Item 2. Management’s Discussion and Analysis
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 2021 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.
Executive Summary
XPO Logistics, Inc., together with its subsidiaries (“XPO,” or “we”), is a leading provider of freight transportation services. We use our proprietary technology to move goods efficiently through our customers’ supply chains; in North America, we achieved this primarily by providing less-than-truckload (“LTL”) and truck brokerage services until November 1, 2022, when we completed the spin-off of our brokered transportation platform. The spin-off resulted in LTL being XPO’s sole business in North America, and created a new public company, RXO, Inc. (“RXO”), comprised of our former services for truck brokerage, managed transportation, last mile and freight forwarding.
In the first nine months of 2022, our company had two reportable segments — (i) North American LTL and (ii) Brokerage and Other Services — and within each segment, we were a leading provider operating in vast, fragmented transportation sectors with growing penetration, and with company-specific avenues for value creation. As of September 30, 2022, we had approximately 44,000 employees and 748 locations in 20 countries serving approximately 50,000 multinational, national, regional and local customers.
2022 Strategic Plan
On March 8, 2022, we announced that our Board of Directors approved a strategic plan to pursue the spin-off of our tech-enabled brokered transportation platform as a publicly traded company, which we completed in November 2022. In addition, our Board of Directors authorized the planned divestitures of our North American intermodal operation, which we sold in March 2022, and our European business, which we intend to divest. There can be no assurance that the divestiture of our European business will occur, or of the terms or timing of a transaction.
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RXO Spin-Off
We completed the spin-off of RXO on November 1, 2022 in a transaction intended to be tax-free to XPO and our shareholders for U.S. federal income tax purposes. The spin-off was accomplished by the distribution of 100% of the outstanding common stock of RXO to XPO shareholders, creating a new, independent public company that began trading under the symbol “RXO” on the New York Stock Exchange. The historical results of operations and the financial position of RXO are included in the condensed consolidated financial statements in this Form 10-Q. The RXO businesses will not be consolidated in our reporting from November 1, 2022 forward, and such businesses will be reflected as discontinued operations in all periods prior to the spin-off. Additionally, effective in the fourth quarter of 2022, we will revise our reportable segments to reflect our new internal organization.
In connection with the spin-off, we have entered into a separation and distribution agreement, as well as various other agreements with RXO that provide a framework for the relationships between the parties going forward, including, among others, an employee matters agreement, a tax matters agreement, an intellectual property license agreement and a transition services agreement, through which XPO will provide certain services to RXO.
Divestiture of Intermodal
In March 2022, we sold intermodal for cash proceeds of approximately $705 million, net of cash disposed and subject to customary post-closing working capital adjustments that remain ongoing. We recorded a $450 million pre-tax gain on the sale, net of transaction costs, during the first quarter of 2022. During the second quarter of 2022, we recognized a working capital adjustment of $16 million, which reduced the gain initially recognized in the first quarter of 2022. We agreed to provide certain specified customary transition services for a period not exceeding 12 months from the sale. Intermodal was included in our Brokerage and Other Services segment through the date of the sale.
In conjunction with the RXO spin-off, and effective in the fourth quarter of 2022, the results of intermodal qualify to be accounted for as a discontinued operation because the sale was part of one strategic plan of disposal, and all periods prior to the date of the spin-off will be reflected as a discontinued operation. For further information on the sale of intermodal, see Note 3—Divestiture.
2021 Spin-Off of the Logistics Segment
On August 2, 2021, we completed the spin-off of our logistics segment as GXO Logistics, Inc. (“GXO”). The historical results of our logistics segment are presented as discontinued operations in our Condensed Consolidated Financial Statements. For information on our discontinued operations, see Note 2—Discontinued Operations.
No costs related to the GXO spin-off were incurred for the three months ended September 30, 2022. For the nine months ended September 30, 2022, we incurred costs of approximately $4 million related to the GXO spin-off. For the three and nine months ended September 30, 2021, we incurred costs of approximately $68 million and $111 million, respectively, related to the GXO spin-off, of which $57 million and $96 million, respectively, are reflected within income (loss) from discontinued operations in our Condensed Consolidated Statements of Income (Loss).
North American Less-Than-Truckload Segment
XPO has one of the largest networks of tractors, trailers and terminals in the North American LTL industry, with approximately 8% share of a $51 billion U.S. market. LTL in North America is a growing industry providing a critical service to the economy, with favorable pricing dynamics and a stable competitive landscape.
We serve approximately 25,000 customers with geographic density and day-definite regional, national and cross-border services that reach approximately 99% of U.S. zip codes, as well as cross-border service to Mexico, Canada and the Caribbean. Our capacity gives us the ability to manage large freight volumes efficiently and balance our network to leverage fixed costs. XPO delivered approximately 18 billion pounds of freight for the trailing 12 months through September 30, 2022.
Importantly, our LTL business historically has generated a high return on invested capital and robust free cash flow. This allows us to invest in ongoing development of our proprietary technology and numerous other growth and optimization initiatives. We are managing the business to specific objectives, such as high customer service scores for on-time delivery and damage-free freight, the insourcing of more linehaul miles from third-party transportation
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providers as we add more capacity, and the addition of 900 net new doors to our network by year-end 2023, from an October 2021 baseline. As of September 30, 2022, we had added five terminals to our network, representing 369 net new doors.
Additionally, we are continuing to execute on a host of idiosyncratic initiatives that are specific to XPO and independent of the macroeconomic environment. The ongoing deployment of our proprietary LTL technology encompasses multiple levers for value creation, such as pricing optimization, cost modeling by customer and lane, and piece-level tracking.
As other examples, we added a second production line at our in-house trailer manufacturing facility in January and expect to double our output run-rate. We are also investing in training more drivers at our 130 in-house commercial driver schools, and expect to train approximately 1,700 drivers this year. Our trailer manufacturing and our expansive footprint of driver schools are unique, self-reliant capabilities that address equipment constraints and the driver shortage, and are largely independent of macroeconomic conditions.
Specific to our technology, we believe we have a large opportunity to further improve the profitability of our LTL network through innovation, beyond the large gain in operating margin achieved to date. We use intelligent route-building to move LTL freight across North America, and proprietary visualization tools to help reduce the cost of pickups and deliveries. Our XPO Smart ® productivity tools are installed in our cross-dock operations, and our new piece-level tracking tool increases visibility of a shipment at the per-pallet level, with positive impacts to trailer loading, dock planning and shortage claims. Our largest opportunity is related to our proprietary pricing technology, which includes automated, dynamic pricing for local accounts and a new pricing platform utilized by our pricing experts for larger accounts.
Brokerage and Other Services Segment
Prior to the completion of the RXO spin-off, XPO was the fourth largest truckload transportation broker in the U.S. Our asset-light truck brokerage business places shippers’ freight with qualified independent carriers using our XPO Connect ® technology platform. We price this service on either a contract or a spot basis, and we operate with a variable cost structure that adjusts quickly to market changes. We derive our revenue from diversified industry verticals, and we have many long-standing, blue-chip customer relationships — on average, our top 10 customers have a 16-year tenure with us.
Our truck brokerage business has a long track record of generating top-line growth and margin expansion, a high return on invested capital and strong free cash flow. In 2022, notable factors driving our performance included our access to massive truckload capacity for shippers through our carrier relationships, strong management expertise, company-specific avenues for value creation led by our cutting-edge technology, and favorable industry tailwinds.
Broker penetration of for-hire truckload transportation has doubled in the last 15 years, and is still less than 25%. We have approximately 4% share of the $88 billion U.S. brokered truckload industry, giving us a long runway for revenue growth — the total addressable for-hire truckload opportunity in 2021 was estimated to be approximately $400 billion. Demand for truckload capacity in the e-commerce and omnichannel retail sectors continues to be robust, and more and more shippers are outsourcing to brokers, while increasingly preferring brokers like XPO that offer digital capabilities.
As of September 30, 2022, we had relationships with approximately 108,000 independent truckload carriers in North America, representing more than one and a half million trucks. These relationships enable us to serve high demand without taking on high fixed costs. Even though we don’t own the trucks or employ the drivers that transport our customers’ freight, shippers view us as a highly reliable core carrier due to our operational excellence and capacity resources.
Our XPO Connect ® brokerage platform is another major differentiator for our business, together with our pricing technology, which we believe can unlock incremental profitable growth well beyond our current levels. We bring together seasoned transportation experts and master technologists to transform truck brokerage through digitization, making the process more productive for shippers, carriers and our company. As of September 30, 2022, cumulative truck driver downloads of the mobile app for XPO Connect ® approximated 850,000.
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The impact of XPO Connect ® is pervasive throughout our brokerage operations. As of September 30, 2022, approximately 80% of our truck brokerage orders in North America were created or covered digitally. From 2013 through 2021, the compound annual growth rate (“CAGR”) of our truck brokerage revenue was 27.4% — approximately three times the U.S. brokered truckload industry CAGR of 9.6% — in part because larger customers communicate digitally with XPO Connect ® through APIs and other integrations, and our automation makes our brokerage team more efficient at tendering loads.
Our Brokerage and Other Services segment also includes asset-light, complementary brokered services for managed transportation, including expedited ground and air charter capabilities, last mile for heavy goods and freight forwarding, all of which use our technology. Our European business is also reported within this segment.
Technology and Sustainability
Our proprietary technology is a major competitive advantage for us across our service lines. Our company has been investing in transportation automation, data science and digitization for more than a decade, well ahead of the industry curve, to innovate how goods move through supply chains. We believe that we are well-positioned to satisfy customer demands for faster, more efficient supply chains with greater visibility, while enhancing revenue and profitability.
Importantly, our technology also helps our company meet its environmental, social and governance (“ESG”) goals, such as a reduction in the carbon footprint of certain supply chain operations, and can help our customers meet their own goals. For a detailed discussion of our philosophy relating to innovation and ESG matters, see the Company Overview included in our 2021 Form 10-K, as well as our current Sustainability Report at sustainability.xpo.com .
Impacts of 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 virus that emerged in 2020 affected, and may continue to affect, economic activity broadly and customer sectors served by our industry. Labor shortages, particularly a shortage of truck drivers and dockworkers, and equipment shortages continue to present challenges to many transportation-related industries. Additionally, disruptions in supply chains for industrial materials and supplies, such as semiconductor chips, have impacted some of the end-market activities that create demand for our services. We cannot predict how long these dynamics will last, or whether future challenges, if any, will adversely affect our results of operations. To date, the totality of the actions we have taken during the pandemic, and continue to take in the recovery, have mitigated the impact on our profitability relative to the impact on our revenue and volumes, while our strong liquidity and disciplined capital management enable us to continue to invest in growth initiatives.
Additionally, economic inflation can have a negative impact on our operating costs. 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. For the three and nine months ended September 30, 2022, a combination of growing demand for freight transportation services, the ongoing truck driver shortage and rising fuel prices resulted in higher transportation procurement costs; these costs were offset by mechanisms in our customer contracts, including fuel surcharge clauses and general rate increases. An economic recession could depress customer demand for transportation services and adversely affect our results of operations.
Regarding the war between Russia and Ukraine, we have no direct exposure to those geographies. We cannot predict how global supply chain activities or the economy at large may be impacted by a prolonged war in Ukraine or sanctions imposed in response to the war, or whether future conflicts, if any, may adversely affect our results of operations.
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Consolidated Summary Financial Table
Three Months Ended September 30, Percent of Revenue Change Nine Months Ended September 30, Percent of Revenue Change
(Dollars in millions) 2022
2021
2022 2021 2022 vs. 2021 2022
2021
2022 2021 2022 vs. 2021
Revenue $ 3,042 $ 3,270 100.0 % 100.0 % (7.0) % $ 9,747 $ 9,445 100.0 % 100.0 % 3.2 %
Cost of transportation and services
(exclusive of depreciation and amortization)
2,044 2,306 67.2 % 70.5 % (11.4) % 6,634 6,545 68.1 % 69.3 % 1.4 %
Direct operating expense (exclusive of
depreciation and amortization)
363 366 11.9 % 11.2 % (0.8) % 1,113 1,058 11.4 % 11.2 % 5.2 %
Sales, general and administrative
expense
298 339 9.8 % 10.4 % (12.1) % 966 1,001 9.9 % 10.6 % (3.5) %
Depreciation and amortization expense 118 118 3.9 % 3.6 % — % 349 357 3.6 % 3.8 % (2.2) %
Gain on sale of business — — — % — % — % (434) — (4.5) % — % NM
Transaction and integration costs 25 15 0.8 % 0.5 % 66.7 % 60 26 0.6 % 0.3 % 130.8 %
Restructuring costs 9 14 0.3 % 0.4 % (35.7) % 19 16 0.2 % 0.2 % 18.8 %
Operating income 185 112 6.1 % 3.4 % 65.2 % 1,040 442 10.7 % 4.7 % 135.3 %
Other income (15) (19) (0.5) % (0.6) % (21.1) % (44) (45) (0.5) % (0.5) % (2.2) %
Debt extinguishment loss — 46 — % 1.4 % NM 26 54 0.3 % 0.6 % (51.9) %
Interest expense 35 53 1.2 % 1.6 % (34.0) % 103 176 1.1 % 1.9 % (41.5) %
Income from continuing operations
before income tax provision
165 32 5.4 % 1.0 % 415.6 % 955 257 9.8 % 2.7 % 271.6 %
Income tax provision 34 11 1.1 % 0.3 % 209.1 % 194 60 2.0 % 0.6 % 223.3 %
Income from continuing operations 131 21 4.3 % 0.6 % 523.8 % 761 197 7.8 % 2.1 % 286.3 %
Income (loss) from discontinued
operations, net of taxes
— (78) — % (2.4) % NM (1) 22 — % 0.2 % NM
Net income (loss) $ 131 $ (57) 4.3 % (1.7) % NM $ 760 $ 219 7.8 % 2.3 % 247.0 %
NM - Not meaningful
Three and Nine Months Ended September 30, 2022, Compared with Three and Nine Months Ended September 30, 2021
Revenue for the third quarter of 2022 decreased 7.0% to $3.0 billion, compared with the same quarter in 2021. Revenue for the first nine months of 2022 increased 3.2% to $9.7 billion, compared with the same period in 2021. The decrease in revenue in the third quarter of 2022 compared to the same period in 2021 reflects the sale of intermodal in March 2022, partially offset by growth in our LTL segment, which includes the impact of increased revenue from fuel surcharges. Revenue in the first nine months of 2022 compared to the same period in 2021 reflects growth in our LTL segment and our North American truck brokerage operation, partially offset by the sale of intermodal. The sale of intermodal reduced revenue growth by approximately 9.5 percentage points in the third quarter of 2022 and 5.1 percentage points in the first nine months of 2022. Additionally, foreign currency movement reduced revenue by approximately 2.6 percentage points in the third quarter of 2022 and 2.0 percentage points in the first nine months of 2022.
Cost of transportation and services (exclusive of depreciation and amortization) includes the cost of providing or procuring freight transportation for XPO customers and salaries paid to employee drivers in our LTL and truck brokerage businesses.
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Cost of transportation and services (exclusive of depreciation and amortization) for the third quarter of 2022 was $2.0 billion, or 67.2% of revenue, compared with $2.3 billion, or 70.5% of revenue, for the same quarter in 2021. Cost of transportation and services (exclusive of depreciation and amortization) for the first nine months of 2022 was $6.6 billion, or 68.1% of revenue, compared with $6.5 billion, or 69.3% of revenue, for the same period in 2021. The year-over-year decrease as a percentage of revenue in both periods reflects the sale of intermodal. Additionally impacting the decrease as a percentage of revenue in both periods were lower third-party transportation costs, which were partially offset by higher fuel and compensation costs.
Direct operating expenses (exclusive of depreciation and amortization) are comprised of both fixed and variable expenses and include operating costs related to our LTL service centers. Direct operating expenses (exclusive of depreciation and amortization) 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.
Direct operating expense (exclusive of depreciation and amortization) for the third quarter of 2022 was $363 million, or 11.9% of revenue, compared with $366 million, or 11.2% of revenue, for the same quarter in 2021. Direct operating expense (exclusive of depreciation and amortization) for the first nine months of 2022 was $1.11 billion, or 11.4% of revenue, compared with $1.06 billion, or 11.2% of revenue, for the same period in 2021. The decrease in direct operating expense in the third quarter of 2022 reflects the sale of intermodal and lower gains on sales of property and equipment, partially offset by higher compensation and facility costs. The increase in direct operating expense in the first nine months of 2022 reflects higher compensation and facility costs, partially offset by the sale of intermodal and lower gains on sales of property and equipment. Direct operating expense for the third quarters of 2022 and 2021 included $2 million and $6 million, respectively, and the first nine months of 2022 and 2021 included $4 million and $36 million, respectively, of gains on sales of property and equipment. As a percentage of revenue, direct operating expense for the third quarter and nine-month periods reflects the lower gains on sales of property and equipment. Additionally, the leveraging of compensation costs across a larger revenue base partially offset the year-over-year increase as a percentage of revenue in the nine-month period.
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, professional fees, facility costs, bad debt expense and legal costs.
SG&A for the third quarter of 2022 was $298 million, or 9.8% of revenue, compared with $339 million, or 10.4% of revenue, for the same quarter in 2021. SG&A for the first nine months of 2022 was $966 million, or 9.9% of revenue, compared with $1.0 billion, or 10.6% of revenue, for the same period in 2021. SG&A for the third quarter and first nine months of 2021 included $29 million of legal costs related to settlements in connection with classification of independent contractors at intermodal. Additionally, the third quarter of 2022 reflects lower compensation-related costs, partially offset by higher commission expense due to the performance of our North American transportation business, while the first nine months of 2022 reflects the impact of the intermodal sale, partially offset by higher commission expense. As a percentage of revenue, the year-over-year decrease in both periods was primarily driven by the legal costs recorded in the third quarter of 2021 and the sale of intermodal. Additionally, the year-over-year decrease as a percentage of revenue in the nine-month period reflects the leveraging of compensation costs across a larger revenue base.
Depreciation and amortization expense for the third quarter of 2022 and 2021 was $118 million. Depreciation and amortization expense for the first nine months of 2022 was $349 million, compared with $357 million for the same period in 2021. The third quarter of 2022 primarily reflects higher depreciation expense at our LTL segment, offset by the sale of intermodal. The decrease in the nine-month period reflected the sale of intermodal.
Gain on sale of business was $434 million, net of transaction costs, for the first nine months of 2022 and related to the sale of intermodal during the first quarter of 2022. For more information, see Note 3—Divestiture to our Condensed Consolidated Financial Statements.
Transaction and integration costs for the third quarter of 2022 were $25 million, compared with $15 million for the same quarter in 2021. Transaction and integration costs for the first nine months of 2022 were $60 million, compared with $26 million for the same period in 2021. Transaction and integration costs for the third quarter and first nine months of 2022 and 2021 are primarily comprised of third-party professional fees related to strategic
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initiatives, including the spin-offs and other divestment activities, as well as retention awards paid to certain employees.
Restructuring costs for the third quarter of 2022 were $9 million, compared with $14 million for the same quarter in 2021. Restructuring costs for the first nine months of 2022 were $19 million, compared with $16 million for the same period in 2021. We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure, including actions in connection with spin-offs and other divestment activities. For more information, see Note 6—Restructuring Charges to our Condensed Consolidated Financial Statements. We may incur incremental restructuring costs in 2022 in connection with the spin-off of our brokered transportation platform or for other reasons; however, we are currently unable to reasonably estimate these costs.
Other income primarily consists of pension income. Other income for the third quarter of 2022 was $15 million, compared with $19 million for the same quarter in 2021. Other income for the first nine months of 2022 was $44 million, compared with $45 million for the same period in 2021. The third quarter and first nine months of 2021 reflected a realized gain in connection with the de-designation of a cross-currency swap.
Debt extinguishment loss was $26 million for the first nine months of 2022. There was no debt extinguishment loss in the third quarter of 2022. Debt extinguishment loss was $46 million for the third quarter of 2021 and $54 million for the first nine months of 2021. In the second quarter of 2022, we redeemed a portion of our outstanding senior notes due 2025 and wrote-off related debt issuance costs. In the third quarter of 2021, we redeemed our outstanding senior notes due 2023 and 2024 and wrote-off related debt issuance costs, as well as incurred a pre-payment penalty. Additionally, in the first quarter of 2021, we redeemed our outstanding senior notes due 2022 and wrote-off related debt issuance costs, as well as incurred costs related to the amendment of our Senior Secured Term Loan Credit Agreement (the “Term Loan Credit Agreement”).
Interest expense decreased to $35 million for the third quarter of 2022 from $53 million for the third quarter of 2021. Interest expense decreased to $103 million for the first nine months of 2022 from $176 million for the first nine months of 2021. The decrease in interest expense reflects lower average total indebtedness in the third quarter and first nine months of 2022.
Our effective income tax rates were 20.6% and 33.5% for the third quarter of 2022 and 2021, respectively, and 20.3% and 23.1% for the first nine months of 2022 and 2021, respectively. The effective tax rates for the third quarter and nine-month periods of 2022 and 2021 were based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented. The primary item impacting the effective tax rate for the third quarter of 2022 is a reduction in tax expense of $3 million from the sale of intermodal and the primary items impacting the effective tax rate for the first nine months of 2022 is a tax expense of $71 million from the sale of intermodal, which resulted in a reduction to our effective tax rate due to the book gain exceeding the tax gain, as well as a tax benefit of $3 million from stock-based compensation.
The primary items impacting the effective tax rate for the third quarter of 2021 were tax benefits of $45 million related to a tax planning initiative that resulted in the recognition of a long-term capital loss and $3 million from uncertain tax positions that were partially offset by discrete tax expenses of $41 million related to valuation allowances, of which $34 million were transferred to GXO. The primary items impacting the effective tax rate for the first nine months of 2021 were tax benefits of $45 million related to a tax planning initiative that resulted in the recognition of a long-term capital loss, $8 million from uncertain tax positions and $4 million from stock-based compensation that were partially offset by tax expenses of $41 million related to valuation allowances, of which $34 million were transferred to GXO, and $5 million from return to provision adjustments.
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Segment Financial Results
Our chief operating decision maker (“CODM”) regularly reviews financial information at the operating segment level to allocate resources to the segments and to assess their performance. Our CODM evaluates segment profit based on adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”), which we define as net income from continuing operations attributable to common shareholders before debt extinguishment loss, interest expense, income tax, depreciation and amortization expense, gain on sale of business, litigation settlements for significant matters, transaction and integration costs, restructuring costs and other adjustments. See Note 4—Segment Reporting to our Condensed Consolidated Financial Statements for further information and a reconciliation of adjusted EBITDA to Net income from continuing operations attributable to common shareholders.
North American Less-Than-Truckload Segment
Three Months Ended September 30, Percent of Revenue Change Nine Months Ended September 30, Percent of Revenue Change
(Dollars in millions) 2022 2021 2022 2021 2022 vs. 2021 2022 2021 2022 2021 2022 vs. 2021
Revenue $ 1,204 $ 1,071 100.0 % 100.0 % 12.4 % $ 3,548 $ 3,114 100.0 % 100.0 % 13.9 %
Adjusted EBITDA 258 222 21.5 % 20.8 % 16.2 % 757 694 21.3 % 22.3 % 9.1 %
Depreciation and amortization expense 60 57 5.0 % 5.3 % 5.3 % 175 169 4.9 % 5.4 % 3.6 %
Revenue in our North American LTL segment increased 12.4% to $1.2 billion for the third quarter of 2022, compared with $1.1 billion for the same quarter in 2021. Revenue increased 13.9% to $3.5 billion for the first nine months of 2022, compared with $3.1 billion for the same period in 2021. Revenue included fuel surcharge revenue of $273 million and $167 million, respectively, for the third quarters of 2022 and 2021, and $771 million and $466 million, respectively, for the first nine months of 2022 and 2021.
We evaluate the revenue performance of our LTL business using several commonly used metrics, including volume (weight per day in pounds) and yield, which is a commonly used measure of LTL pricing trends. We measure yield using gross revenue per hundredweight, excluding fuel surcharges. Impacts on yield can include weight per shipment and length of haul, among other factors. The following table summarizes our key revenue metrics:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 Change % 2022 2021 Change %
Pounds per day (thousands) 70,063 72,152 (2.9) % 70,854 73,138 (3.1) %
Gross revenue per hundredweight, excluding fuel surcharges $ 21.43 $ 20.02 7.0 % $ 21.18 $ 19.47 8.8 %
The year-over-year increases in revenue for both the third quarter and first nine months of 2022 reflect an increase in gross revenue per hundredweight. The decrease in weight per day for the third quarter and first nine months reflects lower shipments per day.
Adjusted EBITDA was $258 million, or 21.5% of revenue, for the third quarter of 2022, compared with $222 million, or 20.8% of revenue, for the same quarter in 2021. Adjusted EBITDA was $757 million, or 21.3% of revenue, for the first nine months of 2022, compared with $694 million, or 22.3% of revenue, for the same period in 2021. Adjusted EBITDA for the third quarter and first nine months of 2021 included $5 million and $27 million of gains from real estate transactions, respectively. There were no gains from real estate transactions in the third quarter and first nine months of 2022. Additionally, adjusted EBITDA in both periods of 2022 reflects higher revenue, partially offset by increased compensation and fuel costs, as well as higher purchased transportation costs in the year-to-date period from higher highway subservice costs per mile.
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Brokerage and Other Services Segment
Three Months Ended September 30, Percent of Revenue Change Nine Months Ended September 30, Percent of Revenue Change
(Dollars in millions) 2022 2021 2022 2021 2022 vs. 2021 2022 2021 2022 2021 2022 vs. 2021
Revenue $ 1,921 $ 2,261 100.0 % 100.0 % (15.0) % $ 6,420 $ 6,493 100.0 % 100.0 % (1.1) %
Adjusted EBITDA 123 131 6.4 % 5.8 % (6.1) % 439 386 6.8 % 5.9 % 13.7 %
Depreciation and amortization expense 54 60 2.8 % 2.7 % (10.0) % 168 180 2.6 % 2.8 % (6.7) %
Revenue in our Brokerage and Other Services segment decreased 15.0% to $1.9 billion for the third quarter of 2022, compared with $2.3 billion for the same quarter in 2021. The decrease in revenue was due to the sale of intermodal in March 2022, which impacted revenue by approximately 13.7 percentage points, and lower revenue generated from services in our managed transportation operation and lower ocean volume in our freight forwarding business. Additionally, lower revenue generated from our truck brokerage business in the third quarter of 2022 was primarily driven by lower truckload pricing in the spot market, partially offset by a year-over-year increase in volume, facilitated by the company’s digital brokerage platform. Foreign currency movement reduced revenue by approximately 3.8 percentage points in the third quarter of 2022.
Revenue decreased 1.1% to $6.4 billion for the first nine months of 2022, compared with $6.5 billion for the same period in 2021. The decrease in revenue was due to the sale of intermodal in March 2022, which impacted revenue by approximately 7.4 percentage points in the first nine months of 2022. Revenue in the first nine months of 2022 compared to the same period in 2021 benefited from an increase in North American truck brokerage loads, as well as strong pricing across the segment. Foreign currency movement reduced revenue by approximately 3.0 percentage points in the first nine months of 2022.
Adjusted EBITDA was $123 million, or 6.4% of revenue, for the third quarter of 2022, compared with $131 million, or 5.8% of revenue, for the same quarter in 2021. Adjusted EBITDA was $439 million, or 6.8% of revenue, for the first nine months of 2022, compared with $386 million, or 5.9% of revenue, for the same period in 2021. The decrease in the third quarter of 2022 compared to the same period in 2021 was primarily driven by the sale of intermodal, partially offset by lower third-party transportation costs in North American truck brokerage. The increase in the first nine months of 2022 compared to the same period in 2021 was primarily driven by higher revenue in North American truck brokerage, partially offset by higher third-party transportation and compensation-related costs.
Liquidity and Capital Resources
Our cash and cash equivalents balance was $544 million as of September 30, 2022, compared to $260 million as of December 31, 2021. Our principal existing sources of cash are: (i) cash generated from operations; (ii) borrowings available under our Second Amended and Restated Revolving Loan Credit Agreement, as amended (the “ABL Facility”); (iii) proceeds from the issuance of other debt; and (iv) proceeds from divestiture activities. As of September 30, 2022, we have $996 million available to draw under our ABL Facility, based on a borrowing base of $1 billion and outstanding letters of credit of $4 million. Additionally, we have a $200 million uncommitted secured evergreen letter of credit facility, under which we had issued $185 million in aggregate face amount of letters of credit as of September 30, 2022.
As of September 30, 2022, we had approximately $1.5 billion of total liquidity. We continually evaluate our liquidity requirements 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.
In connection with the spin-off, effective November 4, 2022, the commitments under the ABL Facility will automatically be reduced from $1 billion to $600 million with no further action by any of the parties thereto. Adjusting for this reduction of commitments and the borrowing base, our total liquidity of $1.5 billion as of September 30, 2022 would have been $1.0 billion.
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Trade Receivables Securitization and Factoring Programs
We sell certain of our trade accounts receivable on a non-recourse basis to third-party financial institutions under factoring agreements. We also sell trade accounts receivable under our securitization program co-arranged by two banks (the “Purchasers”). We use trade receivables securitization and factoring programs to help manage our cash flows and offset the impact of extended payment terms for some of our customers. For more information, see Note 1—Organization, Description of Business and Basis of Presentation to our Condensed Consolidated Financial Statements.
The maximum amount of net cash proceeds available at any one time under our securitization program, inclusive of any unsecured borrowings, is €200 million (approximately $196 million as of September 30, 2022). As of September 30, 2022, €6 million (approximately $6 million) was available under the program, subject to having sufficient receivables available to sell and with consideration to amounts previously sold.
Under the program, we service the receivables we sell on behalf of the Purchasers, which gives us visibility into the timing of customer payments. The benefit to our cash flow includes the difference between the cash consideration and the amount we collected as a servicer on behalf of the Purchasers. In the first nine months of 2022 and 2021, we collected cash as servicer of $1.3 billion and $1.2 billion, respectively.
Term Loan Facility
In the first quarter of 2021, we amended our Term Loan Credit Agreement and recorded a debt extinguishment loss of $3 million in the first nine months of 2021.
Senior Notes Due 2025
In April 2022, we redeemed $630 million of the then $1.15 billion outstanding principal amount of our 6.25% senior notes due 2025 (“Senior Notes due 2025”). The redemption price for the notes was 100% of the principal amount plus a premium, as defined in the indenture, of approximately $21 million and accrued and unpaid interest. We paid for the redemption using available liquidity. We recorded a debt extinguishment loss of $26 million in the first nine months of 2022 due to this redemption. In October 2022, we commenced a tender offer to purchase for cash any and all of our outstanding Senior Notes due 2025. See below for more information.
Senior Notes Due 2023 and 2024
In the third quarter of 2021, we redeemed our outstanding 6.125% senior notes due 2023 (“Senior Notes due 2023”) and our outstanding 6.75% senior notes due 2024 (“Senior Notes due 2024”). The redemption price for the Senior Notes due 2023 was 100.0% of the principal amount, plus accrued and unpaid interest and the redemption price for the Senior Notes due 2024 was 103.375% of the principle amount, plus accrued and unpaid interest. We paid for the redemption using approximately $794 million of cash received from GXO, proceeds from an equity offering described in Note 9—Stockholders’ Equity and available cash. We recorded debt extinguishment losses in the third quarter of 2021 of $3 million and $43 million related to the redemption of the Senior Notes due 2023 and Senior Notes due 2024, respectively.
Senior Notes Due 2022
In the first quarter of 2021, we redeemed our outstanding 6.50% senior notes due 2022. The redemption price for the notes was 100% of the principal amount, plus accrued and unpaid interest. We paid for the redemption with available cash. We recorded a debt extinguishment loss of $5 million in the first nine months of 2021 due to this redemption.
RXO Debt
In preparation for the spin-off, in October 2022, a wholly-owned subsidiary of XPO that merged with and into RXO substantially concurrent with the consummation of the spin-off, completed an offering of $355 million aggregate principal amount of notes due 2027 (the “RXO Notes”). The RXO 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. They were issued at an issue price of 98.962% of par.
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In addition to the RXO Notes, RXO entered into a term loan facility that provides $100 million in aggregate principal amount of term loans (the “RXO Term Loan”) and a revolving credit facility that provides $500 million in aggregate commitments.
The net proceeds (including any interest thereon) from the issuance of the RXO Notes and incurrence of the RXO Term Loan, together with RXO’s cash and cash equivalents on hand, were used to fund a cash distribution of approximately $488 million to XPO in October 2022, which we intend to use to repay existing indebtedness and fund any related fees and expenses prior to the 12-month anniversary of the distribution. As the spin-off has been consummated, the RXO Notes, the RXO Term Loan and RXO’s revolving credit facility are direct obligations of RXO.
Debt Tender Offer
In October 2022, we commenced a tender offer to purchase for cash any and all of our outstanding Senior Notes due 2025, which had a principal balance outstanding of $520 million as of September 30, 2022. The tender offer will expire on November 17, 2022, unless extended or earlier terminated by XPO.
Share Issuance
In July 2021, we completed a registered underwritten offering of 5.0 million shares of our common stock at a public offering price of $138.00 per share, plus an additional 750,000 shares of our common stock through an option granted to underwriters. Of the 5.0 million shares, we offered 2.5 million shares directly and 2.5 million shares were offered by Jacobs Private Equity, LLC (“JPE”), an entity controlled by the Company’s former chief executive officer and current executive chairman. The additional 750,000 purchased shares were also split equally between us and JPE. We received approximately $384 million of proceeds, net of fees and expenses, from the sale of the shares and used them to repay a portion of our outstanding borrowings and for general corporate purposes. XPO did not receive any proceeds from the sale of shares by JPE.
Preferred Stock and Warrant Exchanges
Commencing in the fourth quarter of 2020, holders of our convertible preferred stock and warrants exchanged their holdings for our common stock or a combination of our common stock and cash. These exchanges were intended to simplify our equity capital structure, including in contemplation of the spin-off of our logistics segment. In the first quarter of 2021, 975 preferred shares were exchanged, and we issued approximately 139 thousand shares of common stock. In the second quarter of 2021, the remaining 40 preferred shares were exchanged, and we issued 5,714 shares of common stock. With respect to the warrants, in the first quarter of 2021, 9.8 million warrants were exchanged, and we issued 9.2 million shares of common stock. The warrants exchanged included holdings of JPE. Subsequent to the exchange in the second quarter of 2021, there are no shares of preferred stock or warrants outstanding.
Share Repurchases
In February 2019, our Board of Directors authorized repurchases of up to $1.5 billion of our common stock. Our share repurchase authorization permits us to purchase shares in both the open market and in private transactions, with the timing and number of shares dependent on a variety of factors, including price, general business conditions, market conditions, alternative investment opportunities and funding considerations. We are not obligated to repurchase any specific number of shares and may suspend or discontinue the program at any time.
There have been no share repurchases since the first quarter of 2020. Our remaining share repurchase authorization was $503 million as of September 30, 2022.
Loan Covenants and Compliance
As of September 30, 2022, we were in compliance with the covenants and other provisions of our debt agreements. Any failure to comply with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.
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Sources and Uses of Cash
Nine Months Ended September 30,
(In millions) 2022 2021
Net cash provided by operating activities from continuing operations $ 664 $ 558
Net cash provided by (used in) investing activities from continuing operations 351 (143)
Net cash used in financing activities from continuing operations (706) (1,880)
During the nine months ended September 30, 2022, we: (i) generated cash from operating activities from continuing operations of $664 million; and (ii) generated net proceeds from the sale of intermodal of $705 million. We used cash during this period primarily to: (i) purchase property and equipment of $394 million; and (ii) redeem a portion of our senior notes due 2025 for $651 million.
During the nine months ended September 30, 2021, we: (i) generated cash from operating activities from continuing operations of $558 million; (ii) generated proceeds from sales of property and equipment of $72 million; (iii) received a distribution from GXO of $794 million; and (iv) generated proceeds of $384 million from the issuance of common stock. We used cash during this period primarily to: (i) purchase property and equipment of $212 million; (ii) redeem our senior notes due 2022, 2023 and 2024 for $2.8 billion; and (iii) repay our ABL Facility borrowings of $200 million.
Cash flows from operating activities from continuing operations for the nine months ended September 30, 2022 increased by $106 million, compared with the same period in 2021. The increase reflects higher income from continuing operations of $564 million for the nine months ended September 30, 2022, compared with the same period in 2021, partially offset by the impact of operating assets and liabilities utilizing $111 million of cash in the first nine months of 2022, compared with utilizing $68 million during the same period in 2021 and a $434 million gain on sale of business recognized during the nine months ended September 30, 2022. Within operating assets and liabilities, accrued expenses and other liabilities generated $143 million less cash while accounts receivable utilized $126 million less cash in the first nine months of 2022, compared with the same period in 2021, primarily as a result of timing of payments in the 2022 period.
Investing activities from continuing operations generated $351 million of cash in the nine months ended September 30, 2022 and used $143 million of cash in the nine months ended September 30, 2021. During the nine months ended September 30, 2022, we received $705 million of cash from the sale of intermodal, net of cash disposed, received $29 million from the settlement of cross currency swaps and used $394 million to purchase property and equipment. During the nine months ended September 30, 2021, we used $212 million of cash to purchase property and equipment and received $72 million from sales of property and equipment.
Financing activities from continuing operations used $706 million of cash in the nine months ended September 30, 2022 and $1.9 billion of cash in the nine months ended September 30, 2021. The primary uses of cash from financing activities during the first nine months of 2022 were $651 million used to redeem a portion of the senior notes due 2025 and $47 million used to repay borrowings. The primary uses of cash from financing activities during the nine months ended September 30, 2021 were $2.8 billion used to redeem the senior notes due 2022, 2023 and 2024 and $200 million used to repay borrowings under our ABL Facility. The primary sources of cash from financing activities during the first nine months of 2021 were $794 million of proceeds from a distribution from GXO and $384 million of net proceeds from our common stock offering.
Except for the redemption of a portion of our senior notes due 2025 as described above, there were no material changes to our December 31, 2021 contractual obligations during the nine months ended September 30, 2022. RXO’s operating lease obligations of approximately $140 million as of September 30, 2022 will not be part of our contractual obligations following the spin-off. We anticipate full year net capital expenditures to be between $375 million and $425 million in 2022 (excluding any net capital expenditures associated with the RXO spin-off).
New Accounting Standards
Information related to new accounting standards is included in Note 1—Organization, Description of Business and Basis of Presentation to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
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