RXO, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 40 Consolidated Balance Sheets as of December 31, 202 3 and 202 2 43 Consolidated Statements of Operations for the Years Ended December 31, 202 3 , 202 2 and 20 21 44 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 202 3 , 202 2 and 20 21 45 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 3 , 202 2 and 20 21 46 Consolidated Statements of Changes in Equity for the Years Ended December 31, 202 3 , 202 2 and 20 21 47 Notes to Consolidated Financial Statements 48 39 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors RXO, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of RXO, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, 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, 2023, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 40 Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 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 a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Liabilities for self-insured claims As discussed in Note 2 to the consolidated financial statements, the Company participates in a combination of self-insurance programs and purchased insurance that are managed to provide for the costs of liability, vehicular, and workers’ compensation (self-insured claims). The Company records estimates of the undiscounted liabilities associated with claims incurred as of the balance sheet date, including estimates of claims incurred but not reported, by considering historical cost experience, demographic, and severity factors, and judgments about current and expected levels of cost per claim and retention levels. Insurance liabilities, including those related to claims managed through self-insurance and purchased insurance, amounted to $62 million as of December 31, 2023 and are recorded within Accrued expenses and Other long-term liabilities. We identified the assessment of the estimated liabilities for self-insured claims as a critical audit matter. The evaluation of the uncertainty in the amounts that will ultimately be paid to settle these claims required subjective auditor judgment. Assumptions that may affect the estimated liability of self-insured claims include the consideration of historical cost experience, demographic and severity factors, and judgments about current and expected levels of cost per claim that have uncertainty related to future occurrences or events and conditions. Additionally, the Company’s liabilities for self-insured claims included estimates for expenses of claims that have been incurred but have not been reported, and specialized skills were needed to evaluate the actuarial methods and assumptions used to make these estimates. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s self-insurance process. This included controls over the assumptions used in estimating the liabilities for self-insured claims. In addition, for a sample of claims we compared the Company’s estimates of liabilities to current available information, which included incident and case reports, current and historical cost experience, or other evidence. We involved actuarial professionals with specialized skills and knowledge, who assisted in: 41 Table of Contents • comparing the Company’s actuarial reserving methodologies with accepted actuarial methods and procedures • evaluating assumptions used in determining the liability, including expected level of cost per claim, in relation to recent historical loss payment trends, and demographic and severity factors • developing an independent expected range of liabilities, including liabilities for claims that have been incurred but have not been reported, based on actuarial methodologies • comparing the Company’s recorded liability to the independently developed liability range. /s/ KPMG LLP We have served as the Company’s auditor since 2022. Stamford, Connecticut February 12, 2024 42 Table of Contents RXO, Inc. Consolidated Balance Sheets December 31, (Dollars in millions, shares in thousands, except per share amounts) 2023 2022 ASSETS Current assets Cash and cash equivalents $ 5 $ 98 Accounts receivable, net of $ 12 and $ 13 in allowances, respectively 743 900 Other current assets 48 31 Total current assets 796 1,029 Long-term assets Property and equipment, net of $ 293 and $ 241 in accumulated depreciation, respectively 124 119 Operating lease assets 195 159 Goodwill 630 630 Identifiable intangible assets, net of $ 118 and $ 106 in accumulated amortization, respectively 68 79 Other long-term assets 12 15 Total long-term assets 1,029 1,002 Total assets $ 1,825 $ 2,031 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 414 $ 501 Accrued expenses 199 256 Current maturities of long-term debt 3 4 Short-term operating lease liabilities 53 48 Other current liabilities 13 14 Total current liabilities 682 823 Long-term liabilities Long-term debt and obligations under finance leases 356 451 Deferred tax liability 7 16 Long-term operating lease liabilities 146 114 Other long-term liabilities 40 40 Total long-term liabilities 549 621 Commitments and Contingencies (Note 15) Equity Preferred stock, $ 0.01 par value; 10,000 shares authorized; 0 shares issued and outstanding as of December 31, 2023 and 2022 — — Common stock, $ 0.01 par value; 300,000 shares authorized; 117,026 and 116,400 shares issued and outstanding as of December 31, 2023 and 2022, respectively 1 1 Additional paid-in capital 590 588 Retained earnings 6 2 Accumulated other comprehensive loss ( 3 ) ( 4 ) Total equity 594 587 Total liabilities and equity $ 1,825 $ 2,031 See accompanying notes to consolidated financial statements. 43 Table of Contents RXO, Inc. Consolidated Statements of Operations Years Ended December 31, (Dollars in millions, shares in thousands, except per share amounts) 2023 2022 2021 Revenue $ 3,927 $ 4,796 $ 4,689 Cost of transportation and services (exclusive of depreciation and amortization) 2,967 3,624 3,681 Direct operating expense (exclusive of depreciation and amortization) 235 226 192 Sales, general and administrative expense 591 640 539 Depreciation and amortization expense 67 86 81 Transaction and integration costs 12 84 2 Restructuring costs 16 13 2 Operating income 39 123 192 Other expense 3 — 1 Interest expense, net 32 4 — Income before income taxes 4 119 191 Income tax provision — 27 41 Net income $ 4 $ 92 $ 150 Earnings per share data Basic earnings per share $ 0.03 $ 0.80 $ 1.30 Diluted earnings per share $ 0.03 $ 0.79 $ 1.30 Weighted-average common shares outstanding Basic weighted-average common shares outstanding 116,871 115,335 115,163 Diluted weighted-average common shares outstanding 119,456 115,791 115,163 See accompanying notes to consolidated financial statements. 44 Table of Contents RXO, Inc. Consolidated Statements of Comprehensive Income Years Ended December 31, (In millions) 2023 2022 2021 Net income $ 4 $ 92 $ 150 Other comprehensive income (loss), net of tax Foreign currency translation gain (loss), net of tax effect of $ 0 , $ 0 and $ 0 $ 1 $ ( 2 ) $ — Other comprehensive income (loss) 1 ( 2 ) — Comprehensive income $ 5 $ 90 $ 150 See accompanying notes to consolidated financial statements. 45 Table of Contents RXO, Inc. Consolidated Statements of Cash Flows Years Ended December 31, (In millions) 2023 2022 2021 Operating activities Net income $ 4 $ 92 $ 150 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization expense 67 86 81 Stock compensation expense 19 32 8 Deferred tax (benefit) ( 8 ) ( 20 ) 3 Other 9 6 3 Changes in assets and liabilities Accounts receivable 158 92 ( 242 ) Other assets ( 14 ) 14 ( 4 ) Accounts payable ( 86 ) ( 14 ) 129 Accrued expenses and other liabilities ( 60 ) 22 27 Net cash provided by operating activities 89 310 155 Investing activities Payment for purchases of property and equipment ( 64 ) ( 57 ) ( 39 ) Proceeds from sale of property and equipment — 1 1 Other ( 2 ) — — Net cash used in investing activities ( 66 ) ( 56 ) ( 38 ) Financing activities Proceeds from borrowings on revolving credit facility 76 — — Repayment of borrowings on revolving credit facility ( 71 ) — — Proceeds from issuance of debt — 451 — Repayment of debt and finance leases ( 104 ) — — Payment for debt issuance costs — ( 9 ) — Payment for tax withholdings related to vesting of stock compensation awards ( 14 ) ( 3 ) — Repurchase of common stock ( 2 ) — — Net transfers to XPO — ( 621 ) ( 159 ) Other ( 2 ) ( 1 ) 1 Net cash used in financing activities ( 117 ) ( 183 ) ( 158 ) Effect of exchange rates on cash, cash equivalents and restricted cash 1 ( 2 ) — Net increase (decrease) in cash, cash equivalents and restricted cash ( 93 ) 69 ( 41 ) Cash, cash equivalents and restricted cash, beginning of period 98 29 70 Cash, cash equivalents and restricted cash, end of period $ 5 $ 98 $ 29 Supplemental disclosure of cash flow information: Cash paid for income taxes, net 27 3 5 Cash paid for interest, net 32 — — See accompanying notes to consolidated financial statements. 46 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, 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 Net income — — — 4 — — 4 Other comprehensive income — — — — 1 — 1 Stock compensation expense — — 19 — — — 19 Vesting of stock compensation awards 726 — — — — — — Tax withholdings related to vesting of stock compensation awards — — ( 15 ) — — — ( 15 ) Repurchase of common stock ( 100 ) — ( 2 ) — — — ( 2 ) Balance as of December 31, 2023 117,026 $ 1 $ 590 $ 6 $ ( 3 ) $ — $ 594 See accompanying notes to consolidated financial statements. 47 Table of Contents RXO, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 2023, 2022 and 2021 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. 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. We present our operations in the consolidated financial statements as one reportable segment. On November 1, 2022, the Company completed the separation (the “Separation”) from XPO, Inc. (formerly known as XPO Logistics, Inc.) (“XPO”) 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. On November 1, 2022, RXO became a standalone publicly-traded company. 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, 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; 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. 48 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 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. 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 certain 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. 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. 49 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 upon 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. 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) 2023 2022 2021 Beginning balance $ 13 $ 9 $ 10 Provision charged to expense 5 11 6 Write-offs, less recoveries, and other adjustments ( 6 ) ( 7 ) ( 7 ) Ending balance $ 12 $ 13 $ 9 The Company may sell certain accounts receivable from time to time on a non-recourse basis pursuant to factoring arrangements to better match and neutralize the cash flow impact of transportation cost outflows. During the quarter ended December 31, 2023, we received cash for accounts receivable balances sold of $ 36 million under these arrangements. 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. 50 Table of Contents 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: 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 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 51 Table of Contents • 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. 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 entity considers many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in the entity's stock price and market capitalization of the entity 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 a combination of the income approach and 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 2023 goodwill assessment, we performed a quantitative analysis for our reporting units using a combination of the income and market approaches. As of November 30, 2023 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. 52 Table of Contents 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 4 to 16 years. Accrued Expenses The components of accrued expenses are as follows: December 31, (In millions) 2023 2022 Accrued transportation and facility charges $ 86 $ 120 Accrued salaries and wages 41 59 Accrued insurance 23 24 Other accrued expenses 49 53 Total accrued expenses $ 199 $ 256 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, 2023 and 2022, our insurance liabilities amounted to $ 62 million and $ 60 million, respectively, and were included in Accrued expenses and Other long-term liabilities on our Consolidated Balance Sheets. Income Taxes 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 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. 53 Table of Contents Up until the date of the Separation, the operations of the Company were included in the consolidated U.S. federal, certain state, 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 our consolidated financial statements. Similarly, the tax treatment of certain items reflected in our consolidated financial statements may not be reflected in the consolidated financial statements and tax returns of XPO. Up until the date of the Separation, the income taxes of the Company as presented in the consolidated financial statements may not have been indicative of the income taxes that the Company will incur post-Separation. 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. 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. 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. Reclassifications Certain amounts reported for prior years have been reclassified to conform to the current year’s presentation. Adoption of New Accounting Standard In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 roll-forward 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 roll-forward information, which is effective for fiscal years beginning after December 15, 2023. We adopted this standard on January 1, 2023, on a prospective basis. The adoption did not have an impact on our financial statement disclosures. 54 Table of Contents Accounting Pronouncements Issued but Not Yet Effective In March 2023, the FASB issued ASU 2023-01, “Leases (Topic 842) - Common Control Arrangements.” The amendments in this update improve current GAAP by clarifying the accounting treatment for leasehold improvements associated with common control leases in order to create uniformity in practice. The ASU seeks to provide guidance to more accurately match the amortization expense of leasehold improvements under common control arrangements with the useful life of the improvements to the consolidated entity as a whole. The amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. We are currently evaluating the impact of the new guidance. In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures.” The amendments in this update improve reportable segment disclosure requirements through enhanced disclosures about significant segment expenses. The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items and interim disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements of the ASU are required for entities with a single reportable segment. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods for our fiscal years beginning after December 15, 2024, and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. We are currently evaluating the impact of the new guidance. In December 2023, the FASB issued 2023-09, “Income Taxes (Topic 740) - Improvements to Income Tax Disclosure.” The ASU seeks to enhance income tax information primarily through changes in the rate reconciliation and income taxes paid information. The amendments are effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. We are currently evaluating the impact of the new guidance. 3. 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 7 %, 9 % and 9 % of our revenues were generated outside the U.S. (primarily in Canada, Mexico and Asia) for the years ended December 31, 2023, 2022 and 2021, respectively. Our revenue disaggregated by service offering is as follows: Years Ended December 31, (In millions) 2023 2022 2021 Truck brokerage $ 2,358 $ 2,929 $ 2,749 Last mile 1,014 1,061 1,016 Managed transportation 439 523 603 Freight forwarding 251 422 434 Eliminations ( 135 ) ( 139 ) ( 113 ) Total $ 3,927 $ 4,796 $ 4,689 55 Table of Contents Our revenue disaggregated by industry sector is as follows: Years Ended December 31, (In millions) 2023 2022 2021 Retail/e-commerce $ 1,533 $ 1,799 $ 1,771 Industrial/manufacturing 743 817 778 Food and beverage 438 530 585 Automotive 411 390 308 Logistics and transportation 197 338 331 Other 605 922 916 Total $ 3,927 $ 4,796 $ 4,689 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, 2023, the fixed consideration component of our remaining performance obligation was approximately $ 71 million, and we expect approximately 99 % 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 contract revisions or terminations. 4. 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 Accrued expenses in the Consolidated Balance Sheets: Year Ended December 31, 2023 (In millions) Reserve Balance as of December 31, 2022 Charges Incurred Payments Other Reserve Balance as of December 31, 2023 Severance $ 2 $ 12 $ ( 10 ) $ — $ 4 Facilities 1 4 ( 3 ) — 2 Total $ 3 $ 16 $ ( 13 ) $ — $ 6 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 We expect the majority of the cash outlays related to the remaining restructuring liability at December 31, 2023 to be complete within twelve months. 56 Table of Contents 5. Property and Equipment The following table summarizes our property and equipment : December 31, (In millions) 2023 2022 Property and equipment Buildings and leasehold improvements $ 33 $ 23 Vehicles, tractors and trailers 24 23 Machinery and equipment 41 36 Computer software and equipment 319 278 Total property and equipment, gross 417 360 Less: accumulated depreciation ( 293 ) ( 241 ) Total property and equipment, net $ 124 $ 119 Net book value of capitalized internally-developed software included in property and equipment, net $ 63 $ 62 Depreciation of property and equipment and amortization of computer software was $ 55 million, $ 65 million and $ 58 million for the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023 and 2022, our long-lived tangible assets outside of the U.S. were not significant. 6. 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) 2023 2022 Operating leases: Operating lease assets $ 195 $ 159 Short-term operating lease liabilities $ 53 $ 48 Long-term operating lease liabilities 146 114 Total operating lease liabilities $ 199 $ 162 Finance leases: Property and equipment, gross $ 9 $ 7 Accumulated depreciation ( 4 ) ( 2 ) Property and equipment, net $ 5 $ 5 Current portion of obligations under finance leases $ 2 $ 2 Long-term portion of obligations under finance leases 4 4 Total finance lease liabilities $ 6 $ 6 57 Table of Contents Supplemental weighted-average information for leases is as follows: December 31, 2023 2022 Weighted-average remaining lease term (years) Operating leases 4.2 4.1 Finance leases 3.2 4.3 Weighted-average discount rate Operating leases 5.2 % 4.7 % Finance leases 5.7 % 6.1 % The components of our lease expense are as follows: Years Ended December 31, (In millions) 2023 2022 2021 Operating lease cost $ 59 $ 51 $ 46 Short-term lease cost 15 10 8 Variable lease cost 15 14 12 Total operating lease cost $ 89 $ 75 $ 66 Finance lease cost: Amortization of leased assets $ 2 $ 1 $ — Interest on lease liabilities 1 — — Total finance lease cost $ 3 $ 1 $ — Total lease cost $ 92 $ 76 $ 66 Supplemental cash flow information related to leases is as follows: Years Ended December 31, (In millions) 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 57 $ 49 $ 41 Financing cash flows for finance leases 2 1 — Leased assets obtained in exchange for new lease obligations: Operating leases 100 57 55 Finance leases 2 7 — Future minimum lease payments as of December 31, 2023 are as follows: (In millions) Finance Leases Operating Leases 2024 $ 2 $ 62 2025 2 54 2026 2 41 2027 1 31 2028 — 20 Thereafter — 15 Total lease payments 7 223 Less: interest ( 1 ) ( 24 ) Present value of lease liabilities $ 6 $ 199 58 Table of Contents As of December 31, 2023, we had additional operating leases that have not yet commenced with future undiscounted lease payments of $ 12 million. These operating leases will commence in 2024, with initial lease terms ranging from 3 years to 7 years . 7. Goodwill and Intangible Assets There were no cumulative goodwill impairments as of December 31, 2023. 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 2023 or 2022. During 2023 we retired $ 1 million of fully amortized customer relationship intangible assets. Estimated future amortization expense for amortizable intangible assets for the next five years and thereafter is as follows: (In millions) 2024 2025 2026 2027 2028 Thereafter Estimated amortization expense $ 12 $ 12 $ 12 $ 11 $ 8 $ 13 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 $ 13 million, $ 21 million and $ 24 million for the years ended December 31, 2023, 2022, and 2021, respectively. 8. Debt The following table summarizes the principal balance and carrying value of our debt: December 31, 2023 December 31, 2022 (In millions) Principal Balance Carrying Value Principal Balance Carrying Value Revolver $ 5 $ 5 $ — $ — Term Loan — — 100 100 7.50 % Notes due 2027 (1) 355 347 355 346 Finance leases, asset financing and other 7 7 9 9 Total debt and obligations under finance leases 367 359 464 455 Less: Current maturities of long-term debt 3 3 4 4 Total long-term debt and obligations under finance leases $ 364 $ 356 $ 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 $ 8 million and $ 9 million as of December 31, 2023 and December 31, 2022, respectively. Our principal payment obligations on debt (excluding finance leases) for the next five years and thereafter is as follows: (In millions) 2024 2025 2026 2027 2028 Thereafter Principal payments on debt $ 1 $ — $ — $ 360 $ — $ — 59 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, 2023, the Company was in compliance with the covenants of the Revolver. As of December 31, 2023, we had $ 5 million outstanding under the Revolver, with interest payable quarterly. Borrowings under the Revolver are payable, at our option, at any time prior to or at maturity on October 18, 2027. The effective interest rate on the Revolver was 6.82 % 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 Credit Agreement On October 18, 2022, we entered into a five-year $ 100 million unsecured term loan facility (the “Term Loan”). The original maturity date of the Term Loan was November 1, 2027. In connection with the Revolver commitment increase, 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. Notes 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, if applicable. The Notes were issued at an issue price of 98.962 % of par. The effective interest rate on the Notes was 8.13 % as of December 31, 2023. We may redeem the Notes, in whole or in part, at any time on or after November 15, 2024 at a redemption price equal to (i) 103.750 % of the principal amount to be redeemed if the redemption occurs during the 12 -month period beginning on November 15, 2024, (ii) 101.875 % of the principal amount to be redeemed if the redemption occurs during the 12-month period beginning on November 15, 2025 and (iii) 100 % of the principal amount to be redeemed if the redemption occurs on or after November 15, 2026, in each case plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time prior to November 15, 2024, we may also redeem up to 40 % of the Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.500 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to November 15, 2024, we may redeem the Notes, in whole or in part, at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable “make-whole” premium. 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, 2023, the Company was in compliance with the covenants of the Notes. 60 Table of Contents 9. 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. Assets and Liabilities The Company bases its fair value estimates on market assumptions and available information. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and current maturities of long-term debt approximated their fair values as of December 31, 2023 and December 31, 2022, due to their short-term nature and/or being receivable or payable on demand. Debt The fair value of our debt and classification in the fair value hierarchy is as follows: (In millions) Level December 31, 2023 December 31, 2022 Revolver 3 $ 5 $ — Term Loan 2 — 95 7.50% Notes due 2027 1 366 358 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. We valued Level 3 debt using unobservable inputs which reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date. 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 $ 9 million, $ 8 million and $ 7 million for the years ended December 31, 2023, 2022 and 2021, respectively, and were primarily included in Sales, general and administrative expense in the Consolidated Statements of Operations. 11. Stockholders’ Equity On May 2, 2023, the Company’s Board of Directors authorized the repurchase of up to $ 125 million of the Company’s common stock (the “2023 Share Repurchase Program”). During the twelve months ended 2023, the Company repurchased 100,000 shares of its common stock for $ 2 million at an average price of $ 20.53 per share, funded by available cash. There were no share repurchases in the fourth quarter of 2023. As of December 31, 2023, $ 123 million remained approved to be used for share repurchases under the 2023 Share Repurchase Program. The 2023 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time at the discretion of the Company’s Board of Directors. We are not obligated to repurchase any specific number of shares. 61 Table of Contents 12. 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 Employee Matters Agreement (“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, as shown in the table below, exclude 1.7 million and 2.8 million shares held by non-RXO employees at December 31, 2023 and December 31, 2022, respectively, 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, as shown in the table below, exclude these 12 thousand and 43 thousand shares at December 31, 2023 and December 31, 2022, respectively, 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, 2023, 6.9 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) 2023 2022 2021 Restricted stock and restricted stock units $ 14 $ 9 $ 6 Performance-based restricted stock units 5 23 2 Total stock-based compensation expense $ 19 $ 32 $ 8 Tax benefit on stock-based compensation $ 4 $ 8 $ 1 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. 62 Table of Contents 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. A summary of RSU and PRSU award activity for the year ended December 31, 2023 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, 2022 1,005,171 $ 21.68 896,631 $ 19.68 Granted 1,200,161 20.62 62,605 19.08 Vested ( 410,646 ) 20.85 ( 229,934 ) 22.16 Forfeited and canceled ( 120,098 ) 22.68 ( 29,014 ) 21.17 Outstanding as of December 31, 2023 1,674,588 $ 21.06 700,288 $ 18.74 The total aggregate fair value of RSUs and PRSUs that vested during 2023, 2022 and 2021 was $ 13 million, $ 18 million and $ 5 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, 2023, all outstanding RSUs vest subject to service conditions and all outstanding PRSUs vest subject to service and performance conditions. As of December 31, 2023, unrecognized compensation cost related to unvested RSUs and PRSUs of $ 32 million is anticipated to be recognized over a weighted-average period of approximately 1.71 years . 63 Table of Contents 13. 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 certain 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) 2023 2022 2021 U.S. $ ( 2 ) $ 88 $ 169 Foreign 6 31 22 Income before income taxes $ 4 $ 119 $ 191 The components of the income tax provision (benefit) consist of the following: Years Ended December 31, (In millions) 2023 2022 2021 Current: U.S. Federal $ 4 $ 33 $ 30 State 3 5 6 Foreign 1 9 2 Total current income tax provision 8 47 38 Deferred: U.S. Federal ( 8 ) ( 17 ) 4 State ( 1 ) ( 3 ) ( 1 ) Foreign 1 — — Total deferred income tax provision (benefit) ( 8 ) ( 20 ) 3 Total income tax provision $ — $ 27 $ 41 The reconciliation of the statutory federal income tax rate to the effective income tax rate consists of the following: Years Ended December 31, 2023 2022 2021 U.S. federal statutory tax rate 21.0 % 21.0 % 21.0 % State taxes, net of U.S. federal benefit 42.4 3.0 2.6 Non-deductible expenses 81.6 1.5 — Foreign rate differential 17.1 1.5 0.6 Foreign operations (1) 32.2 ( 0.8 ) 0.4 Provision to return and deferred tax adjustments 4.5 ( 2.4 ) ( 0.1 ) Changes in uncertain tax positions ( 55.5 ) ( 0.4 ) ( 2.4 ) Other ( 156.3 ) ( 0.8 ) ( 0.7 ) Effective tax rate ( 13.0 ) % 22.6 % 21.4 % (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. 64 Table of Contents 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: December 31, (In millions) 2023 2022 Deferred tax asset Net operating loss and other tax attribute carryforwards $ 7 $ 3 Accrued expenses 13 16 Other 11 12 Total deferred tax asset 31 31 Valuation allowance ( 1 ) ( 1 ) Total deferred tax asset, net 30 30 Deferred tax liability Intangible assets ( 28 ) ( 26 ) Property and equipment ( 6 ) ( 16 ) Other ( 1 ) ( 1 ) Total deferred tax liability ( 35 ) ( 43 ) Net deferred tax liability $ ( 5 ) $ ( 13 ) The deferred tax asset and deferred tax liability above are reflected on our Consolidated Balance Sheets as follows: December 31, (In millions) 2023 2022 Other long-term assets $ 2 $ 3 Deferred tax liability ( 7 ) ( 16 ) Net deferred tax liability $ ( 5 ) $ ( 13 ) Operating Loss and Tax Credit Carryforwards Our operating loss and tax credit carryforwards are as follows: December 31, (In millions) Expiration Date 2023 2022 Federal net operating losses for all U.S. operations $ — $ 4 Tax effect (before federal benefit) of state net operating losses Various times starting in 2024 (1) 1 1 Foreign net operating losses available to offset future taxable income Various times starting in 2028 (1) 20 5 State tax credit carryforwards Various times starting in 2026 1 — (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. 65 Table of Contents The balances and activity related to our valuation allowance are as follows: (In millions) Beginning Balance Additions Reductions Ending Balance Year Ended December 31, 2023 $ 1 $ — $ — $ 1 Year Ended December 31, 2022 1 — — 1 Year Ended December 31, 2021 2 — ( 1 ) 1 Unrecognized Tax Benefits A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Years Ended December 31, (In millions) 2023 2022 2021 Beginning balance $ — $ 1 $ 4 Reductions due to the statute of limitations — ( 1 ) ( 3 ) Ending balance $ — $ — $ 1 Interest and penalties — 2 2 Gross unrecognized tax benefits $ — $ 2 $ 3 Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of the end of the year $ — $ — $ 1 We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2023, we have no tax years under examination by the IRS or in any foreign jurisdictions. We are under examination in various states. The U.S. federal tax return after the separation date of November 1, 2022, certain state and local returns after 2016 and non-U.S. returns after 2010 are open under relevant statutes of limitations and are subject to audit. 14. 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 1.1 million and 0.5 million of these awards vested or were forfeited in 2023 and 2022, respectively, resulting in 1.7 million and 2.8 million shares remaining outstanding at December 31, 2023 and December 31, 2022, respectively. 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, 2023 and December 31, 2022. 66 Table of Contents 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. 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. The computations of basic and diluted earnings per share are as follows: Years Ended December 31, (Dollars in millions, shares in thousands, except per share amounts) 2023 2022 2021 Net income $ 4 $ 92 $ 150 Basic weighted-average common shares 116,871 115,335 115,163 Dilutive effect of stock-based awards 2,585 456 — Diluted weighted-average common shares 119,456 115,791 115,163 Basic earnings per share $ 0.03 $ 0.80 $ 1.30 Diluted earnings per share $ 0.03 $ 0.79 $ 1.30 Antidilutive shares excluded from diluted weighted-average common shares 396 1,095 — 15. 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, cash flows and financial position. 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 results of operations, cash flows and financial position. Legal costs incurred related to these matters are expensed as incurred. 67 Table of Contents 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 results of operations, cash flows or financial position could be negatively impacted. Our last mile subsidiary is involved in several class action and collective action cases involving misclassification claims. The misclassification claims related solely to our last mile business, 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. In one of the misclassification claims, Muniz v. RXO Last Mile, Inc. , the court has granted plaintiffs partial summary judgment and determined our last mile subsidiary misclassified the plaintiff owner/operators as independent contractors when they should have been deemed employees. We are vigorously defending ourselves in this matter and believe we have a number of meritorious defenses, and there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. We believe the misclassification claims, including Muniz v. RXO Last Mile, Inc. , 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. 16. 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. Allocation of General Corporate Expenses Post-Separation, costs were no longer allocated from XPO to the Company; therefore, no related amounts were reflected on the Company’s financial statements for the year ended December 31, 2023. 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. 68 Table of Contents 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 Sales, general and administrative expense $ 50 $ 60 Depreciation and amortization expense 9 9 Transaction and integration costs 46 2 Restructuring costs 7 1 Total $ 112 $ 72 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 Revenue $ 109 $ 181 Costs $ 52 $ 79 69 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.