RXO, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 39 Consolidated Balance Sheets as of December 31, 202 2 and 202 1 41 Consolidated Statements of Operations for the Years Ended December 31, 202 2 , 202 1 and 20 20 42 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 202 2 , 202 1 and 20 20 43 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 2 , 202 1 and 20 20 44 Consolidated Statements of Changes in Equity for the Years Ended December 31, 202 2 , 202 1 and 20 20 45 Notes to Consolidated Financial Statements 46 38 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors RXO, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of RXO, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits 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. We believe that our audits provide a reasonable basis for our opinion. 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 separate opinions 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 3 to the consolidated financial statements, the Company completed its separation from XPO, Inc. (“XPO”) on November 1, 2022. 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 to be used 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. 39 Table of Contents 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 complex auditor judgment and the involvement of IT professionals with specialized skills and knowledge. 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 to key IT applications 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 – 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 2022. Stamford, Connecticut February 24, 2023 40 Table of Contents RXO, Inc. Consolidated Balance Sheets December 31, (Dollars in millions, shares in thousands, except per share amounts) 2022 2021 ASSETS Current assets Cash and cash equivalents $ 98 $ 29 Accounts receivable, net of allowances of $ 13 and $ 9 , respectively 900 1,010 Other current assets 31 44 Total current assets 1,029 1,083 Long-term assets Property and equipment, net of $ 241 and $ 219 in accumulated depreciation, respectively 119 111 Operating lease assets 159 128 Goodwill 630 630 Identifiable intangible assets, net of $ 106 and $ 217 in accumulated amortization, respectively 79 100 Other long-term assets 15 16 Total long-term assets 1,002 985 Total assets $ 2,031 $ 2,068 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 501 $ 520 Accrued expenses 256 248 Current maturities of long-term debt 4 — Short-term operating lease liabilities 48 42 Other current liabilities 14 6 Total current liabilities 823 816 Long-term liabilities Long-term debt and obligations under finance leases 451 — Deferred tax liability 16 52 Long-term operating lease liabilities 114 93 Other long-term liabilities 40 37 Total long-term liabilities 621 182 Commitments and Contingencies (Note 14) Equity Preferred stock, $ 0.01 par value; 10,000 shares authorized; 0 shares issued and outstanding as of December 31, 2022 — — Common stock, $ 0.01 par value; 300,000 shares authorized; 116,400 shares issued and outstanding as of December 31, 2022 1 — Additional paid-in capital 588 — Retained earnings 2 — XPO investment — 1,072 Accumulated other comprehensive loss ( 4 ) ( 2 ) Total equity 587 1,070 Total liabilities and equity $ 2,031 $ 2,068 See accompanying notes to consolidated financial statements. 41 Table of Contents RXO, Inc. Consolidated Statements of Operations Years Ended December 31, (Dollars in millions, shares in thousands, except per share amounts) 2022 2021 2020 Revenue $ 4,796 $ 4,689 $ 3,357 Cost of transportation and services (exclusive of depreciation and amortization) 3,624 3,681 2,568 Direct operating expense (exclusive of depreciation and amortization) 226 192 174 Sales, general and administrative expense 640 539 455 Depreciation and amortization expense 86 81 76 Transaction and integration costs 84 2 14 Restructuring costs 13 2 10 Operating income 123 192 60 Other expense — 1 3 Interest expense, net 4 — — Income before income taxes 119 191 57 Income tax provision 27 41 14 Net income $ 92 $ 150 $ 43 Earnings per share data Basic earnings per share $ 0.80 $ 1.30 $ 0.37 Diluted earnings per share $ 0.79 $ 1.30 $ 0.37 Weighted-average common shares outstanding Basic weighted-average common shares outstanding 115,335 115,163 115,163 Diluted weighted-average common shares outstanding 115,791 115,163 115,163 See accompanying notes to consolidated financial statements. 42 Table of Contents RXO, Inc. Consolidated Statements of Comprehensive Income Years Ended December 31, (In millions) 2022 2021 2020 Net income $ 92 $ 150 $ 43 Other comprehensive income (loss), net of tax Foreign currency translation gain (loss), net of tax effect of $ — , $ — and $ — $ ( 2 ) $ — $ 1 Other comprehensive income (loss) ( 2 ) — 1 Comprehensive income $ 90 $ 150 $ 44 See accompanying notes to consolidated financial statements. 43 Table of Contents RXO, Inc. Consolidated Statements of Cash Flows Years Ended December 31, (In millions) 2022 2021 2020 Operating activities Net income $ 92 $ 150 $ 43 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization expense 86 81 76 Stock compensation expense 32 8 8 Deferred tax expense ( 20 ) 3 ( 9 ) Other 6 3 14 Changes in assets and liabilities Accounts receivable 92 ( 242 ) ( 264 ) Other assets 14 ( 4 ) ( 5 ) Accounts payable ( 14 ) 129 87 Accrued expenses and other liabilities 22 27 75 Net cash provided by operating activities 310 155 25 Investing activities Payment for purchases of property and equipment ( 57 ) ( 39 ) ( 47 ) Proceeds from sale of property and equipment 1 1 8 Net cash used in investing activities ( 56 ) ( 38 ) ( 39 ) Financing activities Proceeds from issuance of debt 451 — — Payment for debt issuance costs ( 9 ) — — Payment for tax withholdings related to vesting of stock compensation awards ( 3 ) — — Net transfers (to) from XPO ( 621 ) ( 159 ) 32 Other ( 1 ) 1 — Net cash (used in) provided by financing activities ( 183 ) ( 158 ) 32 Effect of exchange rates on cash, cash equivalents and restricted cash ( 2 ) — 1 Net increase (decrease) in cash, cash equivalents and restricted cash 69 ( 41 ) 19 Cash, cash equivalents and restricted cash, beginning of period 29 70 51 Cash, cash equivalents and restricted cash, end of period $ 98 $ 29 $ 70 Supplemental disclosure of cash flow information: Cash paid for income taxes 3 5 2 See accompanying notes to consolidated financial statements. 44 Table of Contents RXO, Inc. Consolidated Statements of Changes in Equity Common Stock (Dollars in millions, shares in thousands) Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss XPO Investment Total Equity Balance as of December 31, 2019 — $ — $ — $ — $ ( 3 ) $ 982 $ 979 Net income — — — — — 43 43 Other comprehensive income — — — — 1 — 1 Stock compensation expense — — — — — 8 8 Net transfers from XPO — — — — 37 37 Balance as of December 31, 2020 — $ — $ — $ — $ ( 2 ) $ 1,070 $ 1,068 Net income — — — — — 150 150 Stock compensation expense — — — — — 8 8 Net transfers to XPO — — — — — ( 156 ) ( 156 ) Balance as of December 31, 2021 — $ — $ — $ — $ ( 2 ) $ 1,072 $ 1,070 Net income — — — 2 — 90 92 Other comprehensive loss — — — — ( 2 ) — ( 2 ) Stock compensation expense — — 3 — — 29 32 Vesting of stock compensation awards 1,237 — — — — — — Tax withholdings related to vesting of stock compensation awards — — ( 3 ) — — — ( 3 ) Net transfers to XPO — — — — — ( 602 ) ( 602 ) Issuance of common stock and reclassification of XPO investment 115,163 1 588 — — ( 589 ) — Balance as of December 31, 2022 116,400 $ 1 $ 588 $ 2 $ ( 4 ) $ — $ 587 See accompanying notes to consolidated financial statements. 45 Table of Contents RXO, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 2022, 2021 and 2020 1. Organization RXO, Inc., (“RXO”, the “Company” or “we”), is a brokered transportation platform defined by cutting-edge technology and an asset-light business model, with the largest component being our core truck brokerage business. Our operations also include three asset-light, brokered transportation services, all of which are complementary to our truck brokerage business: managed transportation, last mile and freight forwarding. We present our operations in the consolidated financial statements as one reportable segment. On November 1, 2022, the Company completed the separation from XPO, Inc. (formerly known as XPO Logistics, Inc.) (“XPO”) (the “Separation”) in a transaction intended to be tax-free for U.S. federal income tax purposes. The Separation was accomplished by the distribution of 100 percent of the outstanding common stock of RXO to XPO stockholders as of the close of business on October 20, 2022, the record date for the distribution. XPO stockholders received one share of RXO common stock for every share of XPO common stock held at the close of business on the record date. RXO is now a standalone publicly traded company, and, on November 1, 2022, regular-way trading of RXO’s common stock commenced on the New York Stock Exchange (the “NYSE”) under the ticker symbol “RXO.” 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 November 1, 2022, the Company became a standalone publicly traded company, and its financial statements post-Separation are prepared on a consolidated basis. The combined 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 RXO. The charges reflected have either been 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 Sales, 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 RXO to XPO in the year in which the cost was recorded in the Consolidated Statements of Operations. 46 Table of Contents For the periods ended before the Separation, XPO investment represents XPO’s historical investment in RXO and includes the net effects of transactions with and allocations from XPO as well as RXO’s accumulated earnings. Certain transactions between RXO and XPO, including XPO’s non-RXO subsidiaries, have been included in these consolidated financial statements, and are considered to be effectively settled at the time the transaction is recorded. The total net effect of the cash settlement of these transactions is reflected in the Consolidated Statements of Cash Flows as a financing activity and in the Consolidated Balance Sheets as XPO investment. The components of the net transfers to and from XPO include certain costs allocated from XPO Corporate functions, income tax expense, certain cash receipts and payments made on behalf of RXO and general financing activities. 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 RXO, Inc. and its majority-owned subsidiaries. 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 transportation services industry, 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 Revenue Recognition We recognize revenue when we transfer control of promised products or services to customers in an amount equal to the consideration we expect to receive for those products or services. Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. We generate revenue by providing truck brokerage and other transportation services for our customers. Additional services may be provided to our customers under their transportation contracts, including unloading and other incidental services. The transaction price is based on the consideration specified in the customer’s contract. 47 Table of Contents A performance obligation is created when a customer under a transportation contract submits a bill of lading for the transport of goods from origin to destination. These performance obligations are satisfied as the shipments move from origin to destination. We recognize transportation revenue proportionally as a shipment moves from origin to destination and the related costs are recognized as incurred. Some of our customer contracts contain our promise to stand ready to provide transportation services. For these contracts, we recognize revenue on a straight-line basis over the term of the contract because the pattern of benefit to the customer, and our efforts to fulfill the contract, are generally distributed evenly throughout the period. Performance obligations are generally short-term, with transit times usually less than one week. Generally, customers are billed on shipment of the freight or on a weekly or monthly basis and make payment according to approved payment terms. When we do not control the specific services, we recognize revenue as the difference between the amount the customer pays us for the service less the amount we are charged by third parties who provide the service. Generally, we can adjust our pricing based on contractual provisions related to achieving agreed-upon performance metrics, changes in volumes, services and market conditions. 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. Cash and Cash Equivalents We consider 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 the sum of payments honored by the Company's bank exceed the amount of cash available in the Company's account. The Company had $ 1 million in bank overdrafts as of December 31, 2022 recorded within Other current liabilities in the Consolidated Balance Sheets. There were no bank overdrafts as of December 31, 2021. Accounts Receivable and Allowance for Credit Losses We record accounts receivable at the contractual amount, and we record an allowance for credit losses for the amount we estimate we may not collect. In determining the allowance for credit losses, we consider historical collection experience, the age of the accounts receivable balances, the credit quality and risk of our customers, any specific customer collection issues, current economic conditions, and other factors that may impact our customers’ ability to pay. We also consider reasonable and supportable forecasts of future economic conditions and their expected impact on customer collections in determining our allowance for credit losses. We write off accounts receivable balances once the receivables are no longer deemed collectible. The roll-forward of the allowance for credit losses is as follows: Years Ended December 31, (In millions) 2022 2021 2020 Beginning balance $ 9 $ 10 $ 7 Provision charged to expense 11 6 11 Write-offs, less recoveries, and other adjustments ( 7 ) ( 7 ) ( 8 ) Ending balance $ 13 $ 9 $ 10 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 expense as incurred. For internally-developed computer software, all costs incurred during planning and evaluation are expensed as incurred. Costs incurred during the application development stage are capitalized and included in property and equipment. Capitalized software also includes the fair value of acquired internally-developed technology. We compute depreciation expense on a straight-line basis over the estimated useful lives of the assets as follows: 48 Table of Contents Classification Estimated Useful Life Buildings and leasehold improvements Term of lease to 39 years Vehicles, tractors and trailers 3 to 14 years Machinery and equipment 3 to 10 years Computer software and equipment 3 to 7 years Leases We have operating leases primarily for real estate, tractors and trailers and finance leases for equipment. We determine if an arrangement is a lease at inception. We recognize operating lease right-of-use assets and liabilities at the lease commencement date based on the estimated present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use the incremental borrowing rates of RXO based on the information available at commencement date to determine the present value of future lease payments. This rate is determined from a hypothetical yield curve available at the lease commencement date that takes into consideration market yield levels of RXO’s relevant debt outstanding as well as the index that matches RXO’s credit rating, and then adjusts as if the borrowings were collateralized. We include options to extend or terminate a lease in the lease term when we are reasonably certain to exercise such options. We exclude variable lease payments (such as payments based on an index or reimbursements of lessor costs) from our initial measurement of the lease liability. We recognize leases with an initial term of 12 months or less as lease expense over the lease term, and those leases are not recorded on our Consolidated Balance Sheets. We account for lease and non-lease components within a contract as a single lease component for our real estate leases. Lease expense for operating leases is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Segment Reporting We conduct our business and track our results as one reportable segment based upon the aggregation of our operating segments. Our chief operating decision maker regularly reviews financial information at the operating segment level to allocate resources and assess performance. We have determined that all our operating segments share the following similar economic and qualitative characteristics and therefore meet the criteria established in Accounting Standards Codification (“ASC”) 280–Segment Reporting for operating segments to be aggregated into one reportable segment: • The operating segments have similar economic characteristics (e.g., comparable adjusted earnings before interest, taxes, depreciation and amortization margins, our measure of segment profitability), and similar long-term financial models; • The nature of the services offered by each operating segment is similar: all the services leverage technology and an asset-light infrastructure to arrange for the transportation of customer goods by qualified independent carriers; • The operating segments all operate within the transportation industry and in primarily the same geography (North America); • All operating segments provide business-to-business services, with no segment transacting directly with the end-user customer; • Each operating segment’s customer base spans diversified industry verticals that overlap with other operating segments and have a common salesforce engaged in significant cross-selling activities; and • All operating segments conduct business in a similar regulatory environment applicable to the transportation industry, including regulation and licensing by various governmental agencies; most notably, the Federal Motor Carrier Safety Administration of the U.S. Department of Transportation. 49 Table of Contents All of our operating segments can be expected to have similar future prospects as they have similar economic attributes. The causes for fluctuations in operating and financial performance are generally the same among the operating segments and include such factors as: (i) changes in overall demand for outsourced freight transportation services, (ii) changes in prices charged by third-party carriers, (iii) decisions by customers to develop or expand internal transportation capabilities, and (iv) macroeconomic impacts on supply chains for materials, parts and finished goods. Goodwill We measure goodwill as the excess of consideration transferred over the fair value of net assets acquired in business combinations. We allocate goodwill to our reporting units for the purpose of impairment testing. We evaluate goodwill for impairment annually, or more frequently if an event or circumstance indicates an impairment loss may have been incurred. We measure goodwill impairment, if any, at the amount a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. Our reporting units are our operating segments or one level below our operating segments for which discrete financial information is prepared and regularly reviewed by segment management. We have six reporting units. 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. Under the income approach, 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 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. For our 2022 goodwill assessment, we performed a quantitative analysis for our reporting units using a combination of income and market approaches. As of November 30, 2022 we completed our annual impairment tests for goodwill with all of our reporting units having fair values in excess of their carrying values, resulting in no impairment of goodwill. Intangible Assets and Long-lived Assets We review intangible assets and long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An asset is considered to be impaired if the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. We estimate fair value using the expected future cash flows discounted at a rate comparable with the risks associated with the recovery of the asset. Our intangible assets subject to amortization consist of customer relationships. We amortize intangible assets on a straight-line basis or on a basis consistent with the pattern in which the economic benefits are realized. The estimated useful life for customer relationships is 10 to 16 years. 50 Table of Contents Accrued Expenses The components of accrued expenses are as follows: As of December 31, (In millions) 2022 2021 Accrued transportation and facility charges $ 120 $ 118 Accrued salaries and wages 60 49 Accrued insurance 23 23 Other accrued expenses 53 58 Total accrued expenses $ 256 $ 248 Insurance We participate in a combination of self-insurance programs and purchased insurance that are managed to provide for the costs of medical, casualty, liability, vehicular, cargo, workers’ compensation, cyber risk and property claims. Insurance coverage levels are adjusted annually based on risk tolerance and premium expense. Liabilities for the risks we retain, including estimates of claims incurred but not reported, are not discounted and are estimated, in part, by considering retention levels, historical cost experience, demographic and severity factors, and judgments about current and expected levels of cost per claim. Changes in these assumptions can impact actual costs paid to settle the claims and those amounts may be different than estimates. Additionally, claims may emerge in future years for events that occurred in a prior year at a rate that differs from previous actuarial projections. At December 31, 2022 and 2021, our insurance liabilities amounted to $ 58 million and $ 55 million, respectively, and were included in accrued expenses and other long-term liabilities on our Consolidated Balance Sheets. Income Taxes Up until the date of the Separation, the operations of the Company were included in the consolidated U.S. federal and certain state and local and foreign income tax returns filed by XPO, where applicable. Income tax expense and other income tax related information contained in the consolidated financial statements up until the date of the Separation were presented on a separate return basis as if the Company had filed its own tax returns. As a result, actual tax transactions included in the consolidated financial statements of XPO may not be included in the consolidated financial statements. Similarly, the tax treatment of certain items reflected in the consolidated financial statements may not be reflected in the consolidated financial statements and tax returns of XPO. Therefore, portions of items such as net operating losses (“NOLs”), credit carryforwards, other deferred taxes, and valuation allowances may exist in the consolidated financial statements that may or may not exist in XPO’s consolidated financial statements and vice versa. In addition, although deferred tax assets up until the date of the Separation were recognized for NOLs and tax credits in accordance with the separate return method, certain NOLs and credits did not carry over with the Company in connection with the Separation. The income taxes of the Company as presented in the consolidated financial statements may not be indicative of the income taxes that the Company will incur in the future. In jurisdictions where the Company has been included in tax returns filed by XPO, any income tax receivables or payables resulting from the related income tax provisions have been reflected in the Consolidated Balance Sheets within XPO investment. 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. 51 Table of Contents We account for income taxes using the asset and liability method on a legal entity and jurisdictional basis, under which we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. Our calculation relies on several factors, including pre-tax earnings, differences between tax laws and accounting rules, statutory tax rates, tax credits, uncertain tax positions, and valuation allowances. We use judgment and estimates in evaluating our tax positions. Valuation allowances are established when, in our judgment, it is more likely than not that our deferred tax assets will not be realized based on all available evidence. We record global intangible low-taxed income tax as a period cost. We recognize tax benefits from uncertain tax positions only if (based on the technical merits of the position) it is more likely than not that the tax positions will be sustained on examination by the tax authority. We adjust these tax liabilities, including related interest and penalties, based on the current facts and circumstances. We report tax-related interest and penalties as a component of income tax expense. Foreign Currency Translation and Transactions The assets and liabilities of our foreign subsidiaries that use their local currency as their functional currency are translated to U.S. dollars (“USD”) using the exchange rate prevailing at each balance sheet date, with balance sheet currency translation adjustments recorded in accumulated other comprehensive income (loss) (“AOCI”) on our Consolidated Balance Sheets. The assets and liabilities of our foreign subsidiaries whose local currency is not their functional currency are remeasured from their local currency to their functional currency and then translated to USD. The results of operations of our foreign subsidiaries are translated to USD using average exchange rates prevailing for each period presented. We convert foreign currency transactions recognized on our Consolidated Statements of 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 expense in our Consolidated Statements of Operations and were not material for any of the periods presented. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The levels of inputs used to measure fair value are: • Level 1—Quoted prices for identical instruments in active markets; • Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and • Level 3—Valuations based on inputs that are unobservable, generally utilizing pricing models or other valuation techniques that reflect management’s judgment and estimates. We base our fair value estimates on market assumptions and available information. The carrying values of cash, accounts receivable, accounts payable and accrued expenses approximated their fair values as of December 31, 2022 and 2021 due to their short-term nature and/or being receivable or payable on demand. Stock-Based Compensation We account for stock-based compensation based on the equity instrument’s grant date fair value. For grants of restricted stock units (“RSUs”) subject to service-based or performance-based vesting conditions only, 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. 52 Table of Contents Related-Party Transactions Transactions between the Company and XPO, and other non-RXO subsidiaries of XPO, are deemed related-party transactions through the November 1, 2022 Separation date. Related-party transactions are comprised of the following: (i) those that have been effectively settled for cash, and (ii) those which have historically not been settled and have been forgiven by either party. For those that have been cash settled, we have recorded related-party receivables (assets) or payables (liabilities) in the Consolidated Balance Sheets as of December 31, 2021. For those that have been forgiven as of the date of the Separation, the amounts have been recorded as an adjustment of XPO Investment in the Consolidated Balance Sheets. Reclassifications Certain amounts reported for prior years have been reclassified to conform to the current year’s presentation. Adoption of New Accounting Standard In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” The ASU increases the transparency surrounding government assistance by requiring annual disclosure of (i) the types of assistance received, (ii) an entity’s accounting for the assistance and (iii) the effect of the assistance on the entity’s financial statements. We adopted this standard on January 1, 2022, on a prospective basis. The adoption did not have a material impact on our financial statement disclosures. Accounting Pronouncements Issued but Not Yet Effective In September 2022, the FASB issued ASU 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” The ASU increases the transparency surrounding supplier finance programs by requiring the buyer to disclose information on an annual basis about the key terms of the program, the outstanding obligation amounts as of the end of the period, a rollforward of such amounts, and the balance sheet presentation of the related amounts. Additionally, the obligation amount outstanding at the end of the period must be disclosed in interim periods. The amendments are effective for fiscal years beginning after December 15, 2022 except for the requirement to disclose the rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. We are currently evaluating the impact of the new guidance, which is limited to financial statement disclosures. 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 RXO and XPO as part of the Separation, (ii) cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of RXO’s business with RXO and financial responsibility for the obligations and liabilities of XPO’s remaining business with XPO, (iii) the allocation among RXO 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 RXO and XPO related to the Separation. Under the TSA, (i) XPO provides RXO and certain of its affiliates, on an interim, transitional basis, various services, and (ii) RXO provides XPO and certain of its affiliates, on an interim, transitional basis, various services. The services provided include, among others, employee benefits administration, information technology services, regulatory services, accounting support, general administrative services and other support services. The services generally commenced on the date of the Separation and will terminate no later than eight months following the Separation. 53 Table of Contents XPO and RXO 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. RXO is generally responsible for federal, state and foreign (i) income taxes imposed on a separate return basis on RXO or any of its subsidiaries and (ii) non-income taxes imposed on a separate return basis on RXO or any of its subsidiaries, or with respect to which RXO or any of its subsidiaries is obligated to file the applicable return, in all cases, 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 RXO 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. The IPLA between an RXO subsidiary and XPO provides such RXO subsidiary licenses to certain XPO software and other intellectual property rights retained by XPO, and provides XPO licenses to certain software, patents and other intellectual property owned by RXO subsidiaries. In October 2022, the Company completed an offering of $ 355 million aggregate principal amount of unsecured notes (the “Notes”) and entered into a five-year unsecured term loan facility of $ 100 million (the “Term Loan”). Net proceeds from the issuance of the Notes and the incurrence of the Term Loan, together with cash on RXO's balance sheet, were used to fund a net cash distribution of $ 604 million from RXO to XPO, in the fourth quarter of 2022. See Note 9 — Debt for additional information. 4. Revenue Recognition Disaggregation of Revenues We disaggregate our revenue by geographic area, service offering and industry sector. The majority of our revenue, based on sales office location, is generated in the U.S. Approximately 9 %, 9 % and 8 % of our revenues were generated outside the U.S. (primarily in North America, excluding the U.S., and Asia) for the years ended December 31, 2022, 2021 and 2020, respectively. Our revenue disaggregated by service offering is as follows: Years Ended December 31, (In millions) 2022 2021 2020 Truck brokerage $ 2,929 $ 2,749 $ 1,684 Last mile 1,061 1,016 908 Managed transportation 523 603 582 Freight forwarding 422 434 225 Eliminations ( 139 ) ( 113 ) ( 42 ) Total $ 4,796 $ 4,689 $ 3,357 54 Table of Contents Our revenue disaggregated by industry sector is as follows: Years Ended December 31, (In millions) 2022 2021 2020 Retail/e-commerce $ 1,799 $ 1,771 $ 1,262 Food and beverage 530 585 394 Industrial/manufacturing 817 778 553 Logistics and transportation 338 331 240 Automotive 390 308 252 Other 922 916 656 Total $ 4,796 $ 4,689 $ 3,357 Performance Obligations Remaining performance obligations represent firm contracts for which services have not been performed and future revenue recognition is expected. As permitted in determining the remaining performance obligation, we omit obligations that: (i) have original expected durations of one year or less or (ii) contain variable consideration. As of December 31, 2022, the fixed consideration component of our remaining performance obligation was approximately $ 158 million, and we expect approximately 94 % of that amount to be recognized over the next 3 years and the remainder thereafter. We estimate remaining performance obligations at a point in time and actual amounts may differ from these estimates due to changes in foreign currency exchange rates and contract revisions or terminations. 5. Restructuring Charges We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure. These actions generally include severance and facility-related costs, including impairment of operating lease assets, and are intended to improve our efficiency and profitability going forward. The following is a rollforward of the Company’s restructuring liability, which is included in Other current liabilities in the Consolidated Balance Sheets: Year Ended December 31, 2022 (In millions) Reserve Balance as of December 31, 2021 Charges Incurred Payments Other Reserve Balance as of December 31, 2022 Severance $ — $ 10 $ ( 2 ) $ ( 6 ) $ 2 Facilities 2 2 ( 3 ) — 1 Contract termination — 1 ( 1 ) — — Total $ 2 $ 13 $ ( 6 ) $ ( 6 ) $ 3 Year Ended December 31, 2021 (In millions) Reserve Balance as of December 31, 2020 Charges Incurred Payments Other Reserve Balance as of December 31, 2021 Severance $ — $ 2 $ — $ ( 2 ) $ — Facilities 5 — ( 3 ) — 2 Total $ 5 $ 2 $ ( 3 ) $ ( 2 ) $ 2 We expect the majority of the cash outlays related to the remaining restructuring liability at December 31, 2022 to be complete within twelve months. 55 Table of Contents 6. Property and Equipment The following table summarizes our property and equipment : December 31, (In millions) 2022 2021 Property and equipment Buildings and leasehold improvements $ 23 $ 17 Vehicles, tractors and trailers 23 18 Machinery and equipment 36 38 Computer software and equipment 278 257 Total property and equipment, gross 360 330 Less: accumulated depreciation ( 241 ) ( 219 ) Total property and equipment, net $ 119 $ 111 Net book value of capitalized internally-developed software included in property and equipment, net $ 62 $ 75 Depreciation of property and equipment and amortization of computer software was $ 65 million, $ 58 million and $ 51 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022 and 2021, our long-lived tangible assets outside of the U.S. were not significant. 7. Leases Most of our leases are operating leases and consist of real estate leases. In addition, we lease trucks, tractors and trailers. The following amounts are recorded in the Consolidated Balance Sheets related to leases: December 31, (In millions) 2022 2021 Operating leases: Operating lease assets $ 159 $ 128 Short-term operating lease liabilities $ 48 $ 42 Long-term operating lease liabilities 114 93 Total operating lease liabilities $ 162 $ 135 Finance leases: Property and equipment, gross $ 7 $ — Accumulated depreciation ( 2 ) — Property and equipment, net $ 5 $ — Current portion of obligations under finance leases $ 2 $ — Long-term portion of obligations under finance leases 4 — Total finance lease liabilities $ 6 $ — 56 Table of Contents Supplemental weighted-average information for leases is as follows: December 31, 2022 2021 Weighted-average remaining lease term (years) Operating leases 4.1 4.0 Finance leases 4.3 N/A Weighted-average discount rate Operating leases 4.7 % 4.6 % Finance leases 6.1 % N/A The components of our lease expense are as follows: Years Ended December 31, (In millions) 2022 2021 2020 Operating lease cost $ 51 $ 46 $ 45 Short-term lease cost 10 8 9 Variable lease cost 14 12 11 Total operating lease cost $ 75 $ 66 $ 65 Finance lease cost: Amortization of leased assets $ 1 $ — $ — Total finance lease cost $ 1 $ — $ — Total lease cost $ 76 $ 66 $ 65 Supplemental cash flow information related to leases is as follows: Years Ended December 31, (In millions) 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 49 $ 41 $ 44 Financing cash flows for finance leases 1 — — Leased assets obtained in exchange for new lease obligations: Operating leases 57 55 37 Finance leases 7 — — Future minimum lease payments as of December 31, 2022 are as follows: (In millions) Finance Leases Operating Leases 2023 $ 2 $ 54 2024 2 47 2025 1 31 2026 1 20 2027 — 11 Thereafter — 16 Total lease payments 6 179 Less: interest — ( 17 ) Present value of lease liabilities $ 6 $ 162 As of December 31, 2022, we had additional operating leases that have not yet commenced with future undiscounted lease payments of $ 8 million. These operating leases will commence in 2023 with initial lease terms of 5 years . 57 Table of Contents 8. Goodwill and Intangible Assets There were no cumulative goodwill impairments as of December 31, 2022. Our identifiable intangible assets consist entirely of customer relationships, all of which are definite-lived. We did not recognize any impairment of our identified intangible assets in 2022 or 2021. During 2022 we retired fully amortized intangible assets of $ 132 million, consisting of $ 130 million in customer relationships and $ 2 million in non-compete agreements. Estimated future amortization expense for amortizable intangible assets for the next five years and thereafter is as follows: (In millions) 2023 2024 2025 2026 2027 Thereafter Estimated amortization expense $ 13 $ 12 $ 11 $ 11 $ 11 $ 21 Actual amounts of amortization expense may differ from estimated amounts due to changes in foreign currency exchange rates, additional intangible asset acquisitions, future impairment of intangible assets, accelerated amortization of intangible assets and other events. Intangible asset amortization expense was $ 21 million, $ 24 million and $ 25 million for the years ended December 31, 2022, 2021, and 2020, respectively. 9. Debt The following table summarizes the principal balance and carrying value of our debt: December 31, 2022 (In millions) Principal Balance Carrying Value Term Loan $ 100 $ 100 7.50 % Notes due 2027 (1) 355 346 Finance leases, asset financing and other 9 9 Total debt and obligations under finance leases 464 455 Less: Current maturities of long-term debt 4 4 Total long-term debt and obligations under finance leases $ 460 $ 451 (1) Th e carrying value of the 7.50 % Notes due 2027 is presented net of unamortized debt issuance cost and discount of $ 9 million as of December 31, 2022. The fair value of our debt and classification in the fair value hierarchy is as follows: December 31, (In millions) Level 2022 2021 Term Loan 2 $ 95 $ — 7.50 % Notes due 2027 1 358 — We valued Level 1 debt using quoted prices in active markets. We valued Level 2 debt using bid evaluation pricing models or quoted prices of securities with similar characteristics. Our principal payment obligations on debt (excluding finance leases) for the next five years and thereafter is as follows: (In millions) 2023 2024 2025 2026 2027 Thereafter Principal payments on debt $ 2 $ 1 $ 5 $ 5 $ 445 $ — 58 Table of Contents Revolving Credit Agreement On October 18, 2022, we entered into a five-year , unsecured multi-currency revolving credit facility (the “Revolver”). The Revolver borrowing capacity is up to $ 500 million, of which $ 50 million is available for the issuance of letters of credit. Loans under the Revolver bear interest at a fluctuating rate plus an applicable margin based on the Company’s credit ratings. The Company is required to pay a commitment fee on any unused commitment, based on pricing levels set forth in the agreement. The covenants in the Revolver are customary for financings of this type. The Revolver requires the Company to maintain a maximum consolidated leverage ratio and minimum interest coverage ratio. At December 31, 2022, the Company is in compliance with the covenants of the Revolver. There were no amounts outstanding under the Revolver as of December 31, 2022. Term Loan Credit Agreement On October 18, 2022, we entered into the $ 100 million Term Loan. The Term Loan bears interest at a fluctuating rate per annum plus an applicable margin calculated based on RXO’s credit ratings, payable quarterly. Beginning with the fiscal quarter ending March 31, 2025, the Term Loan will amortize on a quarterly basis in an amount equal to (i) 5 % per annum for the first eight fiscal quarters ending on or after such date and (ii) 10 % per annum for each fiscal quarter ending thereafter. The Term Loan matures on November 1, 2027. The effective interest rate on the Term Loan was 5.93 % as of December 31, 2022. The covenants in the Term Loan are customary for financings of this type. In addition, the Term Loan requires the Company to maintain a maximum consolidated leverage ratio and minimum interest coverage ratio. At December 31, 2022, the Company was in compliance with the covenants of the credit agreement governing the Term Loan. Notes On October 25, 2022, we completed the private placement of $ 355 million in aggregate principal amount of the Notes. The Notes bear interest at a rate of 7.50 % per annum payable semiannually in cash in arrears on May 15 and November 15 of each year, beginning May 15, 2023, and mature on November 15, 2027, unless earlier repurchased or redeemed, if applicable. The Notes were issued at an issue price of 98.962 % of par. The effective interest rate on the Notes was 8.14 % as of December 31, 2022. The Notes are guaranteed by each of our direct and indirect wholly-owned domestic subsidiaries (other than certain excluded subsidiaries). The Notes and its guarantees are unsecured, senior indebtedness for us and our guarantors. The Notes contain covenants customary for debt securities of this nature. At December 31, 2022, the Company was in compliance with the covenants of the N otes. 10. Employee Benefit Plan The Company sponsors a defined contribution plan that is available to employees whose primary place of employment is the U.S. The Company matches up to 4 % of employees’ pre-tax contributions, after completing one year of service. The Company’s costs for the defined contribution plan were $ 8 million, $ 7 million and $ 6 million for the years ended December 31, 2022, 2021 and 2020, respectively, and were primarily included in Sales, general and administrative expense in the Consolidated Statements of Operations. 59 Table of Contents 11. Stock-Based Compensation Prior to the Separation, RXO employees participated in XPO’s equity incentive plan, pursuant to which they were granted restricted stock units ("RSUs"), performance-based restricted stock units ("PRSUs") and non-qualified or incentive stock options. All awards granted under these plans were related to XPO common shares. In connection with the Separation, and in accordance with the EMA and the RXO, Inc. 2022 Omnibus Incentive Plan (the "2022 Incentive Plan" or the "Plan") adopted in 2022, the Company’s employees with outstanding former XPO stock-based awards received replacement stock-based awards under the Plan at Separation. The value of the replaced stock-based awards was designed to preserve the aggregate intrinsic value of the award immediately after the Separation when compared to the aggregate intrinsic value of the award immediately prior to the Separation. In connection with the Separation, certain holders of outstanding XPO share-based compensation awards received an adjusted award consisting of both shares of XPO common stock and shares of RXO common stock. Non-vested shares outstanding at December 31, 2022, as shown in the table below, exclude 2.8 million shares held by non-RXO employees, consisting of certain XPO employees, former employees of XPO as of the distribution date, and XPO non-employee directors who remained on the XPO Board of Directors on the distribution date, that will be settled in RXO common stock once vested under the EMA. Additionally, one employee of RXO was granted RSUs and PRSUs in XPO stock in connection with the Separation. Non-vested shares outstanding at December 31, 2022, as shown in the table below, exclude these 43 thousand shares, as they will be settled in XPO common stock in accordance with the EMA. The Company recognizes stock-based compensation expense related only to those awards held by RXO employees. In October 2022, the Company established the 2022 Incentive Plan, which authorizes the issuance of up to 13.9 million shares of common stock as awards. Under the 2022 Incentive Plan, directors, officers and employees may be granted various types of stock-based compensation awards, including stock options, restricted stock, RSUs, PRSUs, stock appreciation rights and cash incentive awards (collectively, “Awards”). As of December 31, 2022, 7.6 million shares of common stock were available for the grant of Awards under the 2022 Incentive Plan. Prior to the Separation, the stock-based compensation expense recorded by the Company includes the expense associated with the employees historically attributable to the Company’s operations, as well as the expense associated with the allocation of equity-based compensation expense for XPO corporate employees. The amounts presented are not necessarily indicative of future awards and do not necessarily reflect the costs that the Company would have incurred as an independent company for the periods presented. Our stock-based compensation expense is recorded in Sales, general and administrative expense on our Consolidated Statements of Operations: Years ended December 31, (In millions) 2022 2021 2020 Restricted stock and restricted stock units $ 9 $ 6 $ 7 Performance-based restricted stock units 23 2 1 Total stock-based compensation expense $ 32 $ 8 $ 8 Tax benefit on stock-based compensation $ 8 $ 1 $ 2 Restricted Stock, Restricted Stock Units and Performance-Based Restricted Stock Units We grant RSUs and PRSUs to our key employees, officers and directors with various vesting requirements. RSUs generally vest based on the passage of time (service conditions) and PRSUs generally vest based on the achievement of our financial targets (performance conditions). PRSUs may also be subject to stock price (market conditions), employment conditions and other non-financial conditions. The holders of the RSUs and PRSUs do not have the rights of a stockholder and do not have voting rights until the shares are issued and delivered in settlement of the awards. The number of RSUs and PRSUs vested includes shares of our common stock that we withheld on behalf of our employees to satisfy the minimum tax withholdings. We estimate the fair value of PRSUs subject to market-based vesting conditions using a Monte Carlo simulation lattice model. 60 Table of Contents A summary of RSU and PRSU award activity for the year ended December 31, 2022 is presented below: RSUs PRSUs Number of RSUs Weighted-Average Grant Date Fair Value Number of PRSUs Weighted-Average Grant Date Fair Value Outstanding as of December 31, 2021 — $ — — $ — Converted from XPO 1,035,371 21.80 1,888,987 20.57 Granted 9,240 17.19 — — Vested ( 24,742 ) 25.85 ( 992,356 ) 21.39 Forfeited and canceled ( 14,698 ) 20.43 — — Outstanding as of December 31, 2022 1,005,171 $ 21.68 896,631 $ 19.68 The total aggregate fair value of RSUs and PRSUs that vested during 2022, 2021 and 2020 was $ 18 million, $ 5 million and $ 4 million, respectively. Total aggregate fair value of awards vested prior to the Separation was derived from XPO's stock price at grant. As of December 31, 2022, all outstanding RSUs vest subject to service conditions and all outstanding PRSUs vest subject to service and performance conditions. As of December 31, 2022, unrecognized compensation cost related to unvested RSUs and PRSUs of $ 31 million is anticipated to be recognized over a weighted-average period of approximately 2.23 years . 12. Income Taxes 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. Income before taxes related to our U.S. and foreign operations is as follows: Years Ended December 31, (In millions) 2022 2021 2020 U.S. $ 88 $ 169 $ 45 Foreign 31 22 12 Income before income taxes $ 119 $ 191 $ 57 The components of the income tax provision (benefit) consist of the following: Years Ended December 31, (In millions) 2022 2021 2020 Current: U.S. Federal $ 33 $ 30 $ 15 State 5 6 3 Foreign 9 2 5 Total current income tax provision 47 38 23 Deferred: U.S. Federal ( 17 ) 4 ( 6 ) State ( 3 ) ( 1 ) ( 2 ) Foreign — — ( 1 ) Total deferred income tax provision (benefit) ( 20 ) 3 ( 9 ) Total income tax provision $ 27 $ 41 $ 14 61 Table of Contents The reconciliation of the statutory federal income tax rate to the effective income tax rate consists of the following: Years Ended December 31, 2022 2021 2020 U.S. federal statutory tax rate 21.0 % 21.0 % 21.0 % State taxes, net of U.S. federal benefit 3.0 2.6 2.7 Foreign rate differential 1.5 0.6 1.3 Foreign operations (1) ( 0.8 ) 0.4 — Provision to return and deferred tax adjustments ( 2.4 ) ( 0.1 ) ( 0.3 ) Changes in uncertain tax positions ( 0.4 ) ( 2.4 ) 0.3 Other 0.7 ( 0.7 ) ( 0.3 ) Effective tax rate 22.6 % 21.4 % 24.7 % (1) Foreign operations include the net impact of changes to valuation allowances, the cost of inclusion of foreign income in the U.S. net of foreign taxes, and permanent items related to foreign operations. Components of the Net Deferred Tax Asset or Liability The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows: Years Ended December 31, (In millions) 2022 2021 Deferred tax asset Net operating loss and other tax attribute carryforwards $ 3 $ 3 Accrued expenses 16 10 Other 12 5 Total deferred tax asset 31 18 Valuation allowance ( 1 ) ( 1 ) Total deferred tax asset, net 30 17 Deferred tax liability Intangible assets ( 26 ) ( 39 ) Property and equipment ( 16 ) ( 27 ) Other ( 1 ) ( 1 ) Total deferred tax liability ( 43 ) ( 67 ) Net deferred tax liability $ ( 13 ) $ ( 50 ) The deferred tax asset and deferred tax liability above are reflected on our Consolidated Balance Sheets as follows: December 31, (In millions) 2022 2021 Other long-term assets $ 3 $ 2 Deferred tax liability ( 16 ) ( 52 ) Net deferred tax liability $ ( 13 ) $ ( 50 ) 62 Table of Contents Operating Loss and Tax Credit Carryforwards Our operating loss and tax credit carryforwards are as follows: December 31, (In millions) Expiration Date 2022 2021 Federal net operating losses for all U.S. operations 2034 - 2037 $ 4 $ — Tax effect (before federal benefit) of state net operating losses Various times starting in 2023 (1) 1 1 Foreign net operating losses available to offset future taxable income Various times starting in 2023 (1) 5 5 (1) Some losses have unlimited carryforward periods. Valuation Allowance We established a valuation allowance for some of our deferred tax assets, as it is more likely than not that these assets will not be realized in the foreseeable future. We concluded that the remaining deferred tax assets will more likely than not be realized, though this is not assured, and as such no valuation allowance has been provided on these assets. The balances and activity related to our valuation allowance are as follows: (In millions) Beginning Balance Additions Reductions Ending Balance Year Ended December 31, 2022 $ 1 $ — $ — $ 1 Year Ended December 31, 2021 2 — ( 1 ) 1 Year Ended December 31, 2020 2 — — 2 Unrecognized Tax Benefits A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Years Ended December 31, (In millions) 2022 2021 2020 Beginning balance $ 1 $ 4 $ 4 Reductions due to the statute of limitations ( 1 ) ( 3 ) — Ending balance $ — $ 1 $ 4 Interest and penalties 2 2 3 Gross unrecognized tax benefits $ 2 $ 3 $ 7 Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of the end of the year $ — $ 1 $ 4 We do not expect a reduction to unrecognized tax benefits over the next 12 months due to the statute of limitations lapsing on positions or because tax positions are sustained on audit. We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2022, we have no tax years under examination by the IRS or in any foreign, state or local jurisdictions. State and local returns after 2015 and non-U.S. returns after 2009 are open under relevant statutes of limitations and are subject to audit. 63 Table of Contents 13. Earnings Per Share Prior to the Separation, RXO employees participated in XPO’s equity incentive plan, pursuant to which they were granted RSUs, PRSUs and non-qualified or incentive stock options. All awards granted under these plans were related to XPO common shares. In connection with the Separation, outstanding awards held by RXO employees were converted in accordance with the EMA, with RXO employees either receiving converted awards solely in RXO based shares or a combination of RXO and XPO shares. The conversion methodology used was calculated in accordance with the EMA and with the purpose of maintaining the aggregate intrinsic value of the award immediately after the Separation when compared to the aggregate intrinsic value immediately prior to the Separation. In connection with the Separation, outstanding XPO share-based compensation awards held by non-RXO employees, consisting of certain XPO employees, former employees of XPO as of the distribution date, and XPO non-employee directors who remained on the XPO Board of Directors on the distribution date, received an adjusted award consisting of both shares of XPO common stock and shares of RXO common stock. As of the Separation date, 3.3 million total shares, including 2.4 million RSUs and 0.9 million PRSUs, were converted in this manner. Approximately 0.5 million of these awards vested or were forfeited in 2022, resulting in 2.8 million shares remaining outstanding at December 31, 2022. The adjusted RSU awards are subject to the same terms and vesting conditions that applied to the original XPO award immediately before the distribution. The adjusted PRSU awards are subject to the same terms and vesting conditions that applied to the original XPO award immediately before the distribution, provided that the XPO Compensation Committee may modify the applicable performance-based vesting conditions prior to the effective time (including by deeming the applicable performance-based vesting conditions to be achieved at a designated performance level). As these awards will ultimately be settled in RXO shares upon vesting, they have been included in our calculation of diluted weighted-average common shares outstanding as of December 31, 2022. On November 1, 2022, the date of the Separation, 115,162,555 shares of common stock of RXO were distributed to XPO stockholders of record as of the record date. This share amount is utilized for the calculation of basic and diluted earnings per share for all years presented prior to the Separation. For all periods prior to the Separation, it is assumed that there are no dilutive equity instruments as there were no equity awards of RXO outstanding prior to the Separation. For the year ended December 31, 2022, diluted earnings per share is computed by giving effect to all potentially dilutive stock awards that are outstanding. The computation of diluted earnings per share excludes the effect of the potential exercise of stock-based awards when the effect of the potential exercise would be anti-dilutive. Approximately 1.1 million shares are excluded from the calculation of diluted earnings per share for the year ended December 31, 2022, because their inclusion would have been anti-dilutive. The computations of basic and diluted earnings per share is as follows: Years Ended December 31, (Dollars in millions, shares in thousands, except per share amounts) 2022 2021 2020 Net income $ 92 $ 150 $ 43 Basic weighted-average common shares 115,335 115,163 115,163 Dilutive effect of stock-based awards 456 — — Diluted weighted-average common shares 115,791 115,163 115,163 Basic earnings per share $ 0.80 $ 1.30 $ 0.37 Diluted earnings per share $ 0.79 $ 1.30 $ 0.37 64 Table of Contents 14. Commitments and Contingencies We are involved, and will continue to be involved, in numerous proceedings arising out of the conduct of our business. These proceedings may include claims for property damage or personal injury incurred in connection with the transportation of freight, environmental liability, commercial disputes and employment-related claims, including claims involving asserted breaches of employee restrictive covenants. These matters also include several class action and collective action cases involving claims that the contract carriers with which we contract for performance of delivery services, or their delivery workers, should be treated as employees, rather than independent contractors (“misclassification claims”) and may seek substantial monetary damages (including claims for unpaid wages, overtime, unreimbursed business expenses, deductions from wages, penalties and other items), injunctive relief, or both. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount accrued, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred. If there is a reasonable possibility that a loss, or additional loss, may have been incurred, we disclose the estimate of the possible loss or range of loss if it is material and an estimate can be made, or disclose that such an estimate cannot be made. The determination as to whether a loss can reasonably be considered to be possible or probable is based on our assessment, together with legal counsel, regarding the ultimate outcome of the matter. We believe that we have adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not believe that the ultimate resolution of any matters to which we are presently a party will have a material adverse effect on our results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our financial condition, results of operations or cash flows. Legal costs incurred related to these matters are expensed as incurred. We carry liability and excess umbrella insurance policies that are deemed sufficient to cover potential legal claims arising in the normal course of conducting our operations as a transportation company. The liability and excess umbrella insurance policies generally do not cover the misclassification claims described in this note. In the event we are required to satisfy a legal claim outside the scope of the coverage provided by insurance, our financial condition, results of operations or cash flows could be negatively impacted. The Company’s last mile subsidiary is involved in several class action and collective action cases involving misclassification claims. The misclassification claims related solely to the Company’s last mile services, which operated as a wholly owned subsidiary of XPO until the spin-off of RXO was completed. As of November 1, 2022, pursuant to the Separation and Distribution Agreement between XPO and RXO, the liabilities of XPO’s last mile subsidiary, including legal liabilities, if any, related to the misclassification claims, were spun-off as part of RXO. Pursuant to the Separation and Distribution Agreement, RXO has agreed to indemnify XPO for certain matters relating to RXO, including indemnifying XPO from and against any liabilities, damages, costs, or expenses incurred by XPO arising out of or resulting from the misclassification claims described above. We believe these suits are without merit and we intend to defend the Company vigorously. We are unable at this time to determine the amount of the possible loss or range of loss, if any, that we may incur as a result of these matters. 15. Related Party Prior to the Separation, the Company did not operate as a standalone business and the consolidated financial statements were derived from the consolidated financial statements and accounting records of XPO. Transactions between the Company and XPO, and other non-RXO subsidiaries of XPO, that occurred prior to the Separation have been classified as related-party transactions. Transactions that originated with XPO prior to the Separation were cash settled or forgiven as of November 1, 2022. For amounts that were forgiven, the amounts have been recorded as an adjustment to XPO Investment. 65 Table of Contents Allocation of General Corporate Expenses Prior to the Separation, certain shared costs were allocated to the Company from XPO’s corporate overhead. The Consolidated Statements of Operations include expenses for certain centralized functions and other programs provided and/or administered by XPO that were charged directly to the Company. In addition, for purposes of preparing these consolidated financial statements, a portion of XPO’s total corporate expenses have been allocated to the Company. See Note 2 — Basis of Presentation and Significant Accounting Policies for a discussion of the methodology used to allocate such costs for purposes of preparing these consolidated financial statements. Costs included in our Consolidated Statements of Operations for our allocated share of XPO’s corporate overhead are as follows: Years Ended December 31, (In millions) 2022 2021 2020 Sales, general and administrative expense $ 50 $ 60 $ 52 Depreciation and amortization expense 9 9 5 Transaction and integration costs 46 2 — Restructuring costs 7 1 — Total $ 112 $ 72 $ 57 Transactions with XPO and its non-RXO Subsidiaries Revenue and costs generated from related parties are as follows: Years Ended December 31, (In millions) 2022 2021 2020 Revenue $ 109 $ 181 $ 122 Costs $ 52 $ 79 $ 77 Balances with XPO and its non-RXO Subsidiaries Assets and liabilities on the Consolidated Balance Sheets include the following related-party amounts that were cash settled: December 31, (In millions) 2022 2021 Amounts due from XPO and its affiliates Trade receivables (1) $ — $ 10 Amounts due to XPO and its affiliates Trade payables (2) — 6 (1) Represents trade receivables generated from revenue with XPO prior to the Separation. (2) Represents trade payables generated from costs with XPO prior to the Separation. 66 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.