflation rates, expected long-term rate of return on plan assets, mortality rates, and other factors. The assumptions used in recording the projected benefit obligation and fair value of plan assets represent our best estimates based on available information regarding historical experience and factors that may cause future expectations to differ. Our obligation and future expense amounts could be materially impacted by differences in actual experience or changes in assumptions. The impact of plan amendments, actuarial gains and losses and prior-service costs are recorded in AOCI and are generally amortized as a component of net periodic benefit cost over the remaining service period of the active employees covered by the defined benefit pension plans. Unamortized gains and losses are amortized only to the extent they exceed 10% of the higher of the fair value of plan assets or the projected benefit obligation of the respective plan. Stock-Based Compensation We account for stock-based compensation based on the equity instrument’s grant date fair value. For grants of restricted stock units (“RSUs”) subject to service-based or performance-based vesting conditions only, we establish the fair value based on the market price on the date of the grant. For grants of RSUs subject to market-based vesting conditions, we establish the fair value using the Monte Carlo simulation lattice model. We determined the fair value of our stock-based awards based on our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We account for forfeitures as they occur. We recognize the grant date fair value of equity awards as compensation cost over the requisite service period. We recognize expense for our performance-based restricted stock units (“PRSUs”) over the awards’ requisite service period based on the number of awards expected to vest with consideration to the actual and expected financial results. We do not recognize expense until achievement of the performance targets for a PRSU award is considered probable. Adoption of New Accounting Standard In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to enhance consistency and comparability among reporting entities. We adopted this standard on January 1, 2021 on a prospective basis. The adoption did not have a material effect on our consolidated financial statements. Accounting Pronouncements Issued but Not Yet Effective In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” The ASU increases the transparency surrounding government assistance by requiring disclosure of (i) the types of assistance received, (ii) an entity’s accounting for the assistance and (iii) the effect of the assistance on the entity’s financial statements. This ASU is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted. We are currently evaluating the impact of the new guidance, which is limited to financial statement disclosures. In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The amendments are elective and are effective upon issuance through December 31, 2022. We are currently evaluating the impact of the new guidance. 69 Table of Contents 3. Discontinued Operations As discussed above, on August 2, 2021, we completed the spin-off of our Logistics segment. 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, which we used to repay a portion of our outstanding borrowings. For further information, see Note 12—Debt. During the year ended December 31, 2021, we incurred approximately $ 125 million of costs related to the spin-off, of which $ 101 million are reflected within income from discontinued operations in our Consolidated Statements of Income. The following table summarizes the financial results from discontinued operations of GXO: Years Ended December 31, (In millions) 2021 2020 2019 Revenue $ 4,350 $ 6,182 $ 6,087 Direct operating expense (exclusive of depreciation and amortization) 3,614 5,156 5,120 Sales, general and administrative expense 364 517 421 Depreciation and amortization expense 185 296 272 Transaction and other operating costs 105 50 14 Operating income 82 163 260 Other income ( 27 ) ( 38 ) ( 31 ) Interest expense 12 18 23 Income from discontinued operations before income tax provision 97 183 268 Income tax provision 79 53 69 Net income from discontinued operations, net of taxes 18 130 199 Net income from discontinued operations attributable to noncontrolling interests ( 5 ) ( 10 ) ( 21 ) Net income from discontinued operations attributable to GXO $ 13 $ 120 $ 178 70 Table of Contents The following table summarizes the assets and liabilities from discontinued operations of GXO: December 31, (In millions) 2020 Cash and cash equivalents $ 323 Accounts receivable, net 1,212 Other current assets 129 Total current assets of discontinued operations 1,664 Property and equipment, net 770 Operating lease assets 1,434 Goodwill 2,063 Identifiable intangible assets, net 299 Other long-term assets 100 Total long-term assets of discontinued operations 4,666 Accounts payable 408 Accrued expenses 770 Short-term borrowings and current finance lease liabilities 57 Short-term operating lease liabilities 332 Other current liabilities 161 Total current liabilities of discontinued operations 1,728 Long-term debt and finance lease liabilities 129 Deferred tax liability 85 Long-term operating lease liabilities 1,099 Other long-term liabilities 117 Total long-term liabilities of discontinued operations $ 1,430 Prior to the spin-off of GXO, the U.K. pension plan was sold to a GXO entity. For further information, see Note 13—Employee Benefit Plans. 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 (“EMA”), 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 consolidated financial statements was immaterial. Additionally, in accordance with these agreements, GXO has agreed to indemnify XPO for certain payments XPO makes with respect to certain self-insurance matters that were incurred by GXO prior to the spin-off and remain obligations of XPO. The receivable and reserve for these matters was approximately $ 23 million and $ 21 million, respectively, as of December 31, 2021. 71 Table of Contents 4. Segment Reporting and Geographic Information In connection with the spin-off, we revised our reportable segments to reflect how our chief operating decision maker (“CODM”) makes decisions related to resource allocation and segment performance. Prior to the spin-off, we had two reportable segments: Transportation and Logistics. Following the spin-off, we have two reportable segments: (i) North American LTL and (ii) Brokerage and Other Services. In our North American LTL segment, 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. service to and from Mexico and Canada, as well as intra-Canada service. In our Brokerage and Other Services segment, shippers create the truckload demand and we place their freight with qualified carriers, pricing our service on either a spot or contract basis. Our Brokerage and Other Services segment also includes last mile logistics for heavy goods sold through e-commerce, omnichannel retail and direct-to-consumer channels. Several other non-core brokered freight transportation modes are included in our Brokerage and Other Services segment, as well as our European transportation offerings. Some of our operating units provide services to our other operating units outside of their reportable segment. Billings for such services are based on negotiated rates and are reflected as revenues of the billing segment. We adjust these rates from time to time based on market conditions. We eliminate intersegment revenues and expenses in our consolidated results. Corporate includes corporate headquarters costs for executive officers and certain legal and financial functions, and other costs and credits not attributed to our reporting segments. Our CODM regularly reviews financial information at the operating segment level to allocate resources to the segments and to assess their performance. We include items directly attributable to a segment, and those that can be allocated on a reasonable basis, in segment results reported to the CODM. We do not provide asset information by segment to the CODM. During the third quarter of 2021, our CODM began evaluating 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. Prior to the change in our reporting segments in the third quarter of 2021, our CODM used operating income as the measure of segment profit (loss). Prior period segment disclosures have been recast to conform to the current period presentation. 72 Table of Contents Selected financial data for our segments is as follows: Years Ended December 31, (in millions) 2021 2020 2019 Revenue North American LTL $ 4,118 $ 3,539 $ 3,791 Brokerage and Other Services 8,907 6,800 7,041 Eliminations ( 219 ) ( 140 ) ( 151 ) Total $ 12,806 $ 10,199 $ 10,681 Adjusted EBITDA North American LTL $ 904 $ 764 $ 851 Brokerage and Other Services 547 284 406 Corporate ( 212 ) ( 201 ) ( 167 ) Total adjusted EBITDA 1,239 847 1,090 Less: Debt extinguishment loss 54 — 5 Interest expense 211 307 268 Income tax provision (benefit) 87 ( 22 ) 60 Depreciation and amortization expense 476 470 467 Unrealized (gain) loss on foreign currency option and forward contracts 1 ( 1 ) 9 Litigation settlements 31 — — Transaction and integration costs (1) 37 75 5 Restructuring costs (2) 19 31 35 Income (loss) from continuing operations $ 323 $ ( 13 ) $ 241 Depreciation and amortization expense North American LTL $ 226 $ 224 $ 227 Brokerage and Other Services 240 229 220 Corporate 10 17 20 Total $ 476 $ 470 $ 467 (1) 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. Transaction and integration costs for 2021 and 2020 include $ 1 million and $ 5 million, respectively, related to our North American LTL segment; $ 16 million and $ 16 million, respectively, related to our Brokerage and Other Services segment and $ 20 million and $ 54 million, respectively, related to Corporate. (2) See Note 6— Restructuring Charges for further information on our restructuring actions. As of December 31, 2021 and 2020, we held long-lived tangible assets outside of the U.S. of $ 422 million and $ 465 million, respectively. 73 Table of Contents 5. Revenue Recognition Disaggregation of Revenues We disaggregate our revenue by geographic area and service offering. Our revenue disaggregated by geographical area, based on sales office location, was as follows: Year Ended December 31, 2021 (In millions) North American LTL Brokerage and Other Services Eliminations Total Revenue United States $ 4,029 $ 5,387 $ ( 219 ) $ 9,197 North America (excluding United States) 89 311 — 400 France — 1,354 — 1,354 United Kingdom — 879 — 879 Europe (excluding France and United Kingdom) — 843 — 843 Other — 133 — 133 Total $ 4,118 $ 8,907 $ ( 219 ) $ 12,806 Year Ended December 31, 2020 (In millions) North American LTL Brokerage and Other Services Eliminations Total Revenue United States $ 3,461 $ 3,899 $ ( 140 ) $ 7,220 North America (excluding United States) 78 233 — 311 France — 1,205 — 1,205 United Kingdom — 677 — 677 Europe (excluding France and United Kingdom) — 739 — 739 Other — 47 — 47 Total $ 3,539 $ 6,800 $ ( 140 ) $ 10,199 Year Ended December 31, 2019 (In millions) North American LTL Brokerage and Other Services Eliminations Total Revenue United States $ 3,702 $ 3,902 $ ( 151 ) $ 7,453 North America (excluding United States) 89 196 — 285 France — 1,358 — 1,358 United Kingdom — 760 — 760 Europe (excluding France and United Kingdom) — 805 — 805 Other — 20 — 20 Total $ 3,791 $ 7,041 $ ( 151 ) $ 10,681 74 Table of Contents Our revenue disaggregated by service offering was as follows: Years Ended December 31, (In millions) 2021 2020 2019 North America: LTL (1) $ 4,192 $ 3,575 $ 3,841 Truck brokerage 2,749 1,684 1,372 Last mile 1,016 908 873 Other brokerage (2) 2,025 1,564 1,853 Total North America 9,982 7,731 7,939 Europe 3,077 2,622 2,923 Eliminations ( 253 ) ( 154 ) ( 181 ) Total $ 12,806 $ 10,199 $ 10,681 (1) Less-Than-Truckload revenue is before intercompany eliminations and includes revenue from the Company’s trailer manufacturing business. (2) Other brokerage includes intermodal and drayage, expedite, freight forwarding and managed transportation services. Freight forwarding includes operations conducted outside of North America but managed by our North American entities. Performance Obligations Remaining performance obligations represent firm contracts for which services have not been performed and future revenue recognition is expected. As permitted in determining the remaining performance obligation, we omit obligations that: (i) have original expected durations of one year or less or (ii) contain variable consideration. On December 31, 2021, the fixed consideration component of our remaining performance obligation was approximately $ 124 million, and we expect approximately 86 % of that amount to be recognized over the next three years and the remainder thereafter. We estimate remaining performance obligations at a point in time and actual amounts may differ from these estimates due to changes in foreign currency exchange rates and contract revisions or terminations. 6. Restructuring Charges We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure, including actions in connection with the spin-off and in response to COVID-19. These actions generally include severance and facility-related costs, including impairment of right-of-use assets, and are intended to improve our efficiency and profitability. Our restructuring-related activity was as follows: Year Ended December 31, 2021 (In millions) Reserve Balance as of December 31, 2020 Charges Incurred Payments Foreign Exchange and Other Reserve Balance as of December 31, 2021 Severance Brokerage and Other Services $ 7 $ 10 $ ( 12 ) $ 1 $ 6 Corporate 1 9 ( 2 ) ( 1 ) 7 Total severance 8 19 ( 14 ) — 13 Facilities Brokerage and Other Services 5 — ( 3 ) — 2 Total facilities 5 — ( 3 ) — 2 Total $ 13 $ 19 $ ( 17 ) $ — $ 15 75 Table of Contents We expect the majority of the cash outlays related to the charges incurred in 2021 will be complete within twelve months. Year Ended December 31, 2020 (In millions) Reserve Balance as of December 31, 2019 Charges Incurred Payments Foreign Exchange and Other Reserve Balance as of December 31, 2020 Severance North American LTL $ 1 $ 4 $ ( 5 ) $ — $ — Brokerage and Other Services 11 13 ( 17 ) — 7 Corporate 3 8 ( 9 ) ( 1 ) 1 Total severance 15 25 ( 31 ) ( 1 ) 8 Facilities Brokerage and Other Services — 6 — ( 1 ) 5 Total facilities — 6 — ( 1 ) 5 Total $ 15 $ 31 $ ( 31 ) $ ( 2 ) $ 13 7. Property and Equipment December 31, (In millions) 2021 2020 Property and equipment Land $ 276 $ 297 Buildings and leasehold improvements 380 375 Vehicles, tractors, trailers and tankers 1,825 1,791 Machinery and equipment 270 264 Computer software and equipment 885 810 3,636 3,537 Less: accumulated depreciation and amortization ( 1,828 ) ( 1,646 ) Total property and equipment, net $ 1,808 $ 1,891 Net book value of capitalized internally-developed software included in property and equipment, net $ 230 $ 248 Depreciation of property and equipment and amortization of computer software was $ 388 million, $ 382 million and $ 370 million for the years ended December 31, 2021, 2020 and 2019, respectively. 76 Table of Contents 8. Leases Most of our leases are real estate leases. In addition, we lease trucks, trailers, containers and material handling equipment. The components of our lease expense and gain realized on sale-leaseback transactions were as follows: Years Ended December 31, (In millions) 2021 2020 2019 Operating lease cost $ 235 $ 221 $ 197 Short-term lease cost 150 86 88 Variable lease cost 32 29 25 Total operating lease cost $ 417 $ 336 $ 310 Finance lease cost: Amortization of leased assets $ 53 $ 43 $ 43 Interest on lease liabilities 5 5 5 Total finance lease cost $ 58 $ 48 $ 48 Total lease cost $ 475 $ 384 $ 358 Gain recognized on sale-leaseback transactions (1) $ 69 $ 84 $ 93 (1) For the years ended December 31, 2021, 2020 and 2019, we completed multiple sale-leaseback transactions for land and buildings, including a sale and partial leaseback of our shared-services center in Portland, Oregon in 2019. We received aggregate cash proceeds of $ 96 million, $ 143 million and $ 199 million in 2021, 2020 and 2019, respectively. Gains on sale-leaseback transactions are included in Direct operating expense (exclusive of depreciation and amortization) in our Consolidated Statements of Income. Supplemental balance sheet information related to leases was as follows: December 31, (In millions) 2021 2020 Operating leases: Operating lease assets $ 908 $ 844 Short-term operating lease liabilities $ 170 $ 152 Operating lease liabilities 752 696 Total operating lease liabilities $ 922 $ 848 Finance leases: Property and equipment, gross $ 403 $ 392 Accumulated depreciation ( 156 ) ( 135 ) Property and equipment, net $ 247 $ 257 Short-term borrowings and current maturities of long-term debt $ 57 $ 59 Long-term debt 180 193 Total finance lease liabilities $ 237 $ 252 Weighted-average remaining lease term: Operating leases 8 years 7 years Finance leases 6 years 6 years Weighted-average discount rate: Operating leases 4.86 % 5.26 % Finance leases 1.98 % 2.33 % 77 Table of Contents Supplemental cash flow information related to leases was as follows: Years Ended December 31, (In millions) 2021 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 224 $ 223 $ 201 Operating cash flows for finance leases 5 5 5 Financing cash flows for finance leases 75 59 51 Leased assets obtained in exchange for new lease obligations: Operating leases 271 268 344 Finance leases 71 46 53 Net operating lease activity, including the reduction of the operating lease asset and the accretion of the operating lease liability, are reflected in Depreciation, amortization and net lease activity on our Consolidated Statements of Cash Flows. Maturities of lease liabilities as of December 31, 2021 were as follows: (In millions) Finance Leases Operating Leases 2022 $ 61 $ 206 2023 56 189 2024 49 151 2025 34 113 2026 18 88 Thereafter 37 373 Total lease payments 255 1,120 Less: interest ( 18 ) ( 198 ) Present value of lease liabilities $ 237 $ 922 As of December 31, 2021, we had additional 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. 9. Goodwill (In millions) North American LTL Brokerage and Other Services Total Goodwill as of December 31, 2019 $ 722 $ 1,752 $ 2,474 Impact of foreign exchange translation and other — 62 62 Goodwill as of December 31, 2020 722 1,814 2,536 Impact of foreign exchange translation and other — ( 57 ) ( 57 ) Goodwill as of December 31, 2021 $ 722 $ 1,757 $ 2,479 There were no cumulative goodwill impairments as of December 31, 2021. 78 Table of Contents 10. Intangible Assets December 31, 2021 December 31, 2020 (In millions) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Definite-lived intangibles Customer relationships $ 1,192 $ 612 $ 1,211 $ 536 We did not recognize any impairment of our identified intangible assets in 2021 and 2020. We recorded a non-cash, pre-tax charge of $ 6 million in 2019 related to the impairment of customer relationships intangibles associated with exiting our direct postal injection business. Estimated future amortization expense for amortizable intangible assets for the next five years is as follows: (In millions) 2022 2023 2024 2025 2026 Thereafter Estimated amortization expense $ 75 $ 65 $ 64 $ 62 $ 62 $ 252 Actual amounts of amortization expense may differ from estimated amounts due to changes in foreign currency exchange rates, additional intangible asset acquisitions, future impairment of intangible assets, accelerated amortization of intangible assets and other events. Intangible asset amortization expense was $ 86 million, $ 87 million and $ 96 million for the years ended December 31, 2021, 2020 and 2019, respectively. 11. Derivative Instruments In the normal course of business, we are exposed to risks arising from business operations and economic factors, including fluctuations in interest rates and foreign currencies. We use derivative instruments to manage the volatility related to these exposures. The objective of these derivative instruments is to reduce fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. These financial instruments are not used for trading or other speculative purposes. Historically, we have not incurred, and do not expect to incur in the future, any losses as a result of counterparty default. The fair value of our derivative instruments and the related notional amounts were as follows: December 31, 2021 Derivative Assets Derivative Liabilities (In millions) Notional Amount Balance Sheet Caption Fair Value Balance Sheet Caption Fair Value Derivatives designated as hedges Cross-currency swap agreements $ 362 Other current assets $ — Other current liabilities $ ( 4 ) Cross-currency swap agreements 110 Other long-term assets — Other long-term liabilities — Interest rate swaps 2,003 Other current assets — Other current liabilities — Total $ — $ ( 4 ) 79 Table of Contents December 31, 2020 Derivative Assets Derivative Liabilities (In millions) Notional Amount Balance Sheet Caption Fair Value Balance Sheet Caption Fair Value Derivatives designated as hedges Cross-currency swap agreements $ 450 Other current assets $ — Other current liabilities $ ( 44 ) Cross-currency swap agreements 740 Other long-term assets — Other long-term liabilities ( 65 ) Interest rate swaps 2,003 Other current assets — Other current liabilities ( 4 ) Total $ — $ ( 113 ) The derivatives are classified as Level 2 within the fair value hierarchy. The derivatives are valued using inputs other than quoted prices such as foreign exchange rates and yield curves. The effect of derivative and nonderivative instruments designated as hedges on our Consolidated Statements of Income was as follows: Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives Amount of Gain (Loss) Reclassified from AOCI into Net Income Amount of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Years Ended December 31, (In millions) 2021 2020 2019 2021 2020 2019 2021 2020 2019 Derivatives designated as cash flow hedges Cross-currency swap agreements $ 4 $ ( 12 ) $ 7 $ 7 $ ( 15 ) $ 5 $ — $ — $ 1 Interest rate swaps — ( 5 ) 5 — — — — — — Derivatives designated as net investment hedges Cross-currency swap agreements 84 ( 81 ) 55 — — — 6 9 10 Total $ 88 $ ( 98 ) $ 67 $ 7 $ ( 15 ) $ 5 $ 6 $ 9 $ 11 The pre-tax gain (loss) recognized in earnings for foreign currency option and forward contracts not designated as hedging instruments was a loss of $ 1 million, a gain of $ 1 million and a loss of $ 9 million for the years ended December 31, 2021, 2020 and 2019, respectively. These amounts are recorded in Foreign currency (gain) loss on our Consolidated Statements of Income. Cross-Currency Swap Agreements We enter into cross-currency swap agreements to manage the foreign currency exchange risk related to our international operations by effectively converting our fixed-rate USD-denominated debt, including the associated interest payments, to fixed-rate, euro (“EUR”)-denominated debt. The risk management objective of these transactions is to manage foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies and reduce the variability in the functional currency equivalent cash flows of this debt. In 2021, in preparation for the spin-off, we novated (or transferred) cross-currency swaps that were recorded as a liability with a fair value of approximately $ 28 million to GXO, as well as the associated amounts in AOCI. During the term of the swap contracts, we will receive interest, either on a quarterly or semi-annual basis, from the counterparties based on USD fixed interest rates, and we will pay interest, also on a quarterly or semi-annual basis, to the counterparties based on EUR fixed interest rates. At maturity, we will repay the original principal amount in EUR and receive the principal amount in USD. These agreements expire at various dates through 2024. We designated these cross-currency swaps as qualifying hedging instruments and account for them as net investment hedges. We apply the simplified method of assessing the effectiveness of our net investment hedging relationships. Under this method, for each reporting period, the change in the fair value of the cross-currency swaps is initially 80 Table of Contents recognized in AOCI. The change in the fair value due to foreign exchange remains in AOCI and the initial component excluded from effectiveness testing will initially remain in AOCI and then will be reclassified from AOCI to Interest expense each period in a systematic manner. For net investment hedges that were de-designated prior to their maturity, the amounts in AOCI will remain in AOCI until the subsidiary is sold or substantially liquidated. Cash flows related to the periodic exchange of interest payments for these net investment hedges are included in Cash flows from operating activities of continuing operations on our Consolidated Statements of Cash Flows. Prior to the spin-off, we entered into cross-currency swap agreements to manage the related foreign currency exposure from intercompany loans. We designated these cross-currency swaps as qualifying hedging instruments and accounted for them as cash flow hedges. Gains and losses resulting from the change in the fair value of the cross-currency swaps was initially recognized in AOCI and reclassified to Foreign currency (gain) loss to offset the foreign exchange impact in earnings created by settling intercompany loans. Cash flows related to these cash flow hedges was included in Cash flows from operating activities of continuing operations on our Consolidated Statements of Cash Flows. Interest Rate Hedging We execute short-term interest rate swaps to mitigate variability in forecasted interest payments on our Senior Secured Term Loan Credit Agreement (the “Term Loan Credit Agreement”). The interest rate swaps convert floating-rate interest payments into fixed rate interest payments. We designated the interest rate swaps as qualifying hedging instruments and account for these derivatives as cash flow hedges. The outstanding interest rate swaps mature in 2022. We record gains and losses resulting from fair value adjustments to the designated portion of interest rate swaps in AOCI and reclassify them to Interest expense on the dates that interest payments accrue. Cash flows related to the interest rate swaps are included in Cash flows from operating activities of continuing operations on our Consolidated Statements of Cash Flows. Foreign Currency Option and Forward Contracts We periodically use foreign currency option contracts to mitigate the risk of a reduction in the value of earnings from our operations that use the EUR or the British pound sterling as their functional currency. Additionally, we periodically use foreign currency forward contracts to mitigate exposure from intercompany loans that are not designated as permanent and can create volatility in earnings. Generally, the foreign currency contracts (both option and forward contracts) are not designated as qualifying hedging instruments. The contracts are used to manage our exposure to foreign currency exchange rate fluctuations and are not speculative. The contracts generally expire in 12 months or less. We had no outstanding contracts as of December 31, 2021 and December 31, 2020. Gains or losses on the contracts are recorded in Foreign currency (gain) loss on our Consolidated Statements of Income. Cash flows related to the foreign currency contracts are included in Cash flows from investing activities of continuing operations on our Consolidated Statements of Cash Flows, consistent with the nature and purpose for which these derivatives were acquired. 81 Table of Contents 12. Debt December 31, 2021 December 31, 2020 (In millions) Principal Balance Carrying Value Principal Balance Carrying Value ABL facility $ — $ — $ 200 $ 200 Term loan facilities 2,003 1,977 2,003 1,974 6.50 % Senior notes due 2022 — — 1,200 1,195 6.125 % Senior notes due 2023 — — 535 531 6.75 % Senior notes due 2024 — — 1,000 989 6.25 % Senior notes due 2025 1,150 1,141 1,150 1,138 6.70 % Senior debentures due 2034 300 214 300 210 Borrowings related to securitization program — — 24 24 Finance leases, asset financing and other 240 240 260 260 Total debt 3,693 3,572 6,672 6,521 Short-term borrowings and current maturities of long-term debt 58 58 1,286 1,281 Long-term debt $ 3,635 $ 3,514 $ 5,386 $ 5,240 The fair value of our debt and classification in the fair value hierarchy was as follows: (In millions) Fair Value Level 1 Level 2 December 31, 2021 $ 3,811 $ 1,571 $ 2,240 December 31, 2020 6,908 4,429 2,479 We valued Level 1 debt using quoted prices in active markets. We valued Level 2 debt using bid evaluation pricing models or quoted prices of securities with similar characteristics. The fair value of the asset financing arrangements approximates carrying value as the debt is primarily issued at a floating rate, the debt may be prepaid at any time at par without penalty, and the remaining life of the debt is short-term in nature. Our principal payment obligations on debt (excluding finance leases) for the next five years and thereafter was as follows: (In millions) 2022 2023 2024 2025 2026 Thereafter Principal payments on debt $ — $ — $ 1 $ 3,153 $ 1 $ 301 ABL Facility In 2015, we entered into the ABL Facility that provided commitments of up to $ 1.0 billion with a maturity date of October 30, 2020. In April 2019, we amended the ABL Facility including: (i) increasing the commitments to $ 1.1 billion, (ii) extending the maturity date to April 30, 2024, subject to springing maturity if some of our senior notes reach specified levels set in the credit agreement and (iii) reducing the interest rate margin. In July 2021, we amended the ABL Facility 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. We can issue up to $ 350 million of letters of credit under the ABL Facility. Our availability under the ABL Facility is equal to the borrowing base less advances and outstanding letters of credit. Our borrowing base includes a fixed percentage of: (i) our eligible U.S. and Canadian accounts receivable; plus (ii) any of our eligible U.S. and Canadian rolling stock and equipment. A maximum of 20 % of our borrowing base can be equipment and rolling stock in the aggregate. As of December 31, 2021, our borrowing base was $ 1.0 billion and our availability was $ 995 million after considering outstanding letters of credit of $ 5 million. As of December 31, 2021, we were in compliance with the ABL Facility’s financial covenants. 82 Table of Contents Our loans under the ABL Facility bear interest at a rate equal to: LIBOR or base rate plus (i) an applicable margin of 1.25 % to 1.50 % for LIBOR loans or (ii) 0.25 % to 0.50 %, for base rate loans. The ABL Facility is secured on a first lien basis by the assets of the credit parties as priority collateral and on a second lien basis by certain other assets. The priority collateral consists primarily of our U.S. and Canadian accounts receivable and any of our U.S. and Canadian rolling stock and equipment included in our borrowing base. The ABL Facility contains representations and warranties, affirmative and negative covenants, and events of default customary for agreements of this nature. The covenants in the ABL Facility can limit our ability to incur indebtedness; grant liens; engage in certain mergers, consolidations, acquisitions and dispositions; make certain investments and restricted payments; and enter into certain transactions with affiliates. We may also be required to maintain a Fixed Charge Coverage Ratio (as defined in the ABL Facility) of not less than 1.00 if availability under the ABL Facility is below certain thresholds. As of December 31, 2021, we were compliant with this financial covenant. Letters of Credit Facility In 2020, we entered into 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 under the facility. Term Loan Facilities In 2015, we entered into a Term Loan Credit Agreement that provided for a single borrowing of $ 1.6 billion. We amended the Term Loan Credit Agreement in 2019 to include a new tranche of term loans (the “Incremental Term Loan Facility”), to reduce the interest rates and to extend the maturity dates. Net proceeds from borrowings under the Incremental Term Loan Facility were used for general corporate purposes, including to fund purchases of our common stock described in Note 14—Stockholders’ Equity. The loans under the Incremental Term Loan Facility were issued at a price of 99.50 % of par. In 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, as amended, are as follows: December 31, 2020 (In millions) December 31, 2021 First Tranche Second Tranche Principal balance $ 2,003 $ 1,503 $ 500 Interest spread: Base rate loans 0.75 % 1.00 % 1.50 % LIBOR loans 1.75 % 2.00 % 2.50 % Maturity date February 2025 February 2025 February 2025 We recorded a debt extinguishment loss of $ 3 million in 2021 due to this amendment. The interest rate on our term loan facility was 1.85 % as of December 31, 2021. We must prepay an aggregate principal amount of the term loan facility equal to (a) 50 % of any Excess Cash Flow, as defined in the agreement, for the most recent fiscal year ended, minus (b) the sum of (i) all voluntary prepayments of loans during the fiscal year and (ii) all voluntary prepayments of loans under the ABL Facility or any other revolving credit facilities during the fiscal year if accompanied by a corresponding permanent reduction in the commitments under the credit agreement or any other revolving credit facilities in the case of each of the immediately preceding clauses (i) and (ii), if such prepayments are funded with internally generated cash flow, as defined in the agreement. If our Consolidated Secured Net Leverage Ratio, as defined in the agreement, for the fiscal year was less than or equal to 3.00 :1.00 and greater than 2.50 :1.00, the Excess Cash Flow percentage will be 25 %. If our Consolidated Secured Net Leverage Ratio for the fiscal year was less than or equal to 2.50 :1.00, the Excess Cash Flow percentage will be 0 %. The remaining principal is due at maturity. As of December 31, 2021, our Consolidated Secured Net Leverage Ratio was less than 2.50 :1.00, and no excess cash payment was required. 83 Table of Contents Senior Notes 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. The Senior Notes due 2025 mature on May 1, 2025 and bear interest at a rate of 6.25 % per annum. Interest on the notes is paid semi-annually. A total of $ 850 million of the notes were issued at par, and $ 300 million of the notes were issued subsequently at 101.75 % of face value. Net proceeds from the notes were initially invested in cash and cash equivalents and were subsequently used in 2021 to redeem our outstanding Senior Notes due 2022 as described above. The senior notes are guaranteed by each of our direct and indirect wholly-owned restricted subsidiaries (other than some excluded subsidiaries) that are obligors under, or guarantee obligations under, our ABL Facility or existing Term Loan facility or guarantee certain of our capital markets indebtedness or any guarantor of the senior notes. The senior notes and its guarantees are unsecured, unsubordinated indebtedness for us and our guarantors. The senior notes contain covenants customary for notes of this nature. Senior Debentures We assumed in conjunction with an acquisition 6.70 % Senior Debentures due 2034 (the “Senior Debentures”) with an aggregate principal amount of $ 300 million. The Senior Debentures bear interest payable semiannually, in cash in arrears, and mature on May 1, 2034. Including amortization of the fair value adjustment recorded on the acquisition date, interest expense on the Senior Debentures is recognized at an annual effective interest rate of 10.96 %. Trade Securitization Program As discussed in Note 2—Basis of Presentation and Significant Accounting Policies, our European business participates in a trade receivables securitization program. The program contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio. Our trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables. These borrowings are owed to the program’s Purchasers and are included in short-term debt until they are repaid in the following month’s settlement. We had no such borrowings outstanding as of December 31, 2021 and had borrowings of € 20 million ($ 24 million) as of December 31, 2020. 84 Table of Contents Unsecured Credit Facility In December 2018, we entered into a $ 500 million unsecured credit facility (“Unsecured Credit Facility”). As of December 31, 2018, we had borrowed $ 250 million under the Unsecured Credit Facility. We borrowed an additional $ 250 million in January 2019. We used the proceeds of both borrowings to finance a portion of our share repurchases described in Note 14—Stockholders’ Equity. In connection with the issuance of the Senior Notes due 2024 described above, we repaid our outstanding obligations under the Unsecured Credit Facility and terminated it in February 2019. We recorded a debt extinguishment loss of $ 5 million in 2019 in connection with this repayment. 13. Employee Benefit Plans Defined Benefit Pension Plans We sponsor both funded and unfunded defined benefit pension plans for some employees in the U.S. These pension plans include qualified plans that are eligible for beneficial treatment under the Internal Revenue Code and non-qualified plans that provide additional benefits for employees who are impacted by limitations on compensation eligible for benefits available under the qualified plans. Prior to the spin-off of GXO, the pension plan for some employees in the United Kingdom was sold to a GXO entity and GXO paid approximately £ 26 million (approximately $ 34 million) to XPO, which represented the value of the net assets at the date of the sale. In connection with this transaction, approximately $ 82 million of accumulated other comprehensive income, net of tax, was transferred to GXO. We also maintain defined benefit pension plans for some of our foreign subsidiaries that are excluded from the disclosures below due to their immateriality. The information below excludes the results of the pension plan that was sold to GXO. We measure defined benefit pension plan obligations based on the present value of projected future benefit payments for all participants for services rendered to date. The projected benefit obligation is a measure of benefits attributed to service to date, assuming that the plan continues in effect and that estimated future events (including turnover and mortality) occur. We determine the net periodic benefit costs using assumptions regarding the projected benefit obligation and the fair value of plan assets as of the beginning of the year. Net periodic benefit costs are recorded in Other income on our Consolidated Statements of Income. We calculate the funded status of the defined benefit pension plans, which represents the difference between the projected benefit obligation and the fair value of plan assets, on a plan-by-plan basis. Funded Status of Defined Benefit Pension Plans The reconciliation of the changes in the plans’ projected benefit obligations as of December 31 was as follows: (In millions) 2021 2020 Projected benefit obligation at beginning of year $ 2,052 $ 1,862 Interest cost 39 54 Actuarial (gain) loss ( 82 ) 216 Benefits paid ( 84 ) ( 80 ) Projected benefit obligation at end of year $ 1,925 $ 2,052 The actuarial gain in 2021 was a result of assumption changes, including an increase in the discount rate, updated mortality projection scales and other assumptions for plan participants. 85 Table of Contents The reconciliation of the changes in the fair value of plan assets as of December 31 was as follows: (In millions) 2021 2020 Fair value of plan assets at beginning of year $ 2,062 $ 1,863 Actual return on plan assets 25 274 Employer contributions 6 5 Benefits paid ( 84 ) ( 80 ) Fair value of plan assets at end of year $ 2,009 $ 2,062 The funded status of the plans as of December 31 was as follows: (In millions) 2021 2020 Funded status at end of year $ 84 $ 10 Amount recognized in balance sheet: Long-term assets $ 156 $ 88 Current liabilities ( 5 ) ( 5 ) Long-term liabilities ( 67 ) ( 73 ) Net pension asset recognized $ 84 $ 10 Plans with projected and accumulated benefit obligation in excess of plan assets: Projected and accumulated benefit obligation (1) $ 72 $ 78 (1) Relates to our non-qualified plans which are unfunded. The funded status of our qualified plans and non-qualified plans was $ 156 million and $( 72 ) million, respectively, as of December 31, 2021. The actuarial loss included in AOCI that has not yet been recognized in net periodic benefit expense was $ 43 million and $ 50 million, respectively, as of December 31, 2021 and 2020. The net periodic benefit cost and amounts recognized in Other comprehensive income (loss) for the years ended December 31 was as follows: (In millions) 2021 2020 2019 Net periodic benefit (income) expense: Interest cost $ 39 $ 54 $ 66 Expected return on plan assets ( 101 ) ( 102 ) ( 90 ) Amortization of actuarial loss 1 — — Net periodic benefit income $ ( 61 ) $ ( 48 ) $ ( 24 ) Amounts recognized in Other comprehensive income (loss): Actuarial (gain) loss $ ( 7 ) $ 45 $ ( 49 ) Reclassification of recognized AOCI gain due to settlements — — — (Gain) loss recognized in Other comprehensive income (loss) $ ( 7 ) $ 45 $ ( 49 ) 86 Table of Contents The weighted-average assumptions used to determine the net periodic benefit costs and benefit obligations for the year ended December 31 were as follows: Qualified Plans Non-Qualified Plans 2021 2020 2019 2021 2020 2019 Discount rate - net periodic benefit costs 1.96 % 2.96 % 4.08 % 1.11 % - 1.71 % 2.40 % - 2.78 % 3.65 % - 3.95 % Discount rate - benefit obligations 2.84 % 2.48 % 3.35 % 2.19 % - 2.72 % 1.62 % - 2.30 % 2.72 % - 3.20 % Expected long-term rate of return on plan assets 5.00 % 5.60 % 5.80 % No rate of compensation increase was assumed as the plans are frozen to additional participant benefit accruals. We use a full yield curve approach to estimate the interest cost component of net periodic benefit cost by applying specific spot rates along the yield curve used to determine the benefit obligation to each of the underlying projected cash flows based on time until payment. Expected benefit payments for the defined benefit pension plans for the years ended December 31 are summarized below. These estimates are based on assumptions about future events. Actual benefit payments may vary from these estimates. (In millions) 2022 2023 2024 2025 2026 2027-2030 Expected benefit payments $ 94 $ 97 $ 100 $ 102 $ 104 $ 532 Plan Assets We manage the assets in the U.S. plans using a long-term liability-driven investment strategy that seeks to mitigate the funded status volatility by increasing participation in fixed income investments as the plan’s funded status increases. We developed this strategy by analyzing a variety of diversified asset-class combinations with the projected liabilities. Our current investment strategy is to achieve an investment mix of approximately 88 % in fixed income securities and 12 % of investments in equity securities. The fixed income allocation consists primarily of domestic fixed income securities and targets to hedge more than 95 % of domestic projected liabilities. The target allocations for equity securities includes approximately 50 % in U.S. equities and approximately 50 % in non-U.S. equities. Investments in equity and fixed income securities consist of individual securities held in managed separate accounts and commingled investment funds. Generally, our investment strategy does not include an allocation to cash and cash equivalents, but a cash allocation may arise periodically in response to timing considerations regarding contributions, investments, and the payment of benefits and eligible plan expenses. We periodically evaluate our defined benefit plans’ asset portfolios for significant concentrations of risk. Types of investment concentration risks that are evaluated include concentrations in a single issuer, specific security, asset class, credit rating, duration, industry/sector, currency, foreign country or individual fund manager. As of December 31, 2021, our defined benefit plan assets had no significant concentrations of risk. Our investment policy does not allow investment managers to use market-timing strategies or financial derivative instruments for speculative purposes but financial derivative instruments are used to manage risk and achieve stated investment objectives for duration, yield curve, credit, foreign exchange and equity exposures. Generally, our investment managers are prohibited from short selling, trading on margin, and trading commodities, warrants or other options, except when acquired as a result of the purchase of another security, or in the case of options, when sold as part of a covered position. The assumption of 5.00 % for the overall expected long-term rate of return on plan assets in 2021 was developed using asset allocation and return expectations. The return expectations are created using long-term historical and expected returns for the various asset classes and current market expectations for inflation, interest rates and economic growth. 87 Table of Contents The fair values of investments held in the qualified pension plans by major asset category as of December 31, 2021 and 2020, and the percentage that each asset category comprises of total plan assets were as follows: (Dollars in millions) Level 1 Level 2 Not Subject to Leveling (1) Total Percentage of Plan Assets December 31, 2021 Cash and cash equivalents: Short-term investment fund $ — $ — $ 34 $ 34 1.7 % Equity: U.S. large companies — — 107 107 5.3 % U.S. small companies — — 17 17 0.8 % International 47 — 82 129 6.4 % Fixed income securities 406 1,310 6 1,722 85.8 % Total plan assets $ 453 $ 1,310 $ 246 $ 2,009 100.0 % December 31, 2020 Cash and cash equivalents: Short-term investment fund $ — $ — $ 37 $ 37 1.8 % Equity: U.S. large companies — — 136 136 6.6 % U.S. small companies — — 33 33 1.6 % International 53 — 102 155 7.5 % Fixed income securities 425 1,274 1 1,700 82.5 % Derivatives — 1 — 1 — % Total plan assets $ 478 $ 1,275 $ 309 $ 2,062 100.0 % (1) Investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total defined benefit pension plan assets. For the periods ended December 31, 2021 and 2020, we had no investments held in the pension plans within Level 3 of the fair value hierarchy. Our common stock was not a plan asset as of December 31, 2021 or 2020. The non-qualified plans are unfunded. Funding Our funding practice is to evaluate our tax and cash position, and the funded status of our plans, in determining our planned contributions. We estimate that we will contribute $ 5 million to our non-qualified plans in 2022 but this could change based on variations in interest rates, asset returns and other factors. Defined Contribution Retirement Plans Our costs for defined contribution retirement plans were $ 60 million, $ 57 million and $ 57 million for the years ended December 31, 2021, 2020 and 2019, respectively. Postretirement Medical Plan We provide health benefits through a postretirement medical plan for eligible employees hired before 1993 (the “Postretirement Plan”). 88 Table of Contents Funded Status of Postretirement Medical Plan The reconciliation of the changes in the plan’s benefit obligation and the determination of the amounts recognized on our Consolidated Balance Sheets were as follows: As of December 31, (In millions) 2021 2020 Projected benefit obligation at beginning of year $ 44 $ 41 Interest cost on projected benefit obligation 1 1 Actuarial loss — 4 Participant contributions 1 1 Benefits paid ( 5 ) ( 3 ) Projected and accumulated benefit obligation at end of year $ 41 $ 44 Funded status of the plan $ ( 41 ) $ ( 44 ) Amounts recognized in the balance sheet consist of: Current liabilities $ ( 3 ) $ ( 3 ) Long-term liabilities ( 38 ) ( 41 ) Net amount recognized $ ( 41 ) $ ( 44 ) Discount rate assumption as of December 31 2.67 % 2.20 % The amounts included in AOCI that have not yet been recognized in net periodic benefit income (expense) and the net periodic benefit income (expense) for the postretirement plan were not material in any of the periods presented. The discount rates assumptions used to calculate the interest cost were 1.56 % - 2.34 %, 2.66 % - 3.22 % and 3.87 % - 4.36 % for the years ended December 31, 2021, 2020 and 2019, respectively. Expected benefit payments, which reflect expected future service, as appropriate, for the years ended December 31 are summarized below. These estimates are based on assumptions about future events. Actual benefit payments may vary from these estimates. (In millions) 2022 2023 2024 2025 2026 2027-2030 Expected benefit payments $ 3 $ 3 $ 3 $ 4 $ 3 $ 14 14. Stockholders’ Equity Our Board of Directors is authorized to establish one or more series of preferred stock. Series A Convertible Perpetual Preferred Stock and Warrants In 2011, we issued 75,000 shares of the Series A Preferred Stock with an initial liquidation preference of $ 1,000 per share which were convertible into shares of our common stock at a conversion price of $ 7.00 per common share (subject to customary anti-dilution adjustments). We also issued warrants exercisable for shares of our common stock at an initial exercise price of $ 7.00 per common share (subject to customary anti-dilution adjustments). Our preferred stock ranked senior to our common stock with respect to dividend and liquidation rights. Our preferred stock paid quarterly cash dividends equal to the greater of: (i) the “as-converted” dividends on our underlying common stock for the relevant quarter and (ii) 4 % of the then-applicable liquidation preference per annum. Our preferred stock was not redeemable. In December 2020, some holders of our convertible preferred stock exchanged their holdings for a combination of our common stock, based on the stated conversion price, and a lump-sum payment that represents an approximation of the net present value of the future dividends payable on the preferred stock. Additionally, some holders of our warrants exchanged (or committed to exchange subject to the satisfaction of certain customary closing conditions) 89 Table of Contents 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 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 JPE. 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. Share Repurchases In December 2018, our Board of Directors authorized the repurchase of up to $ 1 billion of our common stock, which was completed in the first quarter of 2019. The share repurchases were funded by our Unsecured Credit Facility and available cash. In February 2019, our Board of Directors authorized additional repurchases of up to $ 1.5 billion of our common stock. The 2019 authorization permits us to purchase shares in both the open market and in private transactions, with the timing and number of shares dependent on a variety of factors, including price, general business conditions, market conditions, alternative investment opportunities and funding considerations. We are not obligated to repurchase any specific number of shares and may suspend or discontinue the program at any time. The share purchases under this program have been funded by our available cash and proceeds from our 2019 debt offerings. 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, (In millions, except per share data) 2020 2019 Shares purchased and retired 2 25 Aggregate value $ 114 $ 1,347 Average price per share $ 66.58 $ 53.41 Remaining authorization $ 503 $ 617 90 Table of Contents 15. Stock-Based Compensation We grant various types of stock-based compensation awards to directors, officers and key employees under our 2016 incentive plan. These awards include stock options, restricted stock, restricted stock units, performance-based units, cash incentive awards and other equity-related awards (collectively, “Awards”). As a result of the spin-off and in accordance with plan rules, the shares remaining for future issuance under the 2016 plan were equitably adjusted. With this adjustment, up to 7.2 million shares of our common stock have been authorized for issuance as Awards. Shares awarded may consist of authorized and unissued shares or treasury shares. The 2016 plan will terminate on May 15, 2029, unless terminated earlier by our Board of Directors. As of December 31, 2021, 1.7 million shares of our common stock were available for the grant of Awards under the 2016 plan. In connection with the spin-off, stock-based compensation awards that were previously granted to GXO’s employees and directors under XPO’s incentive plan were converted to awards issued under GXO’s incentive plan. Additionally, in order to preserve the value of the awards held by employees continuing with XPO following the spin-off, the number of outstanding shares underlying the awards were adjusted using the ratio and methodology outlined in the EMA. The ratio was based on the closing price per share of XPO common stock on July 30, 2021 compared to the closing price per share of XPO common stock on August 2, 2021. The strike prices of options were similarly adjusted as outlined in the EMA. The impact of these adjustments on the number of awards outstanding is included in the effect of spin-off activity in the tables below. The modification of these awards in connection with the spin-off did not result in incremental compensation cost. Our employee stock purchase plan offers eligible employees, excluding our executive officers and directors, the right to purchase our common stock up to 10 % of each employee’s compensation. Shares are purchased at 5 % below fair market value on the last trading day of each six-month offering period. The plan authorizes the purchase of up to two million shares of our common stock. The plan will terminate in October 2027, unless terminated earlier by our Board of Directors. We do not recognize stock-based compensation expense as the plan is non-compensatory. At December 31, 2021, two million shares of our common stock were available for purchase under the plan. Our stock-based compensation expense is recorded in SG&A on our Consolidated Statements of Income: Years ended December 31, (In millions) 2021 2020 2019 Restricted stock and restricted stock units $ 28 $ 32 $ 24 Performance-based restricted stock units 9 2 5 Cash-settled performance-based restricted stock units — 7 27 Total stock-based compensation expense $ 37 $ 41 $ 56 Tax benefit on stock-based compensation $ ( 5 ) $ ( 13 ) $ ( 2 ) Stock Options Our stock options typically vest over three to five years after the grant date for our employees and officers and one year after the grant date for our Board of Directors. The stock options have a 10 -year contractual term and the exercise price equals our stock price on the grant date. 91 Table of Contents A summary of stock option award activity for the year ended December 31, 2021 is presented below: Stock Options Number of Stock Options Weighted-Average Exercise Price Weighted-Average Remaining Term Outstanding as of December 31, 2020 (1) 42,755 $ 21.01 3.36 Granted (2) — — Exercised ( 51,783 ) 14.62 Forfeited — — Effect of spin-off (3) 15,636 NM Outstanding as of December 31, 2021 6,608 $ 9.80 0.93 Options exercisable as of December 31, 2021 6,608 $ 9.80 0.93 NM - Not meaningful (1) Outstanding awards at December 31, 2020 includes awards that were subsequently converted to awards issued under GXO’s incentive plan. (2) The above table excludes stock option awards that were granted in 2021 that subsequently converted to awards issued under GXO’s incentive plan. (3) Represents the net impact of (i) adjustments made to preserve the value of awards immediately before and after the spin-off, and (ii) the conversion of certain awards to awards issued under GXO’s incentive plan. The intrinsic value of options outstanding and exercisable as of December 31, 2021 was less than $ 1 million. The total intrinsic value of options exercised during 2021, 2020 and 2019 was $ 4 million, $ 56 million and $ 6 million, respectively. The total cash received from options exercised during 2021, 2020 and 2019 was $ 2 million, less than $ 1 million and $ 1 million, respectively. Restricted Stock, Restricted Stock Units and Performance-Based Restricted Stock Units We grant RSUs and PRSUs to our key employees, officers and directors with various vesting requirements. RSUs generally vest based on the passage of time (service conditions) and PRSUs generally vest based on the achievement of our financial targets (performance conditions). PRSUs may also be subject to stock price (market conditions), employment conditions and other non-financial conditions. The holders of the RSUs and PRSUs do not have the rights of a stockholder and do not have voting rights until the shares are issued and delivered in settlement of the awards. The number of RSUs and PRSUs vested includes shares of our common stock that we withheld on behalf of our employees to satisfy the minimum tax withholdings. We estimate the fair value of PRSUs subject to market-based vesting conditions using a Monte Carlo simulation lattice model. 92 Table of Contents A summary of RSU and PRSU award activity for the year ended December 31, 2021 is presented below: RSUs PRSUs Number of RSUs Weighted-Average Grant Date Fair Value Number of PRSUs Weighted-Average Grant Date Fair Value Outstanding as of December 31, 2020 (1) 1,615,812 $ 67.43 1,856,561 $ 45.39 Granted 839,372 87.13 70,954 80.67 Vested ( 578,216 ) 68.31 ( 22,617 ) 75.00 Forfeited and canceled ( 337,312 ) 105.04 ( 597,739 ) 44.19 Effect of spin-off (2) ( 78,046 ) NM 699,076 NM Outstanding as of December 31, 2021 1,461,610 $ 54.81 2,006,235 $ 46.19 NM - Not meaningful (1) Outstanding awards at December 31, 2020 includes awards that were subsequently converted to awards issued under GXO’s incentive plan. (2) Represents the net impact of (i) adjustments made to preserve the value of awards immediately before and after the spin-off, and (ii) the conversion of certain awards to awards issued under GXO’s incentive plan. The total fair value of RSUs that vested during 2021, 2020 and 2019 was $ 69 million, $ 64 million and $ 13 million, respectively. All of the outstanding RSUs as of December 31, 2021 vest subject to service conditions. The total fair value of PRSUs that vested during 2021, 2020 and 2019 was $ 2 million, $ 8 million and $ 23 million, respectively. Of the outstanding PRSUs as of December 31, 2021, 1,700,480 vest subject to service and a combination of market and performance conditions, 283,764 vest subject to service and performance conditions and 21,991 vest subject to service and market conditions. As of December 31, 2021, unrecognized compensation cost related to non-vested RSUs and PRSUs of $ 69 million is anticipated to be recognized over a weighted-average period of approximately 2.64 years. 16. Income Taxes Income (loss) from continuing operations before taxes related to our U.S. and foreign operations was as follows: Years Ended December 31, (In millions) 2021 2020 2019 U.S. $ 420 $ 45 $ 286 Foreign ( 10 ) ( 80 ) 15 Income (loss) from continuing operations before income tax provision (benefit) $ 410 $ ( 35 ) $ 301 93 Table of Contents The income tax provision (benefit) is comprised of the following: Years Ended December 31, (In millions) 2021 2020 2019 Current: U.S. Federal $ 56 $ 30 $ ( 3 ) State 13 7 1 Foreign 13 16 22 Total current income tax provision $ 82 $ 53 $ 20 Deferred: U.S. Federal $ ( 10 ) $ ( 40 ) $ 52 State ( 7 ) ( 3 ) 4 Foreign 22 ( 32 ) ( 16 ) Total deferred income tax provision (benefit) 5 ( 75 ) 40 Total income tax provision (benefit) $ 87 $ ( 22 ) $ 60 The effective tax rate reconciliations were as follows: Years Ended December 31, 2021 2020 2019 U.S. federal statutory tax rate 21.0 % 21.0 % 21.0 % State taxes, net of U.S. federal benefit 2.4 ( 7.4 ) 1.2 Foreign operations (1) 10.3 16.9 ( 1.1 ) Contribution- and margin-based taxes 1.2 ( 22.4 ) 2.8 Changes in uncertain tax positions ( 2.1 ) ( 10.8 ) ( 1.6 ) Non-deductible compensation 1.8 ( 0.4 ) 0.1 Provision to return adjustments 1.2 11.4 ( 1.4 ) Effect of law changes ( 1.0 ) ( 3.9 ) 0.8 Stock-based compensation ( 1.4 ) 42.0 ( 0.9 ) Long-term capital loss ( 11.0 ) — — Other (2) ( 1.1 ) 17.0 ( 1.2 ) Effective tax rate 21.3 % 63.4 % 19.7 % (1) Foreign operations include the net impact of changes to valuation allowances, the cost of inclusion of foreign income in the U.S. net of foreign taxes, the impact of foreign tax rate differences from the U.S. Federal rate and permanent items related to foreign operations. (2) In the year ended December 31, 2020, the impact of “Other” on the effective tax rate was disproportionately high compared to 2019 and 2021 due to the low income (loss) from continuing operations before income tax provision (benefit) in 2020. For 2020, “Other” is primarily comprised of 7.7 % of U.S. Federal tax credits, 6.5 % of U.S. Federal tax permanent adjustments, and 2.7 % of changes in valuations allowance. 94 Table of Contents Components of the Net Deferred Tax Asset or Liability The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability were as follows: Years Ended December 31, (In millions) 2021 2020 Deferred tax asset Net operating loss and other tax attribute carryforwards $ 77 $ 72 Accrued expenses 60 87 Pension and other retirement obligations — 21 Other 46 69 Total deferred tax asset 183 249 Valuation allowance ( 37 ) ( 40 ) Total deferred tax asset, net 146 209 Deferred tax liability Intangible assets ( 172 ) ( 194 ) Property and equipment ( 252 ) ( 256 ) Pension and other retirement obligations ( 6 ) — Other ( 24 ) ( 38 ) Total deferred tax liability ( 454 ) ( 488 ) Net deferred tax liability $ ( 308 ) $ ( 279 ) The deferred tax asset and deferred tax liability above are reflected on our Consolidated Balance Sheets as follows: December 31, (In millions) 2021 2020 Other long-term assets $ 8 $ 7 Deferred tax liability ( 316 ) ( 286 ) Net deferred tax liability $ ( 308 ) $ ( 279 ) Operating Loss and Tax Credit Carryforwards Our operating loss and tax credit carryforwards were as follows: December 31, (In millions) Expiration Date 2021 2020 Federal net operating losses for all U.S. operations (including those of minority owned subsidiaries) 2033 - 2037 (1) $ 14 $ 22 Federal long-term capital loss carryforwards 2027 126 — Tax effect (before federal benefit) of state net operating losses Various times starting in 2022 (1) 24 26 Federal tax credit carryforwards Various times starting in 2032 1 — State tax credit carryforward Various times starting in 2022 (1) 3 4 Foreign net operating losses available to offset future taxable income Various times starting in 2022 (1) 93 189 (1) Some credits and losses have unlimited carryforward periods . 95 Table of Contents Valuation Allowance We established a valuation allowance for some of our deferred tax assets, as it is more likely than not that these assets will not be realized in the foreseeable future. We concluded that the remaining deferred tax assets will more likely than not be realized, though this is not assured, and as such no valuation allowance has been provided on these assets. The balances and activity related to our valuation allowance were as follows: (In millions) Beginning Balance Additions Reductions Ending Balance Year Ended December 31, 2021 $ 40 $ 43 $ ( 46 ) $ 37 Year Ended December 31, 2020 33 8 ( 1 ) 40 Year Ended December 31, 2019 38 3 ( 8 ) 33 Unrecognized Tax Benefits A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Years Ended December 31, (In millions) 2021 2020 2019 Beginning balance $ 17 $ 15 $ 20 Additions for tax positions of the current period — — — Additions for tax positions of prior years — 5 3 Reductions for tax positions of prior years ( 1 ) ( 1 ) ( 7 ) Settlements with tax authorities ( 1 ) ( 1 ) ( 1 ) Reductions due to the statute of limitations ( 7 ) ( 1 ) — Currency translation adjustment — — — Ending balance $ 8 $ 17 $ 15 Interest and penalties 5 6 6 Gross unrecognized tax benefits $ 13 $ 23 $ 21 Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of the end of the year $ 8 $ 17 $ 15 We could reflect a reduction to unrecognized tax benefits of up to $ 1 million over the next 12 months due to the statute of limitations lapsing on positions or because tax positions are sustained on audit. We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2021, we have no tax years under examination by the IRS. We have various U.S. state and local examinations and non-U.S. examinations in process. The U.S. federal tax returns after 2008, state and local returns after 2013, and non-U.S. returns after 2010 are open under relevant statutes of limitations and are subject to audit. 17. Earnings Per Share We compute basic and diluted earnings per share using the two-class method, which allocates earnings to participating securities. The participating securities in 2020 and 2019 consisted of our Series A Convertible Perpetual Preferred Stock. The undistributed earnings are allocated between common shares and participating securities as if all earnings had been distributed during the period. Losses are not allocated to the preferred shares. As discussed in Note 14—Stockholders’ Equity, we recorded a preferred stock conversion charge in December 2020 in connection with the conversion of our Series A preferred stock. 96 Table of Contents The computations of basic and diluted earnings per share were as follows: Years Ended December 31, (In millions, except per share data) 2021 2020 2019 Basic earnings (loss) per common share Income (loss) from continuing operations $ 323 $ ( 13 ) $ 241 Net loss from continuing operations attributable to noncontrolling interests — 3 — Net income (loss) from continuing operations attributable to XPO 323 ( 10 ) 241 Preferred stock conversion charge — ( 22 ) — Series A preferred stock dividends — ( 3 ) ( 3 ) Non-cash allocation of undistributed earnings — ( 6 ) ( 37 ) Net income (loss) from continuing operations attributable to common shares $ 323 $ ( 41 ) $ 201 Income from discontinued operations, net of taxes $ 18 $ 130 $ 199 Net income from discontinued operations attributable to noncontrolling interests ( 5 ) ( 10 ) ( 21 ) Net income from discontinued operations attributable to common shares $ 13 $ 120 $ 178 Net income (loss) from continuing operations attributable to common shares, basic $ 323 $ ( 41 ) $ 201 Net income from discontinued operations attributable to common shares, basic 13 120 178 Net income attributable to common shares, basic $ 336 $ 79 $ 379 Basic weighted-average common shares 112 92 96 Basic earnings (loss) from continuing operations per share $ 2.88 $ ( 0.45 ) $ 2.09 Basic earnings from discontinued operations per share 0.11 1.32 1.86 Basic earnings per share $ 2.99 $ 0.87 $ 3.95 Diluted earnings (loss) per common share Net income (loss) from continuing operations attributable to common shares, diluted $ 323 $ ( 41 ) $ 201 Net income from discontinued operations attributable to common shares, diluted 13 120 178 Net income attributable to common shares, diluted $ 336 $ 79 $ 379 Basic weighted-average common shares 112 92 96 Dilutive effect of stock-based awards and warrants 2 — 10 Diluted weighted-average common shares 114 92 106 Diluted earnings (loss) from continuing operations per share $ 2.82 $ ( 0.45 ) $ 1.89 Diluted earnings from discontinued operations per share 0.11 1.32 1.68 Diluted earnings per share $ 2.93 $ 0.87 $ 3.57 Potential common shares excluded — 20 10 Certain shares were not included in the computation of diluted earnings (loss) per share because the effect was anti-dilutive. 97 Table of Contents 18. Commitments and Contingencies We are involved, and will continue to be involved, in numerous proceedings arising out of the conduct of our business. These proceedings may include claims for property damage or personal injury incurred in connection with the transportation of freight, claims regarding anti-competitive practices, and employment-related claims, including claims involving asserted breaches of employee restrictive covenants. These matters also include numerous putative class action, multi-plaintiff and individual lawsuits, and administrative proceedings involving claims that our owner-operators or contract carriers should be treated as employees, rather than independent contractors (“misclassification claims”). These lawsuits and proceedings may seek substantial monetary damages (including claims for unpaid wages, overtime, failure to provide meal and rest breaks, unreimbursed business expenses, penalties and other items), injunctive relief, or both. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We review and adjust accruals for loss contingencies quarterly and as additional information becomes available. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount accrued, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred. If there is a reasonable possibility that a loss, or additional loss, may have been incurred, we disclose the estimate of the possible loss or range of loss if it is material and an estimate can be made, or disclose that such an estimate cannot be made. The determination as to whether a loss can reasonably be considered to be possible or probable is based on our assessment, together with legal counsel, regarding the ultimate outcome of the matter. We believe that we have adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not believe that the ultimate resolution of any matters to which we are presently a party will have a material adverse effect on our results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our financial condition, results of operations or cash flows. Legal costs incurred related to these matters are expensed as incurred. We carry liability and excess umbrella insurance policies that we deem sufficient to cover potential legal claims arising in the normal course of conducting our operations as a transportation company. The liability and excess umbrella insurance policies generally do not cover the misclassification claims described in this note. In the event we are required to satisfy a legal claim outside the scope of the coverage provided by insurance, our financial condition, results of operations or cash flows could be negatively impacted. Intermodal Drayage Classification Claims Certain of our intermodal drayage subsidiaries are defendants in class action litigations brought by independent contract carriers in California who contracted with these subsidiaries. In these cases, the contract carriers assert that they should be classified as employees, rather than independent contractors. In two related cases pending in Federal District Court in Los Angeles , Alvarez v. XPO Logistics Cartage, LLC and Arrellano v. XPO Port Services, Inc. , the Court has certified classes beginning in April 2016 and March 2013, respectively. Plaintiffs allege that defendants exercised an impermissible degree of control over plaintiffs’ operations through the terms of the parties’ contracts and defendants’ policies, including enforcement of requirements imposed on motor carriers by state and federal law. The particular claims asserted vary from case to case but generally include claims that, should the contract carriers be determined to be employees, they would be entitled to reimbursement for unpaid wages and/or minimum wage, unpaid wages for missed meal and rest periods, reimbursement of certain of the contract carriers’ business expenses (including fuel and insurance related costs), Labor Code penalties under California’s Private Attorneys General Act, and attorneys’ fees and costs associated with bringing the action. Defendants mounted a vigorous defense on the merits of plaintiffs’ claims, including as to whether the plaintiffs met the applicable test for the threshold issue of employment classification. Trial in both cases was scheduled to begin September 7, 2021. In August 2021, the parties held a mediation at which a tentative settlement was reached in both actions. Subject to the Court’s approval, we have agreed to pay the plaintiff class in the Alvarez case a total of $ 20 million, which includes all attorneys’ fees and other costs. We have agreed to pay the plaintiff class in the Arrellano case a total of 98 Table of Contents $ 9.5 million, which includes all attorneys’ fees and other costs. We accrued for both settlements in the third quarter of 2021. Under the terms of both settlement agreements, we do not have to reclassify our contractors as employees and the plaintiff classes have agreed to release us from all liability from the inception of each respective class period through December 31, 2021. All parties involved have agreed to dismiss all claims and counterclaims with prejudice, and the settlement agreements do not contain any admission of liability, wrongdoing or responsibility by any of the parties. The Court granted preliminary approval of the settlements on October 8, 2021, and pursuant to the settlement agreements, the company provided the settlement funds to the third-party class administrators in December 2021. On January 10, 2022, following a hearing, the Court granted final approval of the settlements. Plaintiffs’ motions for attorneys’ fees and incentive awards have been taken under submission, so final judgment has not yet been entered, but the company currently expects distribution of funds to class members to occur in the first half of 2022. Shareholder Litigation On December 14, 2018, a putative class action captioned Labul v. XPO Logistics, Inc. et al. , was filed in the U.S. District Court for the District of Connecticut against us and some of our current and former executives, alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 20(a) of the Exchange Act, based on alleged material misstatements and omissions in our public filings with the U.S. Securities and Exchange Commission. On June 3, 2019, lead plaintiffs Local 817 IBT Pension Fund, Local 272 Labor-Management Pension Fund, and Local 282 Pension Trust Fund and Local 282 Welfare Trust Fund (together, the “Pension Funds”) filed a consolidated class action complaint. Defendants moved to dismiss the consolidated class action complaint on August 2, 2019. On November 4, 2019, the Court dismissed the consolidated class action complaint without prejudice to the filing of an amended complaint. The Pension Funds, on January 3, 2020, filed a first amended consolidated class action complaint against us and a current executive. Defendants moved to dismiss the first amended consolidated class action complaint on March 3, 2020. On March 19, 2021, the Court dismissed the first amended consolidated class action complaint with prejudice and closed the case. On April 29, 2021, the Pension Funds filed a notice of appeal, and the appellate process is ongoing. Also, on May 13, 2019, Adriana Jez filed a purported shareholder derivative action captioned Jez v. Jacobs, et al. , (the “Jez complaint”) in the U.S. District Court for the District of Delaware, alleging breaches of fiduciary duty, unjust enrichment, waste of corporate assets, and violations of the Exchange Act against some of our current and former directors and officers, with the company as a nominal defendant. The Jez complaint was later consolidated with similar derivative complaints filed by purported shareholders Erin Candler and Kevin Rose under the caption In re XPO Logistics, Inc. Derivative Litigation. On December 12, 2019, the Court ordered plaintiffs to designate an operative complaint or file an amended complaint within 45 days. On January 27, 2020, plaintiffs designated the Jez complaint as the operative complaint in the consolidated cases. Defendants moved to dismiss the operative complaint on February 26, 2020. Rather than file a brief in opposition, on March 27, 2020, plaintiffs moved for leave to file a further amended complaint and to stay briefing on defendants’ motions to dismiss. The Court granted plaintiffs’ motion on July 6, 2020. On April 14, 2021, the Court issued an order staying proceedings pending resolution of an appeal in the Labul action. Plaintiffs stipulated that they will dismiss the shareholder derivative action with prejudice if the Labul dismissal is affirmed on appeal. We believe these suits are without merit and we intend to defend the company vigorously. We are unable at this time to determine the amount of the possible loss or range of loss, if any, that we may incur as a result of these matters. Insurance Contribution Litigation In April 2012, Allianz Global Risks US Insurance Company sued eighteen insurance companies in a case captioned Allianz Global Risks US Ins. Co. v. ACE Property & Casualty Ins. Co., et al., Multnomah County Circuit Court (Case No. 1204-04552). Allianz sought contribution on environmental and product liability claims that Allianz agreed to defend and indemnify on behalf of its insured, Daimler Trucks North America (“DTNA”). Defendants had insured Freightliner’s assets, which DTNA acquired in 1981. Con-way, Freightliner’s former parent company, intervened. We acquired Con-way in 2015. Con-way and Freightliner had self-insured under fronting agreements with defendant insurers ACE, Westport, and General. Under those agreements, Con-way agreed to indemnify the fronting carriers for damages assessed under the fronting policies. Con-way’s captive insurer, Centron, was also a 99 Table of Contents named defendant. After a seven-week jury trial in 2014, the jury found that Con-way and the fronting insurers never intended that the insurers defend or indemnify any claims against Freightliner. In June 2015, Allianz appealed to the Oregon Court of Appeals. In May 2019, the Oregon Court of Appeals upheld the jury verdict. In September 2019, Allianz appealed to the Oregon Supreme Court. In March 2021, the Oregon Supreme Court reversed the jury verdict, holding that it was an error to allow the jury to decide how the parties intended the fronting policies to operate, and also holding that the trial court improperly instructed the jury concerning one of the pollution exclusions at issue. In July of 2021, the matter was remanded to the trial court for further proceedings consistent with the Oregon Supreme Court’s decision. There is no date yet set for the next stages of the proceeding. The parties have filed cross-motions for summary judgment concerning the interpretation of certain of the fronting policies, which are yet to be decided. Following summary judgment, we anticipate a jury trial on the pollution exclusion, then a bench trial on allocation of defense costs among the subject insurance policies. We have accrued an immaterial amount for the potential exposure associated with Centron in the bench trial regarding allocation. As any losses that may arise in connection with the fronting policies issued by defendant insurers ACE, Westport, and General are not reasonably estimable at this time, no liability has been accrued in the accompanying consolidated financial statements for those potential exposures. 19. Quarterly Financial Data (Unaudited) Our unaudited results of operations for each of the quarters in the years ended December 31, 2021 and 2020 are summarized below: (In millions, except per share data) First Quarter Second Quarter Third Quarter (2) Fourth Quarter 2021 Revenue $ 2,989 $ 3,186 $ 3,270 $ 3,361 Operating income 139 191 112 174 Income from continuing operations 63 113 21 126 Income (loss) from discontinued operations, net of taxes 55 45 ( 78 ) ( 4 ) Net income (loss) 118 158 ( 57 ) 122 Net income (loss) attributable to common shareholders: (1) Continuing operations 63 113 21 126 Discontinued operations 52 43 ( 78 ) ( 4 ) Net income (loss) attributable to common shareholders 115 156 ( 57 ) 122 Basic earnings (loss) per share: (1) Continuing operations 0.59 1.01 0.19 1.09 Discontinued operations 0.49 0.38 ( 0.69 ) ( 0.03 ) Basic earnings (loss) per share attributable to common shareholders 1.08 1.39 ( 0.50 ) 1.06 Diluted earnings (loss) per share: (1) Continuing operations 0.56 1.00 0.19 1.08 Discontinued operations 0.46 0.38 ( 0.68 ) ( 0.03 ) Diluted earnings (loss) per share attributable to common shareholders 1.02 1.38 ( 0.49 ) 1.05 (1) The sum of the quarterly Net income (loss) attributable to common shareholders and earnings (loss) per share may not equal annual amounts due to differences in the weighted-average number of shares outstanding during the respective periods and because losses are not allocated to the Series A Preferred Stock in calculating earnings (loss) per share. (2) The third quarter of 2021 included a litigation settlement charge of $ 29 million. 100 Table of Contents (In millions, except per share data) First Quarter (2) Second Quarter (3) Third Quarter Fourth Quarter (4) 2020 Revenue $ 2,459 $ 2,127 $ 2,675 $ 2,938 Operating income (loss) 38 ( 101 ) 138 153 Income (loss) from continuing operations ( 9 ) ( 107 ) 37 66 Income (loss) from discontinued operations, net of taxes 34 ( 27 ) 61 62 Net income (loss) 25 ( 134 ) 98 128 Net income (loss) attributable to common shareholders: (1) Continuing operations ( 11 ) ( 105 ) 28 34 Discontinued operations 32 ( 27 ) 56 59 Net income (loss) attributable to common shareholders 21 ( 132 ) 84 93 Basic earnings (loss) per share: (1) Continuing operations ( 0.11 ) ( 1.16 ) 0.30 0.37 Discontinued operations 0.34 ( 0.29 ) 0.63 0.64 Basic earnings (loss) per share attributable to common shareholders 0.23 ( 1.45 ) 0.93 1.01 Diluted earnings (loss) per share: (1) Continuing operations ( 0.11 ) ( 1.16 ) 0.27 0.33 Discontinued operations 0.34 ( 0.29 ) 0.56 0.58 Diluted earnings (loss) per share attributable to common shareholders 0.23 ( 1.45 ) 0.83 0.91 (1) The sum of the quarterly Net income (loss) attributable to common shareholders and earnings (loss) per share may not equal annual amounts due to differences in the weighted-average number of shares outstanding during the respective periods and because losses are not allocated to the Series A Preferred Stock in calculating earnings (loss) per share. (2) The first quarter of 2020 included transaction and integration costs of $ 37 million. (3) The second quarter of 2020 included transaction and integration costs of $ 29 million and restructuring costs of $ 28 million. (4) The fourth quarter of 2020 included a $ 22 million, or $ 0.22 per diluted share from continuing operations, preferred stock conversion charge that reduced income attributable to common shareholders from continuing operations for earnings per share purposes, but did not affect net income, associated with the December 2020 conversion of our preferred stock. 101 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.