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 2022 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, Inc., together with its subsidiaries (“XPO,” or “we”), is a leading provider of freight transportation services with company-specific avenues for value creation. We use our proprietary technology to move goods efficiently through our customers’ supply chains in North America and Europe. As of March 31, 2023, we had approximately 38,000 employees and 558 locations in 17 countries serving approximately 48,000 customers.
Our company has two reportable segments: North American Less-Than-Truckload (“LTL”), the largest component of our business, and European Transportation. Our North American LTL segment includes the results of our trailer manufacturing operations.
In the first quarter of 2023, we made certain changes to our financial reporting to increase transparency and improve comparability. Specifically, we changed the expense captions within Operating income in the Condensed Consolidated Statements of Income to reflect the nature of the expense. The change to natural expense classification had no impact on consolidated Revenues or Operating income. We have recast prior period amounts to conform to the current year’s presentation. We provided certain unaudited recast financial information for fiscal years 2020, 2021 and 2022 in a Form 8-K filed with the U.S. Securities and Exchange Commission on April 11, 2023.
North American Less-Than-Truckload Segment
LTL in North America is a bedrock industry providing a critical service to the economy, with favorable pricing dynamics and a stable competitive landscape. We have one of the largest LTL networks in North America, with approximately 8% share of the $59 billion U.S. market as of December 31, 2022.
Our LTL sales and service professionals and network of drivers, tractors, trailers and terminals serve approximately 27,000 customers in North America. We provide shippers with critical geographic density and day-definite domestic and cross-border services to approximately 99% of U.S. zip codes, as well as Mexico, Canada and the Caribbean.
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Together, our capacity and reach give us the ability to manage large freight volumes efficiently and balance our network to leverage fixed costs. For the trailing 12 months ended March 31, 2023, we delivered approximately 18 billion pounds of freight.
Importantly, our LTL business historically has generated a high return on invested capital and robust free cash flow. This supports our ongoing investments in the expansion of our network capacity and the enhancement of our proprietary technology. We are managing the business to specific objectives, such as high customer service scores for on-time delivery and damage-free freight, the optimal sourcing of linehaul transportation, and the addition of 900 net new doors to our terminal footprint by the first quarter of 2024 from an October 2021 baseline. Since implementing our LTL 2.0 growth plan in the fourth quarter of 2021, we added six terminals to our network, representing 369 net new doors.
Additionally, we are continuing to execute a host of initiatives that are specific to XPO and largely independent of the macroeconomic environment. We produced 4,705 trailers at our in-house trailer manufacturing facility in 2022, nearly doubling the 2021 output. Our goal is to produce more than 6,000 trailers in 2023. We are also investing in expanding the number of drivers trained at our 130 commercial driver schools. Our in-house trailer manufacturing and driver schools are examples of idiosyncratic, self-reliant capabilities that are advantageous to XPO, particularly when industry constraints on equipment or drivers exist.
Specific to our technology, we believe we have a large opportunity to drive further growth and profitability in our LTL network through innovation. For further information, see the “Technology and Sustainability” section below.
European Transportation Segment
XPO has a unique pan-European transportation platform with leading positions in key geographies: we are the #1 full truckload broker and the #1 pallet network (LTL) provider in France; the #1 full truckload broker and the #1 LTL provider in Iberia (Spain and Portugal); and a top-tier dedicated truckload provider in the U.K., where we also have the largest single-owner LTL network. We serve a large base of customers within the consumer, trade and industrial markets, including many sector leaders that have long-tenured relationships with us.
Our range of services in Europe encompasses dedicated truckload, LTL, truck brokerage, managed transportation, last mile, freight forwarding and, increasingly, multimodal solutions, such as road-rail and road-short sea combinations that we tailor to customer needs. Our operators use our proprietary XPO Connect ® technology to manage these services within our digital ecosystem in Europe.
Technology and Sustainability
One of the ways in which we deliver superior service to our customers is by empowering our employees with technology. Our industry is evolving, and customers want to de-risk their supply chains by forming relationships with reliable service providers that have invested in innovation.
We have built a highly scalable ecosystem on the cloud that deploys our software consistently across our operating footprint. In our North American LTL business, the caliber of our technology is mission-critical to our success; it optimizes linehaul, pickup-and-delivery and pricing — the main components of the service we provide. An LTL network of our scale has hundreds of thousands of activities underway at any given time, all managed on our technology. For the trailing 12 months ended March 31, 2023, we moved 18 billion pounds of freight 773 million miles, including moving linehaul freight an average of 2.5 million miles a day.
With intelligent route-building, we can reduce empty miles in our linehaul network, improve load factor and mitigate cargo damage. Our proprietary bypass models make recommendations to enhance trailer utilization, assimilating massive amounts of data and taking volume, density, and freight dimensions into account. We use our visualization tools to reduce costs with pickups and deliveries, and we developed piece-level tracking to identify individual pallets to enhance shipment loading and visibility. We also developed a robust pricing platform for contractual account management and automated, dynamic pricing for local accounts.
Importantly, our technology also helps our company meet its environmental, social and governance (“ESG”) goals, such as a reduction in our carbon footprint, 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 2022 Form 10-K, as well as our current Sustainability Report at sustainability.xpo.com .
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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 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. 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.
Additionally, economic inflation can have a negative impact on our operating costs, such as the rising costs of fleet maintenance, fuel and purchased transportation we experienced in 2022. We mitigate these costs by mechanisms in our customer contracts, including fuel surcharge clauses and general rate increases. In addition, the rise in interest rates increased our cost of capital in 2022. An economic recession could depress customer demand for transportation services.
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.
Consolidated Summary Financial Table
Three Months Ended March 31, Percent of Revenue Change
(Dollars in millions) 2023
2022
2023 2022 2023 vs. 2022
Revenue $ 1,907 $ 1,894 100.0 % 100.0 % 0.7 %
Salaries, wages and employee benefits 762 725 40.0 % 38.3 % 5.1 %
Purchased transportation 457 510 24.0 % 26.9 % (10.4) %
Fuel, operating expenses and supplies 427 418 22.4 % 22.1 % 2.2 %
Operating taxes and licenses 15 16 0.8 % 0.8 % (6.3) %
Insurance and claims 44 56 2.3 % 3.0 % (21.4) %
Gains on sales of property and equipment (3) (1) (0.2) % (0.1) % 200.0 %
Depreciation and amortization expense 101 94 5.3 % 5.0 % 7.4 %
Transaction and integration costs 22 7 1.2 % 0.4 % 214.3 %
Restructuring costs 24 6 1.3 % 0.3 % 300.0 %
Operating income 58 63 3.0 % 3.3 % (7.9) %
Other income (5) (14) (0.3) % (0.7) % (64.3) %
Interest expense 42 37 2.2 % 2.0 % 13.5 %
Income from continuing operations
before income tax provision
21 40 1.1 % 2.1 % (47.5) %
Income tax provision 4 8 0.2 % 0.4 % (50.0) %
Income from continuing operations 17 32 0.9 % 1.7 % (46.9) %
Income (loss) from discontinued
operations, net of taxes
(3) 456 (0.2) % 24.1 % (100.7) %
Net income $ 14 $ 488 0.7 % 25.8 % (97.1) %
Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022
Our consolidated revenue for the first quarter of 2023 increased 0.7% to $1.9 billion, compared with the same quarter in 2022. The increase reflects growth in fuel surcharge revenue in our LTL segment, due primarily to higher diesel prices. Foreign currency movement decreased revenue by approximately 2.5 percentage points in the first quarter of 2023.
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Salaries, wages and employee benefits includes compensation-related costs for our employees, including salaries, wages, healthcare-related costs and payroll taxes, and covers drivers and dockworkers, operations and facility workers and employees in support roles and other positions. Salaries, wages and employee benefits for the first quarter of 2023 was $762 million, or 40.0% of revenue, compared with $725 million, or 38.3% of revenue, for the same quarter in 2022. The year-over-year increase as a percentage of revenue primarily reflects the impact of inflation on our cost base, partially offset by lower headcount.
Purchased transportation includes costs of procuring third-party freight transportation. Purchased transportation for the first quarter of 2023 was $457 million, or 24.0% of revenue, compared with $510 million, or 26.9% of revenue, for the same quarter in 2022. The year-over-year decrease as a percentage of revenue primarily reflects lower rates paid to third-party providers for purchased transportation miles and the insourcing of a greater proportion of linehaul from third-party transportation providers.
Fuel, operating expenses and supplies includes the cost of fuel purchased for use in our vehicles as well as related taxes, maintenance and lease costs for our equipment, including tractors and trailers, costs related to operating our owned and leased facilities, bad debt expense, third-party professional fees, information technology expenses and supplies expense. Fuel, operating expenses and supplies for the first quarter of 2023 was $427 million, or 22.4% of revenue, compared with $418 million, or 22.1% of revenue, for the same quarter in 2022. The year-over-year increase primarily reflects higher lease costs and bad debt expense, partially offset by lower third-party information technology expenses.
Operating taxes and licenses includes tax expenses related to our vehicles and our owned and leased facilities as well as license expenses to operate our vehicles.
Insurance and claims includes costs related to vehicular and cargo claims for both purchased insurance and self-insurance programs. Insurance and claims for the first quarter of 2023 was $44 million, compared with $56 million for the same quarter in 2022. The year-over-year decrease reflects lower cargo insurance expense due to improved operating performance related to damaged shipments.
Depreciation and amortization expense for the first quarter of 2023 was $101 million, compared with $94 million for the same quarter in 2022. The year-over-year increase reflects the impact of capital investments, in particular tractors and trailers.
Transaction and integration costs for the first quarter of 2023 were $22 million, compared with $7 million for the same quarter in 2022. Transaction and integration costs for the first quarter of 2023 are primarily comprised of stock-based compensation for certain employees related to strategic initiatives. Transaction and integration costs for the first quarter of 2022 are primarily comprised of third-party professional fees related to strategic initiatives as well as retention awards paid to certain employees. We expect to incur additional transaction and integration costs related to rebranding and stock-based compensation in 2023 and 2024.
Restructuring costs for the first quarter of 2023 were $24 million, compared with $6 million for the same quarter in 2022. 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 5—Restructuring Charges to our Condensed Consolidated Financial Statements.
Other income primarily consists of pension income. Other income for the first quarter of 2023 was $5 million, compared with $14 million for the same quarter in 2022. The year-over-year decrease reflects $11 million of lower net periodic pension income in the first quarter of 2023 primarily due to a rise in interest rates and a lower expected return on plan assets.
Interest expense increased to $42 million for the first three months of 2023 from $37 million for the first three months of 2022. The increase in interest expense is primarily due to a higher floating interest rate on our Term Loan Facilities, partially offset by the impact of the redemption of $1.1 billion of our 6.25% senior notes due 2025 in 2022.
Our effective income tax rates were 18.3% and 19.6% for the first three months of 2023 and 2022, respectively. The effective tax rates for the first quarter of 2023 and 2022 were based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented. The decrease in our effective income tax rate for the first three months of 2023 compared to the same quarter of 2022 was primarily driven by an increased impact
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from discrete items due to lower pre-tax book income. The primary items impacting the effective tax rate for the first quarter of 2023 are $2 million of discrete tax benefits from revaluing deferred state taxes partially offset by forecasted non-deductible executive compensation expense. The primary item impacting the effective tax rate for the first quarter of 2022 was a discrete tax benefit of $2 million from stock-based compensation.
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 (loss) based on adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), which we define as income from continuing operations before interest expense, income tax, depreciation and amortization expense, transaction and integration costs, restructuring costs and other adjustments. Segment Adjusted EBITDA has historically reflected an allocation of corporate costs. In the first quarter of 2023, we began allocating incremental corporate costs from Corporate to North American LTL. Prior periods have been recast to reflect these incremental allocations, which approximate $80 million annually. See Note 3—Segment Reporting to our Condensed Consolidated Financial Statements for further information and a reconciliation of Adjusted EBITDA to Income from continuing operations.
North American Less-Than-Truckload Segment
Three Months Ended March 31, Percent of Revenue Change
(Dollars in millions) 2023 2022 2023 2022 2023 vs. 2022
Revenue $ 1,120 $ 1,107 100.0 % 100.0 % 1.2 %
Adjusted EBITDA 182 186 16.3 % 16.8 % (2.2) %
Depreciation and amortization 68 56 6.1 % 5.1 % 21.4 %
Revenue in our North American LTL segment increased 1.2% to $1.12 billion for the first quarter of 2023, compared with $1.11 billion for the same quarter in 2022. Revenue included fuel surcharge revenue of $217 million and $207 million, respectively, for the first three months of 2023 and 2022. The increase in fuel surcharge revenue primarily reflects higher diesel prices.
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 March 31,
2023 2022 Change %
Pounds per day (thousands) 68,889 70,176 (1.8) %
Gross revenue per hundredweight, excluding fuel surcharges $ 21.06 $ 20.76 1.4 %
The year-over-year increase in revenue, excluding fuel surcharge revenue, for the first quarter of 2023 reflects an increase in gross revenue per hundredweight, almost entirely offset by lower volume. The decrease in weight per day for the first quarter reflects lower average weight per shipment, partially offset by higher shipments per day. In the month of April 2023, as compared to April 2022, weight per day decreased 2.0% while shipments per day increased 3.1%.
Adjusted EBITDA was $182 million, or 16.3% of revenue, for the first three months of 2023, compared with $186 million, or 16.8% of revenue, for the same quarter in 2022. The decrease in Adjusted EBITDA in the first quarter of 2023 reflected higher salaries, wages and employee benefits, primarily due to cost inflation and, to a lesser extent, higher headcount, $11 million of lower pension income and higher fuel costs and bad debt expense. These items were almost entirely offset by lower purchased transportation, primarily due to lower rates paid to third-party providers for purchased transportation miles and the insourcing of a greater proportion of linehaul from third-party transportation providers.
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Depreciation and amortization expense increased to $68 million in the first quarter of 2023 compared with $56 million for the same quarter in 2022 due to the impact of capital investments, in particular tractors and trailers.
European Transportation Segment
Three Months Ended March 31, Percent of Revenue Change
(Dollars in millions) 2023 2022 2023 2022 2023 vs. 2022
Revenue $ 787 $ 787 100.0 % 100.0 % — %
Adjusted EBITDA 37 38 4.7 % 4.9 % (2.6) %
Depreciation and amortization 32 33 4.1 % 4.2 % (3.0) %
Revenue in our European Transportation segment was $787 million in each of the first quarters of 2023 and 2022. Foreign currency movement decreased revenue by approximately 6.1 percentage points in the first quarter of 2023. The increase in revenue compared to the first quarter of 2022, after taking into effect the impact of foreign currency movement, primarily reflects price increases to cover cost inflation as well as higher volume.
Adjusted EBITDA was $37 million, or 4.7% of revenue, for the first three months of 2023, compared with $38 million, or 4.9% of revenue, for the same quarter in 2022. The decrease in Adjusted EBITDA was primarily driven by higher salaries, wages and employee benefits due to the impact of cost inflation and bonuses paid to certain French employees in connection with a government program (PPV: Prime de Partage de la Valeur), almost entirely offset by lower purchased transportation and higher gains on sales of property and equipment.
Liquidity and Capital Resources
Our cash and cash equivalents balance was $309 million as of March 31, 2023, compared to $460 million as of December 31, 2022. 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 March 31, 2023, we have $502 million available to draw under our ABL Facility, based on a borrowing base of $502 million and outstanding letters of credit of less than $1 million. Additionally, we have a $200 million uncommitted secured evergreen letter of credit facility, under which we had issued $154 million in aggregate face amount of letters of credit as of March 31, 2023.
As of March 31, 2023, we had approximately $811 million 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.
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 a securitization program for our European transportation business. 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 $217 million as of March 31, 2023). As of March 31, 2023, the maximum amount available under the program was utilized. Under the securitization program, we service the receivables we sell on behalf of the purchasers. In May 2023, we entered into an agreement to extend the securitization program, which was scheduled to expire in July 2024, through July 2026. The terms and conditions of the extended securitization program are materially consistent with the prior program.
Loan Covenants and Compliance
As of March 31, 2023, 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
Three Months Ended March 31,
(In millions) 2023 2022
Net cash provided by operating activities from continuing operations $ 76 $ 188
Net cash used in investing activities from continuing operations (216) (120)
Net cash used in financing activities from continuing operations (10) (24)
During the three months ended March 31, 2023, we generated cash from operating activities from continuing operations of $76 million. We used cash during this period primarily to: (i) purchase property and equipment of $224 million; (ii) make payments on debt and finance leases of $16 million; and (iii) make payments of $12 million related to tax withholding obligations in connection with the vesting of restricted shares.
During the three months ended March 31, 2022, we generated cash from operating activities from continuing operations of $188 million. We used cash during this period primarily to: (i) purchase property and equipment of $123 million; (ii) make payments on debt and finance leases of $16 million; and (iii) make payments of $12 million related to tax withholding obligations in connection with the vesting of restricted shares.
Cash flows from operating activities from continuing operations for the three months ended March 31, 2023 decreased by $112 million, compared with the same period in 2022. The decrease reflects the impact of operating assets and liabilities utilizing $79 million of cash in the three months ended March 31, 2023, compared with generating $42 million of cash during the same period in 2022. Within operating assets and liabilities, for the three months ended March 31, 2023, compared with the same period in 2022: (i) accounts payable utilized $125 million more cash primarily due to the timing of payments; and (ii) accrued expenses and other liabilities generated $94 million less cash primarily due to the accrual of a tax obligation related to the sale of our intermodal operation in the first quarter of 2022. Partially offsetting these items, accounts receivable utilized $85 million less cash in the first quarter of 2023 as compared to the first quarter of 2022 primarily as a result of a lower sequential increase in revenues.
Investing activities from continuing operations used $216 million of cash in the three months ended March 31, 2023 and $120 million of cash in the three months ended March 31, 2022. During the three months ended March 31, 2023, we used $224 million to purchase property and equipment, as compared to a $123 million usage of cash in the same period in 2022. The increase reflects our continued investment, primarily in tractors and trailers, to support our long-term growth targets.
Financing activities from continuing operations used $10 million of cash in the three months ended March 31, 2023 and $24 million of cash in the three months ended March 31, 2022. The primary uses of cash from financing activities in each of the first three months of 2023 and 2022 were $16 million used to repay borrowings and $12 million to make payments for tax withholdings on restricted shares. The primary source of cash from financing activities during the first three months of 2023 was $19 million of proceeds from bank overdrafts, as compared to $3 million in the same period of 2022.
There were no material changes to our December 31, 2022 contractual obligations during the three months ended March 31, 2023. We anticipate full year gross capital expenditures to be between $500 million and $600 million in 2023, funded by cash on hand and available liquidity.
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.