What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-13 compared with 2023-02-24 · 77 added, 99 removed, 150 unchanged (54% of the section changed)

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This section of this Annual Report generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Annual Report and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Exhibit 99.1 to our Registration Statement on Form 10, as amended, declared effective on October 17, 2022.

is a high-performing brokered transportation platform defined by cutting-edge technology and a nimble, asset-light business model, with the largest component being our core truck brokerage business.

Based on 2021 revenues, we are the fourth largest broker of full truckload freight transportation in the United States, and have approximately 4% share of the entire $88 billion brokered truckload industry.

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.

Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are not included in this Annual Report and can be found in Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operation s ” in our Annual Report on Form 10-K for the year ended December 31, 2022.

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 history of generating robust free cash flow conversion and 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;

Notable factors driving volume 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.

and favorable long-term industry tailwinds.

As of December 31, 2023, we had approximately 115,000 carriers in our North American truck brokerage network, and access to more than 1.4 million trucks.

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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 independent road and air charter carriers.

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.

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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.

On November 1, 2022, regular-way trading of RXO’s common stock commenced on the New York Stock Exchange under the ticker symbol “RXO.”

The Separation was completed under a Separation and Distribution Agreement and various other agreements that govern aspects of our relationship with XPO, including, but not limited to the TMA, EMA, TSA and IPLA.

See Note 3 — The Separation to our consolidated financial statements for additional information.

Impacts of COVID-19 and Other Notable External Conditions

On November 1, 2022, RXO became a standalone publicly-traded company.

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 that emerged in 2020 affected, and may continue to affect, economic activity broadly and customer sectors served by our industry.

Labor shortages, particularly a shortage of truck drivers, and equipment shortages continue to present challenges to many transportation-related industries.

Additionally, disruptions in supply chains for industrial materials and supplies, such as semiconductor chips, have impacted some of the end-market activities that create demand for our services.

We cannot predict how long these dynamics will last, or whether future challenges, if any, will adversely affect our results of operations.

To date, the totality of the actions we have taken during the pandemic, and continue to take, have mitigated the impact on our profitability relative to the impact on our revenue and volumes, while our strong liquidity and disciplined capital management enable us to continue to invest in growth initiatives.

Regarding the war between Russia and Ukraine, we have no direct exposure to those geographies.

We cannot predict how global supply chain activities or the economy at large may be impacted by a prolonged war in Ukraine or sanctions imposed in response to the war, or whether future conflicts, if any, may adversely affect our results of operations.

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.

Impact of Inflation

Inflation can have a negative impact on our operating costs.

A prolonged period of inflation could cause interest rates, fuel, wages and other costs to increase, which would adversely affect our results of operations unless our pricing to our customers correspondingly increases.

During 2022, the transportation industry’s truck driver shortage, together with rising fuel prices, resulted in higher transportation procurement costs to meet growing demand, which costs were largely offset by mechanisms in our customer contracts, including fuel surcharge clauses and general rate increases.

An economic recession could depress activity levels and adversely affect our results of operations.

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

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generally accepted accounting principles (“GAAP”).

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) includes both fixed and variable expenses and consists 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.

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.

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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.

Nevertheless, the consolidated financial statements may not reflect the results of operations, cash flows and financial position 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.

Transaction and integration costs;

and Restructuring 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.

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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.

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 Statements of Changes in Equity as XPO investment.

The components of the net transfers to and from XPO include certain costs allocated from XPO's 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.

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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.

federal income tax return as well as certain state and local income tax returns.

The Company's foreign tax returns are filed on a full-year basis.

The Company’s consolidated financial statements include the accounts of RXO, Inc.

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Year Ended December 31, 2023 Compared with Year Ended December 31, 2022

Revenue for 2022 increased by 2.3% to $4.8 billion, from $4.7 billion in 2021.

The year-over-year increase was driven by a $180 million increase in truck brokerage revenue, due to increased load volume facilitated by our digital platform.

Revenue for 2023 decreased by 18.1% to $3.9 billion, from $4.8 billion in 2022.

The year-over-year decrease was driven primarily by a $571 million decrease in revenue generated from our truck brokerage business, as a result of a 28% reduction in revenue per load, which was impacted by a combination of transportation market rates, fuel prices, length of haul and freight mix.

The decline was partially offset by a 12% increase in load volume.

Additionally, revenue generated from our freight forwarding business decreased by $171 million, driven primarily by a decrease in ocean rates and volume.

Cost of transportation and services (exclusive of depreciation and amortization) in 2023 was $3.0 billion, or 75.6% of revenue, compared with $3.6 billion, or 75.6% of revenue in 2022.

Third-party transportation costs as a percentage of revenue decreased year-over-year by 2.8 percentage points, primarily due to our ability to purchase transportation services at lower cost as the transportation market softened, while the majority of our revenue reflected fixed terms on customer contracts established in stronger rate environments prior to 2022.

Direct operating expense (exclusive of depreciation and amortization) is composed of both fixed and variable expenses and consists 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 expense (exclusive of depreciation and amortization) in 2022 was $226 million, or 4.7% of revenue, compared with $192 million, or 4.1% of revenue, in 2021.

The year-over-year increase as a percentage of revenue was primarily the result of higher compensation-related costs and higher facilities and maintenance costs, which increased as a percentage of revenue by approximately 0.3 and 0.2 percentage points, respectively.

Sales, general and administrative expense (“SG&A”), including the allocated costs of XPO, 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.

SG&A was $640 million in 2022, or 13.3% of revenue, compared with $539 million, or 11.5% of revenue, in 2021.

The year-over-year increase in SG&A as a percentage of revenue primarily resulted from higher compensation-related costs of 1.5 percentage points in 2022 as compared to 2021.

In 2023, we experienced (i) lower transportation costs as a percentage of revenue in last mile and (ii) an improvement in mix in our freight forwarding business.

This was offset by a 3.0 percentage point increase in truck brokerage cost of transportation and services as a percentage of revenue, as lower freight rates were not fully offset by corresponding reductions in cost of purchased transportation during the year.

Direct operating expense (exclusive of depreciation and amortization) of $235 million in 2023 increased $9 million, or 4.0%, from $226 million in 2022.

As a percentage of revenue, direct operating expense (exclusive of depreciation and amortization) increased to 6.0% in 2023 compared to 4.7% in 2022 due to deleverage on lower revenue.

SG&A of $591 million in 2023 decreased $49 million, or 7.7%, from $640 million in 2022.

As a percentage of revenue, SG&A increased to 15.0% in 2023 compared to 13.3% in 2022 due to higher compensation-related costs of 1.5 percentage points reflecting deleverage on lower revenue and incremental corporate costs of operating RXO as a standalone public company.

This was partially offset by cost savings from restructuring actions executed in 2023, which primarily comprised employee severance.

We anticipate the restructuring actions will result in cumulative annualized net cost savings of approximately $32 million.

Depreciation and amortization expense in 2023 was $67 million, compared with $86 million in 2022.

Transaction and integration costs in 2022 were $84 million, compared with $2 million in 2021.

Transaction and integration costs for 2022 and 2021 are primarily comprised of spin-off related costs.

Restructuring costs in 2022 were $13 million, compared with $2 million in 2021, and are primarily composed of spin-off related costs.

Of the total restructuring costs incurred in 2022, $10 million was related to severance costs, $2 million was related to facilities costs, and $1 million was related to contract termination costs.

All restructuring costs incurred in 2021 were related to severance costs.

The year-over-year reduction was driven by (i) a decrease in intangible asset amortization expense as a result of a customer relationship intangible asset being fully amortized in December 2022 and (ii) a decrease in depreciation for our allocated share of XPO’s corporate overhead.

Transaction and integration costs in 2023 and 2022 were $12 million and $84 million, respectively, and primarily comprised spin-off related costs.

Restructuring costs in 2023 and 2022 were $16 million and $13 million, respectively, and primarily comprised severance costs.

Interest expense primarily consists of interest related to indebtedness for money borrowed and finance lease obligations.

The increase in interest expense in 2022 as compared to 2021 is primarily due to interest incurred on borrowings made in connection with the Separation in the fourth quarter.

The increase in interest expense in 2023 as compared to 2022 is primarily due to a full year of interest incurred in 2023 on borrowings made in connection with the Separation in the fourth quarter of 2022.

Our effective income tax rates were (13.0)% and 22.6% in 2023 and 2022, respectively.

The increase in our effective income tax rate for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily driven by reduced tax benefit resulting from changes in reserves for uncertain tax positions.

The change in our effective income tax rate for the year ended December 31, 2023 compared to the year ended December 31, 2022 was driven primarily by a tax benefit of $2 million realized in 2023 from changes in reserves for uncertain tax positions.

For the year ended December 31, 2023, our effective tax rate differs from the U.S.

corporate income tax rate of 21% due to state income taxes within the United States, partially offset by a tax benefit of $3 million from provision to return and other deferred tax adjustments.

corporate income tax rate of 21% due to a tax benefit of $2 million from changes in reserves for uncertain tax positions.

For the year ended December 31, 2022, our effective tax rate differs from the U.S.

corporate income tax rate of 21% due to state income taxes within the United States, partially offset by a tax benefit of $5 million from changes in reserves for uncertain tax positions.

corporate income tax rate of 21% due to state income taxes within the United States, partially offset by a tax benefit of $3 million from provision to return and other deferred tax adjustments.

Liquidity and Capital Resources

Prior to the Separation on November 1, 2022, the Company participated in XPO’s centralized treasury model, which included cash pooling and other intercompany financing arrangements.

Prior to the Separation, we generated positive cash flows from operations.

We have generated and expect to continue generating positive cash flows from operations after the Separation.

Our ability to fund our operations and anticipated capital needs are reliant upon the generation of cash from operations, supplemented as necessary by periodic utilization of our revolving credit facility.

Our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures, repayment of borrowings and strategic business development transactions.

Our ability to fund our operations and anticipated capital needs are reliant upon the generation of cash from operations, supplemented as necessary by 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, 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.

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Capital Expenditures

Our 2022 capital expenditures include capital associated with investments in technology and equipment.

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.

Our 2023 capital expenditures include capital associated with strategic investments in technology, equipment and real estate.

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.

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Loans under the Revolver bear interest at a fluctuating rate plus an applicable margin calculated based on the Company's credit ratings.

There were no amounts outstanding under the Revolver as of December 31, 2022.

There was $ 5 million outstanding under the Revolver as of December 31, 2023.

On November 2, 2023, the Company exercised a feature to increase the total commitments under its Revolver from $ 500 million to $ 600 million.

Term Loan Facilities

On October 18, 2022, we entered into a five-year $ 100 million unsecured term loan facility (the “Term Loan”).

The Term Loan bears interest at a fluctuating rate plus an applicable margin calculated based on the Company'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.

On October 25, 2022, we completed an offering of $355 million in unsecured notes (the “Notes” or the "7.50% Notes due 2027").

On November 2, 2023, the Company repaid all of the outstanding obligations in respect of the $ 100 million principal amount, interest and fees under the Term Loan and terminated the Term Loan.

On October 25, 2022, we completed an offering of $ 355 million in aggregate principal amount of unsecured notes (the “Notes” or the “7.50% Notes due 2027”).

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.

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Total long-term liabilities 549 621 (72) (11.6) %

The decrease in current assets from December 31, 2021 to December 31, 2022 primarily reflects the impact of decreased accounts receivable, driven by increased collections and a decrease in revenue in the fourth quarter of 2022 as compared to 2021, offset by an increase in cash and cash equivalents.

Total long-term assets reflect an increase in operating lease assets associated with new lease contracts entered into during 2022.

The increase in current liabilities is primarily driven by an increase in accrued salaries and wages.

The increase in long-term liabilities reflects the issuance of the Term Loan and Notes in 2022.

Cash Flow Activity for the Years Ended December 31, 2022 and 2021

Total assets decreased by $206 million from December 31, 2022 to December 31, 2023, driven primarily by a $157 million decrease in accounts receivable as a result of a decrease in revenue due to decreased rates and a $93 million decrease in cash and cash equivalents as a result of the payoff of the Term Loan, partially offset by a $36 million increase in operating lease assets.

Total liabilities decreased by $213 million from December 31, 2022 to December 31, 2023, driven primarily by a decrease in third party transportation costs due to decreased rates and a $95 million decrease in long-term debt as a result of the payoff of the Term Loan.

Cash Flow Activity

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

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Net increase (decrease) in cash and cash equivalents $ (93) $ 69 $ (162) 234.8 %

Operating Activities

Cash flows provided by operating activities for 2022 increased by $155 million compared with 2021.

The increase is primarily the result of changes in working capital, which generated $114 million in cash in 2022 compared to using $90 million in cash in 2021, primarily due to revenue growth rate deceleration in 2022 driven by a reduction in freight pricing in the second half of the year.

Cash generated from working capital was offset by lower net income in 2022 as compared to 2021, with net income of $92 million in 2022 compared to $150 million in 2021.

The decrease in net income was primarily driven by an $82 million increase in Transaction and integration costs in 2022.

Investing Activities

Investing activities used $56 million of cash in 2022 compared with $38 million used in 2021.

During 2022, we used $57 million of cash for capital expenditures and received $1 million from sales of property and equipment.

During 2021, we used $39 million of cash for capital expenditures and received $1 million from sales of property and equipment.

The increase in property and equipment purchases between periods is primarily driven by increased spending on computer software and equipment.

Financing Activities

Financing activities used $183 million of cash in 2022 and used $158 million of cash in 2021.

Net cash provided by operating activities for 2023 decreased by $221 million compared with 2022.

The decrease in cash provided by operating activities reflects the impact of an $88 million decrease in net income between periods and changes in working capital.

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

Investing activities used $66 million of cash in 2023 compared with $56 million of cash used in 2022.

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

Financing activities used $117 million of cash in 2023 compared with using $183 million of cash in 2022.

The primary uses of cash from financing activities in 2023 were (i) $104 million for debt and finance lease repayments, driven primarily by the payoff of the Term Loan and (ii) $14 million for payments of tax withholdings related to vesting of stock compensation awards.

The primary use of cash from financing activities in 2022 was $621 million in net transfers to XPO in connection with the Separation.

The source of cash from financing activities in 2022 was the issuance of long-term debt of $451 million, offset by payment of debt issuance costs of $9 million.

The primary source of cash from financing activities in 2022 was the issuance of long-term debt of $451 million, offset by payment of debt issuance costs of $9 million.

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.

The primary use of cash from financing activities in 2021 was $159 million in net transfers to XPO.

Contractual Obligations

We lease certain facilities and equipment under non-cancellable operating lease arrangements.

As of December 31, 2022, our outstanding obligations under operating and finance leases were $162 million and $6 million, respectively.

As of December 31, 2023, our outstanding discounted obligations under operating and finance leases were $199 million and $6 million, respectively.

See Note 6 — Leases to the consolidated financial statements for additional information.

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The Notes mature on November 15, 2027, unless earlier repurchased or redeemed, if applicable.

Additionally, we had the $100 million Term Loan outstanding with interest payable quarterly.

The Term Loan matures on November 1, 2027.

As of December 31, 2023, we had $5 million outstanding under the Revolver, with interest payable monthly or quarterly, depending on RXO’s upfront election.

Borrowings under the Revolver are payable, at our option, at any time prior to or at maturity on October 18, 2027.

See Note 8 — Debt to the consolidated financial statements for additional information.

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Although actual results may differ from estimated results, we believe the estimates are reasonable and appropriate.

Corporate Expense Allocation

The consolidated financial statements of RXO through the date of the Separation include general corporate expenses of XPO for certain support functions that are provided on a centralized basis, such as expenses related to information technology, human resources, accounting, sales and sales operations, procurement, executive services, legal, corporate finance and communications.

For purposes of the Consolidated Statements of Operations, an allocation of these expenses is included to burden all business units comprising XPO’s historical 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.

All such costs have been deemed to have been incurred and settled through XPO investment in the period when the costs were recorded.

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.

Evaluation of Goodwill

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Changes in these assumptions can impact actual costs paid to settle the claims and those amounts may be different than estimates.

Our annual effective tax rate is based on our income and statutory tax rates in the various jurisdictions in which we operate.

Judgment and estimates are required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties.

Evaluating our tax positions would include but not be limited to our tax positions on internal restructuring transactions.

We review our tax positions quarterly and as new information becomes available.

Our effective tax rate in any financial statement period may be materially impacted by changes in the mix and/or level of earnings by taxing jurisdiction.

Deferred income tax assets represent amounts available to reduce income taxes payable in future years.

Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating losses and tax credit carryforwards.

We evaluate the recoverability of these future tax deductions and credits by assessing all available evidence, including the reversal of deferred tax liabilities, carrybacks available, and historical and projected pre-tax profits generated by our operations.

Valuation allowances are established when, in management’s judgment, it is more likely than not that our deferred tax assets will not be realized.

In assessing the need for a valuation allowance, management weighs the available positive and negative evidence, including limitations on the use of tax losses and other carryforwards due to changes in ownership, historic information, and projections of future sources of taxable income that include and exclude future reversals of taxable temporary differences.

New Accounting Standards

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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-K

Item 7. Management’s Discussion and Analysis