RXO(RXO) - 2023 Q1 - Quarterly Report

Part I—Financial Information 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) 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 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 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 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 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 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 This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Organization 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] 2. Basis of Presentation and Significant Accounting Policies 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] - 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][28][30] - The company adopted ASU 2022-04 on January 1, 2023, regarding supplier finance programs, which did not impact financial statement disclosures[34] - 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] 3. Revenue Recognition 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] 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] 4. Restructuring Charges 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] - The majority of cash outlays for the remaining restructuring liability are expected to be completed within twelve months[38] 5. Debt 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] - 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][42] - 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][44] 6. Fair Value Measurements 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] 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 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] 8. Commitments and Contingencies 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] - 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] - 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][52] 9. Related Party 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] 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 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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][64] - RXO is the largest provider of outsourced last mile transportation for heavy goods in the U.S., serving omnichannel and e-commerce retailers[66] Notable External Conditions 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][69] Basis of Presentation 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] - 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][72][73] Results of Operations 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] - 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] - 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] - Restructuring costs of $8 million were incurred in Q1 2023, primarily for severance[80] - 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] Liquidity and Capital Resources 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] - The company believes its existing liquidity and capital sources are sufficient for the next 12 months[83] - Capital expenditures for 2023 include strategic investments in technology, equipment, and real estate, with significant discretion over timing and amount[84] - No material changes to outstanding debt and financing arrangements occurred in Q1 2023, and RXO was in compliance with all covenants[85] Financial Condition 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] - Total liabilities decreased by $11 million, mainly driven by a $7 million decrease in total operating lease liabilities due to amortization[87] Cash Flow Activity 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] - 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] Critical Accounting Policies 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - There have been no material changes to market risk disclosures in Q1 2023 compared to the 2022 Annual Report on Form 10-K[94] Item 4. Controls and Procedures 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] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[96] Part II—Other Information This part provides additional information on RXO's legal proceedings, risk factors, equity sales, and other disclosures Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Defaults Upon Senior Securities RXO reported no defaults upon senior securities - No defaults upon senior securities were reported[101] Item 4. Mine Safety Disclosures This item is not applicable to RXO - This item is not applicable[101] Item 5. Other Information RXO reported no other information for this item - No other information was reported[102] Item 6. Exhibits 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] - Exhibit 10.17 is a Form of Restricted Stock Unit Award Agreement under the RXO, Inc. 2022 Omnibus Incentive Compensation Plan[104] 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]