RXO, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q and other written reports and oral statements we make from time to time contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terms such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target,” “trajectory” or the negative of these terms or other comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference include those discussed below and the risks discussed in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). All forward-looking statements set forth in this Quarterly Report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The following discussion should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report, and with the audited consolidated financial statements and related notes thereto included in the 2023 Annual Report on Form 10-K. Forward-looking statements set forth in this Quarterly Report speak only as of the date hereof, and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, changes in expectations or the occurrence of unanticipated events, except to the extent required by law. Business Overview 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 asset-light managed transportation and last mile services, which complement our truck brokerage business. 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 volume growth in our business include our ability to access massive truckload capacity for shippers through our carrier relationships; our proprietary, cutting-edge technology; our strong management expertise; and favorable long-term industry tailwinds. As of June 30, 2024, we had approximately 118,000 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. This proprietary platform is a major differentiator for our truck brokerage business, and together with our pricing technology, we believe it can unlock incremental profitable growth well beyond our current levels. Our complementary services for managed transportation and last mile also utilize our digital brokerage technology. 15 Table of Contents Our managed transportation service provides asset-light solutions for shippers who outsource their freight transportation to gain reliability, visibility and cost savings. The service uses proprietary technology to enhance our revenue synergy, with cross-selling to truck brokerage and last mile. Our managed transportation offering includes bespoke load planning and procurement, complex solutions tailored to specific challenges, performance monitoring, engineering and data analytics, among other services. Our control tower solution leverages the expertise of a dedicated team focused on continuous improvement, and digital, door-to-door visibility into order status and freight in transit. In addition, we offer technology-enabled managed expedite services that automate transportation procurement for time-critical freight moved by road and air charter carriers. We also offer freight forwarding services, including facilitation of ocean and air transportation, customs brokerage and additional domestic services. 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 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. Pending Acquisition On June 21, 2024, the Company, United Parcel Service of America, Inc. (“UPS”) and certain subsidiaries of UPS entered into a Purchase Agreement (the “Purchase Agreement”), pursuant to which, following the satisfaction or waiver of certain conditions, the Company will purchase (the “Coyote Acquisition”) UPS’ technology-driven, asset-light based truckload freight brokerage services business, as well as certain assets used to conduct haulage, dedicated transport and warehousing services in the United Kingdom (the “Acquired Business”) for $1.025 billion in cash, subject to certain customary adjustments. 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. Generally, inflationary increases in labor and operating costs related to our operations have historically been offset through price increases. However, the pricing environment generally becomes more competitive during economic downturns, which may, as it has in the past, affect our ability to obtain price increases from customers both during and following such periods. Basis of Presentation 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 and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. 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. Cost of transportation and services (exclusive of depreciation and amortization) primarily includes the cost of providing or procuring freight transportation for RXO customers. 16 Table of Contents 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 June 30, Percentage of Revenue (In millions) 2024 2023 2024 2023 Revenue $ 930 $ 963 100.0 % 100.0 % Cost of transportation and services (exclusive of depreciation and amortization) 700 723 75.3 % 75.1 % Direct operating expense (exclusive of depreciation and amortization) 50 59 5.4 % 6.1 % Sales, general and administrative expense 154 144 16.6 % 15.0 % Depreciation and amortization expense 17 18 1.8 % 1.9 % Transaction and integration costs 7 4 0.8 % 0.4 % Restructuring costs 2 1 0.2 % 0.1 % Operating income $ — $ 14 — % 1.5 % Other expense — — — % — % Interest expense, net 8 8 0.9 % 0.8 % Income (loss) before income taxes $ (8) $ 6 (0.9) % 0.6 % Income tax provision (benefit) (1) 3 (0.1) % 0.3 % Net income (loss) $ (7) $ 3 (0.8) % 0.3 % Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023 Revenue decreased by 3.4% to $930 million in the second quarter of 2024, compared with $963 million for the same quarter in 2023. The year-over-year decrease in revenue in the second quarter of 2024 was driven primarily by (i) a $20 million decrease in revenue generated from our managed transportation business, driven primarily by a decrease in ocean and expedite air rates and volume and (ii) a $14 million decrease in revenue generated from our truck brokerage business, as a result of a 7% reduction in revenue per load, which was impacted by a combination of transportation market rates, fuel prices and freight mix, partially offset by a 4% increase in load volume. Cost of transportation and services (exclusive of depreciation and amortization) in the second quarter of 2024 was $700 million, or 75.3% of revenue, compared with $723 million, or 75.1% of revenue in the same quarter of 2023. The year-over-year increase as a percentage of revenue during the second quarter of 2024 was driven primarily by a 0.5 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. Direct operating expense (exclusive of depreciation and amortization) of $50 million in the second quarter of 2024 decreased $9 million, or 15.3%, from $59 million in the same quarter of 2023. As a percentage of revenue, direct operating expense (exclusive of depreciation and amortization) decreased to 5.4% in the second quarter of 2024 compared with 6.1% in the same quarter of 2023 due to cost reduction initiatives. 17 Table of Contents SG&A of $154 million in the second quarter of 2024 increased $10 million, or 6.9%, from $144 million in the second quarter of 2023. As a percentage of revenue, SG&A increased to 16.6% in the second quarter of 2024 compared with 15.0% for the same quarter of 2023 due to a 1.0 percentage point increase in professional and consulting expense. This was partially offset by cost savings from restructuring actions executed in 2023 and the first six months of 2024. We anticipate the restructuring actions executed in 2023 and the first six months of 2024 will result in combined cost savings of more than $65 million annually. Depreciation and amortization expense for the second quarter of 2024 was $17 million, compared with $18 million for the same quarter in 2023. Transaction and integration costs for the second quarter of 2024 and 2023 were $7 million and $4 million, respectively, and primarily comprised acquisition and spin-off related costs. Restructuring costs for the second quarter of 2024 and 2023 were $2 million and $1 million, respectively, and primarily comprised severance costs. Our effective income tax rates were 11.3% and 44.0% for the second quarter of 2024 and 2023, respectively. The effective tax rate for the second quarter of 2024 was calculated using the discrete method. The effective tax rate for the second 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 second quarter of 2024 differs from the U.S. corporate income tax rate of 21% primarily due to the effect of discrete tax items when experiencing a pre-tax loss. Our effective tax rate for the second quarter of 2023 differs from the U.S. corporate income tax rate of 21% primarily due to state income taxes within the U.S and non-deductible expenses. The impact of this driver was enhanced due to our low pre-tax income in the second quarter of 2023. Six Months Ended June 30, Percentage of Revenue (In millions) 2024 2023 2024 2023 Revenue $ 1,843 $ 1,973 100.0 % 100.0 % Cost of transportation and services (exclusive of depreciation and amortization) 1,399 1,482 75.9 % 75.1 % Direct operating expense (exclusive of depreciation and amortization) 103 120 5.6 % 6.1 % Sales, general and administrative expense 299 297 16.2 % 15.1 % Depreciation and amortization expense 33 36 1.8 % 1.8 % Transaction and integration costs 8 10 0.4 % 0.5 % Restructuring costs 13 9 0.7 % 0.5 % Operating income (loss) $ (12) $ 19 (0.7) % 1.0 % Other expense 1 — 0.1 % — % Interest expense, net 16 16 0.9 % 0.8 % Income (loss) before income taxes $ (29) $ 3 (1.6) % 0.2 % Income tax provision (benefit) (7) — (0.4) % — % Net income (loss) $ (22) $ 3 (1.2) % 0.2 % Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023 Revenue decreased by 6.6% to $1.8 billion in the first six months of 2024, compared with $2.0 billion for the same period in 2023. The year-over-year decrease in revenue in the first six months of 2024 was driven primarily by (i) a $65 million decrease in revenue generated from our managed transportation business, driven primarily by a decrease in ocean and expedite air rates and volume and (ii) a $50 million decrease in revenue generated from our truck brokerage business, as a result of an 11% reduction in revenue per load, which was impacted by a combination of transportation market rates, fuel prices, length of haul and freight mix, partially offset by an 8% increase in load volume. 18 Table of Contents Cost of transportation and services (exclusive of depreciation and amortization) in the first six months of 2024 was $1.4 billion, or 75.9% of revenue, compared with $1.5 billion, or 75.1% of revenue, for the same period in 2023. The year-over year increase as a percentage of revenue in the first six months of 2024 was driven primarily by a 1.4 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. Direct operating expense (exclusive of depreciation and amortization) of $103 million in the first six months of 2024 decreased $17 million, or 14.2%, from $120 million in the same period in 2023. As a percentage of revenue, direct operating expense (exclusive of depreciation and amortization) decreased to 5.6% in the first six months of 2024 compared with 6.1% in the same quarter of 2023 due to cost reduction initiatives. SG&A of $299 million in the first six months of 2024 increased $2 million, or 0.7%, from $297 million in the first six months of 2023. As a percentage of revenue, SG&A increased to 16.2% in the first six months of 2024 compared with 15.1% for the same period of 2023 due to a 0.7 percentage point increase in professional and consulting expense. This was partially offset by cost savings from restructuring actions executed in the first six months of 2024. We anticipate the restructuring actions executed in 2023 and the first six months of 2024 will result in combined cost savings of more than $65 million annually. Depreciation and amortization expense for the first six months of 2024 was $33 million, compared with $36 million for the same period in 2023, flat year-over-year as a percentage of revenue. Transaction and integration costs for the first six months of 2024 and 2023 were $8 million and $10 million, respectively, and primarily comprised acquisition and spin-off related costs. Restructuring costs for the first six months of 2024 and 2023 were $13 million and $9 million, respectively, and primarily comprised severance costs. Our effective income tax rates were 22.9% and (11.0)% for the first six months of 2024 and 2023, respectively. The effective tax rate for the first six months of 2024 was calculated using the discrete method. The effective tax rate for the first six months of 2023 was based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented. Our effective tax rate for the first six months of 2024 differs from the U.S. corporate income tax rate of 21% primarily due to state income taxes. Our effective tax rate for the first six months of 2023 differs from the U.S. corporate income tax rate of 21% primarily due to a discrete tax benefit of $2 million from changes in reserves for uncertain tax positions, partially offset by state income taxes within the U.S. and non-deductible expenses. Liquidity and Capital Resources Overview 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. We continually evaluate our liquidity requirements and capital structure in light of our operating needs, growth initiatives and capital resources. We believe that our existing liquidity and sources of capital are sufficient to support our operations over the next 12 months. Capital Expenditures 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. 19 Table of Contents Debt and Financing Arrangements We were in compliance with all covenants and other provisions of our outstanding debt and financing arrangements as of June 30, 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 6—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 June 30, 2024. As discussed further in Note 6—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 Our asset and liability balances are summarized as follows: June 30, December 31, (In millions) 2024 2023 $ Change % Change Total current assets $ 776 $ 796 $ (20) (2.5) % Total long-term assets 1,037 1,029 8 0.8 % Total current liabilities 662 682 (20) (2.9) % Total long-term liabilities 572 549 23 4.2 % Total assets decreased by $12 million from December 31, 2023 to June 30, 2024, driven primarily by a $18 million decrease in accounts receivable as a result of a decrease in revenue. Total liabilities increased by $3 million from December 31, 2023 to June 30, 2024, driven primarily by an increase in debt and operating lease liabilities, partially offset by a decrease in third party transportation costs. Cash Flow Activity Our cash flows from operating, investing and financing activities are summarized as follows: Six Months Ended June 30, (In millions) 2024 2023 $ Change % Change Net cash provided by operating activities $ 2 $ 66 $ (64) (97.0) % Net cash used in investing activities (22) (28) 6 21.4 % Net cash provided by (used in) financing activities 22 (13) 35 269.2 % 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 $ 26 $ (24) (92.3) % Net cash provided by operating activities for the first six months of 2024 decreased by $64 million compared with the same period in 2023. The decrease in cash provided by operating activities reflects the impact of (i) a $25 million decrease in net income between periods and (ii) changes in working capital. Investing activities used $22 million of cash for the first six months of 2024, compared with using $28 million of cash for the same period in 2023. The use of cash in both periods was to purchase property and equipment. 20 Table of Contents Financing activities provided $22 million of cash for the first six months of 2024, compared with using $13 million of cash for the same period in 2023. The primary source of cash in the first six months of 2024 was $27 million in net proceeds from borrowings on revolving credit facilities. The primary uses of cash in the first six months of 2023 were (i) $9 million for payments of tax withholdings related to vesting of stock compensation awards and (ii) $2 million for the repurchase of common stock. 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, 2023 included in the 2023 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 2023 Form 10-K. There have been no significant changes in the Company’s critical accounting estimates since December 31, 2023.