What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-07 · 84 added, 104 removed, 72 unchanged (72% of the section changed)

16 unchanged sentences

managed transportation, last mile and freight forwarding.

Our truck brokerage business has a variable cost structure with robust free cash flow conversion and a long track record of generating a high return on invested capital.

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;

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and favorable long-term industry tailwinds.

As of September 30, 2023, we had approximately 122,000 carriers in our North American truck brokerage network, and access to more than 1.5 million trucks.

As of March 31, 2024, we had approximately 115,000 carriers in our North American truck brokerage network, and access to more than 1.5 million trucks.

We provide our customers with highly efficient access to capacity through our digital brokerage technology.

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Our last mile offering is an asset-light service that facilitates consumer deliveries performed by highly qualified third-party contractors.

We are the largest provider of outsourced last mile transportation for heavy goods in the United States, positioned within 125 miles of the vast majority of the U.S.

We are the largest provider of outsourced last mile transportation for heavy goods in the U.S., positioned within 125 miles of the vast majority of the U.S.

population and serving a customer base of omnichannel and e-commerce retailers and direct-to-consumer manufacturers.

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We are a U.S.-based freight forwarder with a global network of company-owned and partner-owned locations and coverage of key trade lanes that reach approximately 150 countries and territories.

Notable External Conditions

As a leading provider of freight transportation services, our business can be impacted to varying degrees by factors beyond our control.

The COVID-19 pandemic may continue to impact overall economic activity, customer sectors served by our industry, supply chains and labor markets.

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

Additionally, economic inflation can have a negative impact on our operating costs, and any economic recession could depress activity levels and adversely affect our results of operations.

Impact of Inflation

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.

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Basis of Presentation

On November 1, 2022, the Company completed the separation from XPO, Inc.

(formerly known as “XPO Logistics, Inc.”) (“XPO”) (the “Separation”).

Prior to the Separation, the Company’s financial statements were prepared on a standalone combined basis and were derived from the consolidated financial statements and accounting records of XPO.

On November 1, 2022, the Company became a standalone publicly traded company, and its financial statements post-Separation are prepared on a consolidated basis.

The combined financial statements for all periods presented prior to the Separation are now also referred to as “condensed consolidated financial statements” and have been prepared in accordance with GAAP.

Refer to Note 2—Basis of Presentation and Significant Accounting Policies for additional details regarding the basis of presentation used for the Company’s condensed consolidated financial statements as related to the Separation.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S.

generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”).

Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the 2023 Form 10-K.

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

and its majority-owned subsidiaries.

All intercompany accounts and transactions have been eliminated.

In management’s opinion, the condensed consolidated financial statements reflect all adjustments that are of a normal recurring nature and are necessary for a fair presentation of financial condition, results of operations and cash flows for the interim periods presented.

Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

Cost of transportation and services (exclusive of depreciation and amortization) primarily includes the cost of providing or procuring freight transportation for RXO customers.

Direct operating expenses (exclusive of depreciation and amortization) are both fixed and variable expenses and consist mainly of personnel costs, facility and equipment expenses, such as rent, utilities, equipment maintenance and repair, costs of materials and supplies, information technology expenses, and gains and losses on sales of property and equipment.

Sales, general and administrative expense (“SG&A”), including the allocated costs of XPO prior to the Separation, primarily consists of salaries and commissions for the sales function, salary and benefit costs for executive and certain administration functions, third-party professional fees, facility costs, bad debt expense and legal costs.

RXO has a single reportable segment.

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”) primarily consists of salaries and commissions for the sales function;

salary and benefit costs for executive and certain administration functions;

third-party professional fees;

facility costs;

bad debt expense;

and legal costs.

RXO has one reportable segment.

Results of Operations

Three Months Ended September 30, Percentage of Revenue

Three Months Ended March 31, Percentage of Revenue

(In millions) 2024 2023 2024 2023

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Restructuring costs 11 8 1.2 % 0.8 %

Operating income $ 6 $ 15 0.6 % 1.3 %

Operating income (loss) $ (12) $ 5 (1.3) % 0.5 %

Other expense 1 — 0.1 % — %

Interest expense (income), net 8 (1) 0.8 % (0.1) %

Income (loss) before income taxes $ (3) $ 15 (0.3) % 1.3 %

Income tax provision (benefit) (2) 2 (0.2) % 0.2 %

Interest expense, net 8 8 0.9 % 0.8 %

Loss before income taxes $ (21) $ (3) (2.3) % (0.3) %

Income tax benefit (6) (3) (0.7) % (0.3) %

Net income (loss) $ (15) $ — (1.6) % — %

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

Revenue decreased 14.2% to $976 million in the third quarter of 2023, compared with $1,138 million for the same quarter in 2022.

The year-over-year decrease in revenue in the third quarter of 2023 was driven primarily by (i) a $95 million decrease in revenue generated from our truck brokerage business, as a result of a 26% reduction in revenue per load, which was impacted by a combination of transportation market rates, fuel prices, length of haul, and freight mix, partially offset by an 18% increase in load volume and (ii) a $45 million decrease in revenue generated from our freight forwarding business, driven primarily by a decrease in ocean rates and volume.

Cost of transportation and services (exclusive of depreciation and amortization) for the third quarter of 2023 was $742 million, or 76.0% of revenue, compared with $857 million, or 75.3% of revenue, for the same quarter in 2022.

The year-over-year increase as a percentage of revenue during the third quarter of 2023 was driven primarily by a 3.7 percentage point increase in truck brokerage cost of transportation and services as a percentage of revenue, as lower freight rates were not offset by corresponding reductions in cost of purchased transportation in the third quarter of 2023.

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

Direct operating expense (exclusive of depreciation and amortization) for the third quarter of 2023 was $59 million, or 6.0% of revenue, compared with $56 million, or 4.9% of revenue, for the same quarter in 2022.

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

SG&A for the third quarter of 2023 was $148 million, or 15.2% of revenue, compared with $158 million, or 13.9% of revenue, for the same quarter in 2022.

The year-over-year increase in SG&A as a percentage of revenue was primarily a result of higher compensation-related costs of 0.9 percentage points for the third quarter of 2023 compared with the same quarter of 2022, reflecting deleverage on lower revenue and incremental corporate costs of operating RXO as a standalone public company.

Depreciation and amortization expense for the third quarter of 2023 was $16 million, compared with $23 million for the same quarter in 2022.

The year-over-year reduction was driven primarily 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 for the third quarter of 2023 and 2022 were $2 million and $23 million, respectively, and primarily comprised spin-off related costs.

Restructuring costs for the third quarter of 2023 and 2022 were $3 million and $6 million, respectively, and primarily comprised severance costs.

Our effective income tax rates were 50.5% and 18.5% for the third quarter of 2023 and 2022, respectively.

The effective tax rates for the third quarter of 2023 and 2022 were based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented.

Our effective tax rate for the third quarter of 2023 differs from the U.S.

corporate income tax rate of 21% due primarily to state income taxes within the U.S and a discrete tax benefit associated with return to provision true-up.

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

corporate income tax rate of 21% due primarily to a tax benefit of $1 million from changes in reserves for uncertain tax positions partially offset by state income taxes within the U.S.

Nine Months Ended September 30, Percentage of Revenue

(In millions) 2023 2022 2023 2022

Revenue $ 2,949 $ 3,676 100.0 % 100.0 %

Cost of transportation and services (exclusive of depreciation and amortization) 2,224 2,782 75.4 % 75.7 %

Direct operating expense (exclusive of depreciation and amortization) 179 167 6.1 % 4.5 %

Sales, general and administrative expense 445 485 15.1 % 13.2 %

Depreciation and amortization expense 52 65 1.8 % 1.8 %

Transaction and integration costs 12 44 0.4 % 1.2 %

Restructuring costs 12 9 0.4 % 0.2 %

Operating income $ 25 $ 124 0.8 % 3.4 %

Other expense 1 — — % — %

Interest expense (income), net 24 (1) 0.8 % — %

Income before income taxes $ — $ 125 — % 3.4 %

Income tax provision (benefit) (2) 29 (0.1) % 0.8 %

Net income $ 2 $ 96 0.1 % 2.6 %

Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022

Revenue decreased 19.8% to $2.9 billion in the first nine months of 2023, compared with $3.7 billion for the same period in 2022.

The year-over-year decrease in revenue in the first nine months of 2023 was driven primarily by (i) a $517 million decrease in revenue generated from our truck brokerage business, as a result of a 31% reduction in revenue per load, which was impacted by a combination of transportation market rates, fuel prices, length of haul, and freight mix, partially offset by an 11% increase in load volume and (ii) a $140 million decrease in revenue generated from our freight forwarding business, driven primarily by a decrease in ocean rates and volume.

Cost of transportation and services (exclusive of depreciation and amortization) for the first nine months of 2023 was $2.2 billion, or 75.4% of revenue, compared with $2.8 billion, or 75.7% of revenue, for the same period in 2022.

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

This was partially offset by a 2.9 percentage point increase in truck brokerage cost of transportation and services as a percentage of revenue, as lower freight rates were not offset by corresponding reductions in cost of purchased transportation in the first nine months of 2023.

Direct operating expense (exclusive of depreciation and amortization) for the first nine months of 2023 was $179 million, or 6.1% of revenue, compared with $167 million, or 4.5% of revenue, for the same period in 2022.

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

SG&A for the first nine months of 2023 was $445 million, or 15.1% of revenue, compared with $485 million, or 13.2% of revenue, for the same period in 2022.

The year-over-year increase in SG&A as a percentage of revenue primarily resulted from higher compensation-related costs of 1.8 percentage points for the first nine months of 2023 as compared to the first nine months of 2022, 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 the first nine months of 2023, which primarily comprised employee severance.

We anticipate the restructuring actions will result in cumulative annualized net cost savings of approximately $31 million.

Depreciation and amortization expense for the first nine months of 2023 was $52 million, compared with $65 million for the same period in 2022.

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 for the first nine months of 2023 and 2022 were $12 million and $44 million, respectively, and primarily comprised spin-off related costs.

Restructuring costs for the first nine months of 2023 and 2022 were $12 million and $9 million, respectively, and primarily comprised severance costs.

Our effective income tax rates were (574.3)% and 23.6% for the first nine months of 2023 and 2022, respectively.

The effective tax rates for the first nine months of 2023 and 2022 were based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented.

Our effective tax rate for the first nine months of 2023 differs from the U.S.

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

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

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

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Revenue decreased by 9.6% to $913 million in the first quarter of 2024, compared with $1,010 million for the same quarter in 2023.

The year-over-year decrease in revenue in the first quarter of 2024 was driven primarily by (i) a $36 million decrease in revenue generated from our truck brokerage business, as a result of a 15% reduction in revenue per load, which was impacted by a combination of transportation market rates, fuel prices, length of haul, and freight mix, partially offset by an 11% increase in load volume, (ii) a $25 million decrease in revenue generated from our freight forwarding business, driven primarily by a decrease in ocean rates and volume, and (iii) a $20 million decrease in revenue generated from our managed transportation business, driven primarily by a decrease in expedite air rates and volume.

Cost of transportation and services (exclusive of depreciation and amortization) in the first quarter of 2024 was $699 million, or 76.6% of revenue, compared with $759 million, or 75.1% of revenue in the same quarter of 2023.

The year-over-year increase as a percentage of revenue during the first quarter of 2024 was driven primarily by a 2.1 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 quarter.

This was partially offset by an improvement in mix in our freight forwarding business.

Direct operating expense (exclusive of depreciation and amortization) of $53 million in the first quarter of 2024 decreased $8 million, or 13.1%, from $61 million in the same quarter of 2023.

As a percentage of revenue, direct operating expense (exclusive of depreciation and amortization) decreased to 5.8% in the first quarter of 2024 compared with 6.0% in the same quarter of 2023 due to cost reduction initiatives.

SG&A of $145 million for the first quarter of 2024 decreased $8 million, or 5.2%, from $153 million for the first quarter of 2023.

As a percentage of revenue, SG&A increased to 15.9% in the first quarter of 2024 compared to 15.1% for the same quarter of 2023 due to higher compensation-related costs of 0.4 percentage points reflecting deleverage on lower revenue.

This was partially offset by cost savings from restructuring actions executed in 2023 and the first quarter of 2024.

We anticipate the restructuring actions executed in 2023 and the first quarter of 2024 will result in combined cost savings of more than $60 million annually.

Depreciation and amortization expense for the first quarter of 2024 was $16 million, compared with $18 million for the same quarter in 2023, flat year-over-year as a percentage of revenue.

Transaction and integration costs for the first quarter of 2024 and 2023 were $1 million and $6 million, respectively, and primarily comprised spin-off related costs.

Restructuring costs for the first quarter of 2024 and 2023 were $11 million and $8 million, respectively, and primarily comprised severance costs.

Our effective income tax rates were 27.7% and 106.0% for the first quarter of 2024 and 2023, respectively.

The effective tax rate for the first quarter of 2024 was calculated using the discrete method.

The effective tax rate for the first quarter of 2023 was based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the period presented.

Our effective tax rate for the first quarter of 2024 differs from the U.S.

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

Our effective tax rate for the first quarter of 2023 differs from the U.S.

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

The impact of this driver was enhanced due to our low pre-tax loss in the first quarter of 2023.

Liquidity and Capital Resources

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

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.

Our ability to fund our operations and anticipated capital needs is reliant upon the generation of cash from operations, supplemented as necessary by utilization of our revolving credit facility (the “Revolver”).

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

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

The level and the timing of the Company’s capital expenditures within these categories can vary as a result of a variety of factors outside of our control, such as the timing of new contracts and availability of labor and materials.

Our 2024 capital expenditures include capital allocations 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.

Debt and Financing Arrangements

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

We were in compliance with all covenants and other provisions of our outstanding debt and financing arrangements as of March 31, 2024.

Any failure to comply with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.

Refer to Note 5—Debt to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for disclosures regarding the Company’s debt and financing arrangements as of September 30, 2023.

As discussed further in Note 5—Debt , on April 11, 2024, we amended the Revolver (the “Amendment”).

Among other things, the Amendment increases the consolidated leverage ratio financial covenant level applicable under the Revolver from the fiscal quarter ending June 30, 2024 through the fiscal quarter ending March 31, 2025, as follows:

(i) to 4.25:1.00 for the fiscal quarters ending June 30, 2024 and September 30, 2024;

(ii) to 4.00:1.00 for the fiscal quarter ending December 31, 2024;

(iii) to 3.75:1.00 for the fiscal quarter ending March 31, 2025;

and (iv) returns to 3.50:1.00 beginning with the fiscal quarter ending June 30, 2025.

Financial Condition

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

As of September 30, As of December 31,

Our asset and liability balances are summarized as follows:

March 31, December 31,

(In millions) 2024 2023 $ Change % Change

3 unchanged sentences

Total long-term liabilities 543 549 (6) (1.1) %

Total assets decreased by $85 million from December 31, 2022 to September 30, 2023, driven primarily by a $113 million decrease in accounts receivable as a result of a decrease in revenue, offset partially by a $14 million increase in operating lease assets and a $14 million increase in other current assets.

Total liabilities decreased by $88 million from December 31, 2022 to September 30, 2023, driven primarily by a decrease in third party transportation costs.

Total assets decreased by $26 million from December 31, 2023 to March 31, 2024, driven primarily by a $27 million decrease in accounts receivable as a result of a decrease in revenue.

Total liabilities decreased by $14 million from December 31, 2023 to March 31, 2024, driven primarily by a decrease in third party transportation costs.

Cash Flow Activity

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

Nine Months Ended September 30,

Three Months Ended March 31,

(In millions) 2024 2023 $ Change % Change

1 unchanged sentence

Net cash used in investing activities (11) (12) 1 8.3 %

Net cash used in financing activities (17) (38) 21 55.3 %

Net cash provided by (used in) financing activities 6 (8) 14 175.0 %

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

Net increase in cash, cash equivalents and restricted cash $ 2 $ 23 $ (21) (91.3) %

During the first nine months of 2023, we generated cash from operating activities of $70 million, which was used primarily to fund (i) the purchase of $46 million of property and equipment, (ii) $12 million of tax withholdings related to vesting of stock compensation awards, (iii) $3 million in debt and finance lease repayments and (iv) $2 million of common stock repurchases.

During the first nine months of 2022, we generated cash from operating activities of $234 million, which was used to fund (i) $39 million of net transfers to XPO and (ii) the purchase of $39 million of property and equipment.

Net cash provided by operating activities for the first nine months of 2023 decreased by $164 million, compared with the first nine months of 2022.

The decrease in cash provided by operating activities reflects the impact of a $94 million decrease in net income between periods and changes in working capital.

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

Investing activities used $47 million of cash for the first nine months of 2023, compared with using $38 million of cash for the same period in 2022.

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

Financing activities used $17 million of cash for the first nine months of 2023 compared with using $38 million of cash for the same period in 2022.

The primary use of cash from financing activities in the first nine months of 2023 was (i) $12 million for payments of tax withholdings related to vesting of stock compensation awards, (ii) $3 million for debt and finance lease repayments and (iii) $2 million for the repurchase of common stock.

The primary use of cash from financing activities in the first nine months of 2022 was net transfers to XPO.

Net cash provided by operating activities for the first three months of 2024 decreased by $35 million compared with the same period in 2023.

The decrease in cash provided by operating activities reflects the impact of (i) a $15 million decrease in net income between periods and (ii) changes in working capital.

Investing activities used $11 million of cash for the first three months of 2024, compared with using $12 million of cash for the same period in 2023.

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

Financing activities provided $6 million of cash for the first three months of 2024, compared with using $8 million of cash for the same period in 2023.

The primary source of cash in the first three months of 2024 was $8 million in net proceeds from borrowings.

The primary use of cash in the first three months of 2023 was $7 million for payments of tax withholdings related to vesting of stock compensation awards.

Critical Accounting Policies

Our significant accounting policies, which include management’s most subjective and complex estimates and judgments, are included in Note 2—Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements for the year ended December 31, 2022 included in the Annual Report on Form 10-K.

A discussion of accounting estimates, considered critical because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates, are disclosed in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report on Form 10-K.

There have been no significant changes in the Company’s critical accounting estimates since December 31, 2023.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis