Notes to Consolidated Financial Statements
Years Ended December 31, 2022, 2021 and 2020
1. Organization
Nature of Operations
XPO, 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 in North America and Europe. See Note 4—Segment Reporting and Geographic Information for additional information on our operations.
Strategic Actions
In March 2022, our Board of Directors approved a strategic plan for the spin-off of our tech-enabled brokered transportation platform as a new public company, separating it from our LTL business in North America; which was completed in 2022. Additionally, the plan included the sale of our intermodal operation, which was also completed in 2022; and the intended divestiture of our European business. There can be no assurance that the divestiture will occur, or of the terms or timing of a transaction.
On November 1, 2022, we completed the spin-off of our tech-enabled brokered transportation platform as a publicly traded company, RXO, Inc. (“RXO”). The transaction is intended to be tax-free to XPO and our shareholders for U.S. federal income tax purposes. The spin-off was accomplished by the distribution of 100% of the outstanding common stock of RXO to XPO shareholders. RXO is an independent public company trading under the symbol “RXO” on the New York Stock Exchange.
In addition to the transactions related to our March 2022 strategic plan, we completed the spin-off of our logistics segment as GXO Logistics, Inc. (“GXO”) on August 2, 2021. The historical results of operations and the financial positions of GXO, RXO and our intermodal operation are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. The intermodal operation qualified to be accounted for as a discontinued operation after the spin-off of RXO because the sale of the intermodal operation and RXO were part of one strategic plan of disposal. 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.
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.
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 2021, we completed a buy-out offer and squeeze-out for the remaining 3% of XPO Logistics Europe that we did not already own.
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 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, 2022, 2021 and 2020, our restricted cash included in Other long-term assets on our Consolidated Balance Sheets was $10 million.
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. 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) | | 2022 | | 2021 | | 2020 |
| Beginning balance | | $ | 36 | | | $ | 33 | | | $ | 30 | |
| Provision charged to expense | | 27 | | | 20 | | | 31 | |
| Write-offs, less recoveries, and other adjustments | | (20) | | | (17) | | | (32) | |
| Adoption of new accounting standard | | — | | | — | | | 4 | |
| Ending balance | | $ | 43 | | | $ | 36 | | | $ | 33 | |
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 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.
Under the trade receivables securitization program, a wholly-owned bankruptcy-remote special purpose entity of XPO sells trade receivables that originate with wholly-owned subsidiaries to unaffiliated entities. The program expires in July 2024 and contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio.
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 maximum amount of net cash proceeds available at any one time under our securitization program, inclusive of any unsecured borrowings, is €200 million (approximately $214 million as of December 31, 2022). As of December 31, 2022, €1 million (approximately $2 million) was available under the program, subject to having sufficient receivables available to sell and with consideration to amounts previously sold. The weighted average interest rate was 1.47% as of December 31, 2022.
Information related to the trade receivables sold was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | | 2022 | | 2021 | | 2020 |
| Securitization programs | | | | | | |
Receivables sold in period | | $ | 1,744 | | | $ | 1,726 | | | $ | 1,377 | |
Cash consideration | | 1,744 | | | 1,726 | | | 1,377 | |
| | | | | | |
| | | | | | |
| Factoring programs | | | | | | |
Receivables sold in period | | 111 | | | 64 | | | 75 | |
Cash consideration | | 111 | | | 64 | | | 75 | |
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 internal-use 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, tractors and trailers | | 3 to 14 years |
| | |
Machinery and equipment | | 3 to 10 years |
Computer software and equipment | | 1 to 5 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 not 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.
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 2022 and 2021 annual goodwill assessments, which were performed as of August 31, we performed a step-zero qualitative analysis for each of the three reporting units that existed at the time of the assessments. 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.
In the fourth quarter of 2022 and in connection with the RXO spin-off, we performed additional impairment tests because the number of our reporting units increased from three to five to reflect our new internal organization. Specifically, whereas our European Transportation business was previously considered a single reporting unit, after the spin-off of RXO, it was determined that the European Transportation business was comprised of four reporting units. As a result, in the fourth quarter, we tested each of the four new reporting units for potential impairment. A quantitative test was performed for each of these four new reporting units using a combination of income and market approaches and we recorded an aggregate impairment charge of $64 million related to two of these new reporting units.
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 unamortized customer relationships at December 31, 2022 is 14 to 16 years.
Accrued Expenses
The components of accrued expenses as of December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | |
| | As of December 31, |
| (In millions) | | 2022 | | 2021 |
| Accrued salaries and wages | | $ | 294 | | | $ | 320 | |
| Accrued transportation and facility charges | | 226 | | | 272 | |
| Accrued insurance claims | | 111 | | | 82 | |
| Accrued taxes | | 82 | | | 81 | |
| Other accrued expenses | | 61 | | | 67 | |
| Total accrued expenses | | $ | 774 | | | $ | 822 | |
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 our 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.
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, 2022 and 2021, 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, 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) | |
| Other comprehensive income (loss) | | (62) | | | (2) | | | (69) | | | — | | | (133) | |
| Amounts reclassified from AOCI | | (7) | | | — | | | — | | | — | | | (7) | |
Net current period other comprehensive income (loss) | | (69) | | | (2) | | | (69) | | | — | | | (140) | |
| Spin-off of RXO | | 2 | | | — | | | — | | | — | | | 2 | |
| As of December 31, 2022 | | $ | (119) | | | $ | (2) | | | $ | (101) | | | $ | — | | | $ | (222) | |
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-offs of RXO and 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 Other income on our Consolidated Statements of Income.
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, 2022 and 2021 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, 2022 | | $ | 402 | | | $ | 402 | | | $ | 402 | | | |
| December 31, 2021 | | 181 | | | 181 | | | 181 | | | |
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 Other income on our Consolidated Statements of Income.
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 November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” The ASU increases the transparency surrounding government assistance by requiring annual 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. We adopted this standard on January 1, 2022, on a prospective basis. The adoption did not have a material impact on our financial statement disclosures.
Accounting Pronouncements Issued but Not Yet Effective
In September 2022, the FASB issued ASU 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” The ASU increases the transparency surrounding supplier finance programs by requiring the buyer to disclose information on an annual basis about the key terms of the program, the outstanding obligation amounts as of the end of the period, a rollforward of such amounts, and the balance sheet presentation of the related amounts. Additionally, the obligation amount outstanding at the end of the period must be disclosed in interim periods. The amendments are effective for fiscal years beginning after December 15, 2022, except for the requirement to disclose the rollforward information, which is effective for fiscal years beginning after December 15, 2023. 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. 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 the senior secured term loan credit agreement, as amended (the “Term Loan Facility”), provide for an interest rate based on LIBOR. In February 2023, we amended the terms of our ABL, including transitioning the interest rate from LIBOR to other base rates, and we expect to similarly modify the interest rate basis in the Term Loan Facility in 2023. We do not expect the modifications of these facilities to have a material impact on our consolidated financial statements.
3. Discontinued Operations
As discussed above, the results of RXO, intermodal and GXO are presented as discontinued operations.
The following table summarizes the results of operations from discontinued operations:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | | 2022 | | 2021 | | 2020 |
| Revenue | | $ | 4,403 | | | $ | 10,200 | | | $ | 10,374 | |
Cost of transportation and services (exclusive of depreciation and amortization) | | 3,334 | | | 5,281 | | | 4,065 | |
Direct operating expense (exclusive of depreciation and amortization) | | 211 | | | 3,222 | | | 4,581 | |
| Sales, general and administrative expense | | 492 | | | 901 | | | 979 | |
| Depreciation and amortization expense | | 67 | | | 276 | | | 388 | |
| Gain on sale of business | | (430) | | | — | | | — | |
| Transaction and other operating costs | | 125 | | | 134 | | | 67 | |
| Operating income | | 604 | | | 386 | | | 294 | |
| Other income | | (2) | | | (27) | | | (35) | |
| Interest expense | | — | | | 12 | | | 18 | |
| Income from discontinued operations before income tax provision | | 606 | | | 401 | | | 311 | |
| Income tax provision | | 124 | | | 156 | | | 84 | |
| Net income from discontinued operations, net of taxes | | 482 | | | 245 | | | 227 | |
Net income from discontinued operations attributable to noncontrolling interests | | — | | | (5) | | | (10) | |
Net income from discontinued operations attributable to discontinued entities | | $ | 482 | | | $ | 240 | | | $ | 217 | |
During the years ended December 31, 2022 and 2021, we incurred approximately $152 million and $125 million, respectively, of costs related to the spin-offs, of which $120 million and $101 million, respectively, are reflected within income from discontinued operations in our Consolidated Statements of Income.
The following table summarizes the assets and liabilities from discontinued operations:
| | | | | | | | |
| | December 31, |
| (In millions) | | 2021 |
| Cash and cash equivalents | | $ | 34 | |
| Accounts receivable, net | | 1,230 | |
| Other current assets | | 68 | |
| Total current assets of discontinued operations | | 1,332 | |
| Property and equipment, net | | 133 | |
| Operating lease assets | | 210 | |
| Goodwill | | 885 | |
| Identifiable intangible assets, net | | 110 | |
| Other long-term assets | | 25 | |
| Total long-term assets of discontinued operations | | 1,363 | |
| Accounts payable | | 600 | |
| Accrued expenses | | 307 | |
| | |
| Short-term operating lease liabilities | | 63 | |
| Other current liabilities | | 14 | |
| Total current liabilities of discontinued operations | | 984 | |
| | |
| Deferred tax liability | | 69 | |
| | |
| Long-term operating lease liabilities | | 156 | |
| Other long-term liabilities | | 56 | |
| Total long-term liabilities of discontinued operations | | $ | 281 | |
In 2022, RXO completed debt offerings and used the net proceeds to fund a cash payment from RXO to XPO of $446 million, which we used to repay a portion of our outstanding borrowings and fund any related fees and expenses. Additionally, in 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. Prior to the spin-off of GXO, the pension plan for some employees in the United Kingdom was sold to a GXO entity and approximately $82 million of AOCI, net of tax, was transferred to GXO.
In connection with both spin-offs, we entered into separation and distribution agreements as well as various other agreements 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 agreed to provide certain services for a period of time specified in the applicable agreement following the spin-offs. 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 $17 million and $16 million, respectively, as of December 31, 2022 and $23 million and $21 million, respectively, as of December 31, 2021.
4. Segment Reporting and Geographic Information
We are organized into two reportable segments: North American LTL, the largest component of our business, and European Transportation. In the fourth quarter of 2022 and in connection with the RXO spin-off, we revised our reportable segments to reflect our new internal organization. Prior to the RXO spin-off, we had two reportable segments: North American LTL and Brokerage and Other Services.
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. Prior to the RXO spin-off, the trailer manufacturing operations were included in our Brokerage and Other Services segment.
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 reporting 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 (loss) from continuing operations before debt extinguishment loss, interest expense, income tax, depreciation and amortization expense, goodwill impairment charges, transaction and integration costs, restructuring costs and other adjustments.
Selected financial data for our segments is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (in millions) | | 2022 | | 2021 | | 2020 |
| Revenue | | | | | | |
| North American LTL | | $ | 4,645 | | | $ | 4,125 | | | $ | 3,546 | |
| European Transportation | | 3,073 | | | 3,077 | | | 2,622 | |
| | | | | | |
| Total | | $ | 7,718 | | | $ | 7,202 | | | $ | 6,168 | |
| | | | | | |
| Adjusted EBITDA | | | | | | |
| North American LTL | | $ | 1,012 | | | $ | 906 | | | $ | 764 | |
| European Transportation | | 169 | | | 165 | | | 87 | |
| Corporate | | (184) | | | (259) | | | (242) | |
| Total Adjusted EBITDA | | 997 | | | 812 | | | 609 | |
| Less: | | | | | | |
| Debt extinguishment loss | | 39 | | | 54 | | | — | |
| Interest expense | | 135 | | | 211 | | | 308 | |
| Income tax provision (benefit) | | 74 | | | 11 | | | (54) | |
| Depreciation and amortization expense | | 392 | | | 385 | | | 378 | |
Goodwill impairment (1) | | 64 | | | — | | | — | |
Transaction and integration costs (2) | | 58 | | | 36 | | | 67 | |
Restructuring costs (3) | | 50 | | | 19 | | | 22 | |
| Other | | 1 | | | — | | | (2) | |
| Income (loss) from continuing operations | | $ | 184 | | | $ | 96 | | | $ | (110) | |
| | | | | | |
| Depreciation and amortization expense | | | | | | |
| North American LTL | | $ | 239 | | | $ | 227 | | | $ | 225 | |
| European Transportation | | 128 | | | 140 | | | 128 | |
| Corporate | | 25 | | | 18 | | | 25 | |
| Total | | $ | 392 | | | $ | 385 | | | $ | 378 | |
(1) See Note 9— Goodwill for further information on the impairment charge.
(2) Transaction and integration costs for 2022 are primarily comprised of stock-based compensation and third-party professional fees related to strategic initiatives. Transaction and integration costs for 2021 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 2020 included professional fees related to our previously announced exploration of strategic alternatives that was terminated in March 2020. Transaction and integration costs for 2022, 2021 and 2020 include $3 million, $1 million and $5 million, respectively, related to our North American LTL segment; $6 million, $14 million and $8 million, respectively, related to our European Transportation segment and $49 million, $21 million and $54 million, respectively, related to Corporate.
(3) See Note 6— Restructuring Charges for further information on our restructuring actions.
As of December 31, 2022 and 2021, we held long-lived tangible assets outside of the U.S. of $397 million and $421 million, respectively.
5. Revenue Recognition
Disaggregation of Revenues
Our revenue disaggregated by geographic area based on sales office location was as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
| (In millions) | | North
American
LTL | | European Transportation | | | | Total |
| Revenue | | | | | | | | |
| United States | | $ | 4,549 | | | $ | — | | | | | $ | 4,549 | |
| North America (excluding United States) | | 96 | | | — | | | | | 96 | |
| France | | — | | | 1,328 | | | | | 1,328 | |
| United Kingdom | | — | | | 878 | | | | | 878 | |
| Europe (excluding France and United Kingdom) | | — | | | 867 | | | | | 867 | |
| | | | | | | | |
| Total | | $ | 4,645 | | | $ | 3,073 | | | | | $ | 7,718 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| (In millions) | | North
American
LTL | | European Transportation | | | | Total |
| Revenue | | | | | | | | |
| United States | | $ | 4,036 | | | $ | — | | | | | $ | 4,036 | |
| North America (excluding United States) | | 89 | | | — | | | | | 89 | |
| France | | — | | | 1,354 | | | | | 1,354 | |
| United Kingdom | | — | | | 879 | | | | | 879 | |
| Europe (excluding France and United Kingdom) | | — | | | 844 | | | | | 844 | |
| | | | | | | | |
| Total | | $ | 4,125 | | | $ | 3,077 | | | | | $ | 7,202 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| (In millions) | | North
American
LTL | | European Transportation | | | | Total |
| Revenue | | | | | | | | |
| United States | | $ | 3,468 | | | $ | — | | | | | $ | 3,468 | |
| North America (excluding United States) | | 78 | | | — | | | | | 78 | |
| France | | — | | | 1,206 | | | | | 1,206 | |
| United Kingdom | | — | | | 677 | | | | | 677 | |
| Europe (excluding France and United Kingdom) | | — | | | 739 | | | | | 739 | |
| | | | | | | | |
| Total | | $ | 3,546 | | | $ | 2,622 | | | | | $ | 6,168 | |
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-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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2022 | | |
| (In millions) | | Reserve Balance
as of
December 31, 2021 | | Charges Incurred | | Payments | | Foreign Exchange and Other | | Reserve Balance
as of
December 31, 2022 |
| Severance | | | | | | | | | | |
| North American LTL | | $ | — | | | $ | 2 | | | $ | (3) | | | $ | 3 | | | $ | 2 | |
| European Transportation | | 6 | | | 6 | | | (10) | | | (1) | | | 1 | |
Corporate (1) | | 7 | | | 39 | | | (9) | | | (18) | | | 19 | |
| Total severance | | 13 | | | 47 | | | (22) | | | (16) | | | 22 | |
| Contract termination | | | | | | | | | | |
| North American LTL | | — | | | 3 | | | (3) | | | — | | | — | |
| | | | | | | | | | |
| Total contract termination | | — | | | 3 | | | (3) | | | — | | | — | |
| Total | | $ | 13 | | | $ | 50 | | | $ | (25) | | | $ | (16) | | | $ | 22 | |
(1) For the year ended December 31, 2022, charges incurred and foreign exchange and other included the recognition of share-based compensation costs and the corresponding settlement of equity awards upon vesting in conjunction with the spin-off of RXO.
We expect the majority of the cash outlays related to the charges incurred in 2022 will be complete within twelve months.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | | | | | | | | | | |
| | | | | | | | | | |
| European Transportation | | $ | 6 | | | $ | 10 | | | $ | (11) | | | $ | 1 | | | $ | 6 | |
| Corporate | | 1 | | | 9 | | | (2) | | | (1) | | | 7 | |
| Total severance | | 7 | | | 19 | | | (13) | | | — | | | 13 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total | | $ | 7 | | | $ | 19 | | | $ | (13) | | | $ | — | | | $ | 13 | |
7. Property and Equipment
| | | | | | | | | | | | | | |
| | December 31, |
| (In millions) | | 2022 | | 2021 |
| Property and equipment | | | | |
| Land | | $ | 258 | | | $ | 276 | |
| Buildings and leasehold improvements | | 406 | | | 357 | |
| Vehicles, tractors and trailers | | 2,054 | | | 1,806 | |
| Machinery and equipment | | 227 | | | 203 | |
| Computer software and equipment | | 566 | | | 559 | |
| | 3,511 | | | 3,201 | |
| Less: accumulated depreciation and amortization | | (1,679) | | | (1,526) | |
| Total property and equipment, net | | $ | 1,832 | | | $ | 1,675 | |
| Net book value of capitalized internally-developed software included in property and equipment, net | | $ | 129 | | | $ | 139 | |
Depreciation of property and equipment and amortization of computer software was $336 million, $327 million and $321 million for the years ended December 31, 2022, 2021 and 2020, respectively.
8. Leases
Most of our leases are real estate leases. In addition, we lease trucks, trailers 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) | | 2022 | | 2021 | | 2020 |
| Operating lease cost | | $ | 170 | | | $ | 161 | | | $ | 151 | |
| Short-term lease cost | | 51 | | | 50 | | | 36 | |
| Variable lease cost | | 22 | | | 19 | | | 17 | |
Total operating lease cost | | $ | 243 | | | $ | 230 | | | $ | 204 | |
| Finance lease cost: | | | | | | |
Amortization of leased assets | | $ | 49 | | | $ | 51 | | | $ | 41 | |
Interest on lease liabilities | | 5 | | | 5 | | | 5 | |
Total finance lease cost | | $ | 54 | | | $ | 56 | | | $ | 46 | |
| Total lease cost | | $ | 297 | | | $ | 286 | | | $ | 250 | |
Gain recognized on sale-leaseback transactions (1) | | $ | 40 | | | $ | 69 | | | $ | 84 | |
(1) For the years ended December 31, 2022, 2021 and 2020, we completed multiple sale-leaseback transactions primarily for land and buildings. We received aggregate cash proceeds of $49 million, $96 million and $143 million in 2022, 2021 and 2020, 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) | | 2022 | | 2021 |
| Operating leases: | | | | |
| Operating lease assets | | $ | 719 | | | $ | 697 | |
| | | | |
| Short-term operating lease liabilities | | $ | 107 | | | $ | 107 | |
| Operating lease liabilities | | 606 | | | 596 | |
Total operating lease liabilities | | $ | 713 | | | $ | 703 | |
| Finance leases: | | | | |
| Property and equipment, gross | | $ | 414 | | | $ | 403 | |
| Accumulated depreciation | | (185) | | | (156) | |
Property and equipment, net | | $ | 229 | | | $ | 247 | |
| | | | |
| Short-term borrowings and current maturities of long-term debt | | $ | 56 | | | $ | 57 | |
| Long-term debt | | 158 | | | 180 | |
Total finance lease liabilities | | $ | 214 | | | $ | 237 | |
| Weighted-average remaining lease term: | | | | |
Operating leases | | 8 years | | 9 years |
Finance leases | | 6 years | | 6 years |
| Weighted-average discount rate: | | | | |
Operating leases | | 5.01 | % | | 4.79 | % |
Finance leases | | 2.12 | % | | 1.98 | % |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | | 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows for operating leases | | $ | 176 | | | $ | 156 | | | $ | 154 | |
Operating cash flows for finance leases | | 5 | | | 5 | | | 5 | |
Financing cash flows for finance leases | | 60 | | | 75 | | | 59 | |
| Leased assets obtained in exchange for new lease obligations: | | | | | | |
Operating leases | | 191 | | | 203 | | | 203 | |
Finance leases | | 46 | | | 71 | | | 46 | |
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, 2022 were as follows:
| | | | | | | | | | | | | | |
| (In millions) | | Finance Leases | | Operating Leases |
| 2023 | | $ | 59 | | | $ | 137 | |
| 2024 | | 56 | | | 134 | |
| 2025 | | 39 | | | 106 | |
| 2026 | | 31 | | | 91 | |
| 2027 | | 19 | | | 78 | |
| Thereafter | | 20 | | | 345 | |
Total lease payments | | 224 | | | 891 | |
| Less: interest | | (10) | | | (178) | |
Present value of lease liabilities | | $ | 214 | | | $ | 713 | |
As of December 31, 2022, we had additional operating leases that have not yet commenced with future undiscounted lease payments of $52 million. These operating leases will commence in 2023 with initial lease terms of 9 years to 15 years.
9. Goodwill
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | North American LTL | | European Transportation | | Total |
| Goodwill as of December 31, 2020 | | $ | 726 | | | $ | 925 | | | $ | 1,651 | |
| Impact of foreign exchange translation and other | | — | | | (57) | | | (57) | |
| Goodwill as of December 31, 2021 | | 726 | | | 868 | | | 1,594 | |
| Goodwill impairment | | — | | | (64) | | | (64) | |
| Impact of foreign exchange translation and other | | — | | | (58) | | | (58) | |
| Goodwill as of December 31, 2022 | | $ | 726 | | | $ | 746 | | | $ | 1,472 | |
As described in Note 2— Basis of Presentation and Significant Accounting Policies, we recorded an aggregate impairment charge of $64 million for the year ended December 31, 2022 related to reporting units within our European Transportation reportable segment. There were no cumulative goodwill impairments as of December 31, 2021.
10. Intangible Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| (In millions) | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Definite-lived intangibles | | | | | | | | |
| Customer relationships | | $ | 799 | | | $ | 392 | | | $ | 817 | | | $ | 347 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
We did not recognize any impairment of our identified intangible assets in 2022, 2021 and 2020.
Estimated future amortization expense for amortizable intangible assets for the next five years is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Estimated amortization expense | | $ | 54 | | | $ | 54 | | | $ | 54 | | | $ | 53 | | | $ | 53 | | | $ | 139 | |
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 $54 million, $56 million and $55 million for the years ended December 31, 2022, 2021 and 2020, 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, 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) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) | |
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 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) | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Derivatives designated as cash flow hedges | | | | | | | | | | | | | | | | | | |
| Cross-currency swap agreements | | $ | — | | | $ | 4 | | | $ | (12) | | | $ | — | | | $ | 7 | | | $ | (15) | | | $ | — | | | $ | — | | | $ | — | |
| Interest rate swaps | | — | | | — | | | (5) | | | — | | | — | | | — | | | — | | | — | | | — | |
Derivatives designated as net investment hedges | | | | | | | | | | | | | | | | | | |
| Cross-currency swap agreements | | 27 | | | 84 | | | (81) | | | — | | | — | | | — | | | 7 | | | 6 | | | 9 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Total | | $ | 27 | | | $ | 88 | | | $ | (98) | | | $ | — | | | $ | 7 | | | $ | (15) | | | $ | 7 | | | $ | 6 | | | $ | 9 | |
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 GXO 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 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. 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.
During 2022, we received approximately $29 million related to the settlement of certain cross currency swaps that matured during the period. The fair value adjustments related to these swaps remain in AOCI and partially offset foreign currency translation adjustment losses on our net investments in foreign subsidiaries. The proceeds were included in Cash flows from investing activities of continuing operations on our Consolidated Statements of Cash Flows.
In 2021, prior to the spin-off of GXO, 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 Other income on our Consolidated
Statements of Income 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. These swaps were re-designated as net investment hedges in the third quarter of 2021.
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 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 Consolidated Statements of Cash Flows.
12. Debt
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| (In millions) | | Principal Balance | | Carrying Value | | Principal Balance | | Carrying Value |
| | | | | | | | |
| Term loan facilities | | $ | 2,003 | | | $ | 1,981 | | | $ | 2,003 | | | $ | 1,977 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
6.25% Senior notes due 2025 | | 112 | | | 111 | | | 1,150 | | | 1,141 | |
6.70% Senior debentures due 2034 | | 300 | | | 217 | | | 300 | | | 214 | |
| | | | | | | | |
| Finance leases, asset financing and other | | 223 | | | 223 | | | 239 | | | 239 | |
| Total debt | | 2,638 | | | 2,532 | | | 3,692 | | | 3,571 | |
| Short-term borrowings and current maturities of long-term debt | | 59 | | | 59 | | | 58 | | | 58 | |
| Long-term debt | | $ | 2,579 | | | $ | 2,473 | | | $ | 3,634 | | | $ | 3,513 | |
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, 2022 | | $ | 2,601 | | | $ | 392 | | | $ | 2,209 | |
| December 31, 2021 | | 3,811 | | | 1,571 | | | 2,240 | |
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 and asset financing) for the next five years and thereafter was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Principal payments on debt | | $ | — | | | $ | — | | | $ | 2,116 | | | $ | — | | | $ | 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. In connection with the spin-off of RXO, effective November 4, 2022, the commitments under the ABL Facility were reduced from $1.0 billion to $600 million with no further action by any of the parties thereto. There were no other significant changes made to the terms of the facility at that time. 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, 2022, our borrowing base under the ABL facility was $472 million and our availability was $470 million after considering outstanding letters of credit of $2 million. As of December 31, 2022, we were in compliance with the ABL Facility’s financial covenants.
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, 2022, we were compliant with this financial covenant.
In February 2023, we amended our existing 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 equal to $600 million.
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, 2022, we have issued $172 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 have subsequently amended the Term Loan Credit Agreement to increase the principal balance to $2.0 billion, reduce the interest rates and to extend the maturity date to February 2025. The interest rate spread is 0.75% in the case of base rate loans and 1.75% in the case of LIBOR loans. We recorded a debt extinguishment loss of $3 million in 2021 due to an amendment. The interest rate on our term loan facility was 5.93% as of December 31, 2022.
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, 2022, our Consolidated Secured Net Leverage Ratio was less than 2.50:1.00, and no excess cash payment was required.
Senior Notes
In November 2022, we repurchased $408 million of the then $520 million outstanding 6.25% senior notes due 2025 (“Senior Notes due 2025”) in a cash tender offer. Holders of the Senior Notes due 2025 received total consideration of $1,022.50 per $1,000.00 principal amount of notes tendered and accepted for purchase, plus accrued and unpaid interest. We paid for the tender using cash received from RXO in connection with its spin-off. We recorded a debt extinguishment loss of $13 million due to this repurchase in the fourth quarter of 2022.
In April 2022, we redeemed $630 million of the then $1.15 billion outstanding principal amount of the 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 due to this redemption in 2022.
In 2021, we redeemed our outstanding 6.125% senior notes due 2023 (“Senior Notes due 2023”), 6.75% senior notes due 2024 (“Senior Notes due 2024”) and 6.50% senior notes due 2022 (“Senior Notes due 2022”). The redemption price for the Senior Notes due 2023 and Senior Notes due 2022 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 redemptions using available cash, net proceeds from a debt issuance and equity offering and cash received from GXO of approximately $794 million. We recorded debt extinguishment losses of $51 million related to these redemptions.
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
In conjunction with an acquisition, we assumed 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%.
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. We also maintain defined benefit pension plans for some of our foreign subsidiaries that are excluded from the disclosures below due to their immateriality.
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) | | 2022 | | 2021 |
| Projected benefit obligation at beginning of year | | $ | 1,925 | | | $ | 2,052 | |
| Interest cost | | 45 | | | 39 | |
| | | | |
| Actuarial gain | | (453) | | | (82) | |
| Benefits paid | | (93) | | | (84) | |
| | | | |
| Projected benefit obligation at end of year | | $ | 1,424 | | | $ | 1,925 | |
The actuarial gain in both 2022 and 2021 was a result of assumption changes, including an increase in the discount rate, updated mortality projection scales and other assumptions for plan participants.
The reconciliation of the changes in the fair value of plan assets as of December 31 was as follows: | | | | | | | | | | | | | | |
| (In millions) | | 2022 | | 2021 |
| Fair value of plan assets at beginning of year | | $ | 2,009 | | | $ | 2,062 | |
| Actual return on plan assets | | (446) | | | 25 | |
| Employer contributions to non-qualified plans | | 5 | | | 6 | |
| Benefits paid | | (93) | | | (84) | |
| | | | |
| Fair value of plan assets at end of year | | $ | 1,475 | | | $ | 2,009 | |
The funded status of the plans as of December 31 was as follows:
| | | | | | | | | | | | | | |
| (In millions) | | 2022 | | 2021 |
| Funded status at end of year | | $ | 51 | | | $ | 84 | |
| Amount recognized in balance sheet: | | | | |
| Long-term assets | | $ | 106 | | | $ | 156 | |
| Current liabilities | | (5) | | | (5) | |
| Long-term liabilities | | (50) | | | (67) | |
| Net pension asset recognized | | $ | 51 | | | $ | 84 | |
| Plans with projected and accumulated benefit obligation in excess of plan assets: | | | | |
Projected and accumulated benefit obligation (1) | | $ | 56 | | | $ | 72 | |
| | | | |
(1) Relates to our non-qualified plans which are unfunded.
The funded status of our qualified plans and non-qualified plans was $106 million and $(55) million, respectively, as of December 31, 2022.
The actuarial loss included in AOCI that has not yet been recognized in net periodic benefit expense was $142 million and $43 million, respectively, as of December 31, 2022 and 2021.
The net periodic benefit cost and amounts recognized in Other comprehensive loss for the years ended December 31 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2022 | | 2021 | | 2020 |
| Net periodic benefit (income) expense: | | | | | | |
| Interest cost | | $ | 45 | | | $ | 39 | | | $ | 54 | |
| Expected return on plan assets | | (106) | | | (101) | | | (102) | |
| Amortization of actuarial loss | | 1 | | | 1 | | | — | |
| | | | | | |
| | | | | | |
| Net periodic benefit income | | $ | (60) | | | $ | (61) | | | $ | (48) | |
| Amounts recognized in Other comprehensive loss: | | | | | | |
| Actuarial (gain) loss | | $ | 99 | | | $ | (7) | | | $ | 45 | |
| | | | | | |
| Reclassification of recognized AOCI gain due to settlements | | — | | | — | | | — | |
| | | | | | |
| (Gain) loss recognized in Other comprehensive loss | | $ | 99 | | | $ | (7) | | | $ | 45 | |
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 |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Discount rate - net periodic benefit costs | | 2.43 | % | | 1.96 | % | | 2.96% | | 1.70% - 2.23% | | 1.11% - 1.71% | | 2.40% - 2.78% |
| Discount rate - benefit obligations | | 5.42 | % | | 2.84 | % | | 2.48% | | 5.29% - 5.42% | | 2.19% - 2.72% | | 1.62% - 2.30% |
| Expected long-term rate of return on plan assets | | 5.40 | % | | 5.00 | % | | 5.60% | | | | | | |
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) | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028-2031 |
| Expected benefit payments | | $ | 97 | | | $ | 100 | | | $ | 102 | | | $ | 104 | | | $ | 106 | | | $ | 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 90% in fixed income securities and 10% of investments in equity securities. The fixed income allocation consists primarily of domestic fixed income securities and targets to hedge approximately 100% 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, 2022, 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 5.40% for the overall expected long-term rate of return on plan assets in 2022 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.
The fair values of investments held in the qualified pension plans by major asset category as of December 31, 2022 and 2021, 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, 2022 | | | | | | | | | | |
| Cash and cash equivalents: | | | | | | | | | | |
| Short-term investment fund | | $ | — | | | $ | — | | | $ | 33 | | | $ | 33 | | | 2.2 | % |
| Equity: | | | | | | | | | | |
| U.S. large companies | | — | | | — | | | 58 | | | 58 | | | 3.9 | % |
| U.S. small companies | | — | | | — | | | 14 | | | 14 | | | 0.9 | % |
| International | | 22 | | | — | | | 46 | | | 68 | | | 4.6 | % |
| | | | | | | | | | |
| Fixed income securities | | 296 | | | 966 | | | 48 | | | 1,310 | | | 88.9 | % |
| Derivatives | | — | | | (8) | | | — | | | (8) | | | (0.5) | % |
| Total plan assets | | $ | 318 | | | $ | 958 | | | $ | 199 | | | $ | 1,475 | | | 100.0 | % |
| 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 | % |
(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, 2022 and 2021, 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, 2022 or 2021. 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 2023 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 $52 million, $53 million and $52 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Postretirement Medical Plan
We provide health benefits through a postretirement medical plan for eligible employees hired before 1993 (the “Postretirement Plan”).
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) | | 2022 | | 2021 |
| Projected benefit obligation at beginning of year | | $ | 41 | | | $ | 44 | |
| Interest cost on projected benefit obligation | | 1 | | | 1 | |
| Actuarial gain | | (9) | | | — | |
| Participant contributions | | 1 | | | 1 | |
| Benefits paid | | (4) | | | (5) | |
| Projected and accumulated benefit obligation at end of year | | $ | 30 | | | $ | 41 | |
| Funded status of the plan | | $ | (30) | | | $ | (41) | |
| Amounts recognized in the balance sheet consist of: | | | | |
| Current liabilities | | $ | (3) | | | $ | (3) | |
| Long-term liabilities | | (27) | | | (38) | |
| Net amount recognized | | $ | (30) | | | $ | (41) | |
| Discount rate assumption as of December 31 | | 5.40 | % | | 2.67 | % |
The amount included in AOCI that has not yet been recognized in net periodic benefit income (expense) was $9 million and the net periodic benefit expense was less than $1 million for the Postretirement Plan for the year ended December 31, 2022. The amount 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 for the year ended December 31, 2021. The discount rates assumptions used to calculate the interest cost were 2.14% - 2.79%, 1.56% - 2.34% and 2.66% - 3.22% for the years ended December 31, 2022, 2021 and 2020, 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) | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028-2031 |
| Expected benefit payments | | $ | 3 | | | $ | 3 | | | $ | 3 | | | $ | 3 | | | $ | 3 | | | $ | 13 | |
14. Stockholders’ Equity
Share Issuance
In 2021, we completed a registered underwritten offering of 5.0 million shares of our common stock at a public offering price of $138.00 per share, plus an additional 750,000 shares of our common stock through an option granted to underwriters. Of the 5.0 million shares, we offered 2.5 million shares directly and 2.5 million shares were offered by Jacobs Private Equity, LLC (“JPE”), an entity controlled by the Company’s executive chairman. 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.
Series A Convertible Perpetual Preferred Stock (“Preferred Stock”) and Warrants
Commencing the fourth quarter of 2020, holders of our Preferred Stock and warrants exchanged their holdings for our common stock or a combination of our common stock and cash. These exchanges were intended to simplify our equity capital structure, including in contemplation of the GXO spin-off. 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. The warrants exchanged included holdings of JPE. Subsequent to the exchange in 2021, there are no shares of Preferred Stock or warrants outstanding.
Share Repurchases
In February 2019, our Board of Directors authorized repurchases of up to $1.5 billion of our common stock. Our share repurchase authorization permits us to purchase shares in both the open market and in private transactions, with the timing and number of shares dependent on a variety of factors, including price, general business conditions, market conditions, alternative investment opportunities and funding considerations. We are not obligated to repurchase any specific number of shares and may suspend or discontinue the program at any time.
There were no share repurchases in 2022 or 2021. Our remaining share repurchase authorization as of December 31, 2022 is $503 million. In 2020, two million shares were repurchased and retired at an aggregate value of $114 million, or $66.58 average per share. The share purchases in 2020 were funded by our available cash and proceeds from our 2019 debt offerings.
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 RXO spin-off and in accordance with plan rules, the shares remaining for future issuance under the 2016 incentive plan were equitably adjusted. With this adjustment, and an amendment to the 2016 incentive plan approved by stockholders in May 2022 which increased the 2016 incentive plan’s number of authorized shares by 2.3 million shares, up to 11.4 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. In May 2022, the stockholders also approved an amendment to the 2016 incentive plan to extend its term by three years so the 2016 incentive plan will terminate on May 18, 2032, unless terminated earlier by our Board of Directors. As of December 31, 2022, 5.0 million shares of our common stock were available for the grant of Awards under the 2016 incentive plan.
In connection with the RXO spin-off, outstanding stock-based compensation awards that were previously granted under XPO’s incentive plan were adjusted with the intention of preserving the intrinsic value of the awards immediately before the spin-off. XPO employees and directors holding awards in XPO stock received a number of similar awards either in XPO stock or a combination of XPO and RXO stock based on conversion ratios outlined in the EMA. Generally, awards that were previously granted to RXO’s employees and directors under XPO’s incentive plan were converted to awards issued under RXO’s incentive plan. For employees remaining with XPO whose awards will settle in only XPO stock, the conversion ratio was based on the closing price per share of XPO common stock on October 31, 2022 compared to the closing price per share of XPO common stock on November 1, 2022. For employees remaining with XPO receiving a combination of XPO and RXO stock, the conversion ratio reflected a distribution ratio of one share of RXO common stock for every share of XPO common stock. The modification of these awards in connection with the spin-off did not result in incremental compensation cost. The impact of these adjustments on the number of XPO awards outstanding is included in the effect of spin-off activity in the tables below. Additionally, we will not incur any future compensation cost related to equity awards held by RXO employees and directors, but we will incur future compensation cost related to RXO equity awards held by XPO employees.
Our employee stock purchase plan offers eligible employees, excluding our executive officers and directors, the right to purchase our common stock using 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, 2022, two million shares of our common stock were available for purchase under the plan. During the first quarter of 2023, the Compensation Committee of the Board of Directors approved the suspension of our employee stock purchase plan, effective after the March 2023 offering period is completed.
Our stock-based compensation expense is recorded in SG&A on our Consolidated Statements of Income:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| (In millions) | | 2022 | | 2021 | | 2020 |
| Restricted stock and restricted stock units | | $ | 42 | | | $ | 23 | | | $ | 28 | |
| Performance-based restricted stock units | | 35 | | | 8 | | | 2 | |
| Cash-settled performance-based restricted stock units | | — | | | — | | | 7 | |
| | | | | | |
| Total stock-based compensation expense | | $ | 77 | | | $ | 31 | | | $ | 37 | |
| Tax benefit on stock-based compensation | | $ | (1) | | | $ | (4) | | | $ | (14) | |
Stock Options
Our stock options typically vested 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 had a 10-year contractual term and the exercise price equaled our stock price on the grant date.
A summary of stock option award activity for the year ended December 31, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | |
| | Stock Options |
| | Number of Stock Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Term |
| Outstanding as of December 31, 2021 | | 6,608 | | | $ | 9.80 | | | 0.93 |
| | | | | | |
| Exercised | | (10,519) | | | 6.16 | | | |
| | | | | | |
Effect of spin-off (1) | | 3,911 | | | NM | | |
| Outstanding as of December 31, 2022 | | — | | | $ | — | | | 0.00 |
| Options exercisable as of December 31, 2022 | | — | | | $ | — | | | 0.00 |
NM - Not meaningful
(1) Represents the net impact of adjustments made to preserve the value of awards immediately before and after the spin-off.
The total intrinsic value of options exercised during 2022, 2021 and 2020 was less than $1 million, $4 million and $56 million, respectively. The total cash received from options exercised during 2022, 2021 and 2020 was less than $1 million, $2 million and less than $1 million, respectively.
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.
A summary of RSU and PRSU award activity for the year ended December 31, 2022 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, 2021 (1) | | 1,461,610 | | | $ | 54.81 | | | 2,006,235 | | | $ | 46.19 | |
| Granted | | 2,237,776 | | | 39.07 | | | 1,545,948 | | | 57.67 | |
| Vested | | (856,245) | | | 40.23 | | | (209,463) | | | 43.36 | |
| Forfeited and canceled | | (154,904) | | | 47.59 | | | (1,725,372) | | | 17.73 | |
Effect of spin-off (2) | | (280,652) | | | NM | | (578,225) | | | NM |
| Outstanding as of December 31, 2022 | | 2,407,585 | | | $ | 35.15 | | | 1,039,123 | | | $ | 39.89 | |
NM - Not meaningful
(1) Outstanding awards at December 31, 2021 includes awards that were subsequently converted to awards issued under RXO’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 RXO’s incentive plan.
The total fair value of RSUs that vested during 2022, 2021 and 2020 was $46 million, $69 million and $64 million, respectively. All of the outstanding RSUs as of December 31, 2022 vest subject to service conditions.
The total fair value of PRSUs that vested during 2022, 2021 and 2020 was $8 million, $2 million and $8 million, respectively. Of the outstanding PRSUs as of December 31, 2022, 846,546 vest subject to service and performance conditions, 178,465 vest subject to service and a combination of market and performance conditions and 14,112 vest subject to service and market conditions.
As of December 31, 2022, unrecognized compensation cost related to non-vested RSUs and PRSUs of $101 million is anticipated to be recognized over a weighted-average period of approximately 2.16 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) | | 2022 | | 2021 | | 2020 |
| U.S. | | $ | 303 | | | $ | 108 | | | $ | (128) | |
| Foreign | | (45) | | | (1) | | | (36) | |
Income (loss) from continuing operations before income tax provision (benefit) | | $ | 258 | | | $ | 107 | | | $ | (164) | |
The income tax provision (benefit) is comprised of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | | 2022 | | 2021 | | 2020 |
| Current: | | | | | | |
| U.S. Federal | | $ | (17) | | | $ | — | | | $ | 1 | |
| State | | 2 | | | (1) | | | (4) | |
| Foreign | | 9 | | | 5 | | | 12 | |
| Total current income tax provision (benefit) | | $ | (6) | | | $ | 4 | | | $ | 9 | |
| Deferred: | | | | | | |
| U.S. Federal | | $ | 80 | | | $ | (10) | | | $ | (38) | |
| State | | 5 | | | (7) | | | (2) | |
| Foreign | | (5) | | | 24 | | | (23) | |
| Total deferred income tax provision (benefit) | | 80 | | | 7 | | | (63) | |
| Total income tax provision (benefit) | | $ | 74 | | | $ | 11 | | | $ | (54) | |
The effective tax rate reconciliations were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| U.S. federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State taxes, net of U.S. federal benefit | | 1.8 | | | (4.4) | | | 1.8 | |
| | | | | | |
Foreign operations (1) | | (2.8) | | | 27.1 | | | 2.4 | |
| Contribution- and margin-based taxes | | 1.6 | | | 4.4 | | | (4.8) | |
| | | | | | |
| Changes in uncertain tax positions | | (0.1) | | | 0.5 | | | (0.6) | |
| Non-deductible compensation | | 3.8 | | | 10.9 | | | (0.1) | |
| Provision to return adjustments | | (2.0) | | | 8.0 | | | 2.4 | |
| Effect of law changes | | 0.1 | | | (5.4) | | | (0.4) | |
| Stock-based compensation | | (0.3) | | | (4.3) | | | 8.9 | |
| Long-term capital loss | | — | | | (42.4) | | | — | |
| Non-deductible goodwill impairment charge | | 5.2 | | | — | | | — | |
Other (2) | | 0.3 | | | (5.0) | | | 2.5 | |
| Effective tax rate | | 28.6 | % | | 10.4 | % | | 33.1 | % |
(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, 2021, the impact of “Other” on the effective tax rate was disproportionately high compared to 2020 and 2022 due to the low income (loss) from continuing operations before income tax provision (benefit) in 2021. For 2021, “Other” is primarily composed of (3.6)% of U.S. Federal tax credits and (1.8)% of U.S. Federal tax permanent adjustments.
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) | | 2022 | | 2021 |
| Deferred tax asset | | | | |
| Net operating loss and other tax attribute carryforwards | | $ | 40 | | | $ | 69 | |
| Accrued expenses | | 55 | | | 63 | |
| Pension and other retirement obligations | | 6 | | | (6) | |
| Other | | 16 | | | 41 | |
| Total deferred tax asset | | 117 | | | 167 | |
| Valuation allowance | | (35) | | | (35) | |
| Total deferred tax asset, net | | 82 | | | 132 | |
| Deferred tax liability | | | | |
| Intangible assets | | (112) | | | (129) | |
| Property and equipment | | (261) | | | (223) | |
| | | | |
| Other | | (24) | | | (27) | |
| Total deferred tax liability | | (397) | | | (379) | |
| Net deferred tax liability | | $ | (315) | | | $ | (247) | |
The deferred tax asset and deferred tax liability above are reflected on our Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| (In millions) | | 2022 | | 2021 |
| Other long-term assets | | $ | 4 | | | $ | — | |
| Deferred tax liability | | (319) | | | (247) | |
| Net deferred tax liability | | $ | (315) | | | $ | (247) | |
Operating Loss and Tax Credit Carryforwards
Our operating loss and tax credit carryforwards were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| (In millions) | | Expiration Date | | 2022 | | 2021 |
| | | | | | |
| Federal long-term capital loss carryforwards | | | | — | | | 126 | |
Tax effect (before federal benefit) of state net operating losses | | Various times starting in 2023 (1) | | 26 | | | 20 | |
| Federal tax credit carryforwards | | Various times starting in 2032 | | 1 | | | 1 | |
| State tax credit carryforward | | Various times starting in 2023 (1) | | 2 | | | 2 | |
Foreign net operating losses available to offset future taxable income | | Various times starting in 2023 (1) | | 69 | | | 89 | |
(1) Some credits and losses have unlimited carryforward periods.
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, 2022 | | $ | 35 | | | $ | 1 | | | $ | (1) | | | $ | 35 | |
| Year Ended December 31, 2021 | | 36 | | | 43 | | | (44) | | | 35 | |
| Year Ended December 31, 2020 | | 28 | | | 9 | | | (1) | | | 36 | |
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | | 2022 | | 2021 | | 2020 |
| Beginning balance | | $ | 7 | | | $ | 9 | | | $ | 5 | |
| | | | | | |
| Additions for tax positions of prior years | | 1 | | | — | | | 5 | |
| Reductions for tax positions of prior years | | (1) | | | (1) | | | (1) | |
| Settlements with tax authorities | | — | | | (1) | | | — | |
| Reductions due to the statute of limitations | | (1) | | | — | | | — | |
| | | | | | |
| Ending balance | | $ | 6 | | | $ | 7 | | | $ | 9 | |
| Interest and penalties | | 3 | | | 2 | | | 1 | |
| Gross unrecognized tax benefits | | $ | 9 | | | $ | 9 | | | $ | 10 | |
Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of the end of the year | | $ | 6 | | | $ | 7 | | | $ | 9 | |
We could reflect a reduction to unrecognized tax benefits of up to $4 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, 2022, 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 2016, and non-U.S. returns after 2011 are open under relevant statutes of limitations and are subject to audit.
17. Earnings (Loss) 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 consisted of our 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 Preferred Stock.
The computations of basic and diluted earnings per share were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| (In millions, except per share data) | | 2022 | | 2021 | | 2020 |
| Basic earnings (loss) per common share | | | | | | |
| Income (loss) from continuing operations | | $ | 184 | | | $ | 96 | | | $ | (110) | |
| Net loss from continuing operations attributable to noncontrolling interests | | — | | | — | | | 3 | |
| Net income (loss) from continuing operations attributable to XPO | | 184 | | | 96 | | | (107) | |
| Preferred Stock conversion charge | | — | | | — | | | (22) | |
| Preferred Stock dividends | | — | | | — | | | (3) | |
| Non-cash allocation of undistributed earnings | | — | | | — | | | (6) | |
| Net income (loss) from continuing operations attributable to common shares | | $ | 184 | | | $ | 96 | | | $ | (138) | |
| | | | | | | |
| Income from discontinued operations, net of taxes | | $ | 482 | | | $ | 245 | | | $ | 227 | |
| Net income from discontinued operations attributable to noncontrolling interests | | — | | | (5) | | | (10) | |
| Net income from discontinued operations attributable to common shares | | $ | 482 | | | $ | 240 | | | $ | 217 | |
| | | | | | | |
| Net income (loss) from continuing operations attributable to common shares, basic | | $ | 184 | | | $ | 96 | | | $ | (138) | |
| Net income from discontinued operations attributable to common shares, basic | | 482 | | | 240 | | | 217 | |
| Net income attributable to common shares, basic | | $ | 666 | | | $ | 336 | | | $ | 79 | |
| | | | | | | |
| Basic weighted-average common shares | | 115 | | | 112 | | | 92 | |
| | | | | | | |
| Basic earnings (loss) from continuing operations per share | | $ | 1.60 | | | $ | 0.85 | | | $ | (1.50) | |
| Basic earnings from discontinued operations per share | | 4.19 | | | 2.14 | | | 2.37 | |
| Basic earnings per share | | $ | 5.79 | | | $ | 2.99 | | | $ | 0.87 | |
| | | | | | | |
| Diluted earnings (loss) per common share | | | | | | |
| Net income (loss) from continuing operations attributable to common shares, diluted | | $ | 184 | | | $ | 96 | | | $ | (138) | |
| Net income from discontinued operations attributable to common shares, diluted | | 482 | | | 240 | | | 217 | |
| Net income attributable to common shares, diluted | | $ | 666 | | | $ | 336 | | | $ | 79 | |
| | | | | | | |
| Basic weighted-average common shares | | 115 | | | 112 | | | 92 | |
| | | | | | | |
| Dilutive effect of stock-based awards and warrants | | 1 | | | 2 | | | — | |
| Diluted weighted-average common shares | | 116 | | | 114 | | | 92 | |
| | | | | | | |
| Diluted earnings (loss) from continuing operations per share | | $ | 1.59 | | | $ | 0.83 | | | $ | (1.50) | |
| Diluted earnings from discontinued operations per share | | 4.17 | | | 2.10 | | | 2.37 | |
| Diluted earnings per share | | $ | 5.76 | | | $ | 2.93 | | | $ | 0.87 | |
| | | | | | | |
| Potential common shares excluded | | — | | | — | | | 20 | |
Certain shares were not included in the computation of diluted earnings (loss) per share because the effect was anti-dilutive.
18. 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.
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 Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder, and Section 20(a) of the Exchange Act. On March 19, 2021, the Court dismissed the complaint with prejudice, and on June 30, 2022, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal. The case is now concluded.
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. On July 26, 2022, the Court issued an order dismissing the consolidated derivative complaints with prejudice. The case is now concluded.
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 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.
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. On October 20, 2022, the Company met with the County Attorneys and the Los Angeles City Attorney. We are assessing the allegations and the underlying facts. No discussion of potential monetary sanctions or settlement amount has occurred to date, nor can we reasonably estimate potential costs at this time.
19. Quarterly Financial Data (Unaudited)
Our unaudited results of operations for each of the quarters in the years ended December 31, 2022 and 2021 are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| (In millions, except per share data) | | First Quarter (2) | | Second Quarter | | Third Quarter | | Fourth Quarter (3) |
| 2022 | | | | | | | | |
| Revenue | | $ | 1,894 | | | $ | 2,047 | | | $ | 1,946 | | | $ | 1,831 | |
| Operating income | | 63 | | | 171 | | | 139 | | | 4 | |
| Income (loss) from continuing operations | | 32 | | | 96 | | | 92 | | | (36) | |
| Income (loss) from discontinued operations, net of taxes | | 456 | | | 45 | | | 39 | | | (58) | |
| Net income (loss) | | 488 | | | 141 | | | 131 | | | (94) | |
| Net income (loss) attributable to common shareholders: | | | | | | | | |
| Continuing operations | | 32 | | | 96 | | | 92 | | | (36) | |
| Discontinued operations | | 456 | | | 45 | | | 39 | | | (58) | |
| Net income attributable to common shareholders | | 488 | | | 141 | | | 131 | | | (94) | |
Basic earnings (loss) per share: (1) | | | | | | | | |
| Continuing operations | | 0.28 | | | 0.83 | | | 0.80 | | | (0.31) | |
| Discontinued operations | | 3.97 | | | 0.40 | | | 0.34 | | | (0.50) | |
Basic earnings per share attributable to common shareholders | | 4.25 | | | 1.23 | | | 1.14 | | | (0.81) | |
Diluted earnings (loss) per share: (1) | | | | | | | | |
| Continuing operations | | 0.28 | | | 0.83 | | | 0.79 | | | (0.31) | |
| Discontinued operations | | 3.94 | | | 0.39 | | | 0.34 | | | (0.50) | |
Diluted earnings per share attributable to common shareholders | | 4.22 | | | 1.22 | | | 1.13 | | | (0.81) | |
(1) The sum of the quarterly earnings (loss) per share may not equal year-to-date amounts due to differences in the weighted-average number of shares outstanding during the respective periods.
(2) Income from discontinued operations, net of tax during the first quarter of 2022 included the gain on the sale of our intermodal business of approximately $372 million.
(3) The fourth quarter of 2022 included a goodwill impairment charge of $64 million, transaction and integration costs of $42 million and restructuring costs of $35 million.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| (In millions, except per share data) | | First
Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| 2021 | | | | | | | | |
| Revenue | | $ | 1,727 | | | $ | 1,873 | | | $ | 1,830 | | | $ | 1,772 | |
| Operating income | | 61 | | | 120 | | | 65 | | | 66 | |
| Income (loss) from continuing operations | | 5 | | | 57 | | | (13) | | | 47 | |
| Income (loss) from discontinued operations, net of taxes | | 113 | | | 101 | | | (44) | | | 75 | |
| Net income (loss) | | 118 | | | 158 | | | (57) | | | 122 | |
| Net income (loss) attributable to common shareholders: | | | | | | | | |
| Continuing operations | | 5 | | | 57 | | | (13) | | | 47 | |
| Discontinued operations | | 110 | | | 99 | | | (44) | | | 75 | |
| Net income (loss) attributable to common shareholders | | 115 | | | 156 | | | (57) | | | 122 | |
Basic earnings (loss) per share: (1) | | | | | | | | |
| Continuing operations | | 0.04 | | | 0.51 | | | (0.11) | | | 0.40 | |
| Discontinued operations | | 1.04 | | | 0.88 | | | (0.39) | | | 0.66 | |
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 | | 0.04 | | | 0.51 | | | (0.11) | | | 0.40 | |
| Discontinued operations | | 0.98 | | | 0.87 | | | (0.39) | | | 0.65 | |
Diluted earnings (loss) per share attributable to common shareholders | | 1.02 | | | 1.38 | | | (0.50) | | | 1.05 | |
(1) The sum of the quarterly earnings (loss) per share may not equal year-to-date amounts due to differences in the weighted-average number of shares outstanding during the respective periods.