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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-05-03 · 89 added, 45 removed, 93 unchanged (59% of the section changed)

22 unchanged sentences

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.

and favorable long-term industry tailwinds.

As of June 30, 2023, we had approximately 121,000 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.

27 unchanged sentences

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.

Direct operating expenses (exclusive of depreciation and amortization) are 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.

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.

1 unchanged sentence

Results of Operations

Three Months Ended March 31, Percent of Revenue

Three Months Ended June 30, Percentage of Revenue

(In millions) 2023 2022 2023 2022

7 unchanged sentences

Operating income $ 14 $ 58 1.5 % 4.7 %

Other income — (1) — % (0.1) %

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 %

Income before income taxes $ 6 $ 59 0.6 % 4.8 %

Income tax provision 3 15 0.3 % 1.2 %

Net income $ 3 $ 44 0.3 % 3.6 %

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.

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.

Three Months Ended June 30, 2023 Compared with Three Months Ended June 30, 2022

Revenue decreased 21.5% to $963 million in the second quarter of 2023, compared with $1,226 million for the same quarter in 2022.

The year-over-year decrease in revenue in the second quarter of 2023 was driven primarily by (i) a $198 million decrease in revenue generated from our truck brokerage business, as a result of a 33% reduction in revenue per load, which was impacted by a combination of transportation market rates, fuel prices, length of haul, and freight mix, partially offset by a 10% increase in load volume and (ii) a $36 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 second quarter of 2023 was $723 million, or 75.1% of revenue, compared with $904 million or 73.7% of revenue, for the same quarter in 2022.

The year-over-year increase in the second quarter of 2023 was driven primarily by a 5.4 percentage point increase in truck brokerage cost of transportation and services as a percentage of revenue, as a result of tightened capacity in the second quarter of 2023.

This was partially offset b y (i) lower transportation costs as a percentage of revenue in last mile and (ii) an improvement in mix in our freight forwarding business.

Direct operating expense (exclusive of depreciation and amortization) for the second quarter of 2023 was $59 million, or 6.1% of revenue, compared with $56 million, or 4.6% of revenue, for the same quarter in 2022.

The year-over-year increase as a percentage of revenue in the second quarter of 2023 was primarily a result of deleverage on lower revenue.

SG&A for the second quarter of 2023 was $144 million or 15.0% of revenue, compared with $166 million, or 13.5% of revenue, for the same quarter in 2022.

The year-over-year increase in SG&A as a percentage of revenue was primarily a result of higher compensation-related costs of 1.8 percentage points for the second quarter of 2023 compared with the same quarter of 2022, reflecting deleverage on lower revenue and incremental corporate costs of operating RXO as a standalone public company.

Depreciation and amortization expense for the second quarter of 2023 was $18 million, compared with $21 million for the same quarter in 2022.

The year-over-year reduction was driven primarily 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 second quarter of 2023 and 2022 were $4 million and $18 million, respectively, and primarily comprised spin-off related costs.

Restructuring costs for the second quarter of 2023 were $1 million and primarily comprised severance costs.

Restructuring costs for the second quarter of 2022 were $3 million and comprised severance, facilities and contract termination costs.

Our effective income tax rates were 44.0% and 24.3% for the second quarter of 2023 and 2022, respectively.

The effective tax rates for the second 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 second quarter of 2023 differs from the U.S.

corporate income tax rate of 21% due primarily to state income taxes within the U.S and non-deductible expenses.

The impact of these drivers was magnified due to our low pre-tax income in the second quarter of 2023.

Our effective tax rate for the second quarter of 2022 differs from the U.S.

corporate income tax rate of 21% due primarily to state income taxes within the U.S.

Six Months Ended June 30, Percentage of Revenue

(In millions) 2023 2022 2023 2022

Revenue $ 1,973 $ 2,538 100.0 % 100.0 %

Cost of transportation and services (exclusive of depreciation and amortization) 1,482 1,925 75.1 % 75.8 %

Direct operating expense (exclusive of depreciation and amortization) 120 111 6.1 % 4.4 %

Sales, general and administrative expense 297 327 15.1 % 12.9 %

Depreciation and amortization expense 36 42 1.8 % 1.7 %

Transaction and integration costs 10 21 0.5 % 0.8 %

Restructuring costs 9 3 0.5 % 0.1 %

Operating income $ 19 $ 109 1.0 % 4.3 %

Other income — (1) — % — %

Interest expense, net 16 — 0.8 % — %

Income before income taxes $ 3 $ 110 0.2 % 4.3 %

Income tax provision — 27 — % 1.1 %

Net income $ 3 $ 83 0.2 % 3.3 %

Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022

Revenue decreased 22.3% to $2.0 billion in the first six months of 2023, compared with $2.5 billion for the same period in 2022.

The year-over-year decrease in revenue in the first six months of 2023 was driven primarily by (i) a $422 million decrease in revenue generated from our truck brokerage business, as a result of a 33% reduction in revenue per load, which was impacted by a combination of transportation market rates, fuel prices, length of haul, and freight mix, partially offset by an 8% increase in load volume and (ii) a $95 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 six months of 2023 was $1.5 billion, or 75.1% of revenue, compared with $1.9 billion or 75.8% of revenue, for the same period in 2022.

The year-over year decrease in the first six months of 2023 was driven primarily by (i) lower transportation costs as a percentage of revenue in last mile and a (ii) an improvement in mix in our freight forwarding business.

This was partially offset by a 2.5 percentage point increase in truck brokerage cost of transportation and services as a percentage of revenue, as a result of tightened capacity in the second quarter of 2023.

Direct operating expense (exclusive of depreciation and amortization) for the first six months of 2023 was $120 million, or 6.1% of revenue, compared with $111 million, or 4.4% of revenue, for the same period in 2022.

The year-over-year increase as a percentage of revenue in the first six months of 2023 was primarily a result of deleverage on lower revenue.

SG&A for the first six months of 2023 was $297 million or 15.1% of revenue, compared with $327 million, or 12.9% of revenue, for the same period in 2022.

The year-over-year increase in SG&A as a percentage of revenue primarily resulted from higher compensation-related costs of 2.2 percentage points for the first six months of 2023 as compared to the first six months of 2022, reflecting deleverage on lower revenue and incremental corporate costs of operating RXO as a standalone public company.

Depreciation and amortization expense for the first six months of 2023 was $36 million, compared with $42 million for the same period in 2022.

The year-over-year reduction 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 six months of 2023 and 2022 were $10 million and $21 million, respectively, and primarily comprised spin-off related costs.

Restructuring costs for the first six months of 2023 were $9 million and primarily comprised severance costs.

Restructuring costs for the first six months of 2022 were $3 million and comprised severance, facilities and contract termination costs.

Our effective income tax rates were (11.0)% and 24.3% for the first six months of 2023 and 2022, respectively.

The effective tax rates for the first six months 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 six months of 2023 differs from the U.S.

corporate income tax rate of 21% due primarily to a discrete tax benefit of $2 million from changes in reserves for uncertain tax positions, partially offset by state income taxes within the U.S.

and non-deductible expenses.

The impact of these drivers was magnified due to our low pre-tax income in the first six months of 2023.

Our effective tax rate for the first six months of 2022 differs from the U.S.

corporate income tax rate of 21% due primarily to state income taxes within the U.S.

Liquidity and Capital Resources

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.

Our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures, repayment of borrowings, share repurchases 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.

6 unchanged sentences

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.

There have been no material changes to our outstanding debt and financing arrangements in the first six months of 2023 and we were in compliance with all covenants and other provisions of these arrangements as of June 30, 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.

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,

The following table summarizes our asset and liability balances as of June 30, 2023 and December 31, 2022:

As of June 30, As of December 31,

(In millions) 2023 2022 $ Change % Change

3 unchanged sentences

Total long-term liabilities 624 621 3 0.5 %

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.

Total assets decreased by $119 million from December 31, 2022 to June 30, 2023, driven primarily by a $157 million decrease in accounts receivable as a result of a decrease in revenue, offset partially by a $26 million increase in cash and cash equivalents due to net cash provided by operating activities.

Total liabilities decreased by $121 million from December 31, 2022 to June 30, 2023, driven primarily by a $69 million decrease in accounts payable and a $46 million decrease in accrued expenses, both resulting from a decrease in third party transportation costs.

Cash Flow Activity

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

Three Months Ended March 31,

Six Months Ended June 30,

(In millions) 2023 2022 $ Change % Change

1 unchanged sentence

Net cash used in investing activities (28) (24) (4) 16.7 %

Net cash used in financing activities (8) (74) 66 (89.2) %

Net cash (used in) provided by financing activities (13) 30 (43) (143.3) %

Effect of exchange rates on cash, cash equivalents and restricted cash 1 — 1 100.0 %

Net increase in cash, cash equivalents and restricted cash $ 26 $ 183 $ (157) (85.8) %

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.

During the first six months of 2023, we generated cash from operating activities of $66 million, which was used primarily to fund (i) the purchase of $28 million of property and equipment, (ii) $9 million of tax withholdings related to vesting of stock compensation awards and (iii) $2 million of common stock repurchases.

During the first six months of 2022, we:

(i) generated cash from operating activities of $177 million and (ii) received $30 million of net transfers from XPO.

We used cash during this period primarily to purchase $24 million of property and equipment.

Net cash provided by operating activities for the first six months of 2023 decreased by $111 million, compared with the first six months of 2022.

The decrease in cash provided by operating activities reflects the impact of a $80 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.

The change in working capital was primarily driven by the balance sheet impact of decreased revenues and cost of third party transportation between periods.

Investing activities used $28 million of cash for the first six months of 2023, compared with using $24 million of cash for the same period in 2022.

The use of cash in both periods was to purchase property and equipment.

Financing activities used $13 million of cash for the first six months of 2023 compared with generating $30 million of cash for the same period in 2022.

The primary use of cash from financing activities in the first six months of 2023 was (i) $9 million for payments of tax withholdings related to vesting of stock compensation awards and (ii) $2 million for the repurchase of common stock.

The primary source of cash from financing activities in the first six months of 2022 was net transfers from XPO.

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.

Our significant accounting policies, which include management’s most subjective and complex estimates and judgments, are included in Note 2—Basis of Presentation and Significant Accounting Policies 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 and Est 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis