RXO, Inc. (NYSE:RXO) Q4 2023 Earnings Conference Call February 8, 2024 8:00 AM ET Company Participants Drew Wilkerson - CEO James Harris - CFO Jared Weisfeld - CSO Conference Call Participants Ken Hoexter - Bank of America Jordan Alliger - Goldman Sachs Stephanie Moore - Jefferies Brandon Oglenski - Barclays Allison Poliniak - Wells Fargo Scott Schneeberger - Oppenheimer Ravi Shanker - Morgan Stanley Scott Group - Wolfe Research Bruce Chan - Stifel Jack Atkins - Stephens Operator Welcome to RXO Q4 2023 Earn ...

$140 Adjusted EBITDA and margin %1Brokerage y/y volume growth Solid execution in a prolonged soft freight market RXO's brokerage business continues to outperform and gain profitable market share | --- | --- | --- | --- | --- | --- | |-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|-------|----------------------------------------------------------------------------------------|-------|- ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________________ Form 10-Q ___________________________________ (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number: 001-41514 ___________________ ...

Revenue Performance - Revenue for Q2 2023 decreased by 21.5% to $963 million, down from $1,226 million in Q2 2022, primarily due to a $198 million decrease in truck brokerage revenue and a $36 million decrease in freight forwarding revenue [76]. - For the first six months of 2023, revenue decreased by 22.3% to $1.973 billion from $2.538 billion in the same period of 2022, primarily due to a $422 million decrease in truck brokerage revenue [84]. Cost and Expenses - Cost of transportation and services for Q2 2023 was $723 million, representing 75.1% of revenue, compared to $904 million or 73.7% of revenue in Q2 2022, driven by a 5.4 percentage point increase in truck brokerage costs [77]. - Direct operating expenses for Q2 2023 were $59 million, or 6.1% of revenue, up from $56 million or 4.6% of revenue in Q2 2022, reflecting deleverage on lower revenue [78]. - SG&A expenses for Q2 2023 were $144 million, or 15.0% of revenue, compared to $166 million, or 13.5% of revenue in Q2 2022, with higher compensation-related costs contributing to the increase [79]. - Transportation and services costs for the first six months of 2023 were $1.5 billion, or 75.1% of revenue, down from $1.9 billion, or 75.8% of revenue in the same period of 2022 [85]. - Direct operating expenses for the first six months of 2023 were $120 million, or 6.1% of revenue, compared to $111 million, or 4.4% of revenue in the same period of 2022 [86]. - SG&A expenses for the first six months of 2023 were $297 million, or 15.1% of revenue, down from $327 million, or 12.9% of revenue in the same period of 2022 [87]. - Depreciation and amortization expense for the first six months of 2023 was $36 million, a decrease from $42 million in the same period of 2022 [88]. Net Income and Tax - Net income for Q2 2023 was $3 million, down from $44 million in Q2 2022, resulting in a net income margin of 0.3% compared to 3.6% in the prior year [75]. - The effective income tax rate for Q2 2023 was 44.0%, significantly higher than the 24.3% rate in Q2 2022, influenced by state income taxes and non-deductible expenses [82]. - The effective income tax rate for the first six months of 2023 was (11.0)%, compared to 24.3% for the same period in 2022 [90]. Cash Flow and Assets - Net cash provided by operating activities for the first six months of 2023 was $66 million, a decrease of $111 million (62.7%) compared to $177 million in the same period of 2022 [96]. - Cash used in investing activities for the first six months of 2023 was $28 million, compared to $24 million in the same period of 2022 [99]. - Financing activities used $13 million of cash in the first six months of 2023, compared to generating $30 million in the same period of 2022 [100]. - Total current assets decreased by $113 million (11.0%) from December 31, 2022, to June 30, 2023, primarily due to a $157 million decrease in accounts receivable [95]. - Total liabilities decreased by $121 million from December 31, 2022, to June 30, 2023, driven primarily by a $69 million decrease in accounts payable [95]. Business Model and Operations - The company had approximately 121,000 carriers in its North American truck brokerage network, with access to over 1.5 million trucks as of June 30, 2023 [64]. - The company operates an asset-light business model, focusing on truck brokerage, managed transportation, last mile, and freight forwarding services [62]. - Transaction and integration costs for Q2 2023 were $4 million, down from $18 million in Q2 2022, primarily related to spin-off costs [81].

[Part I—Financial Information](index=4&type=section&id=Part%20I%E2%80%94Financial%20Information) This part presents RXO's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents RXO's unaudited condensed consolidated financial statements, including key financial statements and detailed notes on accounting policies, debt, and other financial disclosures [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of RXO's financial position, detailing assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (Millions) | Metric | March 31, 2023 (Millions) | December 31, 2022 (Millions) | Change (Millions) | % Change | | :--------------------------------- | :-------------------------- | :--------------------------- | :---------------- | :------- | | Cash and cash equivalents | $121 | $98 | $23 | 23.5% | | Accounts receivable, net | $862 | $900 | $(38) | (4.2)% | | Total current assets | $1,029 | $1,029 | $0 | 0.0% | | Total long-term assets | $989 | $1,002 | $(13) | (1.3)% | | Total assets | $2,018 | $2,031 | $(13) | (0.6)% | | Total current liabilities | $820 | $823 | $(3) | (0.4)% | | Total long-term liabilities | $613 | $621 | $(8) | (1.3)% | | Total liabilities and equity | $2,018 | $2,031 | $(13) | (0.6)% | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section outlines RXO's financial performance over a period, showing revenues, expenses, and net income Condensed Consolidated Statements of Operations (Millions) | Metric | Three Months Ended March 31, 2023 (Millions) | Three Months Ended March 31, 2022 (Millions) | Change (Millions) | % Change | | :------------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :---------------- | :------- | | Revenue | $1,010 | $1,312 | $(302) | (23.0)% | | Cost of transportation and services | $759 | $1,021 | $(262) | (25.7)% | | Direct operating expense | $61 | $55 | $6 | 10.9% | | Sales, general and administrative expense | $153 | $161 | $(8) | (5.0)% | | Operating income | $5 | $51 | $(46) | (90.2)% | | Net income | $0 | $39 | $(39) | (100.0)% | | Basic earnings per share | $0 | $0.34 | $(0.34) | (100.0)% | | Diluted earnings per share | $0 | $0.34 | $(0.34) | (100.0)% | [Condensed Consolidated Statements of Comprehensive Income](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents RXO's comprehensive income, including net income and other comprehensive income items Condensed Consolidated Statements of Comprehensive Income (Millions) | Metric | Three Months Ended March 31, 2023 (Millions) | Three Months Ended March 31, 2022 (Millions) | Change (Millions) | % Change | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :---------------- | :------- | | Net income | $0 | $39 | $(39) | (100.0)% | | Foreign currency translation gain | $0 | $2 | $(2) | (100.0)% | | Comprehensive income | $0 | $41 | $(41) | (100.0)% | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section details RXO's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Millions) | Metric | Three Months Ended March 31, 2023 (Millions) | Three Months Ended March 31, 2022 (Millions) | Change (Millions) | % Change | | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :---------------- | :------- | | Net cash provided by operating activities | $42 | $103 | $(61) | (59.2)% | | Net cash used in investing activities | $(12) | $(12) | $0 | 0.0% | | Net cash used in financing activities | $(8) | $(74) | $66 | (89.2)% | | Net increase in cash, cash equivalents | $23 | $17 | $6 | 35.3% | | Cash, cash equivalents, end of period | $121 | $46 | $75 | 163.0% | [Condensed Consolidated Statements of Changes in Equity](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Equity) This section illustrates the changes in RXO's equity components over a period, including net income and stock-related transactions Condensed Consolidated Statements of Changes in Equity (Millions) | Metric | December 31, 2022 (Millions) | March 31, 2023 (Millions) | Change (Millions) | | :------------------------------------------- | :--------------------------- | :------------------------ | :---------------- | | Total Equity | $587 | $585 | $(2) | | Stock compensation expense | N/A | $5 | N/A | | Tax withholdings related to stock awards | N/A | $(7) | N/A | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements [1. Organization](index=10&type=section&id=1.%20Organization) This note describes RXO's business model as an asset-light brokered transportation platform - RXO, Inc. operates as a brokered transportation platform with an asset-light business model, primarily focusing on truck brokerage, complemented by managed transportation, last mile, and freight forwarding services[24](index=24&type=chunk) [2. Basis of Presentation and Significant Accounting Policies](index=10&type=section&id=2.%20Basis%20of%20Presentation%20and%20Significant%20Accounting%20Policies) This note outlines the accounting principles and policies used in preparing RXO's financial statements, including post-separation adjustments - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC rules, consistent with the 2022 Form 10-K[25](index=25&type=chunk) - RXO completed its separation from XPO, Inc. on November 1, 2022, becoming a standalone publicly traded company. Financial statements post-Separation are consolidated, while prior periods were combined and derived from XPO's records, including allocated costs[27](index=27&type=chunk)[28](index=28&type=chunk)[30](index=30&type=chunk) - The company adopted ASU 2022-04 on January 1, 2023, regarding supplier finance programs, which did not impact financial statement disclosures[34](index=34&type=chunk) - RXO is currently evaluating the impact of ASU 2023-01, "Leases (Topic 842) - Common Control Arrangements," effective for fiscal years beginning after December 15, 2023[35](index=35&type=chunk) [3. Revenue Recognition](index=12&type=section&id=3.%20Revenue%20Recognition) This note details RXO's revenue sources by service offering and industry sector, along with geographical distribution - The majority of RXO's revenue is generated in the U.S., with approximately **7%** and **9%** from outside the U.S. for Q1 2023 and Q1 2022, respectively[36](index=36&type=chunk) Revenue by Service Offering (Millions) | Service Offering | 2023 (Millions) | 2022 (Millions) | Change (Millions) | % Change | | :------------------ | :-------------- | :-------------- | :---------------- | :------- | | Truck brokerage | $600 | $824 | $(224) | (27.2)% | | Last mile | $240 | $246 | $(6) | (2.4)% | | Managed transportation | $117 | $139 | $(22) | (15.8)% | | Freight forwarding | $80 | $139 | $(59) | (42.4)% | | Total | $1,010 | $1,312 | $(302) | (23.0)% | Revenue by Industry Sector (Millions) | Industry Sector | 2023 (Millions) | 2022 (Millions) | Change (Millions) | % Change | | :-------------------- | :-------------- | :-------------- | :---------------- | :------- | | Retail/e-commerce | $386 | $481 | $(95) | (19.7)% | | Food and beverage | $105 | $150 | $(45) | (30.0)% | | Industrial/manufacturing | $181 | $229 | $(48) | (20.9)% | | Logistics and transportation | $52 | $87 | $(35) | (40.2)% | | Automotive | $102 | $89 | $13 | 14.6% | | Other | $184 | $276 | $(92) | (33.3)% | | Total | $1,010 | $1,312 | $(302) | (23.0)% | - As of March 31, 2023, the fixed consideration component of remaining performance obligations was approximately **$153 million**, with **97%** expected to be recognized over the next 3 years[37](index=37&type=chunk) [4. Restructuring Charges](index=13&type=section&id=4.%20Restructuring%20Charges) This note explains the restructuring charges incurred by RXO, primarily for severance costs, and the expected timing of cash outlays - RXO incurred **$8 million** in restructuring charges for the three months ended March 31, 2023, primarily for severance costs, increasing the total restructuring liability to **$8 million** from **$3 million** at December 31, 2022[38](index=38&type=chunk) - The majority of cash outlays for the remaining restructuring liability are expected to be completed within twelve months[38](index=38&type=chunk) [5. Debt](index=13&type=section&id=5.%20Debt) This note provides details on RXO's debt instruments, including term loans, notes, and revolving credit facilities, and compliance with covenants Debt and Obligations Under Finance Leases (Millions) | Debt Type | Principal Balance (March 31, 2023, Millions) | Carrying Value (March 31, 2023, Millions) | Principal Balance (Dec 31, 2022, Millions) | Carrying Value (Dec 31, 2022, Millions) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------ | :------------------------------------------- | :------------------------------------------ | | Term Loan | $100 | $100 | $100 | $100 | | 7.50% Notes due 2027 | $355 | $346 | $355 | $346 | | Finance leases, asset financing and other | $9 | $9 | $9 | $9 | | Total debt and obligations under finance leases | $464 | $455 | $464 | $455 | - RXO has a five-year, unsecured **$500 million** revolving credit facility with no amounts outstanding as of March 31, 2023, and was in compliance with all covenants[40](index=40&type=chunk) - The company has a five-year **$100 million** unsecured term loan facility with an effective interest rate of **5.93%** as of March 31, 2023, and was in compliance with all covenants[41](index=41&type=chunk)[42](index=42&type=chunk) - RXO completed an offering of **$355 million** in unsecured **7.50% Notes due 2027**, with an effective interest rate of **8.14%** as of March 31, 2023, and was in compliance with all covenants[43](index=43&type=chunk)[44](index=44&type=chunk) [6. Fair Value Measurements](index=14&type=section&id=6.%20Fair%20Value%20Measurements) This note discusses the fair value of RXO's financial instruments, including current assets, liabilities, and specific debt types - The carrying values of current assets and liabilities (cash, receivables, payables, accrued expenses, current debt maturities) approximated their fair values due to their short-term nature[45](index=45&type=chunk) Fair Value of Debt (Millions) | Debt Type | Level | March 31, 2023 (Millions) | December 31, 2022 (Millions) | | :------------------ | :---- | :------------------------ | :--------------------------- | | Term Loan | 2 | $95 | $95 | | 7.50% Notes due 2027 | 1 | $367 | $358 | [7. Earnings per Share](index=15&type=section&id=7.%20Earnings%20per%20Share) This note presents RXO's basic and diluted earnings per share calculations, including the impact of anti-dilutive shares Earnings per Share Calculation (Shares in thousands) | Metric | 2023 (Shares in thousands) | 2022 (Shares in thousands) | | :----------------------------------- | :------------------------- | :------------------------- | | Net income (Millions) | $0 | $39 | | Basic weighted-average common shares | 116,600 | 115,163 | | Diluted weighted-average common shares | 119,369 | 115,163 | | Basic earnings per share | $0 | $0.34 | | Diluted earnings per share | $0 | $0.34 | - Approximately **0.9 million** shares were excluded from diluted EPS calculation for Q1 2023 as their inclusion would have been anti-dilutive[47](index=47&type=chunk) [8. Commitments and Contingencies](index=15&type=section&id=8.%20Commitments%20and%20Contingencies) This note outlines RXO's involvement in various legal proceedings and claims, assessing potential financial impacts and insurance coverage - RXO is involved in various legal proceedings, including claims for property damage, personal injury, environmental liability, commercial disputes, employment-related claims, and class action "misclassification claims" regarding independent contractors[48](index=48&type=chunk) - The company accrues for probable and reasonably estimable losses and believes the ultimate resolution of current matters will not have a material adverse effect on its financial condition, results of operations, or cash flows, though outcomes are uncertain[50](index=50&type=chunk) - RXO's liability and excess umbrella insurance policies generally do not cover misclassification claims, and the company has agreed to indemnify XPO for liabilities related to these claims from its last mile business[51](index=51&type=chunk)[52](index=52&type=chunk) [9. Related Party](index=16&type=section&id=9.%20Related%20Party) This note details transactions and cost allocations with related parties, particularly XPO, before and after RXO's separation - Post-Separation (November 1, 2022), XPO's general shared costs are no longer allocated to RXO[54](index=54&type=chunk) Allocated Expenses from XPO (Millions) | Expense Type | 2022 (Millions) | | :-------------------------------- | :-------------- | | Sales, general and administrative expense | $18 | | Depreciation and amortization expense | $2 | | Transaction and integration costs | $3 | | Total | $23 | Related Party Transactions with XPO (Millions) | Metric | 2022 (Millions) | | :------ | :-------------- | | Revenue | $49 | | Costs | $17 | [10. Subsequent Events](index=17&type=section&id=10.%20Subsequent%20Events) This note discloses significant events occurring after the balance sheet date, such as the authorized share repurchase program - On May 2, 2023, RXO's Board of Directors authorized a share repurchase program of up to **$125 million**, with no expiration date[58](index=58&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes RXO's financial condition, operational results, liquidity, and cash flows, considering external factors and the impact of its separation from XPO [Business Overview](index=18&type=section&id=Business%20Overview) This section describes RXO's asset-light brokered transportation platform, including its core truck brokerage and last mile services - RXO is an asset-light brokered transportation platform, with its core truck brokerage business complemented by managed transportation, last mile, and freight forwarding services[61](index=61&type=chunk) - The company's truck brokerage business leverages proprietary, cutting-edge technology and a network of approximately **119,000 carriers** in North America, with access to over **1.5 million trucks** as of March 31, 2023[63](index=63&type=chunk)[64](index=64&type=chunk) - RXO is the largest provider of outsourced last mile transportation for heavy goods in the U.S., serving omnichannel and e-commerce retailers[66](index=66&type=chunk) [Notable External Conditions](index=19&type=section&id=Notable%20External%20Conditions) This section discusses external factors like the COVID-19 pandemic, inflation, and recession risks impacting RXO's operations and pricing - RXO's business is impacted by external factors such as the COVID-19 pandemic, economic inflation, and potential recession, which can affect operating costs, activity levels, and pricing environment[68](index=68&type=chunk)[69](index=69&type=chunk) [Basis of Presentation](index=19&type=section&id=Basis%20of%20Presentation) This section explains the financial statement preparation post-separation from XPO and defines key expense categories - Following the November 1, 2022 separation from XPO, RXO's financial statements are prepared on a consolidated basis, while prior periods were combined and derived from XPO's records[70](index=70&type=chunk) - Cost of transportation and services primarily covers procuring freight transportation, while direct operating expenses include personnel, facility, equipment, and IT costs. SG&A comprises sales, executive, administrative, professional fees, and legal costs[71](index=71&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk) [Results of Operations](index=20&type=section&id=Results%20of%20Operations) This section analyzes RXO's revenue, expenses, operating income, and net income, highlighting significant year-over-year changes Key Financial Metrics (Millions) | Metric | 2023 (Millions) | 2022 (Millions) | Change (Millions) | % Change | | :------------------------------------------------ | :-------------- | :-------------- | :---------------- | :------- | | Revenue | $1,010 | $1,312 | $(302) | (23.0)% | | Cost of transportation and services (% of revenue) | 75.1% | 77.8% | (2.7) pp | | | Direct operating expense (% of revenue) | 6.0% | 4.2% | 1.8 pp | | | Sales, general and administrative expense (% of revenue) | 15.1% | 12.3% | 2.8 pp | | | Operating income | $5 | $51 | $(46) | (90.2)% | | Net income | $0 | $39 | $(39) | (100.0)% | | Effective income tax rate | 106.0% | 24.3% | 81.7 pp | | - Revenue decreased by **23.0%** year-over-year, primarily due to a **$224 million** decrease in truck brokerage revenue (**32%** reduction in revenue per load, partially offset by **6%** volume increase) and a **$59 million** decrease in freight forwarding revenue (lower ocean rates and volume)[75](index=75&type=chunk) - Cost of transportation and services as a percentage of revenue decreased by **3.0 percentage points**, driven by lower last mile transportation costs and an improved mix in freight forwarding[76](index=76&type=chunk) - SG&A as a percentage of revenue increased due to higher compensation-related costs (**2.7 percentage points**) reflecting deleverage on lower revenue and incremental corporate costs as a standalone public company[78](index=78&type=chunk) - Restructuring costs of **$8 million** were incurred in Q1 2023, primarily for severance[80](index=80&type=chunk) - The effective income tax rate for Q1 2023 was **106.0%**, significantly higher than **24.3%** in Q1 2022, primarily due to a **$2 million** tax benefit from changes in uncertain tax position reserves magnified by a low pre-tax loss[81](index=81&type=chunk) [Liquidity and Capital Resources](index=21&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses RXO's ability to meet short-term and long-term obligations, detailing funding sources and capital expenditure plans - RXO relies on cash from operations and its revolving credit facility to fund operations, working capital, capital expenditures, debt repayment, and strategic development[82](index=82&type=chunk) - The company believes its existing liquidity and capital sources are sufficient for the next 12 months[83](index=83&type=chunk) - Capital expenditures for 2023 include strategic investments in technology, equipment, and real estate, with significant discretion over timing and amount[84](index=84&type=chunk) - No material changes to outstanding debt and financing arrangements occurred in Q1 2023, and RXO was in compliance with all covenants[85](index=85&type=chunk) [Financial Condition](index=22&type=section&id=Financial%20Condition) This section reviews RXO's balance sheet changes, focusing on total assets and liabilities and their primary drivers Financial Condition Summary (Millions) | Metric | March 31, 2023 (Millions) | December 31, 2022 (Millions) | $ Change (Millions) | % Change | | :---------------------- | :------------------------ | :--------------------------- | :------------------ | :------- | | Total current assets | $1,029 | $1,029 | $0 | 0.0% | | Total long-term assets | $989 | $1,002 | $(13) | (1.3)% | | Total current liabilities | $820 | $823 | $(3) | (0.4)% | | Total long-term liabilities | $613 | $621 | $(8) | (1.3)% | - Total assets decreased by **$13 million**, primarily due to a **$7 million** decrease in operating lease assets and a **$3 million** decrease in identifiable intangible assets from amortization[87](index=87&type=chunk) - Total liabilities decreased by **$11 million**, mainly driven by a **$7 million** decrease in total operating lease liabilities due to amortization[87](index=87&type=chunk) [Cash Flow Activity](index=22&type=section&id=Cash%20Flow%20Activity) This section analyzes RXO's cash flows from operating, investing, and financing activities, explaining significant changes Cash Flow Summary (Millions) | Activity | 2023 (Millions) | 2022 (Millions) | $ Change (Millions) | % Change | | :------------------------------------------- | :-------------- | :-------------- | :------------------ | :------- | | Net cash provided by operating activities | $42 | $103 | $(61) | (59.2)% | | Net cash used in investing activities | $(12) | $(12) | $0 | 0.0% | | Net cash used in financing activities | $(8) | $(74) | $66 | (89.2)% | | Net increase in cash, cash equivalents | $23 | $17 | $6 | 35.3% | - The **$61 million** decrease in operating cash flow was due to a **$39 million** decrease in net income and a **$30 million** reduction in cash from accrued expenses and other liabilities[90](index=90&type=chunk) - Financing activities used significantly less cash in Q1 2023 (**$8 million**) compared to Q1 2022 (**$74 million**), primarily because of the absence of net transfers to XPO post-separation[92](index=92&type=chunk) [Critical Accounting Policies](index=23&type=section&id=Critical%20Accounting%20Policies) This section confirms no significant changes to RXO's critical accounting estimates since the prior annual report - There have been no significant changes in RXO's critical accounting estimates since December 31, 2022, as detailed in the 2022 Annual Report on Form 10-K[93](index=93&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=23&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) RXO is exposed to market risks from changes in foreign currency exchange rates, commodity prices, and interest rates, but reported no material changes to its quantitative and qualitative disclosures about these risks during Q1 2023 compared to its 2022 Annual Report on Form 10-K - RXO is exposed to market risks related to foreign currency exchange rates, commodity prices, and interest rates[94](index=94&type=chunk) - There have been no material changes to market risk disclosures in Q1 2023 compared to the 2022 Annual Report on Form 10-K[94](index=94&type=chunk) [Item 4. Controls and Procedures](index=23&type=section&id=Item%204.%20Controls%20and%20Procedures) As of March 31, 2023, RXO's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective. There have been no material changes in internal control over financial reporting during the quarter - As of March 31, 2023, RXO's CEO and CFO concluded that the company's disclosure controls and procedures were effective[95](index=95&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[96](index=96&type=chunk) [Part II—Other Information](index=24&type=section&id=Part%20II%E2%80%94Other%20Information) This part provides additional information on RXO's legal proceedings, risk factors, equity sales, and other disclosures [Item 1. Legal Proceedings](index=24&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 8 of the condensed consolidated financial statements for a description of RXO's legal proceedings, which include various claims and class actions - Legal proceedings are detailed in Note 8—Commitments and Contingencies of the condensed consolidated financial statements[98](index=98&type=chunk) [Item 1A. Risk Factors](index=24&type=section&id=Item%201A.%20Risk%20Factors) RXO states there have been no material changes to the risk factors previously discussed in its Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors have occurred since the Annual Report on Form 10-K for the year ended December 31, 2022[99](index=99&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=24&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) RXO reported no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities or use of proceeds were reported[100](index=100&type=chunk) [Item 3. Defaults Upon Senior Securities](index=24&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) RXO reported no defaults upon senior securities - No defaults upon senior securities were reported[101](index=101&type=chunk) [Item 4. Mine Safety Disclosures](index=24&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to RXO - This item is not applicable[101](index=101&type=chunk) [Item 5. Other Information](index=24&type=section&id=Item%205.%20Other%20Information) RXO reported no other information for this item - No other information was reported[102](index=102&type=chunk) [Item 6. Exhibits](index=25&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including various certifications (Sarbanes-Oxley Act Sections 302 and 906), XBRL documents, and a form of Restricted Stock Unit Award Agreement - The report includes certifications (31.1, 31.2, 32.1, 32.2) and XBRL interactive data files (101.INS, 101.SCH, etc)[104](index=104&type=chunk) - Exhibit 10.17 is a Form of Restricted Stock Unit Award Agreement under the RXO, Inc. 2022 Omnibus Incentive Compensation Plan[104](index=104&type=chunk) [Signatures](index=26&type=section&id=Signatures) The report is signed by Drew M. Wilkerson, Chief Executive Officer, and James E. Harris, Chief Financial Officer, on behalf of RXO, Inc - The report was signed by Drew M. Wilkerson (CEO) and James E. Harris (CFO) on May 3, 2023[108](index=108&type=chunk)

PART I [Item 1. Business](index=5&type=section&id=Item%201%20Business) RXO is an asset-light brokered transportation platform that became a standalone public company in November 2022 - RXO is the fourth largest broker of full truckload freight transportation in the United States, holding approximately **4% share** of the **$88 billion** brokered truckload industry[15](index=15&type=chunk)[165](index=165&type=chunk) - The company completed its separation from XPO, Inc on November 1, 2022, and its common stock began trading on the New York Stock Exchange under the ticker symbol 'RXO'[22](index=22&type=chunk)[172](index=172&type=chunk) - As of December 31, 2022, RXO had approximately **123,000 carriers** in its North American truck brokerage network, with access to more than **1.5 million trucks**[17](index=17&type=chunk)[167](index=167&type=chunk) - Approximately **87% of RXO's truck brokerage transactions** have a digital profile, enabling increased volume processing per employee over time[25](index=25&type=chunk) - RXO serves approximately **10,000 customers**, with its top 20 customers accounting for approximately **39% of 2022 revenue** and the largest customer accounting for approximately **8%**[33](index=33&type=chunk) - As of December 31, 2022, RXO operated with **8,590 team members**, including 6,248 employees and 2,342 temporary workers, with approximately **39% of employees being female**[57](index=57&type=chunk)[58](index=58&type=chunk) [Item 1A. Risk Factors](index=14&type=section&id=Item%201A%20Risk%20Factors) The company faces risks from competition, economic volatility, carrier dependency, and cybersecurity threats - The transportation industry is highly competitive, with many factors potentially impairing profitability, including competitor pricing, customer insourcing, and new technologies[70](index=70&type=chunk) - Economic recessions, inflation, geopolitical conflicts, and changes in international trade policies can significantly reduce freight volume and demand for services[71](index=71&type=chunk)[78](index=78&type=chunk) - The COVID-19 pandemic has caused and may continue to cause supply chain disruptions, labor shortages, and equipment shortages, leading to increased costs[75](index=75&type=chunk)[76](index=76&type=chunk) - Challenges to the classification of third-party carriers as independent contractors could result in increased exposure to taxes, benefits, and other labor-related costs[87](index=87&type=chunk)[89](index=89&type=chunk) - Failure to protect information technology systems against cyberattacks could lead to service interruptions, data loss, reputational damage, and significant costs[94](index=94&type=chunk)[98](index=98&type=chunk)[99](index=99&type=chunk) - As a standalone company, RXO has a limited operating history, and its historical financial information may not be representative of future results[126](index=126&type=chunk)[127](index=127&type=chunk) - The Separation involved indemnification agreements with XPO, and RXO could be subject to significant tax liabilities if the transaction does not qualify as tax-free[129](index=129&type=chunk)[132](index=132&type=chunk)[138](index=138&type=chunk) [Item 1B. Unresolved Staff Comments](index=29&type=section&id=Item%201B%20Unresolved%20Staff%20Comments) The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[151](index=151&type=chunk) [Item 2. Properties](index=29&type=section&id=Item%202%20Properties) RXO operates 204 principal locations, mostly leased facilities in North America, as of December 31, 2022 Principal Locations as of December 31, 2022 | Location | Leased Facilities | Owned Facilities | Customer (1) Facilities | Total | | :--- | :--- | :--- | :--- | :--- | | North America | 165 | 2 | 24 | 191 | | Asia | 9 | — | — | 9 | | Corporate | 4 | — | — | 4 | | Total | 178 | 2 | 24 | 204 | - The company leases its current executive office in Charlotte, North Carolina, and believes its facilities are sufficient for current needs[153](index=153&type=chunk) [Item 3. Legal Proceedings](index=29&type=section&id=Item%203%20Legal%20Proceedings) Information on legal proceedings is detailed in Note 14 of the consolidated financial statements - Information on legal proceedings is included in Note 14 — Commitments and Contingencies to the consolidated financial statements[154](index=154&type=chunk) - Risks associated with legal proceedings are further discussed in the 'Risk Factors' section[154](index=154&type=chunk) [Item 4. Mine Safety Disclosures](index=29&type=section&id=Item%204%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - The disclosure requirement for mine safety is not applicable to the registrant[155](index=155&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=30&type=section&id=Item%205%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) RXO's stock began trading on the NYSE in November 2022 and has not paid dividends - RXO's common stock began regular-way trading on the New York Stock Exchange ('NYSE') on November 1, 2022, under the ticker symbol 'RXO'[158](index=158&type=chunk) - As of February 22, 2023, there were approximately **90 registered holders** of RXO's common stock[158](index=158&type=chunk) - The company has never declared or paid cash dividends on its common stock[159](index=159&type=chunk) Stock Performance (November 1, 2022 - December 31, 2022) | | November 1, 2022 | November 30, 2022 | December 31, 2022 | | :--- | :--- | :--- | :--- | | RXO, Inc | $100.00 | $99.69 | $90.24 | | Dow Jones Transportation Average | $100.00 | $108.34 | $99.05 | | S&P 400 MidCap | $100.00 | $105.54 | $99.50 | [Item 6. Reserved](index=31&type=section&id=Item%206%20Reserved) This item is intentionally left blank - Item 6 is reserved, meaning no information is presented for this section[162](index=162&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%207%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net income declined in 2022 due to spin-off costs, despite a slight revenue increase - RXO completed its separation from XPO on November 1, 2022, becoming a standalone publicly traded company[172](index=172&type=chunk) - The COVID-19 pandemic, labor shortages, equipment shortages, and supply chain disruptions continue to present challenges[173](index=173&type=chunk) - Inflationary pressures in 2022 were largely offset by fuel surcharge clauses and general rate increases in customer contracts[175](index=175&type=chunk) Key Financial Results (Years Ended December 31, in millions) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenue | $4,796 | $4,689 | $3,357 | | Cost of transportation and services (% of revenue) | $3,624 (75.6%) | $3,681 (78.5%) | $2,568 (76.5%) | | Direct operating expense (% of revenue) | $226 (4.7%) | $192 (4.1%) | $174 (5.2%) | | Sales, general and administrative expense (% of revenue) | $640 (13.3%) | $539 (11.5%) | $455 (13.6%) | | Operating income | $123 | $192 | $60 | | Net income | $92 | $150 | $43 | | Transaction and integration costs | $84 | $2 | $14 | | Restructuring costs | $13 | $2 | $10 | | Interest expense, net | $4 | $— | $— | | Income tax provision | $27 | $41 | $14 | | Effective income tax rate | 22.6% | 21.4% | 24.7% | - Net cash provided by operating activities increased by **$155 million to $310 million** in 2022, primarily due to changes in working capital[205](index=205&type=chunk) - Investing activities used **$56 million** in 2022, mainly for capital expenditures on computer software and equipment[206](index=206&type=chunk) - Financing activities used **$183 million** in 2022, primarily due to **$621 million** in net transfers to XPO, partially offset by **$451 million** from new debt issuance[207](index=207&type=chunk) - As of December 31, 2022, RXO had approximately **$455 million of outstanding debt** and was in compliance with all debt covenants[104](index=104&type=chunk)[200](index=200&type=chunk)[201](index=201&type=chunk)[202](index=202&type=chunk)[311](index=311&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=40&type=section&id=Item%207A%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks from fuel prices, interest rates, and foreign currency - RXO is exposed to market risk related to changes in commodity prices (diesel fuel), interest rates on variable-rate debt, and foreign currency exchange rates[222](index=222&type=chunk)[223](index=223&type=chunk)[224](index=224&type=chunk) - Fuel price adjustment clauses in customer contracts are expected to mitigate the effect of diesel fuel price fluctuations[222](index=222&type=chunk) - A **1% change in interest rates** on variable-rate debt would impact annual interest expense by approximately **$1 million**[223](index=223&type=chunk) - Foreign currency exchange rate risk is not expected to have a material impact on financial results[224](index=224&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=41&type=section&id=Item%208%20Financial%20Statements%20and%20Supplementary%20Data) This section presents RXO's audited consolidated financial statements and supplementary data for the past three fiscal years - KPMG LLP issued an **unqualified opinion** on RXO's consolidated financial statements for the years ended December 31, 2022, 2021, and 2020[229](index=229&type=chunk) - A critical audit matter identified was the sufficiency of audit evidence over the duplication of XPO's IT systems and historical financial data into RXO's new IT systems[232](index=232&type=chunk)[233](index=233&type=chunk)[234](index=234&type=chunk) Consolidated Balance Sheet Highlights (December 31, in millions) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total current assets | $1,029 | $1,083 | | Total long-term assets | $1,002 | $985 | | Total assets | $2,031 | $2,068 | | Total current liabilities | $823 | $816 | | Total long-term liabilities | $621 | $182 | | Total liabilities and equity | $2,031 | $2,068 | Consolidated Statements of Operations Highlights (Years Ended December 31, in millions) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenue | $4,796 | $4,689 | $3,357 | | Operating income | $123 | $192 | $60 | | Net income | $92 | $150 | $43 | | Basic earnings per share | $0.80 | $1.30 | $0.37 | | Diluted earnings per share | $0.79 | $1.30 | $0.37 | Consolidated Statements of Cash Flows Highlights (Years Ended December 31, in millions) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $310 | $155 | $25 | | Net cash used in investing activities | $(56) | $(38) | $(39) | | Net cash (used in) provided by financing activities | $(183) | $(158) | $32 | | Net increase (decrease) in cash and cash equivalents | $69 | $(41) | $19 | [1. Organization](index=49&type=section&id=1.%20Organization) RXO operates an asset-light brokered transportation platform and became a standalone public company in November 2022 - RXO, Inc is a brokered transportation platform with an asset-light business model, primarily focused on truck brokerage, managed transportation, last mile, and freight forwarding[252](index=252&type=chunk) - The company completed its separation from XPO, Inc on November 1, 2022, becoming a standalone publicly traded company on the NYSE under 'RXO'[253](index=253&type=chunk) [2. Basis of Presentation and Significant Accounting Policies](index=49&type=section&id=2.%20Basis%20of%20Presentation%20and%20Significant%20Accounting%20Policies) Financial statements were prepared on a combined basis pre-separation and a consolidated basis post-separation - Prior to the Separation, RXO's financial statements were prepared on a standalone combined basis, derived from XPO's records, including allocations of XPO corporate expenses[254](index=254&type=chunk)[256](index=256&type=chunk) - Post-Separation, financial statements are prepared on a consolidated basis, and the company will file its own U.S federal, state, and local income tax returns[254](index=254&type=chunk)[258](index=258&type=chunk) - Revenue is recognized when control of promised products or services is transferred to customers, typically proportionally as shipments move from origin to destination[262](index=262&type=chunk)[265](index=265&type=chunk) - Goodwill is measured as the excess of consideration transferred over the fair value of net assets acquired and is evaluated for impairment annually[278](index=278&type=chunk)[279](index=279&type=chunk) [3. The Separation](index=56&type=section&id=3.%20The%20Separation) The separation from XPO was completed on November 1, 2022, governed by several key agreements - The Separation was completed on November 1, 2022, through the distribution of **100% of RXO's common stock** to XPO stockholders[172](index=172&type=chunk)[253](index=253&type=chunk) - Various agreements govern the relationship between RXO and XPO post-separation, including a Separation and Distribution Agreement and a Transition Services Agreement[295](index=295&type=chunk)[296](index=296&type=chunk)[297](index=297&type=chunk)[298](index=298&type=chunk)[299](index=299&type=chunk) - RXO funded a net cash distribution of **$604 million** to XPO in Q4 2022, using proceeds from new debt issuance[207](index=207&type=chunk)[300](index=300&type=chunk) [4. Revenue Recognition](index=57&type=section&id=4.%20Revenue%20Recognition) Revenue is disaggregated by service offering and industry, with truck brokerage and retail/e-commerce being the largest segments - RXO disaggregates revenue by geographic area (majority U.S), service offering, and industry sector[301](index=301&type=chunk)[302](index=302&type=chunk) Revenue by Service Offering (Years Ended December 31, in millions) | Service Offering | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Truck brokerage | $2,929 | $2,749 | $1,684 | | Last mile | $1,061 | $1,016 | $908 | | Managed transportation | $523 | $603 | $582 | | Freight forwarding | $422 | $434 | $225 | | Eliminations | $(139) | $(113) | $(42) | | Total | $4,796 | $4,689 | $3,357 | Revenue by Industry Sector (Years Ended December 31, in millions) | Industry Sector | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Retail/e-commerce | $1,799 | $1,771 | $1,262 | | Food and beverage | $530 | $585 | $394 | | Industrial/manufacturing | $817 | $778 | $553 | | Logistics and transportation | $338 | $331 | $240 | | Automotive | $390 | $308 | $252 | | Other | $922 | $916 | $656 | | Total | $4,796 | $4,689 | $3,357 | - As of December 31, 2022, the fixed consideration component of remaining performance obligations was approximately **$158 million**[303](index=303&type=chunk) [5. Restructuring Charges](index=58&type=section&id=5.%20Restructuring%20Charges) The company incurred restructuring charges for severance and facility costs to improve efficiency - Restructuring actions, primarily severance and facility-related costs, are undertaken to improve efficiency and profitability[304](index=304&type=chunk) Restructuring Liability Rollforward (Year Ended December 31, 2022, in millions) | | Reserve Balance as of Dec 31, 2021 | Charges Incurred | Payments | Other | Reserve Balance as of Dec 31, 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | | Severance | $— | $10 | $(2) | $(6) | $2 | | Facilities | $2 | $2 | $(3) | $— | $1 | | Contract termination | $— | $1 | $(1) | $— | $— | | Total | $2 | $13 | $(6) | $(6) | $3 | - The majority of cash outlays for the remaining restructuring liability at December 31, 2022, are expected to be completed within twelve months[304](index=304&type=chunk) [6. Property and Equipment](index=59&type=section&id=6.%20Property%20and%20Equipment) Net property and equipment increased slightly in 2022, driven by investments in computer software and equipment Property and Equipment, Net (December 31, in millions) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Buildings and leasehold improvements | $23 | $17 | | Vehicles, tractors and trailers | $23 | $18 | | Machinery and equipment | $36 | $38 | | Computer software and equipment | $278 | $257 | | Total property and equipment, gross | $360 | $330 | | Less: accumulated depreciation | $(241) | $(219) | | Total property and equipment, net | $119 | $111 | - Depreciation of property and equipment and amortization of computer software was **$65 million** in 2022, up from **$58 million** in 2021[305](index=305&type=chunk) [7. Leases](index=59&type=section&id=7.%20Leases) The company's lease portfolio primarily consists of operating leases for real estate and transportation equipment - Most leases are operating leases for real estate, trucks, tractors, and trailers[306](index=306&type=chunk) Lease Balances (December 31, in millions) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Operating lease assets | $159 | $128 | | Total operating lease liabilities | $162 | $135 | | Total finance lease liabilities | $6 | $— | Weighted-Average Lease Information (December 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Weighted-average remaining lease term (Operating leases) | 4.1 years | 4.0 years | | Weighted-average discount rate (Operating leases) | 4.7% | 4.6% | | Weighted-average remaining lease term (Finance leases) | 4.3 years | N/A | | Weighted-average discount rate (Finance leases) | 6.1% | N/A | - Total lease cost for 2022 was **$76 million**, comprising **$75 million** in operating lease cost and **$1 million** in finance lease cost[307](index=307&type=chunk) [8. Goodwill and Intangible Assets](index=61&type=section&id=8.%20Goodwill%20and%20Intangible%20Assets) Goodwill remained stable at $630 million, with no impairment recognized, and intangible assets consist of customer relationships - Goodwill amounted to **$630 million** as of December 31, 2022, with no impairment recognized in 2022 or 2021[238](index=238&type=chunk)[308](index=308&type=chunk) - Identifiable intangible assets consist entirely of definite-lived customer relationships[308](index=308&type=chunk) Estimated Future Amortization Expense for Intangible Assets (in millions) | Year | Estimated Amortization Expense | | :--- | :--- | | 2023 | $13 | | 2024 | $12 | | 2025 | $11 | | 2026 | $11 | | 2027 | $11 | | Thereafter | $21 | - Intangible asset amortization expense was **$21 million** in 2022, compared to **$24 million** in 2021[310](index=310&type=chunk) [9. Debt](index=61&type=section&id=9.%20Debt) The company established new debt facilities in 2022, including a term loan and senior notes, to fund its separation from XPO Debt Summary (December 31, 2022, in millions) | Debt Type | Principal Balance | Carrying Value | | :--- | :--- | :--- | | Term Loan | $100 | $100 | | 7.50% Notes due 2027 | $355 | $346 | | Finance leases, asset financing and other | $9 | $9 | | Total debt and obligations under finance leases | $464 | $455 | | Less: Current maturities of long-term debt | $4 | $4 | | Total long-term debt and obligations under finance leases | $460 | $451 | - RXO entered into a **$500 million** unsecured, multi-currency revolving credit facility in October 2022, with no amounts outstanding as of December 31, 2022[314](index=314&type=chunk) - The **$100 million Term Loan**, entered in October 2022, has an effective interest rate of **5.93%** as of December 31, 2022, and matures on November 1, 2027[315](index=315&type=chunk) - The **$355 million 7.50% Notes due 2027**, issued in October 2022, have an effective interest rate of **8.14%** as of December 31, 2022[317](index=317&type=chunk) - The company was in compliance with all covenants of its debt agreements as of December 31, 2022[316](index=316&type=chunk)[318](index=318&type=chunk) [10. Employee Benefit Plan](index=62&type=section&id=10.%20Employee%20Benefit%20Plan) RXO sponsors a defined contribution plan for U.S. employees with matching contributions - RXO sponsors a defined contribution plan for U.S employees, matching up to **4% of pre-tax contributions** after one year of service[319](index=319&type=chunk) - Costs for the defined contribution plan were **$8 million** in 2022, compared to **$7 million** in 2021[319](index=319&type=chunk) [11. Stock-Based Compensation](index=63&type=section&id=11.%20Stock-Based%20Compensation) Stock-based compensation expense increased significantly in 2022 due to the conversion of awards post-separation - In connection with the Separation, XPO stock-based awards held by RXO employees were converted into replacement RXO stock-based awards[321](index=321&type=chunk)[323](index=323&type=chunk) - Total stock-based compensation expense was **$32 million** in 2022, significantly up from **$8 million** in 2021, primarily due to performance-based restricted stock units[325](index=325&type=chunk) Stock-Based Compensation Expense (Years Ended December 31, in millions) | Category | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Restricted stock and restricted stock units | $9 | $6 | $7 | | Performance-based restricted stock units | $23 | $2 | $1 | | Total stock-based compensation expense | $32 | $8 | $8 | | Tax benefit on stock-based compensation | $8 | $1 | $2 | - As of December 31, 2022, unrecognized compensation cost related to unvested awards was **$31 million**, to be recognized over a weighted-average period of approximately **2.23 years**[330](index=330&type=chunk) [12. Income Taxes](index=64&type=section&id=12.%20Income%20Taxes) The company's effective tax rate was 22.6% in 2022, and it began filing its own tax returns post-separation - Post-Separation, RXO files its own consolidated U.S federal, state, and local income tax returns, whereas previously its income was included in XPO's returns[258](index=258&type=chunk)[331](index=331&type=chunk) Income Before Income Taxes by Geography (Years Ended December 31, in millions) | Geography | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | U.S | $88 | $169 | $45 | | Foreign | $31 | $22 | $12 | | Total | $119 | $191 | $57 | Income Tax Provision (Years Ended December 31, in millions) | Category | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total current income tax provision | $47 | $38 | $23 | | Total deferred income tax provision (benefit) | $(20) | $3 | $(9) | | Total income tax provision | $27 | $41 | $14 | Effective Income Tax Rate Reconciliation (Years Ended December 31) | Factor | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | U.S federal statutory tax rate | 21.0% | 21.0% | 21.0% | | State taxes, net of U.S federal benefit | 3.0% | 2.6% | 2.7% | | Foreign rate differential | 1.5% | 0.6% | 1.3% | | Provision to return and deferred tax adjustments | (2.4%) | (0.1%) | (0.3%) | | Changes in uncertain tax positions | (0.4%) | (2.4%) | 0.3% | | Other | 0.7% | (0.7%) | (0.3%) | | Effective tax rate | 22.6% | 21.4% | 24.7% | - Net deferred tax liability decreased to **$13 million** in 2022 from **$50 million** in 2021[334](index=334&type=chunk) - As of December 31, 2022, RXO had **$4 million** in federal net operating losses and **$5 million** in foreign net operating losses[335](index=335&type=chunk) [13. Earnings Per Share](index=67&type=section&id=13.%20Earnings%20Per%20Share) Diluted earnings per share was $0.79 in 2022, calculated using share counts established at the time of the separation - For periods prior to the Separation, basic and diluted EPS calculations assume **115,162,555 shares** of common stock were outstanding[341](index=341&type=chunk) Earnings Per Share Data (Years Ended December 31) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net income (in millions) | $92 | $150 | $43 | | Basic weighted-average common shares (in thousands) | 115,335 | 115,163 | 115,163 | | Diluted weighted-average common shares (in thousands) | 115,791 | 115,163 | 115,163 | | Basic earnings per share | $0.80 | $1.30 | $0.37 | | Diluted earnings per share | $0.79 | $1.30 | $0.37 | - Approximately **1.1 million shares** were excluded from the diluted EPS calculation for 2022 because their inclusion would have been anti-dilutive[343](index=343&type=chunk) [14. Commitments and Contingencies](index=68&type=section&id=14.%20Commitments%20and%20Contingencies) RXO faces various legal proceedings, including class action lawsuits related to the classification of contract carriers - RXO is involved in numerous legal proceedings, including claims for property damage, personal injury, commercial disputes, and employment-related claims[344](index=344&type=chunk) - Several class action lawsuits involve 'misclassification claims' asserting that contract carriers should be treated as employees, which are generally not covered by insurance[344](index=344&type=chunk)[347](index=347&type=chunk)[348](index=348&type=chunk) - RXO has agreed to indemnify XPO for certain liabilities related to these misclassification claims[348](index=348&type=chunk) - RXO does not believe the ultimate resolution of these matters will have a material adverse effect on its financial condition or results of operations[346](index=346&type=chunk) [15. Related Party](index=68&type=section&id=15.%20Related%20Party) Transactions with former parent company XPO are disclosed, with all related-party balances settled at the time of separation - Transactions between RXO and XPO prior to the November 1, 2022 Separation date are classified as related-party transactions[349](index=349&type=chunk) - Prior to the Separation, RXO's financial statements included **$112 million** in allocated corporate overhead from XPO in 2022, up from **$72 million** in 2021[351](index=351&type=chunk) Related Party Revenue and Costs (Years Ended December 31, in millions) | Category | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenue | $109 | $181 | $122 | | Costs | $52 | $79 | $77 | - All related-party balances with XPO and its non-RXO subsidiaries were cash settled or forgiven as of November 1, 2022[349](index=349&type=chunk) [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=70&type=section&id=Item%209%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reported no changes in or disagreements with its accountants - There were no changes in or disagreements with accountants on accounting and financial disclosure[356](index=356&type=chunk) [Item 9A. Controls and Procedures](index=70&type=section&id=Item%209A%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of year-end 2022 - The CEO and CFO concluded that RXO's disclosure controls and procedures were effective as of December 31, 2022[357](index=357&type=chunk) - Prior to November 1, 2022, RXO relied on certain material processes and internal controls over financial reporting performed by XPO[358](index=358&type=chunk) - No significant change in the company's internal control over financial reporting occurred during the last fiscal quarter[358](index=358&type=chunk) [Item 9B. Other Information](index=70&type=section&id=Item%209B%20Other%20Information) The company reported no other information required to be disclosed under this item - No other information was reported under this item[360](index=360&type=chunk) [Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection](index=70&type=section&id=Item%209C%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspection) This item is not applicable to the company's operations - The disclosure requirement regarding foreign jurisdictions that prevent inspection is not applicable to the registrant[361](index=361&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=71&type=section&id=Item%2010%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors and governance is incorporated by reference from the 2023 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[364](index=364&type=chunk) - RXO has adopted a Code of Business Ethics, applicable to its principal officers, available on its website[365](index=365&type=chunk) [Item 11. Executive Compensation](index=71&type=section&id=Item%2011%20Executive%20Compensation) Information on executive compensation is incorporated by reference from the 2023 Proxy Statement - Information on executive compensation is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[366](index=366&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=71&type=section&id=Item%2012%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership is incorporated by reference from the 2023 Proxy Statement - Information on security ownership of certain beneficial owners and management is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[367](index=367&type=chunk) [Item 13. Certain Relationships and Related Transactions and Director Independence](index=71&type=section&id=Item%2013%20Certain%20Relationships%20and%20Related%20Transactions%20and%20Director%20Independence) Information on related transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information on certain relationships and related transactions and director independence is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[368](index=368&type=chunk) [Item 14. Principal Accountant Fees and Services](index=71&type=section&id=Item%2014%20Principal%20Accountant%20Fees%20and%20Services) Information on accountant fees is incorporated by reference from the 2023 Proxy Statement - KPMG LLP is the independent registered public accounting firm for RXO[369](index=369&type=chunk) - Information on principal accountant fees and services is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[369](index=369&type=chunk) PART IV [Item 15. Exhibit and Financial Statement Schedules](index=72&type=section&id=Item%2015%20Exhibit%20and%20Financial%20Statement%20Schedules) This section lists the consolidated financial statements and various exhibits filed as part of the annual report - The section includes a list of consolidated financial statements and schedules, with all required information either presented or incorporated by reference[372](index=372&type=chunk) - Key exhibits include the Separation and Distribution Agreement, debt agreements, and various employee compensation and governance-related agreements[373](index=373&type=chunk)[374](index=374&type=chunk) - Also listed are various employee compensation plans, certifications from executive officers, and XBRL interactive data files[374](index=374&type=chunk)[376](index=376&type=chunk) [Item 16. Form 10-K Summary](index=74&type=section&id=Item%2016%20Form%2010-K%20Summary) The company did not include a Form 10-K Summary in this report - No Form 10-K Summary is provided[375](index=375&type=chunk)

Part I—Financial Information [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited):) RXO's unaudited condensed combined financial statements present its standalone financial position, operations, and cash flows, derived from XPO's historical records [Condensed Combined Balance Sheets](index=4&type=section&id=Condensed%20Combined%20Balance%20Sheets) As of September 30, 2022, RXO's total assets increased to **$2.237 billion**, driven by a significant rise in cash and cash equivalents Condensed Combined Balance Sheet Highlights (in millions) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $187 | $29 | | Accounts receivable, net | $1,012 | $1,010 | | Total current assets | $1,225 | $1,083 | | Total assets | $2,237 | $2,068 | | **Liabilities & Equity** | | | | Total current liabilities | $888 | $816 | | Total long-term liabilities | $205 | $182 | | Total liabilities | $1,093 | $998 | | Total equity | $1,144 | $1,070 | | Total liabilities and equity | $2,237 | $2,068 | [Condensed Combined Statements of Operations](index=5&type=section&id=Condensed%20Combined%20Statements%20of%20Operations) Q3 2022 revenue decreased to **$1.14 billion** and net income fell to **$13 million**, impacted by higher spin-off related costs Condensed Combined Statements of Operations (in millions) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,138 | $1,198 | $3,676 | $3,362 | | Operating income | $15 | $38 | $124 | $137 | | Net income | $13 | $33 | $96 | $108 | | Basic and Diluted EPS | $0.11 | $0.29 | $0.83 | $0.94 | [Condensed Combined Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Combined%20Statements%20of%20Comprehensive%20Income) Comprehensive income decreased to **$11 million** in Q3 2022 and **$94 million** for nine months, impacted by lower net income and foreign currency losses Condensed Combined Statements of Comprehensive Income (in millions) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income | $13 | $33 | $96 | $108 | | Other comprehensive (loss) income | $(2) | $6 | $(2) | $7 | | Comprehensive income | $11 | $39 | $94 | $115 | [Condensed Combined Statements of Cash Flows](index=7&type=section&id=Condensed%20Combined%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly increased to **$234 million** for the nine months ended September 30, 2022 Condensed Combined Statements of Cash Flows (in millions) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $234 | $119 | | Net cash used in investing activities | $(38) | $(29) | | Net cash used in financing activities | $(38) | $(130) | | Net increase (decrease) in cash | $158 | $(39) | | Cash, end of period | $187 | $31 | [Condensed Combined Statements of Changes in Equity](index=8&type=section&id=Condensed%20Combined%20Statements%20of%20Changes%20in%20Equity) Total equity increased to **$1.144 billion** by September 30, 2022, driven by net income and offset by XPO transfers Changes in Equity for Nine Months Ended Sep 30, 2022 (in millions) | Description | Amount | | :--- | :--- | | Balance as of Dec 31, 2021 | $1,070 | | Net income | $96 | | Other comprehensive loss | $(2) | | Stock compensation expense | $9 | | Net transfers to XPO | $(29) | | **Balance as of Sep 30, 2022** | **$1,144** | [Notes to Condensed Combined Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Combined%20Financial%20Statements) The notes detail the XPO spin-off, financial presentation, revenue by service, legal contingencies, and significant subsequent financing events - On November 1, 2022, XPO completed the spin-off of RXO, which is now a standalone publicly traded company on the NYSE under the ticker 'RXO'[25](index=25&type=chunk) - The financial statements were prepared on a standalone basis derived from XPO's records and include allocations of XPO's corporate expenses for functions like IT, HR, and finance[26](index=26&type=chunk)[30](index=30&type=chunk) Revenue by Service Offering (Nine Months Ended Sep 30, in millions) | Service Offering | 2022 | 2021 | | :--- | :--- | :--- | | Truck brokerage | $2,265 | $1,903 | | Last mile | $784 | $765 | | Managed transportation | $394 | $485 | | Freight forwarding | $340 | $289 | | **Total (after eliminations)** | **$3,676** | **$3,362** | - Subsequent to the quarter end, RXO completed a **$355 million** notes offering, entered into a **$100 million** term loan and a **$500 million** revolving credit facility, and used the proceeds to fund a **$604 million** net cash distribution to XPO[59](index=59&type=chunk)[60](index=60&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk) - RXO has assumed liabilities for several class action cases involving misclassification claims related to XPO's former last mile services and has agreed to indemnify XPO for these matters[51](index=51&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses RXO's market position, Q3 revenue decline, nine-month growth, and post-spin-off liquidity changes - RXO is the **fourth largest broker** of full truckload freight in the U.S., with approximately **4% market share** of the **$88 billion** industry[72](index=72&type=chunk) Results of Operations Summary (in millions) | Metric | Q3 2022 | Q3 2021 | Change | Nine Months 2022 | Nine Months 2021 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,138 | $1,198 | -5.0% | $3,676 | $3,362 | +9.3% | | Operating Income | $15 | $38 | -60.5% | $124 | $137 | -9.5% | | Net Income | $13 | $33 | -60.6% | $96 | $108 | -11.1% | - The Q3 2022 revenue decrease was driven by lower revenue in managed transportation, lower ocean volume in freight forwarding, and lower truckload spot market pricing, despite increased volume[88](index=88&type=chunk) - Transaction and integration costs related to the spin-off were **$23 million** in Q3 2022 and **$44 million** for the first nine months of 2022, significantly impacting operating income[93](index=93&type=chunk) - Net cash from operating activities increased by **$115 million** to **$234 million** in the first nine months of 2022, primarily due to favorable changes in working capital as revenue growth decelerated[99](index=99&type=chunk)[101](index=101&type=chunk) - Post-spin-off, the company's capital structure changed significantly with the incurrence of **$455 million** in new debt in October 2022[96](index=96&type=chunk)[104](index=104&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=23&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes occurred in the company's market risk exposures, including foreign currency and commodity prices, during the first nine months of 2022 - The company is exposed to market risks from changes in foreign currency exchange rates and commodity prices, but there have been no material changes to these exposures during the first nine months of 2022[107](index=107&type=chunk) [Controls and Procedures](index=23&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of September 30, 2022, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[108](index=108&type=chunk) - There were no changes in internal control over financial reporting during the quarter ended September 30, 2022, that materially affected, or are reasonably likely to materially affect, internal controls[110](index=110&type=chunk) Part II—Other Information [Legal Proceedings](index=24&type=section&id=Item%201.%20Legal%20Proceedings) The company refers to Note 6 for details on legal proceedings, primarily misclassification claims related to last mile business - For details on legal proceedings, the report refers to Note 6—Commitments and Contingencies in the financial statements[112](index=112&type=chunk) [Risk Factors](index=24&type=section&id=Item%201A.%20Risk%20Factors) The company reports no material changes to previously disclosed risk factors, except for the completed spin-off on November 1, 2022 - There are no material changes to the risk factors disclosed in the Form 10, with the exception that the spin-off was completed on November 1, 2022[113](index=113&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=24&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds during the period - None[114](index=114&type=chunk) [Defaults Upon Senior Securities](index=24&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[115](index=115&type=chunk) [Mine Safety Disclosures](index=24&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[116](index=116&type=chunk) [Other Information](index=24&type=section&id=Item%205.%20Other%20Information) The company reported no other information for this item - None[117](index=117&type=chunk) [Exhibits](index=25&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including employment agreements, certifications, and XBRL data - Exhibits filed include management compensation agreements, CEO/CFO certifications (Section 302 and 906), and XBRL interactive data files[119](index=119&type=chunk)