XPO, 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 future results, levels of activity, performance or achievements to be materially different from our expected 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 on Form 10-Q 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 on Form 10-Q, and with the audited consolidated financial statements and related notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”). Forward-looking statements set forth in this Quarterly Report on Form 10-Q 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,” “we” or the “Company”), 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, 2024, we had approximately 39,000 employees and 610 locations in 17 countries serving approximately 52,000 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. Within the tables presented, certain amounts may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in millions. North American LTL Segment LTL in North America is a bedrock industry providing a critical service to the economy, with favorable pricing dynamics and an established competitive landscape. XPO is one of the largest LTL networks in North America, with approximately 9% share of the U.S. market, estimated to be $52 billion as of December 31, 2023. 16 Table of Contents We provide approximately 33,000 shippers in North America 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. 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, 2024, our customer-focused organization of truck drivers, service center teams and sales professionals worked together to move approximately 18 billion pounds of freight through our network to its destinations. Importantly, our LTL business historically has generated a high return on invested capital and robust free cash flow. This supports our ongoing investments in our people, network capacity and proprietary technology. We manage 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 expansion of our service center footprint in strategic markets with long-term demand. Since implementing our LTL 2.0 growth plan in the fourth quarter of 2021, we have added over 4,000 tractors and 12,300 trailers. In 2023, we produced over 6,400 trailers at our in-house trailer manufacturing facility, surpassing our goal of more than 6,000 trailers. Our in-house trailer manufacturing is an example of a self-reliant capability that is competitively advantageous to us, particularly when industry conditions make it difficult to source equipment. In December 2023, we completed the acquisition of 28 service centers previously operated by Yellow Corporation (the “Yellow Asset Acquisition”), representing approximately 2,900 doors. We expect the net increase in service centers and doors to be less than the gross number purchased as we look for opportunities to rationalize our existing footprint. This strategic acquisition of assets aligns with our commitment to invest in expanding our LTL network capacity. As a leading provider of freight transportation services, our business can be impacted to varying degrees by factors beyond our control. In 2024, the overall freight environment continues to be recessionary, in large part due to underlying trends in supply and demand. Despite this, we continue to perform well and see growth potential ahead as we continue to expand our business by investing in capacity for the long-term, gaining profitable market share and aligning price with the value we provide to customers. Specific to our technology, we believe that we have a large opportunity to drive further growth and profitability in our LTL network through innovation. For more information, see “Technology” 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 an extensive base of customers within the consumer, trade and industrial markets, including many sector leaders that have long-tenured relationships with us. Our range of freight 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 technology to manage these services within our digital ecosystem in Europe. Technology 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, 2024, we moved approximately 18 billion pounds of freight 813 million miles, including moving linehaul freight an average of 2.6 million miles a day. 17 Table of Contents 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 real-time visualization tools to reduce costs with pickups and deliveries and 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 goals and can help our customers meet their own goals. For a detailed discussion of our philosophy relating to innovation and environmental matters, refer to “Business” in our 2023 Form 10-K. Consolidated Summary Financial Table Three Months Ended March 31, Percent of Revenue Change (Dollars in millions) 2024 2023 2024 2023 2024 vs. 2023 Revenue $ 2,018 $ 1,907 100.0 % 100.0 % 5.8 % Salaries, wages and employee benefits 834 762 41.3 % 40.0 % 9.4 % Purchased transportation 438 457 21.7 % 24.0 % (4.2) % Fuel, operating expenses and supplies 413 427 20.5 % 22.4 % (3.3) % Operating taxes and licenses 19 15 0.9 % 0.8 % 26.7 % Insurance and claims 38 44 1.9 % 2.3 % (13.6) % Gains on sales of property and equipment (2) (3) (0.1) % (0.2) % (33.3) % Depreciation and amortization expense 117 101 5.8 % 5.3 % 15.8 % Transaction and integration costs 14 22 0.7 % 1.2 % (36.4) % Restructuring costs 8 24 0.4 % 1.3 % (66.7) % Operating income 138 58 6.8 % 3.0 % 137.9 % Other income (10) (5) (0.5) % (0.3) % 100.0 % Interest expense 58 42 2.9 % 2.2 % 38.1 % Income from continuing operations before income tax provision 90 21 4.5 % 1.1 % 328.6 % Income tax provision 23 4 1.1 % 0.2 % 475.0 % Income from continuing operations 67 17 3.3 % 0.9 % 294.1 % Loss from discontinued operations, net of taxes — (3) — % (0.2) % (100.0) % Net income $ 67 $ 14 3.3 % 0.7 % 378.6 % Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023 Our consolidated revenue for the first quarter of 2024 increased 5.8% to $2.0 billion, compared with the same period in 2023. The increase in revenue in the first quarter of 2024 compared to the same period in 2023 primarily reflects growth in our North American LTL segment. Foreign currency movement increased revenue by approximately 1.0 percentage point in the first quarter of 2024. Salaries, wages and employee benefits includes compensation-related costs for our employees, including salaries, wages, incentive compensation, 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 2024 was $834 million, or 41.3% of revenue, compared with $762 million, or 40.0% of revenue, for the same period in 2023. The year-over-year increase as a percentage of revenue primarily reflects the impact of inflation on our cost base, the insourcing of a greater proportion of linehaul from third-party transportation providers, and higher incentive compensation related to our operating performance. The increase in salaries, wages and employee benefits also reflects higher volumes in both of our segments. 18 Table of Contents Purchased transportation includes costs of procuring third-party freight transportation. Purchased transportation for the first quarter of 2024 was $438 million, or 21.7% of revenue, compared with $457 million, or 24.0% of revenue, for the same period in 2023. The year-over-year decrease as a percentage of revenue primarily reflects the insourcing of a greater proportion of linehaul from third-party transportation providers and lower rates paid to third-party providers for purchased transportation miles. 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 2024 was $413 million, or 20.5% of revenue, compared with $427 million, or 22.4% of revenue, for the same period in 2023. The year-over-year decrease primarily reflects lower fuel costs and lower bad debt expense. 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. Operating taxes and licenses for the first quarter of 2024 was $19 million, compared with $15 million for the same period in 2023. The year-over-year increase primarily reflects property taxes on newly acquired service centers and lower tax incentives in Illinois. 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 2024 was $38 million, compared with $44 million for the same period in 2023. The year-over-year decrease reflects lower expense due to improved operating performance related to damaged shipments, partially offset by higher vehicular claims. Gains on sales of property and equipment for the first quarter of 2024 was $2 million, compared with $3 million for the same period in 2023. Depreciation and amortization expense for the first quarter of 2024 was $117 million, compared with $101 million for the same period in 2023. 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 2024 were $14 million, compared with $22 million for the same period in 2023. Transaction and integration costs for the first quarter of 2024 and 2023 are primarily comprised of stock-based compensation for certain employees related to strategic initiatives. We expect stock-based compensation costs related to our previously announced strategic initiatives to conclude in 2024. Restructuring costs for the first quarter of 2024 were $8 million, compared with $24 million for the same period in 2023. We engage in restructuring actions as part of our ongoing efforts to best use our resources and infrastructure. For more information, see Note 4—Restructuring Charges to our Condensed Consolidated Financial Statements. Other income for the first quarter of 2024 was $10 million, compared with $5 million for the same period in 2023. The year-over-year increase reflects $3 million in investment income and a $2 million increase in net periodic pension income. Interest expense increased to $58 million for the first quarter of 2024, compared with $42 million for the same period of 2023. The increase is primarily due to the debt issuance in the fourth quarter of 2023 to finance the Yellow Asset Acquisition and higher prevailing interest rates in 2024. Our effective income tax rates were 25.2% and 18.3% for the first quarter of 2024 and 2023, respectively. The effective tax rates for the first quarter of 2024 and 2023 were based on forecasted full-year effective tax rates, adjusted for discrete items that occurred within the periods presented. The increase in our effective income tax rate for the first quarter of 2024 compared to the same period in 2023 was primarily driven by higher pre-tax book income which reduced the impact of discrete tax items. In the first quarter of 2024, the effective tax rate was impacted by losses for which no tax benefit can be recognized and forecasted non-deductible executive compensation expense, partially offset by a discrete tax benefit of $5 million from stock-based compensation. In the first quarter of 2023, the effective tax rate was impacted by $2 million of discrete tax benefits from revaluing deferred state taxes, partially offset by forecasted non-deductible executive compensation expense. 19 Table of Contents 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 includes an allocation of corporate costs. See Note 2—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) 2024 2023 2024 2023 2024 vs. 2023 Revenue $ 1,221 $ 1,120 100.0 % 100.0 % 9.0 % Adjusted EBITDA 255 182 20.9 % 16.3 % 40.1 % Depreciation and amortization 82 68 6.7 % 6.1 % 20.6 % Revenue in our North American LTL segment increased 9.0% to $1.2 billion for the first quarter of 2024, compared with $1.1 billion for the same period in 2023. Revenue included fuel surcharge revenue of $210 million and $217 million, respectively, for the first quarters of 2024 and 2023. The decrease in fuel surcharge revenue was primarily driven by lower 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, while impacts on volume can include shipments per day and weight per shipment. The following table summarizes our key revenue metrics: Three Months Ended March 31, 2024 2023 Change % Pounds per day (thousands) 70,709 68,889 2.6 % Shipments per day 51,392 49,107 4.7 % Average weight per shipment (in pounds) 1,376 1,403 (1.9) % Gross revenue per hundredweight, excluding fuel surcharges $ 23.13 $ 21.06 9.8 % The year-over-year increase in revenue, excluding fuel surcharge revenue, in the first quarter of 2024 reflects higher volume and gross revenue per hundredweight, primarily related to our improvements in service quality and investments in capacity. The increase in volume per day for the first quarter of 2024 reflects higher shipments per day, partially offset by lower average weight per shipment. The increase in yield in the first quarter of 2024 reflects the benefit of numerous pricing initiatives. In the month of April 2024 weight per day increased 3.1%, as compared with April 2023, attributable to a year-over-year increase of 4.7% in shipments per day and a decrease of 1.5% in weight per shipment. These April 2024 operating metrics are preliminary and actual results may vary. Adjusted EBITDA was $255 million, or 20.9% of revenue, for the first quarter of 2024, compared with $182 million, or 16.3% of revenue, for the same period in 2023. The increase in Adjusted EBITDA as a percentage of revenue reflects higher revenue, excluding fuel surcharge revenue, driven by the pricing and volume dynamics explained above, lower purchased transportation, lower bad debt expense, and lower damage claims. These items were partially offset by higher salaries, wages and employee benefits and lower fuel surcharge revenue. Depreciation and amortization expense increased to $82 million in the first quarter of 2024 compared with $68 million for the same period in 2023. The increase was due to the impact of capital investments, in particular tractors and trailers. 20 Table of Contents European Transportation Segment Three Months Ended March 31, Percent of Revenue Change (Dollars in millions) 2024 2023 2024 2023 2024 vs. 2023 Revenue $ 797 $ 787 100.0 % 100.0 % 1.3 % Adjusted EBITDA 38 37 4.8 % 4.7 % 2.7 % Depreciation and amortization 34 32 4.3 % 4.1 % 6.3 % Revenue in our European Transportation segment increased 1.3% to $797 million for the first quarter of 2024, compared with $787 million for the same period in 2023. Foreign currency movement increased revenue by approximately 2.5 percentage points in the first quarter of 2024. Revenue was essentially flat during the first quarter of 2024, compared to the same period in 2023, after taking into effect the impact of foreign currency movement. Adjusted EBITDA was $38 million, or 4.8% of revenue, for the first quarter of 2024, compared with $37 million, or 4.7% of revenue, for the same period in 2023. Liquidity and Capital Resources Our cash and cash equivalents balance was $229 million as of March 31, 2024, compared to $412 million as of December 31, 2023. 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”); and (iii) proceeds from the issuance of other debt. As of March 31, 2024, we have $564 million available to draw under our ABL Facility, based on a borrowing base of $565 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 $138 million in aggregate face amount of letters of credit as of March 31, 2024. As of March 31, 2024, we had approximately $793 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 $216 million as of March 31, 2024). As of March 31, 2024, the maximum amount available under the program was utilized. Under the securitization program, we service the receivables we sell on behalf of the purchasers. The program expires in July 2026. Term Loan Facility The applicable interest rate for the two tranches of the term loan facility approximated 7.32% as of March 31, 2024. Loan Covenants and Compliance As of March 31, 2024, 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. 21 Table of Contents Sources and Uses of Cash Three Months Ended March 31, (In millions) 2024 2023 Net cash provided by operating activities from continuing operations $ 145 $ 76 Net cash used in investing activities from continuing operations (299) (216) Net cash used in financing activities from continuing operations (29) (10) During the three months ended March 31, 2024, we generated cash from operating activities from continuing operations of $145 million. We used cash during the period primarily to: (i) purchase property and equipment of $306 million; (ii) make payments on debt and finance leases of $21 million; and (iii) make payments of $15 million related to tax withholding obligations in connection with the vesting of restricted shares. 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. Cash flows from operating activities from continuing operations for the three months ended March 31, 2024 increased by $69 million, compared with the same period in 2023. The increase primarily reflects: (i) higher income from continuing operations of $50 million and (ii) the impact of operating assets and liabilities utilizing $68 million of cash in the first three months of 2024, compared with utilizing $79 million during the same period in 2023. Investing activities from continuing operations used $299 million of cash in the three months ended March 31, 2024 and $216 million of cash in the three months ended March 31, 2023. During the three months ended March 31, 2024, we used $306 million to purchase property and equipment, as compared to a $224 million usage of cash in the same period in 2023. The increase reflects our continued investment to support our long-term growth targets. Financing activities from continuing operations used $29 million of cash in the three months ended March 31, 2024 and $10 million of cash in the three months ended March 31, 2023. The primary uses of cash from financing activities in each of the first three months of 2024 and 2023 were $21 million and $16 million, respectively, used to repay borrowings, primarily related to finance lease obligations, and $15 million and $12 million, respectively, to make payments for tax withholdings on restricted shares. The primary source of cash from financing activities during the first three months of 2024 was $11 million of proceeds from bank overdrafts, as compared to $19 million in the same period of 2023. There were no material changes to our December 31, 2023 contractual obligations during the three months ended March 31, 2024. We anticipate full year gross capital expenditures to be between $700 million and $800 million in 2024, 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.