XPO, Inc. 10-Q

Item 1. Financial Statements. XPO, Inc. Condensed Consolidated Balance Sheets (Unaudited) June 30, December 31, (In millions, except per share data) 2023 2022 ASSETS Current assets Cash and cash equivalents $ 290 $ 460 Accounts receivable, net of allowances of $ 46 and $ 43 , respectively 1,008 954 Other current assets 224 199 Current assets of discontinued operations — 17 Total current assets 1,522 1,630 Long-term assets Property and equipment, net of $ 1,795 and $ 1,679 in accumulated depreciation, respectively 2,037 1,832 Operating lease assets 704 719 Goodwill 1,493 1,472 Identifiable intangible assets, net of $ 423 and $ 392 in accumulated amortization, respectively 383 407 Other long-term assets 213 209 Total long-term assets 4,830 4,639 Total assets $ 6,352 $ 6,269 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 464 $ 521 Accrued expenses 800 774 Short-term borrowings and current maturities of long-term debt 66 59 Short-term operating lease liabilities 110 107 Other current liabilities 93 30 Current liabilities of discontinued operations — 16 Total current liabilities 1,533 1,507 Long-term liabilities Long-term debt 2,452 2,473 Deferred tax liability 301 319 Employee benefit obligations 91 93 Long-term operating lease liabilities 592 606 Other long-term liabilities 264 259 Total long-term liabilities 3,700 3,750 Stockholders’ equity Common stock, $ 0.001 par value; 300 shares authorized; 116 and 115 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively — — Additional paid-in capital 1,268 1,238 Retained earnings (accumulated deficit) 43 ( 4 ) Accumulated other comprehensive loss ( 192 ) ( 222 ) Total equity 1,119 1,012 Total liabilities and equity $ 6,352 $ 6,269 See accompanying notes to condensed consolidated financial statements. 1 Table of Contents XPO, Inc. Condensed Consolidated Statements of Income (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In millions, except per share data) 2023 2022 2023 2022 Revenue $ 1,917 $ 2,047 $ 3,824 $ 3,941 Salaries, wages and employee benefits 783 752 1,545 1,477 Purchased transportation 444 525 901 1,035 Fuel, operating expenses and supplies 390 434 817 852 Operating taxes and licenses 15 13 30 29 Insurance and claims 46 48 90 104 Gains on sales of property and equipment ( 2 ) ( 1 ) ( 5 ) ( 2 ) Depreciation and amortization expense 107 96 208 190 Transaction and integration costs 17 7 39 14 Restructuring costs 10 2 34 8 Operating income 107 171 165 234 Other income ( 3 ) ( 13 ) ( 8 ) ( 27 ) Debt extinguishment loss 23 26 23 26 Interest expense 43 31 85 68 Income from continuing operations before income tax provision 44 127 65 167 Income tax provision 13 31 17 39 Income from continuing operations 31 96 48 128 Income (loss) from discontinued operations, net of taxes 2 45 ( 1 ) 501 Net income attributable to XPO $ 33 $ 141 $ 47 $ 629 Net income (loss) attributable to common shareholders Continuing operations $ 31 $ 96 $ 48 $ 128 Discontinued operations 2 45 ( 1 ) 501 Net income attributable to common shareholders $ 33 $ 141 $ 47 $ 629 Earnings (loss) per share data Basic earnings per share from continuing operations $ 0.27 $ 0.83 $ 0.42 $ 1.12 Basic earnings (loss) per share from discontinued operations 0.01 0.40 ( 0.01 ) 4.36 Basic earnings per share attributable to common shareholders $ 0.28 $ 1.23 $ 0.41 $ 5.48 Diluted earnings per share from continuing operations $ 0.27 $ 0.83 $ 0.41 $ 1.11 Diluted earnings (loss) per share from discontinued operations 0.01 0.39 ( 0.01 ) 4.33 Diluted earnings per share attributable to common shareholders $ 0.28 $ 1.22 $ 0.40 $ 5.44 Weighted-average common shares outstanding Basic weighted-average common shares outstanding 116 115 116 115 Diluted weighted-average common shares outstanding 118 116 117 116 See accompanying notes to condensed consolidated financial statements. 2 Table of Contents XPO, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In millions) 2023 2022 2023 2022 Net income $ 33 $ 141 $ 47 $ 629 Other comprehensive income (loss), net of tax Foreign currency translation gain (loss), net of tax effect of $ 2 , $( 9 ), $ 10 and $( 11 ) $ 14 $ ( 46 ) $ 27 $ ( 72 ) Unrealized gain on financial assets/liabilities designated as hedging instruments, net of tax effect of $ — , $( 1 ), $ 1 and $( 1 ) 1 3 3 4 Other comprehensive income (loss) 15 ( 43 ) 30 ( 68 ) Comprehensive income attributable to XPO $ 48 $ 98 $ 77 $ 561 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents XPO, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, (In millions) 2023 2022 Cash flows from operating activities of continuing operations Net income $ 47 $ 629 Income (loss) from discontinued operations, net of taxes ( 1 ) 501 Income from continuing operations 48 128 Adjustments to reconcile income from continuing operations to net cash from operating activities Depreciation, amortization and net lease activity 208 190 Stock compensation expense 41 14 Accretion of debt 7 8 Deferred tax expense (benefit) ( 6 ) 22 Gains on sales of property and equipment ( 5 ) ( 2 ) Other 39 37 Changes in assets and liabilities Accounts receivable ( 64 ) ( 241 ) Other assets ( 31 ) ( 38 ) Accounts payable ( 57 ) 72 Accrued expenses and other liabilities 27 167 Net cash provided by operating activities from continuing operations 207 357 Cash flows from investing activities of continuing operations Payment for purchases of property and equipment ( 355 ) ( 242 ) Proceeds from sale of property and equipment 13 7 Proceeds from settlement of cross currency swaps — 19 Net cash used in investing activities from continuing operations ( 342 ) ( 216 ) Cash flows from financing activities of continuing operations Proceeds from issuance of debt 1,977 — Repurchase of debt ( 2,003 ) ( 651 ) Proceeds from borrowings on ABL facility — 275 Repayment of borrowings on ABL facility — ( 275 ) Repayment of debt and finance leases ( 35 ) ( 32 ) Payment for debt issuance costs ( 15 ) — Change in bank overdrafts 51 25 Payment for tax withholdings for restricted shares ( 12 ) ( 13 ) Other 1 ( 2 ) Net cash used in financing activities from continuing operations ( 36 ) ( 673 ) Cash flows from discontinued operations Operating activities of discontinued operations ( 8 ) 39 Investing activities of discontinued operations 1 680 Net cash provided by (used in) discontinued operations ( 7 ) 719 Effect of exchange rates on cash, cash equivalents and restricted cash 5 ( 14 ) Net increase (decrease) in cash, cash equivalents and restricted cash ( 173 ) 173 Cash, cash equivalents and restricted cash, beginning of period 470 273 Cash, cash equivalents and restricted cash, end of period 297 446 Less: Cash, cash equivalents and restricted cash of discontinued operations, end of period — 212 Cash, cash equivalents and restricted cash of continued operations, end of period $ 297 $ 234 Supplemental disclosure of cash flow information Leased assets obtained in exchange for new operating lease liabilities $ 46 $ 72 Leased assets obtained in exchange for new finance lease liabilities 36 10 Cash paid for interest 90 73 Cash paid for income taxes 18 71 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents XPO, Inc. Condensed Consolidated Statements of Changes in Equity (Unaudited) Common Stock (Shares in thousands, dollars in millions) Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Equity Balance as of March 31, 2023 115,750 $ — $ 1,252 $ 10 $ ( 207 ) $ 1,055 Net income — — — 33 — 33 Other comprehensive income — — — — 15 15 Exercise and vesting of stock compensation awards 189 — — — — — Tax withholdings related to vesting of stock compensation awards — — ( 4 ) — — ( 4 ) Stock compensation expense — — 19 — — 19 Other — — 1 — — 1 Balance as of June 30, 2023 115,939 $ — $ 1,268 $ 43 $ ( 192 ) $ 1,119 Common Stock (Shares in thousands, dollars in millions) Shares Amount Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Loss Total Equity Balance as of December 31, 2022 115,435 $ — $ 1,238 $ ( 4 ) $ ( 222 ) $ 1,012 Net income — — — 47 — 47 Other comprehensive income — — — — 30 30 Exercise and vesting of stock compensation awards 504 — — — — — Tax withholdings related to vesting of stock compensation awards — — ( 12 ) — — ( 12 ) Stock compensation expense — — 41 — — 41 Other — — 1 — — 1 Balance as of June 30, 2023 115,939 $ — $ 1,268 $ 43 $ ( 192 ) $ 1,119 5 Table of Contents XPO, Inc. Condensed Consolidated Statements of Changes in Equity (continued) (Unaudited) Common Stock (Shares in thousands, dollars in millions) Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Equity Balance as of March 31, 2022 114,982 $ — $ 1,176 $ 531 $ ( 109 ) $ 1,598 Net income — — — 141 — 141 Other comprehensive loss — — — — ( 43 ) ( 43 ) Exercise and vesting of stock compensation awards 51 — — — — — Tax withholdings related to vesting of stock compensation awards — — ( 1 ) — — ( 1 ) Stock compensation expense — — 10 — — 10 Other — — 2 — — 2 Balance as of June 30, 2022 115,033 $ — $ 1,187 $ 672 $ ( 152 ) $ 1,707 Common Stock (Shares in thousands, dollars in millions) Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Equity Balance as of December 31, 2021 114,737 $ — $ 1,179 $ 43 $ ( 84 ) $ 1,138 Net income — — — 629 — 629 Other comprehensive loss — — — — ( 68 ) ( 68 ) Exercise and vesting of stock compensation awards 296 — — — — — Tax withholdings related to vesting of stock compensation awards — — ( 13 ) — — ( 13 ) Stock compensation expense — — 18 — — 18 Other — — 3 — — 3 Balance as of June 30, 2022 115,033 $ — $ 1,187 $ 672 $ ( 152 ) $ 1,707 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents XPO, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Organization, Description of Business and Basis of Presentation XPO, Inc., together with its subsidiaries (“XPO,” “we” or the “Company”), is a leading provider of freight transportation services. We use our proprietary technology to move goods efficiently through our customers’ supply chains in North America and Europe. See Note 3—Segment Reporting for additional information on our operations. 2022 RXO Spin-Off and Intermodal Sale On November 1, 2022, we completed the spin-off of RXO, Inc. (“RXO”), our tech-enabled brokered transportation platform as a publicly traded company (the “RXO spin-off”). The historical results of operations and the financial positions of RXO and our intermodal operation, which was sold in March 2022, are presented as discontinued operations in our Condensed Consolidated Financial Statements. For information on our discontinued operations, see Note 2—Discontinued Operations. Basis of Presentation We prepared our Condensed Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and on the same basis as the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). The interim reporting requirements of Form 10-Q allow certain information and note disclosures normally included in annual consolidated financial statements to be condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the 2022 Form 10-K. The Condensed Consolidated Financial Statements are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair presentation of the financial condition, operating results and cash flows for the interim periods presented. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. In the first quarter of 2023, we made certain changes to our financial reporting to increase transparency and improve comparability. Specifically, we changed the expense captions within Operating income in the Condensed Consolidated Statements of Income to reflect the nature of the expense. The change to natural expense classification had no impact on consolidated Revenues or Operating income. We have recast prior period amounts to conform to the current year’s presentation. Restricted Cash As of June 30, 2023 and December 31, 2022, our restricted cash included in Other long-term assets on our Condensed Consolidated Balance Sheets was $ 7 million and $ 10 million, respectively. 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 also sell trade accounts receivable under a securitization program for our European transportation business. 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. The maximum amount of net cash proceeds available at any one time under our securitization program, inclusive of any unsecured borrowings, is € 200 million (approximately $ 218 million as of June 30, 2023). As of June 30, 2023, € 5 million (approximately $ 5 million) was available under the program. The weighted average interest rate was 4.41 % as of June 30, 2023. The program expires in July 2026. 7 Table of Contents Information related to the trade receivables sold was as follows: Three Months Ended June 30, Six Months Ended June 30, (In millions) 2023 2022 2023 2022 Securitization programs Receivables sold in period $ 470 $ 458 $ 910 $ 905 Cash consideration 470 458 910 905 Factoring programs Receivables sold in period 34 23 58 44 Cash consideration 34 23 58 44 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 June 30, 2023 and December 31, 2022 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 6—Derivative Instruments; and for further information on financial liabilities, see Note 7—Debt. The fair value hierarchy of cash equivalents was as follows: (In millions) Carrying Value Fair Value Level 1 June 30, 2023 $ 231 $ 231 $ 231 December 31, 2022 402 402 402 Adoption of New Accounting Standards 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. In December 2022, the FASB issued ASU 2022-06, “Reference rate reform (Topic 848): Deferral of the sunset date of Topic 848” which defers the expiration date for Topic 848 from December 31, 2022 until December 31, 2024. At December 31, 2022, our revolving loan credit agreement (the “ABL Facility”) and senior secured term loan credit agreement, as amended (the “Existing Term Loan Facility”), provided for an interest rate based on LIBOR. In 2023, we amended the terms of our ABL Facility and Existing Term Loan Facility, including transitioning the interest rate from LIBOR to other base rates. See Note 7—Debt for further information. We do not expect the modifications of these facilities to have a material impact on our consolidated financial statements. 8 Table of Contents 2. Discontinued Operations As discussed above, the results of RXO and intermodal are presented as discontinued operations. The following table summarizes the results of operations from discontinued operations: Three Months Ended June 30, Six Months Ended June 30, (In millions) 2022 2022 Revenue $ 1,227 $ 2,872 Salaries, wages and employee benefits 151 315 Purchased transportation 879 2,100 Fuel, operating expenses and supplies 76 191 Operating taxes and licenses 1 2 Insurance and claims 4 13 Depreciation and amortization expense 19 41 (Gain) loss on sale of business 16 ( 434 ) Transaction and other operating costs 21 23 Operating income 60 621 Income tax provision 15 120 Net income from discontinued operations attributable to discontinued operations $ 45 $ 501 For the three and six months ended June 30, 2023, we incurred approximately $ 16 million and $ 40 million, respectively, of costs related to the RXO spin-off, of which $ 0 million and $ 4 million, respectively, are reflected within income (loss) from discontinued operations in our Condensed Consolidated Statements of Income. For the three and six months ended June 30, 2022, we incurred approximately $ 18 million and $ 21 million, respectively, of costs related to the RXO spin-off, of which $ 17 million and $ 20 million, respectively, are reflected within income (loss) from discontinued operations in our Condensed Consolidated Statements of Income. 3. Segment Reporting We are organized into two reportable segments: North American Less-Than-Truckload (“LTL”), the largest component of our business, and European Transportation. In our asset-based North American LTL segment, we provide shippers with geographic density and day-definite domestic and cross-border services to the U.S., as well as Mexico, Canada and the Caribbean. Our North American LTL segment also includes the results of our trailer manufacturing operations. In our European Transportation segment, we serve a large base of customers with consumer, trade and industrial markets. We offer dedicated truckload, LTL, truck brokerage, managed transportation, last mile, freight forwarding and multimodal solutions, such as road-rail and road-short sea combinations. Corporate includes corporate headquarters costs for executive officers and certain legal and financial functions, and other costs and credits not attributed to our reportable segments. Our chief operating decision maker (“CODM”) regularly reviews financial information at the operating segment level to allocate resources to the segments and to assess their performance. 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. Our CODM evaluates segment profit (loss) based on adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), which we define as income from continuing operations before debt extinguishment loss, interest expense, income tax, depreciation and amortization expense, transaction and integration costs, restructuring costs and other adjustments. Segment Adjusted EBITDA has historically reflected an allocation of corporate costs. In the first quarter of 2023, we began allocating incremental corporate costs from Corporate to North American LTL. Prior periods have been recast to reflect these incremental allocations, which approximate $ 80 million annually. 9 Table of Contents Selected financial data for our segments is as follows: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2023 2022 2023 2022 Revenue North American LTL $ 1,136 $ 1,240 $ 2,256 $ 2,347 European Transportation 781 807 1,568 1,594 Total $ 1,917 $ 2,047 $ 3,824 $ 3,941 Adjusted EBITDA North American LTL $ 208 $ 274 $ 390 $ 460 European Transportation 46 49 83 87 Corporate ( 10 ) ( 34 ) ( 19 ) ( 74 ) Total Adjusted EBITDA 244 289 454 473 Less: Debt extinguishment loss 23 26 23 26 Interest expense 43 31 85 68 Income tax provision 13 31 17 39 Depreciation and amortization expense 107 96 208 190 Transaction and integration costs (1) 17 7 39 14 Restructuring costs (2) 10 2 34 8 Income from continuing operations $ 31 $ 96 $ 48 $ 128 Depreciation and amortization expense North American LTL $ 71 59 $ 139 $ 115 European Transportation 33 32 65 65 Corporate 3 5 4 10 Total $ 107 $ 96 $ 208 $ 190 (1) Transaction and integration costs for the periods ended June 30, 2023 are primarily comprised of stock-based compensation and retention awards for certain employees related to strategic initiatives. Transaction and integration costs for the periods ended June 30, 2022 are primarily comprised of third-party professional fees related to strategic initiatives as well as retention awards paid to certain employees. Transaction and integration costs for the three months ended June 30, 2023 and 2022 include $ 0 million and $ 2 million, respectively, related to our North American LTL segment, $ 0 million and $ 1 million, respectively, related to our European Transportation segment, and $ 17 million and $ 4 million, respectively, related to Corporate. Transaction and integration costs for the six months ended June 30, 2023 and 2022 include $ 0 million and $ 2 million, respectively, related to our North American LTL segment, $ 1 million and $ 3 million, respectively, related to our European Transportation segment, and $ 38 million and $ 9 million, respectively, related to Corporate. (2) See Note 5— Restructuring Charges for further information on our restructuring actions. 10 Table of Contents 4. Revenue Recognition Disaggregation of Revenues Our revenue disaggregated by geographic area based on sales office location was as follows: Three Months Ended June 30, 2023 (In millions) North American LTL European Transportation Total Revenue United States $ 1,112 $ — $ 1,112 North America (excluding United States) 24 — 24 France — 331 331 United Kingdom — 226 226 Europe (excluding France and United Kingdom) — 224 224 Total $ 1,136 $ 781 $ 1,917 Three Months Ended June 30, 2022 (In millions) North American LTL European Transportation Total Revenue United States $ 1,213 $ — $ 1,213 North America (excluding United States) 27 — 27 France — 352 352 United Kingdom — 224 224 Europe (excluding France and United Kingdom) — 231 231 Total $ 1,240 $ 807 $ 2,047 Six Months Ended June 30, 2023 (In millions) North American LTL European Transportation Total Revenue United States $ 2,209 $ — $ 2,209 North America (excluding United States) 47 — 47 France — 671 671 United Kingdom — 450 450 Europe (excluding France and United Kingdom) — 447 447 Total $ 2,256 $ 1,568 $ 3,824 Six Months Ended June 30, 2022 (In millions) North American LTL European Transportation Total Revenue United States $ 2,297 $ — $ 2,297 North America (excluding United States) 50 — 50 France — 704 704 United Kingdom — 449 449 Europe (excluding France and United Kingdom) — 441 441 Total $ 2,347 $ 1,594 $ 3,941 11 Table of Contents 5. 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 spin-offs and other divestment activities. These actions generally include severance and facility-related costs, including impairment of lease assets, as well as contract termination costs, and are intended to improve our efficiency and profitability. Our restructuring-related activity was as follows: Six Months Ended June 30, 2023 (In millions) Reserve Balance as of December 31, 2022 Charges Incurred Payments Foreign Exchange and Other Reserve Balance as of June 30, 2023 Severance North American LTL $ 2 $ 4 $ ( 2 ) $ — $ 4 European Transportation 1 8 ( 6 ) — 3 Corporate 19 16 ( 19 ) ( 1 ) 15 Total $ 22 $ 28 $ ( 27 ) $ ( 1 ) $ 22 In addition to the severance charges noted in the table above, we recorded a non-cash lease impairment charge of $ 6 million in our North American LTL segment in the first quarter of 2023. We expect that the majority of the cash outlays related to the severance charges incurred in the first six months of 2023 will be completed within 12 months. 6. 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: June 30, 2023 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 $ 663 Other current assets $ 1 Other current liabilities $ ( 24 ) Interest rate swaps 700 Other current assets 2 Other current liabilities — Total $ 3 $ ( 24 ) 12 Table of Contents December 31, 2022 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 $ 332 Other current assets $ — Other current liabilities $ ( 11 ) Cross-currency swap agreements 68 Other long-term assets 3 Other long-term liabilities — Interest rate swaps 1,882 Other current assets — Other current liabilities ( 1 ) Total $ 3 $ ( 12 ) 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 Condensed Consolidated Statements of Income was as follows: Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives Amount of Gain Reclassified from AOCI into Net Income Amount of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Three Months Ended June 30, (In millions) 2023 2022 2023 2022 2023 2022 Derivatives designated as cash flow hedges Interest rate swaps 1 4 1 — — — Derivatives designated as net investment hedges Cross-currency swap agreements ( 3 ) 28 — — 2 2 Total $ ( 2 ) $ 32 $ 1 $ — $ 2 $ 2 Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives Amount of Gain Reclassified from AOCI into Net Income Amount of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Six Months Ended June 30, (In millions) 2023 2022 2023 2022 2023 2022 Derivatives designated as cash flow hedges Interest rate swaps 2 5 1 — — — Derivatives designated as net investment hedges Cross-currency swap agreements ( 13 ) 37 — — 4 4 Total $ ( 11 ) $ 42 $ 1 $ — $ 4 $ 4 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. 13 Table of Contents During the term of the swap contracts, we will receive interest on a quarterly basis from the counterparties based on USD fixed interest rates, and we will pay interest, also on a quarterly 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 recognized in Accumulated other comprehensive income (“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. 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 Condensed Consolidated Statements of Cash Flows. In the second quarter of 2022, we received approximately $ 19 million related to the settlement of certain cross currency swaps that matured during the quarter. The proceeds were included in Cash flows from investing activities of continuing operations on our Condensed 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 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 swap matures in November 2023. 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 Condensed Consolidated Statements of Cash Flows. 7. Debt June 30, 2023 December 31, 2022 (In millions) Principal Balance Carrying Value Principal Balance Carrying Value Term loan facility $ 700 $ 692 $ 2,003 $ 1,981 6.25 % senior notes due 2025 112 112 112 111 6.25 % senior secured notes due 2028 830 820 — — 7.125 % senior notes due 2031 450 445 — — 6.70 % senior debentures due 2034 300 219 300 217 Finance leases, asset financing and other 230 230 223 223 Total debt 2,622 2,518 2,638 2,532 Short-term borrowings and current maturities of long-term debt 66 66 59 59 Long-term debt $ 2,556 $ 2,452 $ 2,579 $ 2,473 The fair value of our debt and classification in the fair value hierarchy was as follows: (In millions) Fair Value Level 1 Level 2 June 30, 2023 $ 2,616 $ 1,691 $ 925 December 31, 2022 2,601 392 2,209 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. 14 Table of Contents ABL Facility As of June 30, 2023, our borrowing base was $ 513 million and our availability under our revolving loan credit agreement (the “ABL Facility”) was $ 512 million after considering outstanding letters of credit of less than $ 1 million. As of June 30, 2023, we were in compliance with the ABL Facility’s financial covenants. In February 2023, we amended our ABL Facility to, among other things: (i) extend the maturity date to April 30, 2026 (subject, in certain circumstances, to a springing maturity if more than $ 250 million of our existing term loan debt or certain refinancings thereof remain outstanding 91 days prior to their respective maturity dates); (ii) replace LIBOR-based benchmark rates applicable to loans outstanding with Secured Overnight Financing Rate-based rates; (iii) reduce the sublimit for issuance of letters of credit to $ 200 million; (iv) reduce the sublimit for borrowings in Canadian Dollars to $ 50 million; (v) exclude real property from the collateral securing the obligations and (vi) make certain other changes to the covenants and other provisions therein. The aggregate commitment of all lenders under the amended ABL Facility remains $ 600 million. Letters of Credit Facility As of June 30, 2023, we had issued $ 141 million in aggregate face amount of letters of credit under our $ 200 million uncommitted secured evergreen letter of credit facility. Term Loan Facility In 2015, we entered into a Term Loan Credit Agreement that provided for a single borrowing of $ 1.6 billion, which was subsequently amended to increase the principal balance to $ 2.0 billion and to extend the maturity date to February 2025 (the “Existing Term Loan Facility”). In May 2023, we amended the Term Loan Credit Agreement to obtain $ 700 million of new term loans (the “New Term Loan Facility”) having substantially similar terms as the Existing Term Loan Facility, except with respect to maturity date, issue price, interest rate, prepayment premiums in connection with certain voluntary prepayments and certain other provisions. The New Term Loan Facility was issued at 99.5 % of the face amount and will mature on May 24, 2028. The New Term Loan Facility will bear interest at a rate per annum equal to, at our option, either (a) a Term Secured Overnight Financing (“SOFR”) rate (subject to a 0.00 % floor) or (b) a base rate (subject to a 0.00 % floor), in each case, plus an applicable margin of 2.00 % for Term SOFR loans or 1.00 % for base rate loans. The interest rate was 7.09 % as of June 30, 2023. In the second quarter of 2023, we used net proceeds from the New Term Loan Facility and new Senior Notes, as described below, together with cash on hand, to repay $ 2.0 billion of outstanding principal under the Existing Term Loan Facility and to pay related fees, expenses and accrued interest. We recorded a debt extinguishment loss of $ 23 million in the second quarter of 2023. Senior Notes Due 2028 and 2031 In May 2023, we completed private placements of $ 830 million aggregate principal amount of senior secured notes due 2028 (the “Senior Secured Notes due 2028”) and $ 450 million aggregate principal amount of senior notes due 2031 (the “Senior Notes due 2031” and together with the Senior Secured Notes due 2028, the “Senior Notes”). The Senior Secured Notes due 2028 mature on June 1, 2028 and bear interest at a rate of 6.25 % per annum. The Senior Notes due 2031 mature on June 1, 2031 and bear interest at a rate of 7.125 % per annum. Interest on the Senior Notes is payable semi-annually in cash in arrears, commencing December 1, 2023. The Senior Notes were issued at par and were used to repay our Existing Term Loan Facility as described above. The Senior Notes are guaranteed by each of our direct and indirect wholly-owned restricted subsidiaries (other than certain excluded subsidiaries) that are obligors under, or guarantee obligations under, our existing secured ABL Facility or the Term Loan Credit Agreement (or certain replacements thereof) or guarantee certain of our other indebtedness. 15 Table of Contents The Senior Secured Notes due 2028 and the guarantees thereof are secured by substantially all of our assets and our guarantors equally and ratably with the indebtedness under the Term Loan Credit Agreement (subject to permitted liens and certain other exceptions). The Senior Notes due 2031 and the guarantees thereof are unsecured, unsubordinated indebtedness for us and our guarantors. The Senior Notes contain covenants and events of default customary for notes of this nature. If the Senior Secured Notes due 2028 and the Company are each assigned investment grade ratings from at least two of the major rating agencies and no default has occurred, then certain covenant requirements will permanently cease to be in effect, and the collateral, security interests, and guarantees securing the Senior Secured Notes due 2028 will automatically be released. Senior Notes Due 2025 In the second quarter of 2022, we redeemed $ 630 million of the then $ 1.15 billion outstanding principal amount of our 6.25 % senior notes due 2025 (“Senior Notes due 2025”). The redemption price for the notes was 100 % of the principal amount plus a premium, as defined in the indenture, of approximately $ 21 million and accrued and unpaid interest. We paid for the redemption using available liquidity. We recorded a debt extinguishment loss of $ 26 million in the second quarter of 2022 due to this redemption. In the fourth quarter of 2022, we repurchased an additional $ 408 million of the outstanding principal amount of our Senior Notes due 2025 in a cash tender offer. 8. Earnings (Loss) per Share The computations of basic and diluted earnings per share were as follows: Three Months Ended June 30, Six Months Ended June 30, (In millions, except per share data) 2023 2022 2023 2022 Net income from continuing operations attributable to common shares $ 31 $ 96 $ 48 $ 128 Net income (loss) from discontinued operations, net of amounts attributable to noncontrolling interest 2 45 ( 1 ) 501 Net income attributable to common shares, basic $ 33 $ 141 $ 47 $ 629 Basic weighted-average common shares 116 115 116 115 Dilutive effect of stock-based awards 2 1 1 1 Diluted weighted-average common shares 118 116 117 116 Basic earnings from continuing operations per share $ 0.27 $ 0.83 $ 0.42 $ 1.12 Basic earnings (loss) from discontinued operations per share 0.01 0.40 ( 0.01 ) 4.36 Basic earnings per share $ 0.28 $ 1.23 $ 0.41 $ 5.48 Diluted earnings from continuing operations per share $ 0.27 $ 0.83 $ 0.41 $ 1.11 Diluted earnings (loss) from discontinued operations per share 0.01 0.39 ( 0.01 ) 4.33 Diluted earnings per share $ 0.28 $ 1.22 $ 0.40 $ 5.44 16 Table of Contents 9. Commitments and Contingencies We are involved, and expect to 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, environmental liability, commercial disputes, insurance coverage disputes and employment-related claims, including claims involving asserted breaches of employee restrictive covenants. 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. 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. 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 Global Risks US Ins. Co. (“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 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 2021, the matter was remanded to the trial court for further proceedings consistent with the Oregon Supreme Court’s decision. The trial court recently decided the parties’ cross-motions for summary judgment, leaving open the pollution exclusion and allocation issues. The trial on the pollution exclusion issue is scheduled to take place in the spring of 2024, and the trial on allocation of defense costs among the applicable insurance policies is set for the fall of 2024. 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 interim consolidated financial statements for those potential exposures. 17 Table of Contents California Environmental Matters In August 2022, the Company received a letter from the San Bernardino County District Attorney’s Office, written in cooperation with certain other California District Attorneys and the Los Angeles City Attorney, notifying the Company of an investigation into alleged violations with respect to underground storage tanks, hazardous materials, and hazardous waste in California, and offering a meeting. The Company has met with the County attorneys and the Los Angeles City Attorney on multiple occasions. We are assessing the allegations and the underlying facts, and continue to engage with the County and Los Angeles City Attorneys to address the alleged violations. No discussion of potential monetary sanctions or settlement amount has occurred to date, nor can we reasonably estimate potential costs at this time. 18 Table of Contents