RXO(RXO) - 2022 Q4 - Annual Report

PART I Item 1. Business 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][165] - 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][172] - 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][167] - Approximately 87% of RXO's truck brokerage transactions have a digital profile, enabling increased volume processing per employee over time[25] - 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] - 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][58] Item 1A. Risk Factors 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] - Economic recessions, inflation, geopolitical conflicts, and changes in international trade policies can significantly reduce freight volume and demand for services[71][78] - The COVID-19 pandemic has caused and may continue to cause supply chain disruptions, labor shortages, and equipment shortages, leading to increased costs[75][76] - 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][89] - Failure to protect information technology systems against cyberattacks could lead to service interruptions, data loss, reputational damage, and significant costs[94][98][99] - As a standalone company, RXO has a limited operating history, and its historical financial information may not be representative of future results[126][127] - 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][132][138] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[151] Item 2. Properties 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] Item 3. Legal Proceedings 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] - Risks associated with legal proceedings are further discussed in the 'Risk Factors' section[154] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - The disclosure requirement for mine safety is not applicable to the registrant[155] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - As of February 22, 2023, there were approximately 90 registered holders of RXO's common stock[158] - The company has never declared or paid cash dividends on its common stock[159] 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 This item is intentionally left blank - Item 6 is reserved, meaning no information is presented for this section[162] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - The COVID-19 pandemic, labor shortages, equipment shortages, and supply chain disruptions continue to present challenges[173] - Inflationary pressures in 2022 were largely offset by fuel surcharge clauses and general rate increases in customer contracts[175] 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] - Investing activities used $56 million in 2022, mainly for capital expenditures on computer software and equipment[206] - 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] - As of December 31, 2022, RXO had approximately $455 million of outstanding debt and was in compliance with all debt covenants[104][200][201][202][311] Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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][223][224] - Fuel price adjustment clauses in customer contracts are expected to mitigate the effect of diesel fuel price fluctuations[222] - A 1% change in interest rates on variable-rate debt would impact annual interest expense by approximately $1 million[223] - Foreign currency exchange rate risk is not expected to have a material impact on financial results[224] Item 8. Financial Statements and Supplementary Data 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] - 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][233][234] 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 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] - The company completed its separation from XPO, Inc on November 1, 2022, becoming a standalone publicly traded company on the NYSE under 'RXO'[253] 2. Basis of Presentation and Significant Accounting Policies 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][256] - 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][258] - Revenue is recognized when control of promised products or services is transferred to customers, typically proportionally as shipments move from origin to destination[262][265] - Goodwill is measured as the excess of consideration transferred over the fair value of net assets acquired and is evaluated for impairment annually[278][279] 3. The Separation 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][253] - Various agreements govern the relationship between RXO and XPO post-separation, including a Separation and Distribution Agreement and a Transition Services Agreement[295][296][297][298][299] - RXO funded a net cash distribution of $604 million to XPO in Q4 2022, using proceeds from new debt issuance[207][300] 4. Revenue Recognition 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][302] 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] 5. Restructuring Charges 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] 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] 6. Property and Equipment 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] 7. Leases 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] 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] 8. Goodwill and Intangible Assets 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][308] - Identifiable intangible assets consist entirely of definite-lived customer relationships[308] 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] 9. Debt 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] - 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] - 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] - The company was in compliance with all covenants of its debt agreements as of December 31, 2022[316][318] 10. Employee Benefit Plan 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] - Costs for the defined contribution plan were $8 million in 2022, compared to $7 million in 2021[319] 11. Stock-Based Compensation 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][323] - 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] 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] 12. Income Taxes 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][331] 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] - As of December 31, 2022, RXO had $4 million in federal net operating losses and $5 million in foreign net operating losses[335] 13. Earnings Per Share 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] 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] 14. Commitments and Contingencies 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] - Several class action lawsuits involve 'misclassification claims' asserting that contract carriers should be treated as employees, which are generally not covered by insurance[344][347][348] - RXO has agreed to indemnify XPO for certain liabilities related to these misclassification claims[348] - 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] 15. Related Party 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] - 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] 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] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 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] Item 9A. Controls and Procedures 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] - Prior to November 1, 2022, RXO relied on certain material processes and internal controls over financial reporting performed by XPO[358] - No significant change in the company's internal control over financial reporting occurred during the last fiscal quarter[358] Item 9B. Other Information The company reported no other information required to be disclosed under this item - No other information was reported under this item[360] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection 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] PART III Item 10. Directors, Executive Officers and Corporate Governance 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] - RXO has adopted a Code of Business Ethics, applicable to its principal officers, available on its website[365] Item 11. Executive Compensation 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] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Item 13. Certain Relationships and Related Transactions and Director Independence 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] Item 14. Principal Accountant Fees and Services 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] - Information on principal accountant fees and services is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[369] PART IV Item 15. Exhibit and Financial Statement Schedules 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] - Key exhibits include the Separation and Distribution Agreement, debt agreements, and various employee compensation and governance-related agreements[373][374] - Also listed are various employee compensation plans, certifications from executive officers, and XBRL interactive data files[374][376] Item 16. Form 10-K Summary The company did not include a Form 10-K Summary in this report - No Form 10-K Summary is provided[375]