C. H. ROBINSON WORLDWIDE, INC. (CHRW) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

C.H. Robinson Worldwide, Inc. (“C.H. Robinson,” “the company,” “we,” “us,” or “our”) is one of the largest global logistics companies in the world, with consolidated total revenues of $24.7 billion in 2022. We bring together customers, carriers, and suppliers to connect and grow supply chains. We are grounded in our customer promise to use our technology, which is built by and for supply chain experts and powered by our information advantage, to deliver smarter solutions. These global solutions, combined with the expertise of our people, deliver value–from improved cost reductions and reliability to sustainability and visibility–that our customers and carriers can rely on.

Our adjusted gross profits and adjusted gross profit margin are non-GAAP financial measures. Adjusted gross profits is calculated as gross profit excluding amortization of internally developed software utilized to directly serve our customers and contracted carriers. Adjusted gross profit margin is calculated as adjusted gross profits divided by total revenues. We believe adjusted gross profits and adjusted gross profit margin are useful measures of our ability to source, add value, and sell services and products that are provided by third parties, and we consider adjusted gross profits to be a primary performance measurement. Accordingly, the discussion of our results of operations often focuses on the changes in our adjusted gross profits and adjusted gross profit margin. The reconciliation of gross profit to adjusted gross profits and gross profit margin to adjusted gross profit margin is presented below (dollars in thousands):

Our adjusted operating margin is a non-GAAP financial measure calculated as operating income divided by adjusted gross profit. We believe adjusted operating margin is a useful measure of our profitability in comparison to our adjusted gross profit, which we consider a primary performance metric as discussed above. The reconciliation of operating margin to adjusted operating margin is presented below (dollars in thousands):

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MARKET TRENDS

The cost of purchased transportation in the North American surface transportation market declined significantly over the course of 2022 as excess carrier capacity combined with slowing demand led to softening market conditions. This compared to extremely tight market conditions in 2021 as strong demand combined with challenges due to driver availability and supply chain disruptions drove purchased transportation costs to historic levels. Many of these challenges improved over the course of 2022, allowing routing guides to perform more efficiently, which resulted in a comparatively soft market versus 2021. Industry freight volumes, as measured by the Cass Freight Index, were flat in 2022, compared to a 13 percent increase in 2021. One of the metrics we use to measure market conditions is the truckload routing guide depth from our Managed Services business. Routing guide depth represents the average number of carriers contacted prior to acceptance when procuring a transportation provider. The average routing guide depth at the end of 2022 declined to 1.2, representing that on average, the first carrier in a shipper's routing guide was executing the shipment in most cases. This average routing guide penetration is reflective of a softening freight market compared to the 1.7 average at the end of 2021.

The cost of purchased transportation fell significantly in the global forwarding market in the second half of 2022 as global demand slowed in most trade lanes. The peak shipping season historically experienced in the second half of each year, which would typically drive elevated rates and volumes, remained uncharacteristically soft. Shippers in the U.S. and Europe continue to struggle with elevated inventory levels as consumer demand has been negatively impacted by inflation and macroeconomic uncertainty. In an effort to adapt to this slowing demand, steamship lines continue to rationalize services by reducing capacity where possible with blank sailings and slow steaming. All of these factors have allowed port congestion to ease in many parts of the world. As with the North American surface transportation market, this compared to extremely tight market conditions in 2021 as strong demand combined with supply chain disruptions caused by port congestion along with equipment and labor shortages drove purchased transportation to historic levels in 2021 and the first half of 2022. The slowdown of global demand has also had a significant impact on the air freight market. Air freight pricing and volumes have significantly declined driven by shippers maintaining higher inventory levels, declining consumer demand, and improving ocean schedule reliability eliminating ocean freight to air freight conversions. Air freight capacity continues to improve and drive rates lower in many trade lanes due to increased belly capacity as commercial flights become more frequent after being significantly reduced during the COVID-19 pandemic.

BUSINESS TRENDS

Our 2022 surface transportation results benefited from the declining cost of purchased transportation over the course of the year, as periods where the cost of purchased transportation declines often result in improved adjusted gross profits per shipment in our portfolio. Industry freight volumes as measured by the Cass Freight Index were flat in 2022 compared to the prior year. Our combined NAST truckload and less than truckload (“LTL”) volume decreased 1.0 percent in 2022 compared to the prior year. As a result of the softening market conditions, our contractual rates negotiated in prior quarters contributed to an increase in our adjusted gross profit per shipment and reduced the percentage of shipments with negative adjusted gross profit margins. Our average truckload linehaul cost per mile, excluding fuel surcharges, decreased approximately 7.5 percent during 2022. Our average truckload linehaul rate charged to our customers, excluding fuel surcharges, decreased approximately 4.0 percent during 2022.

Our 2022 Global Forwarding results were largely consistent with the trends discussed above in the market trends section. We experienced elevated purchased transportation costs and volume growth for ocean freight in the first half of 2022 and saw those purchased transportation costs and volumes rapidly decline in the second half of 2022. Our total ocean freight volumes decreased 0.5 percent for the full year of 2022. Air freight tonnage decreased 9.0 percent as we experienced more customers willing to accept longer transit times in the ocean freight market, which was also aided by the improved schedule reliability for ocean freight.

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SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS

The following summarizes select 2022 year-over-year operating comparisons to 2021:

•Total revenues increased 6.9 percent to $24.7 billion, driven primarily by higher pricing in truckload, LTL, and ocean services.

•Gross profits increased 13.9 percent to $3.6 billion. Adjusted gross profits increased 14.0 percent to $3.6 billion, primarily driven by higher adjusted gross profit per transaction in truckload and LTL services.

•Personnel expenses increased 11.6 percent to $1.7 billion, primarily due to 11.7 percent increase in average employee headcount.

•Selling, general, and administrative (“SG&A”) expenses increased 14.6 percent to $603.4 million, primarily due to increases in purchased and contracted services, legal settlements, travel expenses, and an impairment of internally developed software, partially offset by a $25.3 million gain on the sale-leaseback of our Kansas City regional center and a decrease in credit losses.

•Income from operations totaled $1.3 billion, up 17.1 percent from last year, primarily due to an increase in adjusted gross profits, partially offset by the increase in operating expenses. Adjusted operating margin of 35.3 percent increased 100 basis points.

•Interest and other expenses, net totaled $100.0 million, which primarily consisted of $77.1 million of interest expense, which increased $25.0 million versus last year due to a higher average debt balance. The current year also included a $23.5 million unfavorable impact from foreign currency revaluation and realized foreign currency gains and losses, which increased $8.4 million versus last year primarily due to foreign currency revaluation on intercompany assets and liabilities denominated in U.S. Dollars in countries where the U.S. Dollar is not the functional currency.

•The effective tax rate for 2022 was 19.4 percent compared to 17.4 percent in 2021. The lower rate in the year-ago period was due primarily to a favorable mix of foreign earnings and an increased benefit related to U.S. tax credits and incentives.

•Net income totaled $940.5 million, up 11.4 percent from a year ago. Diluted earnings per share increased 17.3 percent to $7.40.

•Cash flow from operations increased significantly to $1.7 billion.

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CONSOLIDATED RESULTS OF OPERATIONS

The following table summarizes our results of operations (dollars in thousands, except per share data):

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(1) Adjusted gross profit margin is a non-GAAP financial measure explained above.

The following discussion and analysis of our Results of Operations and Liquidity and Capital Resources includes a comparison of the twelve months ended December 31, 2022, to the twelve months ended December 31, 2021. A similar discussion and analysis that compares the twelve months ended December 31, 2021, to the twelve months ended December 31, 2020, can be found in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our 2021 Annual Report on Form 10-K filed with the SEC on February 23, 2022.

A reconciliation of our reportable segments to our consolidated results can be found in Note 9, Segment Reporting, in Part II, Financial Information of this Annual Report on Form 10-K.

Consolidated Results of Operations—Twelve Months Ended December 31, 2022 Compared to Twelve Months Ended December 31, 2021

Total revenues and direct costs. Total transportation revenues and direct costs increased driven by higher pricing and freight costs in nearly all service lines, most notably truckload, LTL, and ocean freight services. These increases were partially offset by volume declines in most of our service lines. The cost of purchased transportation remained historically elevated in the first half of 2022 as the industry continued to struggle with elevated inventory levels and supply chain disruptions due to port congestion and driver and equipment shortages. As global demand began to slow in the middle of 2022, the cost of purchased transportation began to decline, allowing port congestion and challenges due to driver and equipment shortages to ease. Our sourcing total revenue and direct costs increased, driven by higher pricing and cost per case across all customer industries.

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Gross profits and adjusted gross profits. Our transportation adjusted gross profits increased due to increased pricing compared to the prior year across most of our services lines, most notably in our truckload and LTL services resulting in higher adjusted gross profits per transaction. Our surface transportation adjusted gross profit per transaction benefited from the declining cost of purchased transportation relative to our contractual rates negotiated in prior quarters. Sourcing adjusted gross profits increased driven by an increase in case volume across the retail and foodservice industries and higher adjusted gross profits per case across all customer industries.

Operating expenses. Personnel expenses increased primarily due to an increase in salaries and incentive compensation driven by an increase in average employee headcount. These increases were partially offset by a reduction in stock-based compensation expense as the prior year included significant stock-based compensation expense on performance-based equity awards granted prior to 2021. Other SG&A expenses increased primarily due to increases in purchased and contracted services, legal settlements, travel, and warehouse expenses. These increases were partially offset by a $23.5 million gain on the sale-leaseback of a facility in Kansas City and lower credit losses.

Operating expenses in 2022 also included the impact of organizational changes made to support our enterprise strategy of accelerating our digital transformation and productivity initiatives. In connection with these organizational changes, we recorded $21.5 million of personnel expense, primarily related to severance, and $15.2 million of other SG&A expenses, primarily due to the impairment of certain capitalized internally developed software projects as a result of these restructuring initiatives.

Interest and other income/expense, net. Interest and other expense of $100.0 million primarily consisted of $77.1 million of interest expense, which increased $25.0 million compared to the prior year due to a higher average debt balance. The current year also included a $23.5 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses driven primarily by balances denominated in U.S. Dollars, including intercompany balances, in regions where the U.S. Dollar is not the functional currency. The prior year included a $15.1 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses. These prior year expenses were partially offset by a $2.9 million local government subsidy in Asia for achieving specified performance criteria that was almost entirely offset by a reduction in foreign tax credits within the provision for income taxes.

Provision for income taxes. Our effective income tax rate was 19.4 percent in 2022 and 17.4 percent in 2021. The effective income tax rate for the twelve months ended December 31, 2022 was lower than the statutory federal income tax rate primarily due to the tax benefit from U.S. tax credits and incentives, foreign tax credits, and the tax impact of share-based payment awards. These impacts were partially offset by state income taxes, net of federal benefits. The effective income tax rate for the twelve months ended December 31, 2021, was lower than the statutory federal income tax rate primarily due to the tax benefit from U.S. tax credits and incentives, and a lower tax rate on foreign earnings. These impacts were partially offset by state income taxes, net of federal benefits.

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NAST Segment Results of Operations

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(1) Adjusted gross profits is a non-GAAP financial measure explained above.

Twelve Months Ended December 31, 2022 Compared to Twelve Months Ended December 31, 2021

Total revenues and direct costs. NAST total revenues and direct costs increased driven by higher pricing and freight costs in truckload and LTL services in addition to an increase in volume in truckload services. The cost of purchased transportation started at historic levels in 2022 driven by the continuation of the strong demand that impacted much of 2021 combined with challenges related to driver availability, supply chain disruption, and weather events. Many of these challenges improved over the course of 2022 as demand slowed, which resulted in the cost of purchased transportation declining over the course of 2022.

Gross profits and adjusted gross profits. NAST adjusted gross profits increased due to higher adjusted gross profits per transaction. Our truckload services adjusted gross profit per transaction benefited from the declining cost of purchased transportation relative to our contractual rates negotiated in prior quarters. Our average truckload linehaul rate per mile charged to our customers decreased approximately 4.0 percent. Our truckload transportation costs, excluding fuel surcharges, decreased approximately 7.5 percent. NAST LTL adjusted gross profits increased due to increased adjusted gross profits per transaction. NAST other adjusted gross profits increased driven by increased warehousing services and an increase in intermodal adjusted gross profits.

Operating expenses. NAST personnel expense increased primarily due to an increase in salaries and incentive compensation driven by an increase in average employee headcount. These increases were partially offset by a reduction in stock-based compensation expense as the prior year included significant stock-based compensation expense on performance-based equity awards granted prior to 2021. NAST SG&A expenses increased driven by increased investments in technology, legal settlements, warehouse expenses, travel expenses, and increased expenditures for purchased and contracted services, including temporary labor. The operating expenses of NAST and all other segments include allocated corporate expenses. Allocated personnel expenses consist primarily of stock-based compensation allocated based upon segment participation levels in our equity plans. Remaining corporate allocations, including corporate functions and technology related expenses, are primarily included within each segment’s other SG&A expenses and allocated based upon relevant segment operating metrics.

NAST operating expenses in 2022 also included the impact of organizational changes made to support our enterprise strategy of accelerating our digital transformation and productivity initiatives. In connection with these organizational changes, we

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recorded $6.3 million of personnel expense, primarily related to severance, and $3.2 million of other SG&A expenses, primarily due to the impairment of certain capitalized internally developed software projects as a result of these restructuring initiatives.

Global Forwarding Segment Results of Operations

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(1)Adjusted gross profits is a non-GAAP financial measure explained above.

Twelve Months Ended December 31, 2022 Compared to Twelve Months Ended December 31, 2021

Total revenues and direct costs. Total revenues and direct costs increased due to higher pricing and purchased transportation costs in ocean services, partially offset by lower pricing in air freight services, in addition to volume decreases in both ocean and air freight services. Similar to surface transportation, the cost of purchased transportation started at historic levels in 2022 driven by the continuation of the strong demand that impacted much of 2021. This was combined with supply chain disruptions caused by port congestion as well as equipment and labor shortages. As global demand slowed in most trade lanes in the second half of 2022, many of these challenges improved, which resulted in a rapid decline in purchased transportation costs and pricing.

Gross profits and adjusted gross profits. Ocean freight adjusted gross profits increased, driven by higher pricing and resulting in higher adjusted gross profits per transaction in the first half of 2022. These higher adjusted gross profits were largely offset by declining shipments in the second half of 2022, as discussed in the market trends and business trends sections above. Air freight adjusted gross profits decreased, driven by pricing and volumes significantly declining over the course of 2022 as shippers struggled with elevated inventory levels, consumer demand declined, and improving ocean schedule reliability eliminated ocean freight to air freight conversions. Customs adjusted gross profits increased driven by an increase in transaction volumes.

Operating expenses. Personnel expenses increased primarily due to an increase in salaries driven by an increase in average employee headcount. These increases were partially offset by a reduction in stock-based compensation expense as the prior year included significant stock-based compensation expense on performance-based equity awards granted prior to 2021. SG&A expenses increased driven by increased investments in technology, partially offset by lower credit losses.

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Global Forwarding operating expenses in 2022 also included the impact of organizational changes made to support our enterprise strategy of accelerating our digital transformation and productivity initiatives. In connection with these organizational changes, we recorded $3.8 million of personnel expense, primarily related to severance, and $3.2 million of other SG&A expenses, primarily due to the impairment of certain capitalized internally developed software projects as a result of these restructuring initiatives.

All Other and Corporate Segment Results of Operations

All Other and Corporate includes our Robinson Fresh and Managed Services segment, as well as Other Surface Transportation outside of North America and other miscellaneous revenues and unallocated corporate expenses.

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(1) Adjusted gross profits is a non-GAAP financial measure explained above.

Twelve Months Ended December 31, 2022 Compared to Twelve Months Ended December 31, 2021

Total revenues and direct costs. Total revenues and direct costs increased driven by higher pricing and cost per case across all customer industries in Robinson Fresh. Other Surface Transportation total revenues and direct costs also increased, driven by higher truckload pricing in Europe.

Gross profits and adjusted gross profits. Robinson Fresh adjusted gross profits increased, driven by an increase in case volume across the retail and foodservice industries and higher adjusted gross profits per case across all customer industries. Managed Services adjusted gross profits increased, due to an increase in freight under management and growth in adjusted gross profit per transaction. Other Surface Transportation adjusted gross profits increased primarily due to higher European truckload adjusted gross profits per transaction, partially offset by a decline in Europe truckload volumes.

Operating expenses. The operating expenses for All Other and Corporate included the impact of organizational changes made to support our enterprise strategy of accelerating our digital transformation and productivity initiatives. In connection with these organizational changes, we recorded $11.4 million of personnel expense, primarily related to severance, and $8.8 million of other SG&A expenses, primarily due to the impairment of certain capitalized internally developed software projects as a result of these restructuring initiatives.

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LIQUIDITY AND CAPITAL RESOURCES

We have historically generated substantial cash from operations, which has enabled us to fund our organic growth while paying cash dividends and repurchasing stock. In addition, we maintain the following debt facilities as described in Note 4, Financing Arrangements (dollars in thousands):

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(1) Net of unamortized discounts and issuance costs.

We expect to use our current debt facilities and potentially other indebtedness incurred in the future to assist us in continuing to fund working capital, capital expenditures, possible acquisitions, dividends, share repurchases, or other investments.

Cash and cash equivalents totaled $217.5 million as of December 31, 2022, and $257.4 million as of December 31, 2021. Cash and cash equivalents held outside the U.S. totaled $204.7 million as of December 31, 2022, and $217.1 million as of December 31, 2021. Working capital decreased from $1.48 billion at December 31, 2021, to $266.4 million at December 31, 2022.

We prioritize our investments to grow our market share and expand globally in key industries, trade lanes, and geographies, and to digitize our customer, carrier, and internal tools to support our organic growth. We are continually looking for acquisitions, but those acquisitions must fit our culture and enhance our growth opportunities.

The following table summarizes our major sources and uses of cash and cash equivalents (dollars in thousands):

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Cash flow from operating activities. The significant increase in cash flow from operating activities in 2022 from 2021 was due to a decrease in operating working capital. The improvement in 2022 from 2021 was primarily due to a $650 million sequential decrease in operating working capital, which represents accounts receivable and contract assets less total accounts payable and accrued transportation expense. The decrease in operating working capital was driven by the decline in the cost of purchased transportation and the related decline in freight rates near the end of 2022. Conversely, 2021 included a $200 million sequential increase in operating working capital as the cost of purchased transportation and freight rates were rising near the end of 2021. The increase in operating working capital near the end of 2021 was also impacted by a change in business mix from the significant growth of our Global Forwarding business where our days sales outstanding ratio is approximately double that of our NAST business.

Cash used for investing activities. Our investing activities consist primarily of capital expenditures and cash paid for acquisitions. Capital expenditures consisted primarily of investments in software, which are intended to deliver scalable solutions to improve our customer and carrier experience and increase our efficiency to help expand our adjusted operating margins and grow the business.

During 2022, we sold an office building in Kansas City, Missouri, for a sales price of $55.0 million and recognized a gain of $23.5 million on the sale in the twelve months ended December 31, 2022. We simultaneously entered into an agreement to lease the office building for 10 years.

In 2021, we used $14.7 million for the acquisition of Combinex. In 2020, we used $222.7 million for the acquisition of Prime.

We anticipate capital expenditures in 2023 to be approximately $90 million to $100 million.

Cash used for financing activities. We had net borrowings on debt in 2022 and 2021 and net repayments in 2020. Net borrowings in 2022 were primarily to fund share repurchases and working capital needs in the first half of 2022. The increase in cash used for share repurchases was due to an increase in the number of shares repurchased and a higher average price per share during 2022.

Net borrowings in 2021 were primarily to provide cash for operations, as our working capital needs increased throughout 2021 as mentioned above.

The net repayments in 2020 were primarily to reduce the outstanding balance on the Receivables Securitization Facility.

In December 2021, the Board of Directors increased the number of shares authorized to be repurchased by 20,000,000 shares. As of December 31, 2022, there were 7,409,198 shares remaining for future repurchases. The number of shares we repurchase, if any, during future periods will vary based on our cash position, potential alternative uses of our cash, and market conditions. Over the long term, we remain committed to our quarterly dividend and share repurchases to enhance shareholder value. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. We may seek to retire or purchase our outstanding Senior Notes through open market cash purchases, privately negotiated transactions, or otherwise.

We believe that, assuming no change in our current business plan, our available cash, together with expected future cash generated from operations, the amount available under our credit facilities, and credit available in the market, will be sufficient to satisfy our anticipated needs for working capital, capital expenditures, and cash dividends for at least the next 12 months and the foreseeable future thereafter. We also believe we could obtain funds under lines of credit or other forms of indebtedness on short notice, if needed.

As of December 31, 2022, we were in compliance with all of the covenants under our debt agreements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. We consider the following items in our consolidated financial statements to require significant estimation or judgment.

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REVENUE RECOGNITION. At contract inception, we assess the goods and services promised in our contracts with customers and identify our performance obligations to provide distinct goods and services to our customers. Our transportation and logistics service arrangements often require management to use judgment and make estimates that impact the amounts and timing of revenue recognition.

Transportation and Logistics Services - As a global logistics provider, our primary performance obligation under our customer contracts is to utilize our relationships with a wide variety of transportation companies to efficiently and cost-effectively transport our customers’ freight. Revenue is recognized for these performance obligations as they are satisfied over the contract term, which generally represents the transit period. The transit period can vary based upon the method of transport; generally, a number of days for over the road, rail, and air transportation, or several weeks in the case of an ocean shipment.

Recognizing revenue for contracts where the transit period is partially complete or completed and not yet invoiced at period end requires management to make judgments that affect the amounts and timing of revenue recognized at period end. As of December 31, 2022, we recorded revenue of $257.6 million for services we have provided while a shipment was still in-transit but for which we had not yet completed our performance obligation or had not yet invoiced our customer compared to $453.7 million at December 31, 2021. The amount of revenue recognized for contracts where the transit period was partially complete declined significantly at December 31, 2022 compared to December 31, 2021 driven by the macroeconomic and industry factors impacting the cost of purchased transportation, in addition to the supply chain disruptions that caused increased transit times near the end of 2021. See Item 7 of Part II, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for further information.

We utilize our historical knowledge of shipping lanes and estimated transit times to determine the transit period in cases where our customers’ freight has not reached its intended destination. In addition, we analyze contract data for the first few days following the reporting date combined with our historical experience of trends related to partially completed contracts as of the reporting date to determine our right to consideration for the services we have provided where the transit period is partially complete or completed and not yet invoiced at period end. Differences in contract data for the first few days following the reporting date compared with our historical experience or disruptions such as weather events, port congestion, or other delays could cause the actual amount of revenue earned at period end to differ from these estimates.

Total revenues represent the total dollar value of revenue recognized from contracts with customers for the goods and services we provide. Substantially all of our revenue is attributable to contracts with our customers. Most transactions in our transportation and sourcing businesses are recorded at the gross amount we charge our customers for the service we provide and goods we sell. In these transactions, we are primarily responsible for fulfilling the promise to provide the specified good or service to our customer and we have discretion in establishing the price for the specified good or service. Additionally, in our sourcing business, in some cases we take inventory risk before the specified good has been transferred to our customer. Customs brokerage, managed services, freight forwarding, and sourcing managed procurement transactions are recorded at the net amount we charge our customers for the service we provide because many of the factors stated above are not present. See also Note 1, Summary of Significant Accounting Policies, for further information regarding our revenue recognition policies.

GOODWILL. Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible assets and identifiable intangible assets purchased and liabilities assumed.

Goodwill is tested for impairment annually on November 30, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We first perform a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting units is less than their respective carrying value (“Step Zero Analysis”). If the Step Zero Analysis indicates it is more likely than not that the fair value of our reporting units is less than their respective carrying value, an additional impairment assessment is performed (“Step One Analysis”).

When we perform a Step One Analysis, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

In the Step One Analysis, the fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital, and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations when a Step One Analysis is performed.

As part of our annual Step Zero Analysis performed in 2022, we determined that due to certain qualitative factors and the recent performance of our Europe Surface Transportation reporting unit, the more likely than not criteria had been met, and therefore a Step One Analysis was completed for this reporting unit. Our Step Zero Analysis did not indicate that the more likely than not

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criteria was met for any other reporting units and therefore a Step One Analysis was not completed for those reporting units. As a result of our Step One Analysis for Europe Surface Transportation we determined that the fair value was greater than the reporting unit's respective carrying value. As such, the goodwill balance of Europe Surface Transportation was not impaired. No impairments have been recorded in any period presented in the financial statements.

INCOME TAX RESERVES. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may or may not prevail in full or in part. Under U.S. GAAP, if we determine that a tax position, more likely than not, will be sustained upon audit based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50 percent likely of being realized upon resolution. We presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information.

We regularly monitor our tax positions and tax liabilities. We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded tax benefit, when there is (i) a completion of a tax audit, (ii) effective settlement of an issue, (iii) litigation of the issue, including appeals, (iv) a change in applicable tax law including a tax case or legislative guidance, or (v) the expiration of the applicable statute of limitations. Significant judgment is required in accounting for tax reserves. Although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on our effective tax rate, consolidated earnings, financial position and/or cash flows. Uncertain income tax positions are included in “Accrued income taxes” or “Noncurrent income taxes payable” in the consolidated balance sheet.

DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL CONTINGENCIES

The following table aggregates all contractual commitments and commercial obligations, due by period, that affect our financial condition and liquidity position as of December 31, 2022 (dollars in thousands):

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(1)Amounts payable relate to the semi-annual interest due on the senior and long-term notes and the principal amount at maturity.

(2) We maintain operating leases for office space, warehouses, office equipment, and a small number of intermodal containers. See Note 11, Leases, for further information.

(3) Purchase obligations include agreements for services that are enforceable and legally binding and that specify all significant terms. As of December 31, 2022, such obligations primarily include ocean and air freight capacity, telecommunications services, third-party software contracts, maintenance contracts, and information technology related capacity. In some instances our contractual commitments may be usage based or require estimates as to the timing of cash settlement.

We have no financing lease obligations. Long-term liabilities consist primarily of noncurrent taxes payable and long-term notes payable. Due to the uncertainty with respect to the amounts or timing of future cash flows associated with our unrecognized tax benefits as of December 31, 2022, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $43.0 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 5, Income Taxes, to the consolidated financial statements for a discussion on income taxes. As of December 31, 2022, we do not have significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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