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 2024 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 that enable 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. 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. 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. The Coyote Acquisition On September 16, 2024 (the “acquisition date”), the Company acquired the 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 (collectively, “Coyote”), from United Parcel Service of America, Inc. (“UPS”) and certain subsidiaries of UPS. We acquired Coyote for $1.038 billion in cash, subject to certain additional customary adjustments. The purchase price was subsequently increased by $10 million for working capital and other post-closing adjustments, which was paid in the first quarter of 2025. Refer to Note 3—Acquisition to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for disclosures regarding the Company’s acquisition of Coyote. 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, 2024 (the “2024 Form 10-K”). The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the 2024 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, 2025 are not necessarily indicative of the results that may be expected for the year ending December 31, 2025. 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. 16 Table of Contents Cost of transportation and services (exclusive of depreciation and amortization) primarily includes the cost of providing or procuring freight transportation for RXO customers. Direct operating expenses (exclusive of depreciation and amortization) includes both fixed and variable expenses and consists mainly of personnel costs; facility and equipment expenses, such as rent, utilities, equipment maintenance and repair; costs of materials and supplies; information technology expenses; and gains and losses on sales of property and equipment. Sales, general and administrative expense (“SG&A”) 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 March 31, Percentage of Revenue (In millions) 2025 2024 2025 2024 Revenue $ 1,433 $ 913 100.0 % 100.0 % Cost of transportation and services (exclusive of depreciation and amortization) 1,153 699 80.5 % 76.6 % Direct operating expense (exclusive of depreciation and amortization) 48 53 3.3 % 5.8 % Sales, general and administrative expense 210 145 14.7 % 15.9 % Depreciation and amortization expense 32 16 2.2 % 1.8 % Transaction and integration costs 6 1 0.4 % 0.1 % Restructuring costs 14 11 1.0 % 1.2 % Operating loss $ (30) $ (12) (2.1) % (1.3) % Other expense — 1 — % 0.1 % Interest expense, net 9 8 0.6 % 0.9 % Loss before income taxes $ (39) $ (21) (2.7) % (2.3) % Income tax benefit (8) (6) (0.6) % (0.7) % Net loss $ (31) $ (15) (2.2) % (1.6) % Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024 Revenue increased by 57.0% to $1.4 billion in the first quarter of 2025, compared with $913 million for the same quarter in 2024. The year-over-year increase in revenue in the first quarter of 2025 was driven by (i) a $503 million increase in truck brokerage revenue, primarily as a result of the Coyote acquisition and (ii) a $46 million increase in last mile revenue, primarily as a result of a 24% increase in volume. This was partially offset by a $15 million decrease in revenue in our managed transportation business, driven primarily by a decrease in expedite ground volume. Cost of transportation and services (exclusive of depreciation and amortization) in the first quarter of 2025 was $1.2 billion, or 80.5% of revenue, compared with $699 million, or 76.6% of revenue in the same quarter of 2024. The $454 million increase is primarily attributable to the Coyote acquisition. The year-over-year increase as a percentage of revenue during the first quarter of 2025 was driven primarily by (i) a 0.8 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 and (ii) a 3.2 percentage point increase in last mile cost of transportation and services as a percentage of revenue as a result of freight mix changes. Direct operating expense (exclusive of depreciation and amortization) of $48 million in the first quarter of 2025 decreased $5 million, or 9.4%, from $53 million in the same quarter of 2024. As a percentage of revenue, direct operating expense (exclusive of depreciation and amortization) decreased to 3.3% in the first quarter of 2025 compared with 5.8% in the same quarter of 2024 due to cost reduction initiatives. 17 Table of Contents SG&A of $210 million in the first quarter of 2025 increased $65 million, or 44.8%, from $145 million in the first quarter of 2024, primarily attributable to the Coyote acquisition. As a percentage of revenue, SG&A decreased to 14.7% in the first quarter of 2025 compared with 15.9% for the same quarter of 2024 driven primarily by improved leverage as a result of increased scale due to the Coyote acquisition, as well as cost savings from restructuring actions. Depreciation and amortization expense for the first quarter of 2025 was $32 million, compared with $16 million for the same quarter in 2024. Depreciation and amortization expense for the first quarter of 2025 included $16 million as a result of the Coyote acquisition. Transaction and integration costs for the first quarter of 2025 and 2024 were $6 million and $1 million, respectively. Transaction and integration costs for the first quarter of 2025 included $5 million as a result of the Coyote acquisition. Restructuring costs for the first quarter of 2025 and 2024 were $14 million and $11 million, respectively, and primarily comprised severance costs and operating lease impairment costs. Our effective income tax rates were 19.2% and 27.7% for the first quarter of 2025 and 2024, respectively. The effective tax rates for the first quarter of 2025 and 2024 were calculated using the discrete method. Our effective tax rate for the first quarter of 2025 differs from the U.S. corporate income tax rate of 21% primarily due to the effect of nondeductible expenses when experiencing a pre-tax loss. 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. Liquidity and Capital Resources Overview Our ability to fund our operations and anticipated capital needs are reliant upon the generation of cash from operations, supplemented as necessary by utilization of our revolving credit facility. Our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures, repayment of borrowings, share repurchases and strategic business development transactions. The timing and magnitude of our growth and working capital needs can vary and may positively or negatively impact our cash flows. 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 and thereafter, for the foreseeable future. Capital Expenditures Our 2025 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 equipment. 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 We were in compliance with all covenants and other provisions of our outstanding debt and financing arrangements as of March 31, 2025. 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 7 —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 March 31, 2025. 18 Table of Contents Financial Condition Our asset and liability balances are summarized as follows: (In millions) March 31, 2025 December 31, 2024 $ Change % Change Total current assets $ 1,255 $ 1,339 $ (84) (6.3) % Total long-term assets 2,049 2,075 (26) (1.3) % Total current liabilities 964 1,065 (101) (9.5) % Total long-term liabilities 753 737 16 2.2 % Total assets decreased by $110 million from December 31, 2024 to March 31, 2025, primarily due to (i) a $77 million decrease in accounts receivable as a result of a sequential decrease in revenue, (ii) a $20 million decrease in operating lease assets as a result of amortization and (iii) a $19 million decrease in cash and cash equivalents as a result of timing of transaction-related payments associated with the Coyote acquisition. Total liabilities decreased by $85 million from December 31, 2024 to March 31, 2025, primarily due to a sequential decrease in third party transportation costs, partially offset by a $36 million increase in long-term debt and obligations under finance leases. Cash Flow Activity Our cash flows from operating, investing and financing activities are summarized as follows: Three Months Ended March 31, (In millions) 2025 2024 $ Change Net cash provided by (used in) operating activities $ (2) $ 7 $ (9) Net cash used in investing activities (25) (11) (14) Net cash provided by financing activities 7 6 1 Effect of exchange rates on cash, cash equivalents and restricted cash 1 — 1 Net change in cash, cash equivalents and restricted cash $ (19) $ 2 $ (21) Net cash provided by operating activities for the first three months of 2025 decreased by $9 million compared with the same period in 2024. The decrease in cash provided by operating activities reflects the impact of (i) a $16 million increase in net loss between periods and (ii) changes in working capital. Investing activities used $25 million of cash for the first three months of 2025, compared with using $11 million of cash for the same period in 2024. The increased usage in the first quarter of 2025 was due to $10 million paid related to the Coyote acquisition for working capital and other post-closing adjustments. Financing activities provided $7 million of cash for the first three months of 2025, compared to providing $6 million of cash for the same period in 2024. The primary source of cash in the first three months of 2025 was $35 million in net proceeds from borrowings, partially offset by $17 million in payments for tax withholdings primarily attributable to the vesting of stock compensation awards held by non-RXO employees at the spin which are now substantially complete. The primary source of cash in the first three months of 2024 was $8 million in net proceeds from borrowings. 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, 2024 included in the 2024 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 2024 Form 10-K. There have been no significant changes in the Company’s critical accounting estimates since December 31, 2024. 19 Table of Contents