RXO, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q and other written reports and oral statements we make from time to time contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terms such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target,” “trajectory” or the negative of these terms or other comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference include those discussed below and the risks discussed in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). All forward-looking statements set forth in this Quarterly Report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The following discussion should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report, and with the audited consolidated financial statements and related notes thereto included in the 2022 Annual Report on Form 10-K. Forward-looking statements set forth in this Quarterly Report speak only as of the date hereof, and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, changes in expectations or the occurrence of unanticipated events, except to the extent required by law. Business Overview RXO, Inc. (“RXO”, the “Company” or “we”) is a brokered transportation platform defined by cutting-edge technology and an asset-light business model. The largest component is our core truck brokerage business. Our operations also include three asset-light, brokered transportation services, all of which complement our truck brokerage business: managed transportation, last mile and freight forwarding. Our truck brokerage business has a variable cost structure with robust free cash flow conversion and a long track record of generating a high return on invested capital. Shippers create demand for our service, and we place their freight with qualified independent carriers using our technology. We price our service on either a contract or a spot basis. Notable factors driving growth in our business include our ability to access massive truckload capacity for shippers through our carrier relationships; our proprietary, cutting-edge technology; our strong management expertise; and favorable industry tailwinds. As of March 31, 2023, we had approximately 119,000 carriers in our North American truck brokerage network, and access to more than 1.5 million trucks. We provide our customers with highly efficient access to capacity through our digital brokerage technology. This proprietary platform is a major differentiator for our truck brokerage business, and together with our pricing technology, we believe it can unlock incremental profitable growth well beyond our current levels. Our complementary services for managed transportation, last mile and freight forwarding also utilize our digital brokerage technology. 15 Table of Contents Our managed transportation service provides asset-light solutions for shippers who outsource their freight transportation to gain reliability, visibility and cost savings. The service uses proprietary technology to enhance our revenue synergy, with cross-selling to truck brokerage, last mile and freight forwarding. Our managed transportation offering includes bespoke load planning and procurement, complex solutions tailored to specific challenges, performance monitoring, engineering and data analytics, among other services. Our control tower solution leverages the expertise of a dedicated team focused on continuous improvement, and digital, door-to-door visibility into order status and freight in transit. In addition, we offer technology-enabled managed expedite services that automate transportation procurement for time-critical freight moved by road and air charter carriers. Our last mile offering is an asset-light service that facilitates consumer deliveries performed by highly qualified third-party contractors. We are the largest provider of outsourced last mile transportation for heavy goods in the United States, positioned within 125 miles of the vast majority of the U.S. population and serving a customer base of omnichannel and e-commerce retailers and direct-to-consumer manufacturers. Our freight forwarding service is a scalable, asset-light offering managed with advanced technology that facilitates ocean, road and air transportation and assists with customs brokerage. We are a U.S.-based freight forwarder with a global network of company-owned and partner-owned locations and coverage of key trade lanes that reach approximately 150 countries and territories. Notable External Conditions As a leading provider of freight transportation services, our business can be impacted to varying degrees by factors beyond our control. The COVID-19 pandemic may continue to impact overall economic activity, customer sectors served by our industry, supply chains and labor markets. We cannot predict how long these dynamics will last, or whether any future resurgences will adversely affect our results of operations. Additionally, economic inflation can have a negative impact on our operating costs, and any economic recession could depress activity levels and adversely affect our results of operations. A prolonged period of inflation could cause interest rates, fuel, wages and other costs to continue to increase, which would adversely affect our results of operations unless our pricing to our customers correspondingly increases. Generally, inflationary increases in labor and operating costs related to our operations have historically been offset through price increases. However, the pricing environment generally becomes more competitive during economic downturns, which may, as it has in the past, affect our ability to obtain price increases from customers both during and following such periods. Basis of Presentation On November 1, 2022, the Company completed the separation from XPO, Inc. (formerly known as “XPO Logistics, Inc.”) (“XPO”) (the “Separation”). 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. 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 “condensed consolidated financial statements” and have been prepared in accordance with GAAP. Refer to Note 2—Basis of Presentation and Significant Accounting Policies for additional details regarding the basis of presentation used for the Company’s condensed consolidated financial statements as related to the Separation. Cost of transportation and services (exclusive of depreciation and amortization) primarily includes the cost of providing or procuring freight transportation for RXO customers. Direct operating expenses (exclusive of depreciation and amortization) are comprised of both fixed and variable expenses and consist mainly of personnel costs, facility and equipment expenses, such as rent, utilities, equipment maintenance and repair, costs of materials and supplies, information technology expenses, and gains and losses on sales of property and equipment. 16 Table of Contents Sales, general and administrative expense (“SG&A”), including the allocated costs of XPO prior to the Separation, primarily consists of salaries and commissions for the sales function, salary and benefit costs for executive and certain administration functions, third-party professional fees, facility costs, bad debt expense and legal costs. RXO has a single reportable segment. Results of Operations Three Months Ended March 31, Percent of Revenue (In millions) 2023 2022 2023 2022 Revenue $ 1,010 $ 1,312 100.0 % 100.0 % Cost of transportation and services (exclusive of depreciation and amortization) 759 1,021 75.1 % 77.8 % Direct operating expense (exclusive of depreciation and amortization) 61 55 6.0 % 4.2 % Sales, general and administrative expense 153 161 15.1 % 12.3 % Depreciation and amortization expense 18 21 1.8 % 1.6 % Transaction and integration costs 6 3 0.6 % 0.2 % Restructuring costs 8 — 0.8 % — % Operating income $ 5 $ 51 0.5 % 3.9 % Interest expense, net 8 — 0.8 % — % Income (loss) before income taxes $ (3) $ 51 (0.3) % 3.9 % Income tax provision (benefit) (3) 12 (0.3) % 0.9 % Net income $ — $ 39 — % 3.0 % Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022 Revenue decreased 23.0% to $1.0 billion in the first quarter of 2023, compared with $1.3 billion for the same quarter in 2022. The year-over-year decrease in revenue in the first quarter of 2023 was driven primarily by (i) a $224 million decrease in revenue generated from our truck brokerage business, driven primarily by a 32% reduction in revenue per load, partially offset by a 6% increase in volume and (ii) a $59 million decrease in revenue generated from our freight forwarding business, driven primarily by a decrease in ocean rates and volume. Cost of transportation and services (exclusive of depreciation and amortization) for the first quarter of 2023 was $759 million, or 75.1% of revenue, compared with $1.0 billion or 77.8% of revenue, for the same quarter in 2022. Third party transportation costs as a percentage of revenue decreased year-over-year by 3.0 percentage points for the first quarter of 2023, driven primarily by (i) lower transportation costs in last mile and (ii) an improvement in mix in our freight forwarding business. Direct operating expense (exclusive of depreciation and amortization) for the first quarter of 2023 was $61 million, or 6.0% of revenue, compared with $55 million, or 4.2% of revenue, for the same quarter in 2022. The year-over-year increase as a percentage of revenue in the first quarter of 2023 was primarily a result of higher labor-related costs, which increased as a percentage of revenue by 0.8 percentage points due to lower revenue. SG&A for the first quarter of 2023 was $153 million or 15.1% of revenue, compared with $161 million, or 12.3% of revenue, for the same quarter in 2022. The year-over-year increase in SG&A as a percentage of revenue primarily resulted from higher compensation-related costs of 2.7 percentage points for the first quarter of 2023 as compared to the first quarter of 2022, reflecting deleverage on lower revenue and incremental corporate costs of operating RXO as a standalone public company. 17 Table of Contents Depreciation and amortization expense for the first quarter of 2023 was $18 million, compared with $21 million for the same quarter in 2022. The year-over-year change was driven by a decrease in intangible asset amortization expense as a result of a customer relationship intangible asset being fully amortized in December 2022. Transaction and integration costs for the first quarter of 2023 and 2022 were $6 million and $3 million, respectively, and primarily comprised spin-off related costs. Restructuring costs for the first quarter 2023 were $8 million and are primarily comprised of severance costs. Our effective income tax rates were 106.0% and 24.3% for the first quarter of 2023 and 2022, respectively. The effective tax rates for the first quarter of 2023 and 2022 were based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented. Our effective tax rate for the first quarter of 2023 differs from the U.S. corporate income tax rate of 21% primarily due to a tax benefit of $2 million that was the result of changes in reserves for uncertain tax positions. The impact of this driver was magnified due to our low pre-tax loss in the first quarter of 2023. Our effective tax rate for the first quarter of 2022 differs from the U.S. corporate income tax rate of 21% due to state income taxes within the U.S. Liquidity and Capital Resources Overview Our ability to fund our operations and anticipated capital needs are reliant upon the generation of cash from operations, supplemented as necessary by periodic utilization of our revolving credit facility. Our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures, repayment of borrowings and strategic business development transactions. The timing and magnitude of our growth and working capital needs can vary and may positively or negatively impact our cash flows. We continually evaluate our liquidity requirements and capital structure in light of our operating needs, growth initiatives and capital resources. We believe that our existing liquidity and sources of capital are sufficient to support our operations over the next 12 months. Capital Expenditures Our 2023 capital expenditures include capital associated with strategic investments in technology, equipment and real estate. The level and the timing of the Company’s capital expenditures within these categories can vary as a result of a variety of factors outside of our control, such as the timing of new contracts and availability of labor and materials. We believe that we have significant discretion over the amount and timing of our capital expenditures as we are not subject to any agreement that would require significant capital expenditures on a designated schedule or upon the occurrence of designated events. Debt and Financing Arrangements There have been no material changes to our outstanding debt and financing arrangements in the first three months of 2023 and we were in compliance with all covenants and other provisions of these arrangements as of March 31, 2023. Any failure to comply with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations. Refer to Note 5—Debt to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for disclosures regarding the Company’s debt and financing arrangements as of March 31, 2023. 18 Table of Contents Financial Condition The following table summarizes our asset and liability balances as of March 31, 2023 and December 31, 2022: As of March 31, As of December 31, (In millions) 2023 2022 $ Change % Change Total current assets $ 1,029 $ 1,029 $ — — % Total long-term assets 989 1,002 (13) (1.3) % Total current liabilities 820 823 (3) (0.4) % Total long-term liabilities 613 621 (8) (1.3) % Total assets decreased by $13 million from December 31, 2022 to March 31, 2023, driven primarily by (i) a $7 million decrease in operating lease assets, resulting from amortization of existing lease assets and (ii) a $3 million decrease in identifiable intangible assets, net, resulting from amortization of existing identifiable intangible assets. Total liabilities decreased by $11 million from December 31, 2022 to March 31, 2023, driven primarily by a $7 million decrease in total operating lease liabilities as a result of amortization of existing lease obligations. Cash Flow Activity Our cash flows from operating, investing and financing activities are summarized as follows: Three Months Ended March 31, (In millions) 2023 2022 $ Change % Change Net cash provided by operating activities $ 42 $ 103 $ (61) (59.2) % Net cash used in investing activities (12) (12) — — % Net cash used in financing activities (8) (74) 66 (89.2) % Effect of exchange rates on cash, cash equivalents and restricted cash 1 — 1 100.0 % Net increase in cash, cash equivalents and restricted cash $ 23 $ 17 $ 6 35.3 % During the first three months of 2023, we generated cash from operating activities of $42 million, which was used to fund (i) the purchase of $12 million of property and equipment and (ii) $7 million in tax withholdings related to vesting of stock compensation awards. During the first three months of 2022, we generated cash from operating activities of $103 million, which was used to fund (i) $74 million of net transfers to XPO and (ii) the purchase of $12 million of property and equipment. Net cash provided by operating activities for the first three months of 2023 decreased by $61 million, compared with the first three months of 2022. The decrease in cash provided by operating activities reflects the impact of a $39 million decrease in net income between periods and changes in working capital. The change in working capital was primarily driven by a $30 million decrease in cash generated by accrued expenses and other liabilities resulting from a reduction in accrued transportation charges between periods. Investing activities used $12 million of cash in each of the first three months of 2023 and 2022, to purchase property and equipment. Financing activities used $8 million of cash for the first three months of 2023 compared with using $74 million of cash for the same period in 2022. The primary use of cash from financing activities in the first three months of 2023 was for payments of tax withholdings related to vesting of stock compensation awards. The primary use of cash from financing activities in the first three months of 2022 was for net transfers to XPO. 19 Table of Contents Critical Accounting Policies Our significant accounting policies, which include management’s most subjective and complex estimates and judgments, are included in Note 2—Basis of Presentation to the Consolidated Financial Statements for the year ended December 31, 2022 included in the Annual Report on Form 10-K. A discussion of accounting estimates, considered critical because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates, are disclosed in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report on Form 10-K. There have been no significant changes in the Company’s critical accounting estimates since December 31, 2022.