RXO, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS 1 Table of Contents RXO, Inc. Condensed Consolidated Balance Sheets (Unaudited) March 31, December 31, (Dollars in millions, shares in thousands, except per share amounts) 2024 2023 ASSETS Current assets Cash and cash equivalents $ 7 $ 5 Accounts receivable, net of $ 10 and $ 12 in allowances, respectively 716 743 Other current assets 47 48 Total current assets 770 796 Long-term assets Property and equipment, net of $ 305 and $ 293 in accumulated depreciation, respectively 121 124 Operating lease assets 200 195 Goodwill 630 630 Identifiable intangible assets, net of $ 121 and $ 118 in accumulated amortization, respectively 65 68 Other long-term assets 13 12 Total long-term assets 1,029 1,029 Total assets $ 1,799 $ 1,825 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 372 $ 414 Accrued expenses 220 199 Short-term debt and current maturities of long-term debt 16 3 Short-term operating lease liabilities 54 53 Other current liabilities 12 13 Total current liabilities 674 682 Long-term liabilities Long-term debt and obligations under finance leases 351 356 Deferred tax liability 1 7 Long-term operating lease liabilities 150 146 Other long-term liabilities 41 40 Total long-term liabilities 543 549 Commitments and Contingencies (Note 9) Equity Preferred stock, $ 0.01 par value; 10,000 shares authorized; 0 shares issued and outstanding as of March 31, 2024 and December 31, 2023 — — Common stock, $ 0.01 par value; 300,000 shares authorized; 117,544 and 117,026 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively 1 1 Additional paid-in capital 593 590 Retained earnings (Accumulated deficit) ( 9 ) 6 Accumulated other comprehensive loss ( 3 ) ( 3 ) Total equity 582 594 Total liabilities and equity $ 1,799 $ 1,825 See accompanying notes to condensed consolidated financial statements. 2 Table of Contents RXO, Inc. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, (Dollars in millions, shares in thousands, except per share amounts) 2024 2023 Revenue $ 913 $ 1,010 Cost of transportation and services (exclusive of depreciation and amortization) 699 759 Direct operating expense (exclusive of depreciation and amortization) 53 61 Sales, general and administrative expense 145 153 Depreciation and amortization expense 16 18 Transaction and integration costs 1 6 Restructuring costs 11 8 Operating income (loss) $ ( 12 ) $ 5 Other expense 1 — Interest expense, net 8 8 Loss before income taxes $ ( 21 ) $ ( 3 ) Income tax benefit ( 6 ) ( 3 ) Net income (loss) $ ( 15 ) $ — Earnings (loss) per share data Basic earnings (loss) per share $ ( 0.13 ) $ — Diluted earnings (loss) per share $ ( 0.13 ) $ — Weighted-average common shares outstanding Basic weighted-average common shares outstanding 117,217 116,600 Diluted weighted-average common shares outstanding 117,217 119,369 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents RXO, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three Months Ended March 31, (In millions) 2024 2023 Net income (loss) $ ( 15 ) $ — Other comprehensive income (loss), net of tax Foreign currency translation, net of tax effect of $ — and $ — $ — $ — Other comprehensive income (loss) — — Comprehensive income (loss) $ ( 15 ) $ — See accompanying notes to condensed consolidated financial statements. 4 Table of Contents RXO, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, (In millions) 2024 2023 Operating activities Net income (loss) $ ( 15 ) $ — Adjustments to reconcile net income (loss) to net cash from operating activities Depreciation and amortization expense 16 18 Stock compensation expense 5 5 Deferred tax benefit ( 7 ) — Other 2 1 Changes in assets and liabilities Accounts receivable 27 40 Other assets ( 1 ) ( 14 ) Accounts payable ( 41 ) ( 9 ) Accrued expenses and other liabilities 21 1 Net cash provided by operating activities 7 42 Investing activities Payment for purchases of property and equipment ( 11 ) ( 12 ) Net cash used in investing activities ( 11 ) ( 12 ) Financing activities Proceeds from borrowings on revolving credit facilities 39 — Repayment of borrowings on revolving credit facilities ( 31 ) — Payment for tax withholdings related to vesting of stock compensation awards ( 2 ) ( 7 ) Other — ( 1 ) Net cash provided by (used in) financing activities 6 ( 8 ) Effect of exchange rates on cash, cash equivalents and restricted cash — 1 Net increase in cash, cash equivalents and restricted cash 2 23 Cash, cash equivalents, and restricted cash, beginning of period 5 98 Cash, cash equivalents, and restricted cash, end of period $ 7 $ 121 Supplemental disclosure of cash flow information: Leased assets obtained in exchange for new operating lease liabilities $ 23 $ 10 Cash paid for income taxes, net 1 6 Cash paid for interest, net 1 — See accompanying notes to condensed consolidated financial statements. 5 Table of Contents RXO, Inc. Condensed Consolidated Statements of Changes in Equity (Unaudited) Common Stock (Dollars in millions, shares in thousands) Shares Amount Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Loss Total Equity Balance as of December 31, 2023 117,026 $ 1 $ 590 $ 6 $ ( 3 ) $ 594 Net loss — — — ( 15 ) — ( 15 ) Other comprehensive income — — — — — — Stock compensation expense — — 5 — — 5 Vesting of stock compensation awards 518 — — — — — Tax withholdings related to vesting of stock compensation awards — — ( 2 ) — — ( 2 ) Balance as of March 31, 2024 117,544 $ 1 $ 593 $ ( 9 ) $ ( 3 ) $ 582 Common Stock (Dollars in millions, shares in thousands) Shares Amount Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Loss Total Equity Balance as of December 31, 2022 116,400 $ 1 $ 588 $ 2 $ ( 4 ) $ 587 Net income — — — — — — Other comprehensive income — — — — — — Stock compensation expense — — 5 — — 5 Vesting of stock compensation awards 453 — — — — — Tax withholdings related to vesting of stock compensation awards — — ( 7 ) — — ( 7 ) Balance as of March 31, 2023 116,853 $ 1 $ 586 $ 2 $ ( 4 ) $ 585 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents RXO, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 condensed consolidated financial statements as one reportable segment. 2. Basis of Presentation and Significant Accounting Policies Basis of Presentation 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. Significant Accounting Policies Our significant accounting policies are disclosed in Note 2 to the 2023 Form 10-K. There have been no material changes to the Company’s significant accounting policies as of March 31, 2024. Accounting Pronouncements Issued but Not Yet Effective In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 ASU 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. 7 Table of Contents In March 2024, the SEC issued the final rules under SEC Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors. In April 2024, the SEC voluntarily stayed implementation of the final rules as a result of pending judicial review. These rules, if adopted, will require registrants to disclose certain climate-related information, including Scope 1 and Scope 2 greenhouse gas emissions and other climate-related topics, in registration statements and annual reports, when material. Disclosure requirements, absent the results of pending judicial review, will begin phasing in with the Company’s annual reporting for the year ending December 31, 2025. We are currently evaluating the impact the rules will have on our disclosures. 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 % of our revenues were generated outside the U.S. (primarily in Canada, Mexico and Asia) for the three months ended March 31, 2024 and 2023. Our revenue disaggregated by service offering is as follows: Three Months Ended March 31, (In millions) 2024 2023 Truck brokerage $ 564 $ 600 Last mile 232 240 Managed transportation 97 117 Freight forwarding 55 80 Eliminations ( 35 ) ( 27 ) Total $ 913 $ 1,010 Our revenue disaggregated by industry sector is as follows: Three Months Ended March 31, (In millions) 2024 2023 Retail/e-commerce $ 347 $ 386 Industrial/manufacturing 193 181 Food and beverage 103 105 Automotive 101 102 Logistics and transportation 42 52 Other 127 184 Total $ 913 $ 1,010 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 March 31, 2024, the fixed consideration component of our remaining performance obligation was approximately $ 61 million, and we expect approximately 100 % of that amount to be recognized over the next 3 years. We estimate remaining performance obligations at a point in time and actual amounts may differ from these estimates due to contract revisions or terminations. 8 Table of Contents 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 Condensed Consolidated Balance Sheets: Three Months Ended March 31, 2024 (In millions) Reserve Balance as of December 31, 2023 Charges Incurred Payments Reserve Balance as of March 31, 2024 Severance $ 4 $ 8 $ ( 4 ) $ 8 Facilities 2 2 ( 1 ) 3 Contract termination — 1 — 1 Total $ 6 $ 11 $ ( 5 ) $ 12 We expect the majority of the cash outlays related to the remaining restructuring liability at March 31, 2024 to be complete within twelve months. 5. Debt The following table summarizes the principal balance and carrying value of our debt: March 31, 2024 December 31, 2023 (In millions) Principal Balance Carrying Value Principal Balance Carrying Value Revolver $ — $ — $ 5 $ 5 7.50 % Notes due 2027 (1) 355 347 355 347 Finance leases, asset financing and short-term debt 20 20 7 7 Total debt and obligations under finance leases 375 367 367 359 Less: Short-term debt and current maturities of long-term debt 16 16 3 3 Total long-term debt and obligations under finance leases $ 359 $ 351 $ 364 $ 356 (1) The carrying value of the 7.50 % Notes due 2027 is presented net of unamortized debt issuance cost and discount of $ 8 million and $ 8 million as of March 31, 2024 and December 31, 2023, respectively. Revolving Credit Facilities On October 18, 2022, we entered into a five-year , $ 500 million unsecured multi-currency revolving credit facility (the “Revolver”), with $ 50 million 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, with interest payable quarterly. 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 not greater than 3.50 :1.00 and minimum interest coverage ratio of not less than 3.00 :1.00. At March 31, 2024, the Company was in compliance with the covenants of the Revolver. There were no letters of credit outstanding on the Revolver at March 31, 2024. On November 2, 2023, the Company exercised a feature to increase the total commitments under the Revolver from $ 500 million to $ 600 million. On April 11, 2024, the Company and lenders entered into an amendment to increase 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 (the “Covenant Relief Period”), as follows: (i) to 4.25 :1.00 for the fiscal 9 Table of Contents 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. In addition, during the Covenant Relief Period, the Company and its subsidiaries are subject to restrictions with respect to paying dividends or other distributions on equity interests, share repurchases, and other restricted payments, as well as certain material acquisitions, in each case subject to certain exceptions. The Company can elect to terminate the Covenant Relief Period and the restrictions thereunder if the consolidated leverage ratio financial covenant as of any fiscal quarter end is not greater than 3.50 :1.00. We also have a non-U.S. revolving credit facility with a maximum commitment of approximately $ 18 million. This facility has a one-year term and we had $ 13 million outstanding as of March 31, 2024 classified as short-term debt. 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 March 31, 2024. 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 March 31, 2024, the Company was in compliance with the covenants of the Notes. 6. 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 short-term debt and current maturities of long-term debt approximated their fair values as of March 31, 2024 and December 31, 2023, due to their short-term nature and/or being receivable or payable on demand. 10 Table of Contents Debt The fair value of our debt and classification in the fair value hierarchy is as follows: (In millions) Level March 31, 2024 December 31, 2023 Revolver 3 $ — $ 5 7.50 % Notes due 2027 1 364 366 We valued Level 1 debt using quoted prices in active markets. 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. 7. 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 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 under the 2023 Share Repurchase Program in the first quarter of 2024. As of March 31, 2024, $ 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 or use a specific dollar amount of the approved and remaining $ 123 million. 8. Earnings per Share The computations of basic and diluted earnings per share are as follows: Three Months Ended March 31, (Dollars in millions, shares in thousands, except per share data) 2024 2023 Net income (loss) $ ( 15 ) $ — Basic weighted-average common shares 117,217 116,600 Dilutive effect of stock-based awards — 2,769 Diluted weighted-average common shares (1) 117,217 119,369 Basic earnings (loss) per share $ ( 0.13 ) $ — Diluted earnings (loss) per share $ ( 0.13 ) $ — Antidilutive shares excluded from diluted weighted-average common shares 2,514 925 (1) Amounts may not be additive due to rounding. 11 Table of Contents 9. 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 or financial condition. 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 or financial condition. Legal costs incurred related to these matters are expensed as incurred. We carry liability and excess umbrella insurance policies that we deem 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 condition 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. 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 as of November 1, 2022. 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 the Company 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. 12 Table of Contents