RXO, Inc. Form 10-Q Summary
Business context and reporting period
RXO filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. RXO operates an asset-light brokered transportation platform consisting primarily of truck brokerage, plus last mile, managed transportation and freight forwarding services. The company reports one operating segment.
The financial statements are combined historical statements derived from XPO Logistics’ records because RXO was not operated as a standalone company during the periods presented. XPO completed the tax-free intended spin-off of RXO on November 1, 2022, after the reporting period, and RXO began regular-way trading on the NYSE under “RXO” on that date.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 | ||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Revenue | $1,138 million | $1,198 million | $3,676 million | $3,362 million |
| Operating income | $15 million | $38 million | $124 million | $137 million |
| Operating margin | 1.3% | 3.2% | 3.4% | 4.1% |
| Net income | $13 million | $33 million | $96 million | $108 million |
| Net margin | 1.1% | 2.8% | 2.6% | 3.3% |
| Basic and diluted EPS | $0.11 | $0.29 | $0.83 | $0.94 |
| Cash flow from operations | Not separately provided | Not separately provided | $234 million | $119 million |
Cash and cash equivalents were $187 million at September 30, 2022, compared with $29 million at December 31, 2021. Total assets were $2.237 billion and total liabilities were $1.093 billion. Reported debt and finance lease liabilities were $11 million at September 30, 2022, compared with no reported balance at year-end 2021; this excludes debt incurred after quarter-end in connection with the spin-off.
Capital expenditures were $39 million during the first nine months of 2022, compared with $30 million in the prior-year period. Net cash used in financing activities was $38 million, including $39 million of net transfers to XPO.
Material changes versus the prior comparable period
- Third-quarter revenue decreased 5.0%, primarily because of lower managed transportation revenue, lower ocean volumes in freight forwarding and lower truck brokerage pricing in the spot market. Truck brokerage volume increased year over year.
- Nine-month revenue increased 9.3%; management attributed the increase primarily to higher truck brokerage loads and strong pricing. Of the approximately $0.3 billion increase, management attributed 76% to volume, 27% to pricing and a 3% reduction to mix.
- Transportation and services costs improved to 75.3% of revenue in the third quarter and 75.7% for the nine-month period, compared with 80.0% and 78.2%, respectively, in the prior-year periods. Management cited lower procurement costs as transportation markets softened while some customer contracts retained rates established in stronger markets.
- SG&A increased to 13.9% of revenue in the third quarter and 13.2% for the nine-month period, compared with 10.9% and 11.5%, respectively, driven primarily by higher compensation-related costs.
- Transaction and integration costs increased to $23 million in the third quarter and $44 million for the first nine months, primarily reflecting spin-off-related costs. Restructuring costs were $6 million and $9 million, respectively, also primarily related to the spin-off.
- Operating income and net income declined despite nine-month revenue growth, reflecting higher SG&A, transaction and integration costs, restructuring costs and direct operating expenses.
- Operating cash flow increased by $115 million year over year, primarily because accounts receivable used $10 million of cash in 2022 versus $101 million in 2021 and other working-capital changes were favorable.
Guidance, outlook, risks and unusual items
- Management expected full-year 2022 net capital expenditures of $40 million to $50 million, funded by operating cash flow and available liquidity.
- Management stated that existing liquidity and capital sources were sufficient to support operations for the following 12 months, while noting that liquidity and capital structure would be reassessed as a standalone company after the spin-off.
- After quarter-end, RXO issued $355 million of 7.50% senior notes due November 2027, entered into a $100 million five-year unsecured term loan and established a $500 million unsecured multicurrency revolving credit facility. The notes and term loan generated $455 million of new debt and approximately $35 million of annual interest expense.
- Cash on the balance sheet and proceeds from the notes and term loan funded a $604 million net cash distribution to XPO in the fourth quarter of 2022.
- On completion of the spin-off, a performance condition for certain restricted stock units became probable, resulting in $19 million of transaction and integration expense expected in the quarter ended December 31, 2022.
- Key operating risks include economic recession, lower freight demand and pricing, inflation, higher interest rates, fuel and labor costs, driver and equipment shortages, supply-chain disruptions, foreign-currency exposure and potential effects from the Russia-Ukraine war.
- RXO is subject to transportation-related claims, employment claims and independent-contractor misclassification litigation. RXO assumed liabilities related to XPO’s last mile subsidiary and agreed to indemnify XPO for specified misclassification claims. Management stated that probable and reasonably estimable losses were adequately accrued, but an unfavorable outcome could materially affect results.
- The statements include allocations of XPO corporate expenses and reliance on certain XPO processes and internal controls. Management stated that the combined results may not represent results that would have occurred had RXO operated independently.
- Remaining fixed performance obligations were approximately $151 million at September 30, 2022, with approximately 91% expected to be recognized over the next three years.
Facts investors should verify
- Reconcile the post-spin standalone results with the pre-spin combined financial statements and assess the effect of allocated XPO costs and transition services.
- Verify the terms, interest burden, covenants and availability under the $355 million notes, $100 million term loan and $500 million revolving facility.
- Assess whether the $604 million distribution to XPO and the new debt materially changed leverage and liquidity after September 30, 2022.
- Monitor spot-market pricing, truck brokerage volumes, carrier procurement costs and the sustainability of the favorable transportation-cost spread.
- Evaluate the effect of elevated compensation, spin-off, integration and restructuring costs on recurring margins.
- Review exposure to last-mile misclassification claims, indemnification obligations and other legal contingencies, including amounts not covered by insurance.
- Confirm the $19 million stock-compensation charge recorded in the fourth quarter of 2022 and its effect on reported earnings.
- Verify management’s $40 million to $50 million 2022 capital-expenditure expectation and subsequent cash conversion.