GXO · Read the filing

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This Form 10-K contains certain forward-looking statements that are intended to be covered by the safe harbors created by The Private Securities Litigation Reform Act of 1995. Please see “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10, as amended, declared effective on July 21, 2021.

Business Overview

GXO Logistics, Inc., together with its subsidiaries (“GXO,” the “Company” or “we”), is the largest pure-play contract logistics provider in the world and a foremost innovator in an industry propelled by strong secular tailwinds. Our customers rely on us to move their goods with high efficiency through their supply chains — from the moment inbound goods arrive at our logistics sites, through fulfillment and distribution and the management of returned products. Our customer base includes many blue-chip leaders in sectors that demonstrate high growth and/or durable demand, with significant growth potential through customer outsourcing of logistics services.

We strive to provide all of our customers with consistently high levels of service and cutting-edge automation managed by our proprietary technology. We also collaborate with our largest customers on planning and forecasting and provide assistance with network optimization, working with these customers to design or redesign their supply chains to meet specific goals, such as sustainability metrics. Our multidisciplinary, consultative approach has led to many of our key customer relationships extending for years and expanding in scope.

The most dramatic growth in secular demand in recent years has been in e-commerce and related sectors, including omnichannel retail and other direct-to-consumer channels. As part of our growth strategy, we intend to develop additional business in consumer and other verticals where we already have deep expertise, prominent customer relationships and a strong track record of successful performance. We also intend to expand into new verticals by leveraging our capacity and technological strengths and by marketing the benefits of our proprietary platform for warehouse operations. We use technology to manage advanced automation, labor productivity, safety and the complex flow of goods within sophisticated logistics environments.

Our business model is asset-light and historically resilient in cycles, with high returns, strong free cash flow and visibility into revenue and earnings. The vast majority of our contracts with customers are multi-year agreements, and our facility lease arrangements generally align with contract length. Most of our customer contracts contain both fixed and variable components. The fixed component is typically designed to cover facility, technology and equipment costs and may cover management costs, while the variable component is determined based on expected volumes and associated labor costs.

The Separation

On August 2, 2021, we completed the separation from XPO Logistics, Inc. (“XPO”) (the “Separation”). The Separation was accomplished by the distribution of 100 percent of the outstanding common stock of GXO to XPO stockholders as of the close of business on July 23, 2021, the record date for the distribution. XPO stockholders received one share of GXO common stock for every share of XPO common stock held at the close of business on the record date. GXO is now a standalone publicly traded company. On August 2, 2021, regular-way trading of

GXO’s common stock commenced on the New York Stock Exchange under the ticker symbol “GXO.” GXO was incorporated as a Delaware corporation in February 2021.

The Separation was completed under a Separation and Distribution Agreement and various other agreements that govern aspects of our relationship with XPO, including, but not limited to a Transition Services Agreement, a Tax Matters Agreement, an Employee Matters Agreement (“EMA”) and an Intellectual Property License Agreement. See Note — 3 The Separation to our consolidated financial statements for additional information.

Impacts of COVID-19

As a global provider of supply chain solutions, our business can be impacted to varying degrees by factors beyond our control. The rapid escalation of COVID-19 into a pandemic in 2020 and 2021 affected and may continue to affect economic activity broadly and customer sectors served by our industry.

Our operating results and cash flows fluctuated as a result of changes due to the COVID-19 pandemic and the seasonality of our business during the year ended December 31, 2020, and to a lesser extent for the year ended December 31, 2021, as discussed below. Future operating results and cash flows may fluctuate due to these and other factors beyond our control, which may include the cost and availability of labor, the timely procurement of equipment, the impact of product component shortages for our customers, foreign exchange rate fluctuations, changes in government regulations and economic changes in our operating regions. While we generally can pass cost increases through to our customers, inflation may affect our operating results and cash flows. The timing of these pass-through costs can vary.

The totality of the actions we have taken, and continue to take during the pandemic combined with the variable components of our cost structure, have mitigated the impact on our profitability relative to the impact on our revenue and volumes while our strong liquidity and disciplined capital management enable us to continue to invest in key growth initiatives.

However, due to the evolving nature of the COVID-19 pandemic and the efficacy and distribution of vaccines, the extent of the impact of the pandemic on our industry and our business, in particular, remains difficult to predict. Furthermore, the extent and pace of recovery remain uncertain and may differ significantly between the countries in which we operate. Our results of operations may continue to be impacted by the pandemic throughout 2022.

Basis of Presentation

Prior to the Separation, GXO historical financial statements were prepared on a standalone combined basis and were derived from the consolidated financial statements and accounting records of XPO. On August 2, 2021, the Company became a standalone publicly traded company, and its financial statements are now presented on a consolidated basis. The financial statements for all periods presented, including the historical results of the Company before August 2, 2021, are now referred to as “Consolidated Financial Statements” and have been prepared under the rules and regulations for reporting on Form 10-K and following accounting principles generally accepted in the U.S. (“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.

Prior to the Separation, GXO historical assets and liabilities presented were wholly owned by XPO and were reflected on a historical cost basis. In connection with the Separation, GXO assets and liabilities were transferred to the Company on a carry-over basis.

Prior to the Separation, GXO historical results of operations included allocations of XPO costs and expenses, including XPO’s corporate function which incurred a variety of expenses including, but not limited to, information technology, human resources, accounting, sales and sales operations, procurement, executive services, legal, corporate finance and communications. An allocation of these expenses is included to burden all business units comprising XPO’s historical results of operations, including GXO. The charges reflected have been either specifically identified or allocated using drivers including proportional adjusted earnings before interest, taxes,

depreciation and amortization, which include adjustments for transaction and integration costs, as well as restructuring costs and other adjustments, or headcount. These allocated costs are recorded within Selling, general and administrative expense (“SG&A”), Depreciation and amortization expense and Transaction and integration costs in the Consolidated Statements of Operations. All charges and allocations for facilities, functions and services performed by XPO organizations have been deemed settled in cash by GXO to XPO in the year in which the charges and allocations were recorded in the Consolidated Statements of Operations.

For the periods ended before the Separation, GXO was a member of the XPO consolidated group, and its U.S. taxable income was included in XPO’s consolidated U.S. federal income tax return as well as in the tax returns filed by XPO with certain state and local taxing jurisdictions. For the periods ended after the Separation, GXO will file a consolidated U.S. federal income tax return as well as state and local income tax returns. GXO’s foreign income tax returns are filed on a full-year basis.

GXO has one reportable segment.

Results of Operations

Year Ended December 31,

(In millions) 2021 2020 $ Change % Change

Selling, general and administrative expense 714 611 103 16.9 %

Depreciation and amortization expense 335 323 12 3.7 %

Other income, net 23 2 21 n/m

Income (loss) before income taxes 153 (6) 159 n/m

Income tax (expense) benefit 8 (16) 24 n/m

n/m - not meaningful

Revenue for 2021 increased by 28.2%, or $1.7 billion, to $7.9 billion compared with $6.2 billion for 2020. The increase in 2021 compared to the prior year primarily reflects a 29% growth in our e-commerce, omnichannel retail and consumer technology vertical and the acquisition of the majority of Kuehne + Nagel’s contract logistics operations in the U.K. in January 2021 (the “K + N acquisition”). The Kuehne + Nagel business contributed approximately 15.8 percentage points to revenue growth in our European operations and 9.8 percentage points to our total revenue growth for 2021 compared to 2020. Our European and North American operations reported growth of 38.9% and 11.1%, respectively. Foreign currency movement increased revenue by approximately 3.5 percentage points in 2021.

Direct operating expenses comprise both fixed and variable expenses and consist of operating costs related to our logistics facilities, including personnel costs, facility and equipment expenses, such as rent, utilities, equipment maintenance and repair, transportation costs, costs of materials and supplies and information technology expenses. Direct operating expense for 2021 increased by 28.4%, or $1.5 billion, to $6.6 billion compared with $5.2 billion for 2020. As a percentage of Revenue, Direct operating expense were 83.6% and 83.4% in 2021 and 2020, respectively. Direct operating expense increased primarily due to higher personnel and temporary labor expense of $913 million, as well as higher third-party transportation costs and facilities expense of $369 million.

SG&A, including the allocated costs of XPO prior to the Separation, primarily consists of salary and benefit costs for executive and certain administration functions, professional fees, facility costs other than those related to our logistics facilities, bad debt expense and legal costs. SG&A for 2021 increased by 16.9%, or $103 million, to $714 million, compared with $611 million in 2020. SG&A increased due to higher personnel expenses primarily associated with the K + N acquisition.

Depreciation and amortization expense for 2021 increased by 3.7%, or $12 million, to $335 million compared with $323 million for 2020. The increase was primarily due to the impact of capital expenditures associated with new contracts. Depreciation and amortization expense included allocated corporate charges from XPO of $15 million and $21 million in 2021 and 2020, respectively. Depreciation and amortization expense included amortization of intangible assets of $61 million in 2021 and 2020.

Transaction and integration costs were $99 million, compared with $47 million for 2020. Transaction and integration costs in 2021 primarily relate to the Separation and the K + N acquisition. Transaction and integration costs in 2020 relate to costs allocated by XPO, including its exploration of strategic alternatives in 2020.

We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure. These costs are primarily related to severance. Restructuring costs for 2021 were $4 million compared with $29 million for 2020. Restructuring charges in 2021 included an adjustment to a previously recognized liability.

Other income, net consists primarily of pension income. In connection with the Separation, GXO became the plan sponsor for a defined benefit pension plan in the U.K. Other income, net increased to $23 million in 2021 from $2 million in 2020. See Note — 14 Employee Benefit Plans to our consolidated financial statements for additional information.

Interest expense primarily consists of interest related to indebtedness for money borrowed, capital lease obligations, and net investment hedges. Interest expense for 2021 decreased by 12.5%, or $3 million, to $21 million, compared to $24 million for the same period in 2020. In connection with the Separation, we settled our related-party debt with XPO and issued $800 million in notes and entered into cross-currency swap agreements.

Income tax for 2021 was an $8 million benefit compared to a $16 million expense for 2020. Our effective tax rate was negative 5.6% in 2021 and not meaningful in 2020. In 2021, the effective tax rate was primarily impacted by the benefit from intangible assets transferred under the Separation. In 2020, the income tax expense was driven by the net impact of changes to valuation allowances in our foreign operations, and contribution- and margin-based income taxes that we incurred even though our pretax income was negative.

Liquidity and Capital Resources

Overview

Prior to the Separation on August 2, 2021, the Company participated in XPO’s centralized treasury model, which included cash pooling and other intercompany financing arrangements. As part of XPO, we generated positive cash flows from operations. We have generated and expect to continue generating positive cash flows from operations after the Separation.

Our ability to fund our operations and anticipated capital needs are reliant upon the generation of cash from operations, supplemented as necessary by periodic utilization of our revolving credit facility. Our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures, repayment of borrowings and strategic business development transactions. The timing and magnitude of our start-ups can vary and may positively or negatively impact our cash flows.

We continually evaluate our liquidity requirements and capital structure in light of our operating needs, growth initiatives and capital resources. We believe that our existing liquidity and sources of capital are sufficient to support our operations over the next 12 months.

Capital Expenditures

Our 2022 capital expenditures include capital associated with fulfillment costs and investments in technology and automation to improve the speed and accuracy of order fulfillment and the resiliency of their supply chains. The level and the timing of the Company’s capital expenditures within these categories can vary as a result of a variety of factors outside of our control, such as the timing of new contracts, availability of labor and materials, and foreign currency fluctuations. We believe that we have significant discretion over the amount and timing of our capital expenditures as we are not subject to any agreement that would require significant capital expenditures on a designated schedule or upon the occurrence of designated events.

Debt and Financing Arrangements

Revolving Credit Facility

In June 2021, we entered into a five-year unsecured multi-currency revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility provides commitments of up to $800 million, of which $60 million will be available for the issuance of letters of credit. There were no amounts outstanding under the Revolving Credit Facility as of December 31, 2021.

Unsecured Notes

In July 2021, the Company completed an offering of $800 million aggregate principal amount of notes, consisting of $400 million of notes due 2026 (the “2026 Notes”) and $400 million of notes due 2031 (the “2031 Notes,” and together with the 2026 Notes, the “Notes”). The 2026 Notes bear interest at a rate of 1.65% per annum payable semiannually in arrears on January 15 and July 15 of each year, beginning January 15, 2022, and mature on July 15, 2026. The 2031 Notes bear interest at a rate of 2.65% per annum payable semiannually in arrears on January 15 and July 15 of each year, beginning January 15, 2022, and mature on July 15, 2031.

At December 31, 2021, we complied with all applicable covenants under our debt and financing arrangements.

Trade Receivables Securitization and Factoring Programs

We sell certain of our trade accounts receivable on a non-recourse basis to third-party financial institutions under factoring agreements. We also sell certain European trade accounts receivable under a securitization program that contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio. We use trade receivables securitization and factoring programs to help manage our cash flows.

In July 2021, in connection with the Separation, XPO’s existing trade receivable securitization program was amended; the previous €400 million ($455 million) program is now comprised of two separate €200 million ($227 million) programs, one of which remains with the Company and expires in July 2024. As of July 2021, the Company’s special purpose entity no longer purchases trade receivables from XPO. As of December 31, 2020, current assets include trade receivables purchased from XPO in connection with our trade receivables securitization program of $105 million.

In January 2022, the Company halted sales of European trade accounts receivable related to our securitization program with the intention to terminate the program in 2022. The company may replace the securitization program with additional factoring activity or cash on hand.

Information related to the trade receivables sold was as follows:

Year Ended December 31,

Securitization programs

Deferred purchase price — — 80

Factoring programs

See Note — 11 Debt and Financing Arrangements to the consolidated financial statements for additional information.

Financial Condition

The following table summarizes our asset and liability balances as of December 31, 2021 and 2020:

December 31,

(In millions) 2021 2020 $ Change % Change

The increase in our assets and liabilities from December 31, 2020 to December 31, 2021 primarily reflects the impact of the K + N acquisition. Total long-term assets also reflect an increase in contract assets and operating lease assets associated with our new contracts. Total long-term liabilities also reflect the settlement of related-party notes, issuance of the Notes in 2021, and operating lease liabilities associated with our new contracts.

Cash Flow Activity for the Years Ended December 31, 2021 and 2020

Our cash flows from operating, investing and financing activities are summarized as follows:

Year Ended December 31,

(In millions) 2021 2020 $ Change % Change

Net cash provided by operating activities $ 455 $ 333 $ 122 37 %

Net cash used in investing activities (207) (280) 73 (26) %

Net cash provided by (used in) financing activities (241) 67 (308) n/m

Effect of exchange rates on cash and cash equivalents (2) 8 (10) n/m

Net increase in cash and cash equivalents $ 5 $ 128 $ (123) (96) %

n/m - not meaningful

Operating Activities

Cash flows provided by operating activities for 2021 increased by $122 million compared with 2020. The increase primarily reflects higher net income of $183 million in 2021, partially offset by cash provided by working capital of $31 million in 2020.

Investing Activities

Investing activities used $207 million of cash in 2021 compared with $280 million used in 2020. During 2021, we used $250 million of cash for capital expenditures, received $32 million in connection with the K + N acquisition and received $11 million from sales of property and equipment. During 2020, we used $222 million of cash for capital expenditures, used $40 million, net, in connection with the purchase and sale of affiliate trade receivables and used $30 million in connection with a pre-acquisition deposit for the K + N acquisition. During 2020, we received $12 million from sales of property and equipment.

Financing Activities

Financing activities used $241 million of cash in 2021 and generated $67 million of cash in 2020. The primary uses of cash from financing activities in 2021 were $774 million of net transfers to XPO in connection with the Separation, $128 million to purchase the remaining noncontrolling interest in GXO Logistics Europe SAS that we did not own, $72 million cash used to repay debt and finance leases and $26 million to repay borrowings related to our securitization program. The source of cash from financing activities in 2021 was the issuance of long-term debt of $794 million. By comparison, the primary sources of cash from financing activities in 2020 were $168 million of net transfers from XPO and $24 million from net borrowings related to our securitization program. The primary uses of cash from financing activities in 2020 were $123 million used to repay debt and finance leases and $21 million to purchase noncontrolling interests in GXO Logistics Europe SAS.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

We lease certain facilities and equipment under non-cancellable operating lease arrangements. As of December 31, 2021, the value of our obligations under operating and finance leases was $1.8 billion and $167 million, respectively. See Note — 8 Leases to the consolidated financial statements for additional information.

As of December 31, 2021, we have $800 million of unsecured notes outstanding with interest payable semiannually, in arrears on January 15 and July 15 of each year. See Note — 11 Debt and Financing Arrangements to the consolidated financial statements for additional information.

In addition, we have obligations for agreements to purchase goods or services entered into in the ordinary course of business that are enforceable and legally binding and gross unrecognized tax benefits.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles. We make assumptions, estimates and judgments that affect our reported amounts of assets, liabilities, revenues, expenses, gains and losses. Material changes in these assumptions, estimates and/or judgments have the potential to materially alter our results of operations. We have identified the following accounting policies to be the most critical as they are important to our financial condition and results of operations, and require significant judgment and estimates on the part of management in their application.

Evaluation of Goodwill

Goodwill is tested at the reporting unit, which is an operating segment or one level below. At December 31, 2021, we had two reporting units. As of August 31, 2021, we completed qualitative impairment tests for goodwill to determine if our reporting units had fair values in excess of their carrying values. For each reporting unit, we

weighed the relative impact of factors that are specific to the reporting unit as well as industry and macroeconomic factors. The reporting unit specific factors that were considered included actual and expected financial performance and changes to the reporting units’ carrying amounts since the most recent impairment tests. Based on the qualitative assessments, considering the aggregation of the relevant factors, we concluded that it is not more likely than not that the fair value of each reporting unit is less than its respective carrying amount and therefore performing quantitative impairment tests was unnecessary.

A quantitative goodwill impairment test, when performed, includes estimating the fair value of a reporting unit using an income approach and/or a market-based approach. The income approach of determining fair value is based on the present value of estimated future cash flows, which requires us to make various judgmental assumptions, including assumptions about the timing and amount of future cash flows, growth rates and discount rates. The discount rates reflect management’s judgment and are based on a risk adjusted weighted-average cost of capital utilizing industry market data of businesses similar to the reporting units. Inherent in our preparation of cash flow projections are assumptions and estimates derived from a review of our operating results, business plans, expected growth rates, cost of capital and tax rates. Our forecasts also reflect expectations concerning future economic conditions, interest rates and other market data. 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. We believe this approach, which utilizes multiple valuation techniques, yields the most appropriate evidence of fair value.

Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Changes in assumptions or estimates could materially affect the estimate of the fair value of a reporting unit, and therefore could affect the likelihood and amount of any potential impairment.

Employee Benefit Plans

We sponsor an international defined benefit pension plan. Assumptions used in the accounting for these employee benefit plans include the discount rate and expected return on plan assets. Assumptions are determined based on company data and appropriate market indicators and are evaluated each year at December 31. A change in any of these assumptions would have an effect on net periodic pension costs reported in the consolidated financial statements.

The discount rate is determined based on the yield on a portfolio of high-quality bonds, constructed to provide cash flows necessary to meet our pension plans’ expected future benefit payments, as determined for the accumulated benefit obligation. A 25 basis point decrease in the discount rate would result in an estimated increase in the accumulated benefit obligation of approximately $58 million. The expected return on plan assets assumption is derived using the current and expected asset allocation of the pension plan assets and considering historical as well as expected returns on various classes of plan assets. An increase or decrease of 25 basis points in the expected long-term rate of return would have decreased or increased 2021 pension expense by approximately $4 million. See Note — 14 Employee Benefit Plans to the consolidated financial statements for additional information.

New Accounting Standards

Information related to new accounting standards is included in Note — 2 Basis of Presentation and Significant Accounting Policies to the consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our market risk disclosures involve forward-looking statements. Actual results could differ materially from those projected in such forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates.

Interest Rate Risk

Our long-term debt portfolio primarily consists of fixed-rate instruments complemented by a variable-rate Revolving Credit Facility that can be drawn on from time to time. Currently, we do not hold any derivative contracts that hedge our interest rate risk, however, we may consider entering into such contracts in the future. A 1% increase or decrease in interest rates would decrease or increase the fair value of our notes by approximately 6%. See Note — 11 Debt and Financing Arrangements to our consolidated financial statements for additional information.

Foreign Currency Exchange Risk

A portion of our net assets and income are in currencies other than the U.S. dollar (“USD”), primarily the Euro (“EUR”) and British pound sterling (“GBP”). We are exposed to currency risk from potential changes in functional currency values of our foreign currency denominated assets, liabilities and cash flows. Accordingly, our operating results could be adversely affected by foreign currency exchange rate volatility relative to the USD.

We entered into cross-currency swap agreements to manage our foreign currency exchange risk by effectively converting a portion of the fixed-rate USD-denominated notes, including the interest payments, to fixed-rate, EUR-denominated debt. We use foreign currency option contracts to mitigate the risk of a reduction in the value of earnings from our operations that use the EUR or GBP as their functional currency.

As of December 31, 2021, a uniform 10% strengthening in the value of the USD relative to the EUR, including the derivatives noted above, would have resulted in a decrease in net assets of $53 million. As of December 31, 2021, a uniform 10% strengthening in the value of the USD relative to the GBP, including the derivatives noted above, would have resulted in a decrease in net assets of $21 million. These theoretical calculations assume that an instantaneous, parallel shift in exchange rates occurs, which is not consistent with the history of foreign currency transactions. Fluctuations in exchange rates also affect the volume of sales or the foreign currency sales price as competitors’ services become more or less attractive. The sensitivity analysis of the impact of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

See Note — 13 Fair Value Measurements and Financial Instruments to our consolidated financial statements for additional information.

Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements

Page

Report of Independent Registered Public Accounting Firm 31

Consolidated Balance Sheets as of December 31, 2021 and 2020 35

Notes to Consolidated Financial Statements 38

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

GXO Logistics, Inc.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of GXO Logistics, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and

directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Sufficiency of audit evidence over duplication of XPO’s IT systems and financial data

As discussed in Notes 1 and 2 to the consolidated financial statements, the Company completed its separation from XPO Logistics, Inc. (XPO) on August 2, 2021. Prior to the separation, the Company’s historical assets and liabilities presented were wholly owned by XPO and were reflected on a historical cost basis. On the separation date, the assets and liabilities were transferred to the Company on a carry-over basis. To affect the separation, the Company established its own Information Technology (IT) systems for financial reporting (new IT systems). This included duplication of existing XPO programs and historical financial data as well as executing program development and access controls over the configurations and interfaces of key IT applications.

We identified the evaluation of the sufficiency of audit evidence over duplication of XPO’s Information Technology (IT) systems and historical financial data into the new IT systems to be used by the Company for financial reporting as a critical audit matter. Evaluating the sufficiency of audit evidence obtained required a high degree of auditor judgment. Specifically, the number of duplicated XPO programs and volume of historical financial data transferred, as well as the configurations and interfaces of key IT applications and access rights during and after the separation required complex auditor judgment and the involvement of IT professionals with specialized skills and knowledge.

The following are the primary procedures we performed to address this critical audit matter. We involved IT professionals with specialized skills and knowledge who assisted in determining the nature and extent of procedures to be performed and the testing of the Company’s IT program development and access controls through inquiry about and observation of these controls as well as inspection of supporting evidence to:

•obtain an understanding of the relevant IT systems and processes and testing IT general and application controls related to the duplication of XPO’s programs

•evaluate the configurations and interfaces of certain IT applications and access rights; and

•assess the duplication and transfer of historical financial data existing at the date of separation.

In addition, we reconciled the historical net assets and liabilities recorded by the Company to the net assets and liabilities transferred from XPO at the date of the separation.We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the appropriateness of the nature and extent of the audit effort.

/s/ KPMG LLP

We have served as the Company’s auditor since 2021.

Stamford, Connecticut

February 17, 2022

GXO Logistics, Inc.

Consolidated Statements of Operations

Year Ended December 31,

Selling, general and administrative expense 714 611 514

Depreciation and amortization expense 335 323 302

Transaction and integration costs 99 47 1

Restructuring costs 4 29 15

Other income, net 23 2 1

Interest expense (21) (24) (33)

Income (loss) before income taxes 153 (6) 118

Income tax (expense) benefit 8 (16) (37)

Less: Net income attributable to noncontrolling interests (8) (9) (21)

Net income (loss) attributable to GXO $ 153 $ (31) $ 60

Earnings (loss) per share data

Basic earnings (loss) per share $ 1.33 $ (0.27) $ 0.52

Diluted earnings (loss) per share $ 1.32 $ (0.27) $ 0.52

Weighted-average common shares outstanding

See accompanying notes to the consolidated financial statements.

GXO Logistics, Inc.

Consolidated Statements of Comprehensive Income

Year Ended December 31,

Other comprehensive income (loss), net of tax

Other comprehensive income (loss) (39) 132 (12)

Less: Comprehensive income attributable to noncontrolling interests 7 17 23

Comprehensive income attributable to GXO $ 115 $ 93 $ 46

See accompanying notes to the consolidated financial statements.

GXO Logistics, Inc.

Consolidated Balance Sheets

December 31,

(Dollars in millions, shares in thousands, except per share amounts) 2021 2020

ASSETS

Current assets

Cash and cash equivalents $ 333 $ 328

Accounts receivable, net of allowances of $13 and $18, respectively 1,507 1,224

Long-term assets

LIABILITIES AND EQUITY

Current liabilities

Short-term borrowings and obligations under finance leases 34 58

Current operating lease liabilities 453 332

Other current liabilities 220 149

Long-term liabilities

Long-term debt and obligations under finance leases 927 615

Long-term operating lease liabilities 1,391 1,099

Other long-term liabilities 234 148

Commitments and Contingencies (Note 19)

Stockholders’ equity

Additional paid-in capital 2,354 —

Retained earnings 126 —

XPO investment — 2,765

Accumulated other comprehensive income (loss) (130) 58

Total stockholders’ equity before noncontrolling interests 2,351 2,823

Noncontrolling interests 39 125

Total liabilities and equity $ 7,271 $ 6,548

See accompanying notes to the consolidated financial statements.

GXO Logistics, Inc.

Consolidated Statements of Cash Flows

Year Ended December 31,

Cash flows from operating activities:

Depreciation and amortization expense 335 323 302

Stock-based compensation expense 28 25 23

Deferred tax benefit (62) (27) (2)

Changes in operating assets and liabilities

Accrued expenses and other liabilities 189 165 (113)

Net cash provided by operating activities 455 333 145

Cash flows from investing activities:

Proceeds from sale of property and equipment 11 12 15

Cash collected on deferred purchase price receivables — — 112

Purchase and sale of affiliate trade receivables, net — (40) (52)

Acquisition of business, net of cash acquired 32 (30) —

Net cash used in investing activities (207) (280) (147)

Cash flows from financing activities:

Proceeds from issuance of debt, net 794 — —

Repayment of debt and finance leases (72) (123) (376)

Proceeds (repayment) related to trade securitization program (26) 24 —

Purchase of noncontrolling interests (128) (21) (258)

Net cash provided by (used in) financing activities (241) 67 (102)

Effect of exchange rates on cash and cash equivalents (2) 8 3

Net increase (decrease) in cash and cash equivalents 5 128 (101)

Cash and cash equivalents, beginning of year 328 200 301

Cash and cash equivalents, end of year $ 333 $ 328 $ 200

Supplemental disclosure of cash flow information:

Cash paid for interest $ 22 $ 32 $ 29

Cash paid for income taxes $ 75 $ 27 $ 40

Non-cash settlement of related party debt due to the Separation $ 437 $ — $ —

See accompanying notes to the consolidated financial statements.

GXO Logistics, Inc.

Consolidated Statements of Changes in Equity

(Shares in thousands, dollars in millions) Shares Amount

Other comprehensive income (loss) — — — — — (14) (14) 2 (12)

Purchase of noncontrolling interest — — — — (3) — (3) (255) (258)

Other — — — — (7) — (7) (2) (9)

Net income (loss) — — — — (31) — (31) 9 (22)

Purchase of noncontrolling interests — — — — (1) — (1) (20) (21)

Net transfers from (to) XPO — — — — 164 — 164 (2) 162

Other comprehensive loss — — — — — (38) (38) (1) (39)

Stock-based compensation — — 11 — — — 11 — 11

Vesting of stock compensation awards 33 — — — — — — — —

Purchase of noncontrolling interests — — — — — — — (128) (128)

Other — — — — — — — (5) (5)

See accompanying notes to the consolidated financial statements.

GXO Logistics, Inc.

Notes to Consolidated Financial Statements

1. Organization

Nature of Operations

GXO Logistics, Inc., together with its subsidiaries (“GXO” or the “Company”), is the largest pure-play contract logistics provider in the world and the foremost innovator in the logistics industry. The Company provides high-value-add warehousing and distribution, order fulfillment and other supply chain services differentiated by its industry-leading ability to deliver technology-enabled, customized solutions. In addition, the Company is a major provider of reverse logistics or returns management. The Company serves a broad range of customers across a range of industries, such as e-commerce, omnichannel retail, consumer technology, food and beverage, industrial and manufacturing, and consumer packaged goods. The Company presents its operations in the consolidated financial statements as one reportable segment.

On August 2, 2021, the Company completed the separation from XPO Logistics, Inc. (“XPO”) (the “Separation”). The Separation was accomplished by the distribution of 100 percent of the outstanding common stock of GXO to XPO stockholders as of the close of business on July 23, 2021, the record date for the distribution. XPO stockholders received one share of GXO common stock for every share of XPO common stock held at the close of business on the record date. GXO is now a standalone publicly-traded company. On August 2, 2021, regular-way trading of GXO’s common stock commenced on the New York Stock Exchange under the ticker symbol “GXO.” GXO was incorporated as a Delaware corporation in February 2021.

The Separation was completed under a Separation and Distribution Agreement and various other agreements that govern aspects of the Company’s relationship with XPO. See Note — 3 The Separation for additional information of the agreements executed in connection with the Separation.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

Prior to the Separation, the Company’s financial statements were prepared on a standalone combined basis and were derived from the consolidated financial statements and accounting records of XPO (the “historical financial statements”). On August 2, 2021, the Company became a standalone publicly-traded company, and its financial statements post-Separation are prepared on a consolidated basis. The combined consolidated financial statements for all periods presented prior to the Separation are now also referred to as “Consolidated Financial Statements,” and have been prepared under the U.S. generally accepted accounting principles (“GAAP”).

Prior to the Separation, the Company’s historical assets and liabilities presented were wholly owned by XPO and were reflected on a historical cost basis. In connection with the Separation, the Company’s assets and liabilities were transferred to the Company on a carry-over basis.

Prior to the Separation, the historical results of operations included allocations of XPO costs and expenses including XPO’s corporate function which incurred a variety of expenses including, but not limited to, information technology, human resources, accounting, sales and sales operations, procurement, executive services, legal, corporate finance and communications. An allocation of these expenses is included to burden all business units comprising XPO’s historical results of operations, including GXO. The charges reflected have been either specifically identified or allocated using drivers including proportionally adjusted earnings before interest, taxes, depreciation and amortization, which includes adjustments for transaction and integration costs, as well as restructuring costs and other adjustments, or headcount. The Company believes the assumptions regarding allocations of XPO corporate expenses are reasonable. Nevertheless, the consolidated financial statements may not reflect the results of operations, financial position and cash flows had the Company been a standalone entity during

the periods presented. The majority of these allocated costs are recorded within Selling, general and administrative expense; Depreciation and amortization expense; and Transaction and integration costs in the Consolidated Statements of Operations. All charges and allocations for facilities, functions and services performed by XPO organizations have been deemed settled in cash by GXO to XPO in the year in which the cost was recorded in the Consolidated Statements of Operations.

For the periods ended before the Separation, the Company was a member of the XPO consolidated group, and its U.S. taxable income was included in XPO’s consolidated U.S. federal income tax return as well as in the tax returns filed by XPO with certain state and local taxing jurisdictions. For the periods ended after the Separation, the Company will file a consolidated U.S. federal income tax return as well as state and local income tax returns. The Company’s foreign income tax returns are filed on a full-year basis.

The Company’s consolidated financial statements include the accounts of GXO Logistics, Inc. and its majority-owned subsidiaries and variable interest entities where the Company is the primary beneficiary. The Company has eliminated intercompany accounts and transactions.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires the use of estimates, judgments and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. The Company bases its estimates and judgments on historical information and on various other assumptions that it believes are reasonable under the circumstances. GAAP requires the Company to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, income taxes, loss contingencies, valuation of long-lived assets including goodwill and intangible assets and their associated estimated useful lives, collectability of accounts receivable and the fair value of financial instruments. Actual results may vary from those estimates.

The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business slowdowns or shutdowns, depress demand for the logistics business, and adversely impact the Company’s estimates, particularly those that require consideration of forecasted financial information. The business and economic uncertainty resulting from the COVID-19 pandemic has made calculating estimates and assumptions more difficult.

Significant Accounting Policies

Reclassifications

Certain amounts reported for prior years have been reclassified to conform to the current year’s presentation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less on the date of purchase to be cash equivalents. Bank overdraft positions occur when total outstanding issued checks exceed available cash balances at a single financial institution. The Company had no bank overdrafts as of December 31, 2021 and $27 million as of December 31, 2020, recorded within Other current liabilities in the Consolidated Balance Sheets.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable represents the Company’s unconditional right to receive consideration from its customers. The Company records accounts receivable at the contractual amount and records an allowance for doubtful accounts for the amount it estimates it may not collect. In determining the allowance for doubtful accounts, the Company considers historical collection experience, the age of the accounts receivable balances, the credit quality and risk of its customers, any specific customer collection issues, current economic conditions and other factors that may impact its customers’ ability to pay. The Company writes off accounts receivable balances once the receivables are no longer deemed collectible.

The rollforward of the allowance for doubtful accounts was as follows:

Year Ended December 31,

Beginning balance $ 18 $ 20 $ 11

Provisions charged to expense 4 8 13

Write-offs, less recoveries, and other adjustments (9) (10) (4)

Trade Receivables Securitization and Factoring Programs

Property and Equipment

Property and equipment, which includes assets recorded under finance leases, are stated at cost less accumulated depreciation or, in the case of acquired property and equipment, at fair value at the date of acquisition. Maintenance and repair expenditures are charged to expenses as incurred.

For computer software developed, all costs incurred during the planning and evaluation stages are expensed as incurred. Software development costs meet the criteria for capitalization once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the remaining lease term, whichever is shorter. Land and assets held within construction in progress are not depreciated.

The estimated useful lives of property and equipment are described below:

Estimated Useful Life

Buildings 40 years

Leasehold improvements Shorter of useful life or term of lease

Technology and automated systems 3 to 15 years

Warehouse equipment and other 3 to 15 years

Computer, software and equipment 1 to 5 years

Lease Obligations

The Company has operating leases primarily for real estate, warehouse equipment, trucks, trailers, containers and material handling equipment and finance leases for equipment. The Company determines if an arrangement is a lease at inception. For leases with terms greater than 12 months, the Company recognizes lease assets and liabilities at the lease commencement date based on the estimated present value of the lease payments over the lease term. Amounts received from a landlord are classified as a lease incentive and included as a reduction to the lease asset. Lease incentives received are included within operating activities on the Consolidated Statement of Cash Flows. For most of the Company’s leases, the implicit rate cannot be readily determined and, as a result, the Company uses the incremental borrowing rates at commencement date to determine the present value of future lease payments.

For leases that include fixed rental payments for both the use of the asset (“lease costs”) as well as for other occupancy or service costs relating to the asset (“non-lease costs”), the Company generally includes both the lease costs and non-lease costs as a single lease component in the measurement of the lease asset and liability. The Company excludes variable lease payments (such as payments based on an index) from its initial measurement of the lease liability. The Company includes options to extend or terminate a lease in the lease term when the Company is reasonably certain to exercise such options.

Segment Reporting

The Company is comprised of two operating segments based on the operating results regularly reviewed by the chief operating decision-maker (“CODM”) to make decisions about resource allocation and the performance of the business. These two operating segments have been aggregated into a single reporting segment.

Goodwill and Intangible Assets

The Company records goodwill as the excess of the consideration transferred over the fair value of net assets acquired in business combinations. Goodwill is tested for impairment at the reporting unit level, which is an operating segment, or one level below. The Company has two reporting units: i) Americas, Asia and Pacific and ii) Europe. The Company measures goodwill impairment, if any, as the amount by which the carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill.

The review of goodwill impairment consists of either using a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a one-step quantitative impairment test. In performing the qualitative assessment, the Company considers many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in the Company’s stock price and market capitalization of the Company and macroeconomic conditions. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed. The quantitative test requires that the carrying value of each reporting unit be compared with its estimated fair value. If the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill). The Company uses the income approach and/or a market-based approach to determine the reporting units’ fair values, which are based on discounted cash flows. The determination of discounted cash flows of the reporting units and assets and liabilities within the reporting units requires significant estimates and

assumptions. These estimates and assumptions primarily include but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. The Company evaluates the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units.

The Company’s intangible assets consist of customer relationships which are amortized on a straight-line basis or over their respective useful life using patterns that reflect the economic benefits of the assets are expected to be realized. The Company reviews its customer relationships for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

Impairment of Long-lived assets

The Company reviews 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. If an impairment indicator is present, the company evaluates recoverability by comparing the carrying amount of the asset group to the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group. If the assets are impaired, an impairment loss is measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. The Company estimates fair value using the expected future cash flows discounted at a rate consistent with the risks associated with the recovery of the asset.

Insurance liabilities

The Company participates in a combination of self-insurance programs and purchased insurance to provide for the costs of medical, casualty, general liability, vehicular, cargo, cyber attack and workers’ compensation claims. The Company estimates insurance liabilities using several factors, primarily based on independent third-party actuary determined amounts, historical claims experience, estimates of incurred but not reported claims, demographic factors and severity factors.

Liabilities for the risks the Company retains, including estimates of claims incurred but not reported, are not discounted and are estimated, in part, by considering historical cost experience, demographic and severity factors, and judgments about current and expected levels of cost per claim and retention levels. Changes in these assumptions and factors can impact actual costs paid to settle the claims and those amounts may be different than estimates.

Revenue Recognition

The Company generates revenue by providing supply chain services for its customers, including warehousing and distribution, order fulfillment, reverse logistics, packaging and labeling, factory and aftermarket support, and inventory management contracts ranging from a few months to a few years. Generally, the Company’s contracts provide the customer an integrated service that includes two or more services, including but not limited to facility and equipment costs, construction, repair and maintenance services and labor.

For these contracts, the Company does not consider the services to be distinct within the context of the contract when the separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly, the Company generally identifies one performance obligation in its contracts, which is a series of distinct services that remain substantially the same over time and possess the same pattern of transfer. Revenue is recognized using the series guidance over the period in which services are provided under the terms of the Company’s contractual relationships with its clients.

The transaction price is based on the amount specified in the contract with the customer and contains fixed and variable consideration. In general, the fixed consideration in a contract represents reimbursement for facility and equipment costs incurred to satisfy the performance obligation and is recognized on a straight-line basis over the term of the contract. The variable consideration is comprised of cost reimbursement determined based on the costs

incurred, per-unit pricing is determined based on units provided, and time and materials pricing is determined based on the hours of services provided. The variable consideration component is recognized over time based on the level of activity.

Generally, pricing can be adjusted 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 Assets

Contract assets consist of two components, customer acquisition costs and costs to fulfill a contract. The Company capitalizes direct and incremental costs incurred to obtain and to fulfill a contract in advance of revenue recognition, such as certain labor, third-party service and related product costs. These costs are recognized as an asset if the Company expects to recover them. Costs incurred to obtain a contract with an amortization period of one year or less are expensed as incurred. Contract fulfillment costs are recognized consistent with the transfer of the underlying performance obligations to the customer based on the specific contracts to which they relate. Contract assets are primarily amortized to Direct operating expense in the Consolidated Statements of Operations over the contract term.

Contract Liabilities

Contract liabilities, which are recorded within Other current liabilities and Other long-term liabilities on the Consolidated Balance Sheets, represent the Company’s obligation to transfer services to a customer for which the Company has received consideration or the amount is due from the customer.

Derivative Instruments

The Company records all its derivative financial instruments on the Consolidated Balance Sheets as assets or liabilities measured at fair value. For derivatives designated as a hedge, and effective as part of a hedge transaction, the effective portion of the gain or loss on the hedging derivative instrument is reported as a component of other comprehensive income or as a basis adjustment to the underlying hedged item and reclassified to earnings in the year in which the hedged item affects earnings. The effective portion of the gain or loss on hedges of foreign net investments is generally not reclassified to earnings unless the net investment is disposed of. To the extent derivatives do not qualify or are not designated as hedges, or are ineffective, their changes in fair value are recorded in earnings immediately, which may subject us to increased earnings volatility.

Stock-Based Compensation

The Company accounts 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, the Company establishes the fair value based on the market price on the date of the grant. For stock options, the Company determines the fair value based on its stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The Company recognizes the grant date fair value of equity awards as compensation cost over the requisite service period. The Company accounts for forfeitures as they occur.

Defined Benefit Plan

The Company calculates its employer-sponsored retirement plan obligations using various actuarial assumptions and methodologies. Assumptions include discount 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 the Company’s best estimates based on available information regarding historical experience and factors

that may cause future expectations to differ. The Company’s obligation and future expense amounts could be materially impacted by differences in experience or changes in assumptions.

The impact of plan amendments, actuarial gains and losses and prior-service costs are recorded in accumulated other comprehensive income (loss) (“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. Cumulative gains and losses over 10% of the greater of the beginning of year benefit obligation or fair value of the plan assets are amortized over the expected average life expectancy.

Income Taxes

The Company accounts for income taxes using the asset and liability method on a legal entity and jurisdictional basis, under which the Company recognizes 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 the consolidated financial statements or tax returns. The calculation of the annual effective tax rate relies on several factors including pre-tax earnings, various jurisdiction statutory tax rates, tax credits, uncertain tax positions, valuation allowances and differences between tax laws and accounting laws. The effective tax rate in any financial statement period may be materially impacted by changes in the blend and/or level of earnings by individual taxing jurisdictions. Valuation allowances are established when it is more likely than not that the Company’s deferred tax assets will not be realized based on all available evidence. The Company records Global Intangible Low-Taxed Income tax as a period cost.

The Company uses judgments and estimates in evaluating its tax positions. The Company’s tax returns are subject to examination by U.S. Federal, state and foreign taxing jurisdictions. The Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years. The Company recognizes 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. The Company adjusts these tax liabilities, including related interest and penalties, based on the current facts and circumstances. The Company reports tax-related interest and penalties as a component of income tax expense.

Foreign Currency Translation and Transactions

The assets and liabilities of the Company’s 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 in the Consolidated Balance Sheets. The Company converts foreign currency transactions recognized in the Consolidated Statements of Operations 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, net in the Consolidated Statements of Operations and were not material for any of the years presented.

Adoption of New Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to enhance consistency and comparability among reporting entities. The Company adopted this standard on January 1, 2021 on a prospective basis. The adoption did not have a material effect on the consolidated financial statements.

Accounting Pronouncements Issued But Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The amendments

apply only to contracts and hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The amendments are elective and are effective upon issuance through December 31, 2022. The Company intends to apply this guidance when modifications of contracts that include LIBOR occur, which is not expected to have a material impact on the consolidated financial statements.

In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. This guidance will be effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements.

3. The Separation

The Separation was completed under a Separation and Distribution Agreement and various other agreements that govern aspects of the Company’s relationship with XPO, including, but not limited to a Transition Services Agreement (“TSA”), a Tax Matters Agreement (“TMA”), an Employee Matters Agreement (“EMA”) and an Intellectual Property License Agreement (“IPLA”).

The Separation and Distribution Agreement contains provisions that, among other things, relate to (i) assets, liabilities and contracts transferred, assumed and assigned to each of GXO and XPO as part of the Separation, (ii) cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of GXO’s business with GXO and financial responsibility for the obligations and liabilities of XPO’s remaining business with XPO, (iii) the allocation among GXO and XPO of rights and obligations under existing insurance policies for occurrences before completion of the Separation and (iv) procedures governing the resolution of disputes, controversies or claims that may arise between GXO and XPO related to the Separation.

Under the TSA, (i) XPO provides GXO and certain of its affiliates, on an interim, transitional basis, various services, and (ii) GXO provides XPO and certain of its affiliates, on an interim, transitional basis, various services. The services provided include treasury administration, employee benefits administration, information technology services, regulatory services, general administrative services and other support services. The services generally commenced on the date of the Separation and will terminate no later than 12 months following the Separation.

XPO and GXO also entered into a TMA that governs the parties’ respective rights, responsibilities and obligations for tax matters; including responsibility for taxes, entitlement to refunds, allocation of tax attributes, preparation of tax returns, control of tax contests and other tax matters. GXO is generally responsible for federal, state and foreign income taxes (i) imposed on a separate return basis on GXO or any of its subsidiaries or (ii) imposed on a consolidated or combined return basis for audit or other adjustments attributable to GXO or any of its subsidiaries, in each case, for taxable periods, or portions thereof, that ended on or prior to the Separation. The TMA provides special rules that allocate responsibility for tax liabilities arising from a failure of the Separation transactions to qualify for tax-free treatment based on the reasons for such failure. The TMA also imposes restrictions on GXO during the two years following the Separation that are intended to prevent the Separation and certain related transactions from failing to qualify as transactions that are generally tax-free.

The EMA allocated assets, liabilities, and responsibilities relating to employee compensation and benefit plans and programs and other employee-related matters in connection with the Separation. Under the EMA, the Company became the plan sponsor for its U.K. defined benefit pension plan (the “U.K. Retirement Plan”) and recognized net assets of $36 million, reflecting the plan assets and projected benefit obligation, and accumulated other comprehensive loss, net of tax of $82 million. See Note — 14 Employee Benefit Plans for additional information.

The IPLA provides the parties with reciprocal, non-exclusive licenses under certain intellectual property rights transferred to GXO and certain intellectual property rights retained by XPO to provide the parties freedom to operate their respective businesses.

In connection with the Separation, related party debt between GXO and XPO was settled and is no longer reflected in the Consolidated Balance Sheet as of December 31, 2021. In June 2021, the Company entered into a five-year, unsecured multi-currency revolving credit facility (the “Revolving Credit Facility”). Initially, the Revolving Credit Facility provides commitments of up to $800 million, of which $60 million will be available for the issuance of letters of credit. Additionally, in July 2021, the Company completed an offering of $800 million aggregate principal amount of notes, consisting of $400 million of notes due 2026 (the “2026 Notes”) and $400 million of notes due 2031 (the “2031 Notes,” and together with the 2026 Notes, the “Notes”). The net proceeds from the Notes were used to fund a cash payment to XPO of $794 million in connection with the Separation. See Note — 11 Debt and Financing Arrangements for additional information.

In August 2021, the Company amended certain legal entity structures and transferred assets under a legal entity restructuring plan. In connection with the restructuring, the Company entered into certain agreements to license the right to use trademarks, trade names and other intellectual property related to the GXO brand to its non-U.S. affiliates and recorded a positive income tax adjustment of $42 million along with a corresponding increase to deferred tax asset in the third quarter of 2021. Also, in connection with the legal entity restructuring, the Company made a one-time income tax cash payment of $16 million in the fourth quarter of 2021.

4. Acquisitions

European Acquisition

In January 2021, the Company acquired the majority of Kuehne + Nagel’s contract logistics operations in the U.K. (the “K + N acquisition”). For the year ended December 31, 2021, the K + N acquisition generated revenues of $604 million, primarily recorded in the food and beverage vertical, and operating income was not material. The operations provide a range of logistics services, including inbound and outbound distribution, reverse logistics management and inventory management.

The Company recorded the fair value of assets and liabilities assumed, including approximately $300 million of operating and finance lease assets and liabilities. The Company acquired intangibles of $26 million with a weighted-average amortization period of 9 years. Goodwill acquired in connection with the acquisition was $16 million, recorded in the European reporting unit. Pro forma results of operations for this acquisition have not been presented as it is not material to the consolidated financial statements.

GXO Logistics Europe Purchase

In 2020 and 2019, the Company purchased additional noncontrolling interest in GXO Logistics Europe of $21 million and $258 million, respectively. In connection with the Separation, the portion of the noncontrolling interest not attributable to GXO was recorded as a transfer to the XPO investment account. In 2021, the Company completed the purchase of the remaining noncontrolling interest at a cost of approximately $128 million and transferred $40 million to XPO. Following this transaction, the Company owns all of the outstanding shares of GXO Logistics Europe SAS.

5. Revenue Recognition

Revenue disaggregated by geographical area was as follows:

Year Ended December 31,

The Company’s revenue can also be disaggregated by various verticals, reflecting the customers’ principal industry sector. Revenue disaggregated by industry sector was as follows:

Year Ended December 31,

E-commerce, omnichannel retail and consumer technology $ 4,191 $ 3,258 $ 3,007

Contract Balances

December 31,

Contract liabilities (2) 220 97

(1) Contract assets are included in Other current assets and Other long-term assets.

(2) Contract liabilities are included in Other current liabilities and Other long-term liabilities. For the year ended December 31, 2021, the Company recognized revenues of $68 million that were included in contract liabilities at December 31, 2020. As of December 31, 2021, contract liabilities included $64 million related to the K + N acquisition.

Performance Obligations

The remaining performance obligations relate to firm customer contracts for which services have not been performed and future revenue recognition is expected. As permitted in determining the remaining performance obligation, the Company omits obligations that have original expected durations of one year or less or contain variable consideration. On December 31, 2021, the fixed consideration component of the Company’s remaining performance obligation was approximately $2.1 billion, and the Company expects to recognize approximately 69% of that amount over the next three years and the remainder thereafter. The Company estimates remaining performance obligations at a point in time and actual amounts may differ from these estimates due to changes in foreign currency exchange rates and contract revisions or terminations.

6. Restructuring Charges

The Company engages in restructuring actions as part of its ongoing efforts to best use its resources and infrastructure, including actions in response to COVID-19. These actions generally include severance and facility-related costs, including impairment of operating lease assets, and are intended to improve efficiency and profitability.

The following is a rollforward of the Company’s restructuring liability, which is included in Other current liabilities in the Consolidated Balance Sheet:

(In millions)

Charges incurred (1) 29

Payments (16)

Foreign exchange and other (4)

Charges incurred (1) 4

Payments (14)

Foreign exchange and other (7)

(1) Charges incurred are net of adjustments to previously recognized liabilities.

The remaining restructuring liability at December 31, 2021 primarily relates to severance payments and is expected to be substantially paid within 12 months.

7. Property and Equipment

The following table summarizes property and equipment:

December 31,

Land $ 7 $ 6

Buildings and leasehold improvements 326 273

Warehouse equipment and other 832 700

Computer, software and equipment (1) 550 499

Technology and automated systems 276 214

Total property and equipment, gross 1,991 1,692

Less: accumulated depreciation and amortization (1,128) (922)

Total property and equipment, net $ 863 $ 770

(1) Includes internally developed software of $214 million and $198 million as of December 31, 2021 and 2020, respectively.

Depreciation and amortization of property and equipment was $274 million, $262 million and $236 million for the years ended December 31, 2021, 2020 and 2019, respectively.

As of December 31, 2021 and 2020, the Company held long-lived tangible assets outside the U.S. of $428 million and $359 million, respectively.

8. Leases

The following amounts were recorded in the Consolidated Balance Sheets related to leases:

December 31,

Operating leases:

Current operating lease liabilities $ 453 $ 332

Long-term operating lease liabilities 1,391 1,099

Total operating lease liabilities $ 1,844 $ 1,431

Finance leases:

Property and equipment, gross $ 234 $ 199

Accumulated depreciation (79) (49)

Property and equipment, net $ 155 $ 150

Short-term borrowings and obligations under finance leases $ 34 $ 31

Long-term debt and obligations under finance leases 133 127

Total finance lease liabilities $ 167 $ 158

Supplemental weighted-average information for leases was as follows:

December 31,

Weighted-average remaining lease term

Operating leases 5.3 years 5.7 years

Finance leases 11.6 years 11.4 years

Weighted-average discount rate

Operating leases 3.5 % 4.4 %

Finance leases 3.8 % 4.6 %

The components of lease expense were as follows:

Year Ended December 31,

Operating leases:

Finance leases:

Amortization of leased assets $ 32 $ 24 $ 12

Interest expense on lease liabilities 6 4 2

Total lease cost $ 38 $ 28 $ 14

Total operating and finance lease cost $ 850 $ 680 $ 636

Supplemental cash flow information related to leases was as follows:

Year Ended December 31,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows for operating leases $ 578 $ 556 $ 505

Operating cash flows for finance leases 6 4 2

Financing cash flows for finance leases 25 17 11

Leased assets obtained in exchange for new lease obligations:

(1) Includes $281 million related to the K + N acquisition.

(2) Includes $23 million related to the K + N acquisition.

Maturities of lease liabilities as of December 31, 2021 were as follows:

(In millions) Finance Leases Operating Leases

Present value of lease liabilities $ 167 $ 1,844

As of December 31, 2021, the Company had additional operating leases that have not yet commenced with future undiscounted lease payments of approximately $301 million. These operating leases will begin in 2022 and 2023, with initial lease terms ranging from 1 to 15 years.

9. Goodwill

The following tables present the changes in goodwill for the years ended December 31, 2021 and 2020.

(In millions)

Impact of foreign exchange translation 79

Acquisition 16

Impact of foreign exchange translation (62)

As of December 31, 2021 and 2020, there were no accumulated goodwill impairment losses.

10. Intangible Assets

The following table summarizes identifiable intangible assets:

For the years ended December 31, 2021, 2020 and 2019, there were no intangible assets impairment losses.

Intangible asset amortization expense was $61 million, $61 million and $65 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Estimated amortization expense for each of the five succeeding fiscal years and thereafter is as follows.

11. Debt and Financing Arrangements

The following table summarizes the carrying value of debt:

December 31,

Finance leases and other 168 161

Borrowings related to trade securitization program — 26

Related-party debt — 486

Total debt and obligations under finance leases 961 673

Less: Short-term borrowings and obligations under finance leases 34 58

Total long-term debt and obligations under finance leases $ 927 $ 615

(1) The carrying value of the 1.65% Notes due 2026 is presented net of unamortized debt issuance cost and discount of $3 million as of December 31, 2021.

(2) The carrying value of the 2.65% Notes due 2031 is presented net of unamortized debt issuance cost and discount of $4 million as of December 31, 2021.

Unsecured Notes

In July 2021, the Company completed an offering of $800 million aggregate principal amount of notes, consisting of the 2026 Notes and the 2031 Notes.

The 2026 Notes bear interest at a rate of 1.65% per annum payable semiannually in arrears on January 15 and July 15 of each year, beginning January 15, 2022, and maturing on July 15, 2026. The 2031 Notes bear interest at a rate of 2.65% per annum payable semiannually in arrears on January 15 and July 15 of each year, beginning January 15, 2022, and maturing on July 15, 2031. The indentures governing the Notes contain covenants that are customary for financings of this type, including a limitation on liens. At December 31, 2021, the Company was in compliance with the covenants of the indenture governing the Notes.

The Company recognized $6 million of debt discounts and $2 million of debt issuance costs that were recorded as a reduction to the related debt instrument and will be amortized to interest expense over the life of the Notes.

Revolving Credit Facility

In June 2021, prior to the Separation, the Company entered into a five-year unsecured multi-currency Revolving Credit Facility. Initially, the Revolving Credit Facility provides commitments of up to $800 million, of which $60 million will be available for the issuance of letters of credit. Loans under the Revolving Credit Facility will bear interest at a fluctuating rate equal to: (i) with respect to borrowings in dollars, at the Company’s option, the alternate base rate or the reserve-adjusted LIBOR, (ii) with respect to borrowings in Canadian dollars, the reserve-adjusted Canadian Dollar Offered Rate, and (iii) with respect to borrowings in Euros, the reserve-adjusted Euro Interbank Offered Rate, in each case, plus an applicable margin calculated based on the Company’s credit ratings. In addition, the Company is paying a commitment fee of 0.15% per annum on the unused portion of the commitments under the Revolving Credit Facility.

The covenants in the Revolving Credit Facility, which are customary for financings of this type, limit the Company’s ability to incur indebtedness and grant liens, among other restrictions. In addition, the Revolving Credit Facility requires the Company to maintain a consolidated leverage ratio below a specified maximum. At December 31, 2021, the Company was in compliance with the covenants of the credit agreement governing its Revolving Credit Facility.

There were no amounts outstanding under the Revolving Credit Facility as of December 31, 2021. Amounts drawn and repaid within three months are presented as net in the Consolidated Statement of Cash Flows.

Related-Party Debt

The following related-party debt agreements between GXO and XPO were settled pursuant to the Separation and are no longer reflected in the Consolidated Balance Sheet as of December 31, 2021.

•An unsecured loan bearing interest at a rate of 5.625% with a principal amount not exceeding $391 million and maturing in June 2024. As of December 31, 2020, the Company had an outstanding loan payable to XPO of $186 million.

•A €20 million unsecured loan entered into in 2013, bearing interest at a variable rate of twelve-month Euribor plus 1% and maturing in October 2026. As of December 31, 2020, the Company had an outstanding loan payable to XPO of $23 million.

•A £82 million unsecured loan bearing interest at a variable rate of twelve-month LIBOR plus 1% and maturing in October 2026. As of December 31, 2020, the Company had an outstanding loan payable to XPO of $112 million.

•A €335 million loan bearing interest at a fixed rate of 5.625% and maturing in June 2024. As of December 31, 2020, the Company had an outstanding loan payable to XPO of $165 million.

Trade Receivables Securitization and Factoring Programs

The Company sells certain of its trade accounts receivable on a non-recourse basis to third-party financial institutions under factoring agreements. The Company also sells certain European trade accounts receivable under a securitization program that contains financial covenants customary for this type of arrangement, including maintaining a defined average days sales outstanding ratio. The Company accounts for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Consolidated Statements of Cash Flows. The trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables. The Company uses trade receivables securitization and factoring programs to help manage its cash flows.

Under the securitization program, the Company participates in a trade receivables securitization program co-arranged by two European banks (the “Purchasers”). Under the program, a wholly-owned bankruptcy-remote special

purpose entity of the Company sells trade receivables that originate with wholly-owned subsidiaries to unaffiliated entities managed by the Purchasers. The special purpose entity is a variable interest entity and has been presented within these consolidated financial statements based on the Company’s control of the entity’s activities. In July 2021, in connection with the Separation, XPO’s existing trade receivable securitization program was amended; the previous €400 million ($455 million) program is now comprised of two separate €200 million ($227 million) programs, one of which remains with the Company and expires in July 2024. As of July 2021, the Company’s special purpose entity no longer purchases trade receivables from XPO. As of December 31, 2020, Other current assets include trade receivables purchased from XPO in connection with the Company’s trade receivables securitization program of $105 million. The weighted average interest rate was 0.75% as of December 31, 2021. Charges for commitment fees, which are based on a percentage of available amounts, and charges for administrative fees were not material to the Company’s results of operations for the years ended December 31, 2021, 2020 and 2019.

The Company accounts for transfers under its securitization and factoring arrangements as sales because the Company sells full title and ownership in the underlying receivables and control of the receivables is considered transferred. For these transfers, the receivables are removed from the Consolidated Balance Sheets at the date of transfer. In the securitization and factoring arrangements, the Company’s continuing involvement is limited to servicing the receivables. The fair value of any servicing assets and liabilities is immaterial. The trade receivables securitization program permits us to borrow, on an unsecured basis, cash collected in a servicing capacity on previously sold receivables which are included in short-term borrowings and obligations under finance leases in the Consolidated Balance Sheets until they are repaid in the following month’s settlement.

In January 2022, the Company halted sales of European trade accounts receivable related to the securitization program with the intention to terminate the program in 2022.

Information related to trade receivables sold was as follows:

Year Ended December 31,

Securitization programs

Deferred purchase price — — 80

Factoring programs

12. Accrued Expenses

The components of accrued expenses are as follows:

December 31,

Facility and transportation charges $ 387 $ 259

Value-added tax and other taxes 135 141

Total accrued expenses $ 998 $ 784

13. Fair Value Measurements and Financial Instruments

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.

Assets and liabilities

The Company bases its fair value estimates on market assumptions and available information. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and current maturities of long-term debt approximated their fair values as of December 31, 2021 and 2020, due to their short-term nature.

Debt

The fair value of debt was as follows:

(In millions) Level Fair Value Carrying Value Fair Value Carrying Value

Financial Instruments

The Company directly manages its exposure to risks arising from business operations and economic factors, including fluctuations in interest rates and foreign currencies. The Company uses derivative instruments to manage the volatility related to these exposures. The objective of these derivative instruments is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. In connection with the Separation, XPO novated certain cross-currency swaps and options to the Company. As a result, the Company recorded accumulated other comprehensive loss, net of tax of $28 million. These financial instruments are not used for trading or other speculative purposes. The Company does not expect to incur any losses as a result of counterparty default.

Derivatives

Cross-Currency Swap Agreements

The Company enters into cross-currency swap agreements to manage the foreign currency exchange risk related to its international operations by effectively converting fixed-rate USD-denominated debt, including the associated interest payments, to fixed-rate, Euro-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.

During the term of the swap contracts, the Company will receive interest, either on a quarterly or semi-annual basis, from the counterparties based on USD fixed interest rates, and the Company will pay interest, also on a quarterly or

semi-annual basis, to the counterparties based on Euro fixed interest rates. At maturity, the Company will repay the original principal amount in EUR and receive the principal amount in USD. These agreements expire at various dates through 2026.

The Company designated these cross-currency swaps as qualifying hedging instruments and account for them as net investment hedges. The Company applies the critical terms match method of assessing the effectiveness of its 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. For net investment hedges that were de-designated prior to their maturity, the amounts in AOCI will remain in AOCI until the subsidiary is sold or substantially liquidated. Cash flows related to the periodic exchange of interest payments for these net investment hedges are included in Operating activities in the Consolidated Statements of Cash Flows.

Foreign Currency Options

The Company uses foreign currency option contracts to mitigate the risk of a reduction in the value of earnings from the operations that use the Euro or the British pound sterling as their functional currency. The foreign currency option contracts were not designated as qualifying hedging instruments as of December 31, 2021. The contracts are used to manage the Company’s exposure to foreign currency exchange rate fluctuations and are not speculative. The contracts generally expire in 12 months or less. Gains or losses on the contracts are recorded in Other income, net in the Consolidated Statements of Operations. Cash flows related to the foreign currency contracts are included in investing activities in the Consolidated Statements of Cash Flows, consistent with the nature and purpose for which these derivatives were acquired.

The Company presents the fair value of its derivative assets and liabilities on a gross basis. The fair value of derivative instruments and the related notional amounts were as follows:

(In millions) Notional Amount Balance Sheet Location Fair Value

Derivatives designated as hedges

Liabilities:

Cross-currency swap agreements $ 328 Other current liabilities $ 4

Cross-currency swap agreements 165 Other long-term liabilities 4

Derivatives not designated as hedges

Assets:

Foreign currency option contracts $ 368 Other current assets $ 11

Foreign currency option contracts 37 Other long-term assets 1

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 instruments designated as hedges in the Consolidated Statements of Operations was as follows:

Derivatives designated as net investment hedges

Cross-currency swap agreements $ (17) $ 1 $ 2

(1) Amounts reclassified to net income are reported within Other income, net in the Consolidated Statements of Operations.

The gain recognized in earnings for foreign currency options not designated as hedging instruments was $2 million for the year ended December 31, 2021, of which $1 million was unrealized. These amounts are recorded in Other income, net in the Consolidated Statements of Operations.

There were no derivative instruments in the consolidated financial statements as of December 31, 2020.

14. Employee Benefit Plans

Defined Benefit Plan

Prior to the Separation, certain eligible employees of XPO participated in XPO’s U.K. Retirement Plan which did not allow for new participants or additional benefit accruals. In connection with the Separation, the Company became the plan sponsor for the U.K. Retirement Plan, and the consolidated financial statements for the year ended December 31, 2021 include the funded status of the plan and periodic benefit costs. The majority of the plan assets transferred to the Company were fixed income securities including government bonds and debt instruments which are primarily classified as Level 2 in the fair value hierarchy. There are no unfunded commitments or redemption restrictions related to these investments. The Company also maintains defined benefit pension plans for some of its foreign subsidiaries that are excluded from the disclosures below due to their immateriality.

The Company determines the net periodic benefit costs using assumptions regarding the projected benefit obligation and the fair value of the plan assets as of the beginning of the year. Net periodic benefit cost is recorded within Other income, net in the Consolidated Statement of Operations. The Company calculates the funded status of the defined benefit pension plan as the difference between the projected benefit obligation and the fair value of the plan assets.

Funded Status of Defined Benefit Plan

The change in the projected benefit obligation of the plan as of December 31, 2021 was as follows:

(In millions)

Projected benefit obligation at beginning of year $ —

Liabilities assumed from XPO 1,408

Interest cost 11

Actuarial loss 39

Benefits paid (27)

Foreign currency exchange rate changes (31)

Projected benefit obligation at end of year (1) $ 1,400

(1) As of December 31, 2021, the accumulated benefit obligation was equal to the projected benefit obligation.

Actuarial losses were a result of assumption changes, including a decrease in the discount rate and an increase in the inflation assumptions.

The change in the fair value of the plan assets as of December 31, 2021 was as follows:

(In millions)

Fair value of plan assets at beginning of year $ —

Assets transferred from XPO 1,444

Actual return on plan assets 75

Benefits paid (27)

Foreign currency exchange rate changes (32)

Fair value of plan assets at end of year $ 1,460

The reconciliation of the funded status of the plan as of December 31, 2021 was as follows:

(In millions)

Fair value of plan assets $ 1,460

Projected benefit obligation 1,400

Funded status at the end of the year (1) $ 60

(1) Funded status is recorded within Other long-term assets.

The amounts included in AOCI that have not yet been recognized in net periodic benefit as of December 31, 2021 were as follows:

(In millions)

Actuarial loss $ (113)

Prior-service credit 16

Net amount recognized in AOCI (1) $ (97)

(1) In connection with the Separation, $103 million of accumulated other comprehensive loss was transferred from XPO.

The components of net periodic benefit cost for the year ended December 31, 2021 were as follows:

(In millions)

Interest cost $ (11)

GXO US Equity

GXO · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

GXO US Equity☆

GXO · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

GXO US Equity