# RXO, Inc. (RXO) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from RXO, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1929561/000192956123000032/rxo-20221231.htm
Accession: 0001929561-23-000032
Filing date: 2023-02-24
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/RXO/
All MD&A years: /company/RXO/mda/
Next year: /company/RXO/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report. This Annual Report contains certain forward-looking statements that are intended to be covered by the safe harbors created by the Private Securities Litigation Reform Act of 1995. Please see “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.

This section of this Annual Report generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Annual Report and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Exhibit 99.1 to our Registration Statement on Form 10, as amended, declared effective on October 17, 2022.

Overview

RXO, Inc. is a high-performing brokered transportation platform defined by cutting-edge technology and a nimble, asset-light business model, with the largest component being our core truck brokerage business. Based on 2021 revenues, we are the fourth largest broker of full truckload freight transportation in the United States, and have approximately 4% share of the entire $88 billion brokered truckload industry.

Our truck brokerage business has a variable cost structure with robust free cash flow conversion and a long track record of generating a high return on invested capital. Shippers create demand for our service, and we place their freight with qualified independent carriers using our technology. We price our service on either a contract or a spot basis.

Notable factors driving growth in our business include our ability to access massive truckload capacity for shippers through our carrier relationships; our proprietary, cutting-edge technology; our strong management expertise; and favorable industry tailwinds. As of December 31, 2022, we had approximately 123,000 carriers in our North American truck brokerage network, and access to more than 1.5 million trucks.

We provide our customers with highly efficient access to capacity through our digital brokerage technology. This proprietary platform is a major differentiator for our truck brokerage business, and together with our pricing technology, we believe it can unlock incremental profitable growth well beyond our current levels. Our complementary services for managed transportation, last mile and freight forwarding also utilize our digital brokerage technology.

Our managed transportation service provides asset-light solutions for shippers who outsource their freight transportation to gain reliability, visibility and cost savings. The service uses proprietary technology to enhance our revenue synergy, with cross-selling to truck brokerage, last mile and freight forwarding. Our managed transportation offering includes bespoke load planning and procurement, complex solutions tailored to specific challenges, performance monitoring, engineering and data analytics, among other services. Our control tower solution leverages the expertise of a dedicated team focused on continuous improvement, and digital, door-to-door visibility into order status and freight in transit. In addition, we offer technology-enabled managed expedite services that automate transportation procurement for time-critical freight moved by independent road and air charter carriers.

Our last mile offering is an asset-light service that facilitates consumer deliveries performed by highly qualified third-party contractors. We are the largest provider of outsourced last mile transportation for heavy goods in the United States, positioned within 125 miles of the vast majority of the U.S. population and serving a customer base of omnichannel and e-commerce retailers and direct-to-consumer manufacturers.

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Our freight forwarding service is a scalable, asset-light offering managed with advanced technology that facilitates ocean, road and air transportation and assists with customs brokerage. We are a U.S.-based freight forwarder with a global network of company-owned and partner-owned locations and coverage of key trade lanes that reach approximately 160 countries and territories.

The Separation

On November 1, 2022, we completed the separation from XPO, which we refer to as the Separation. The Separation was accomplished by the distribution of 100 percent of the outstanding common stock of RXO to XPO stockholders as of the close of business on October 20, 2022, the record date for the distribution. XPO stockholders received one share of RXO common stock for every share of XPO common stock held at the close of business on the record date. RXO is now a standalone publicly traded company. On November 1, 2022, regular-way trading of RXO’s common stock commenced on the New York Stock Exchange under the ticker symbol “RXO.”

The Separation was completed under a Separation and Distribution Agreement and various other agreements that govern aspects of our relationship with XPO, including, but not limited to the TMA, EMA, TSA and IPLA. See Note 3 — The Separation to our consolidated financial statements for additional information.

Impacts of COVID-19 and Other Notable External Conditions

As a leading provider of freight transportation services, our business can be impacted to varying degrees by factors beyond our control. The COVID-19 pandemic that emerged in 2020 affected, and may continue to affect, economic activity broadly and customer sectors served by our industry. Labor shortages, particularly a shortage of truck drivers, and equipment shortages continue to present challenges to many transportation-related industries. Additionally, disruptions in supply chains for industrial materials and supplies, such as semiconductor chips, have impacted some of the end-market activities that create demand for our services. We cannot predict how long these dynamics will last, or whether future challenges, if any, will adversely affect our results of operations. To date, the totality of the actions we have taken during the pandemic, and continue to take, have mitigated the impact on our profitability relative to the impact on our revenue and volumes, while our strong liquidity and disciplined capital management enable us to continue to invest in growth initiatives.

Regarding the war between Russia and Ukraine, we have no direct exposure to those geographies. We cannot predict how global supply chain activities or the economy at large may be impacted by a prolonged war in Ukraine or sanctions imposed in response to the war, or whether future conflicts, if any, may adversely affect our results of operations.

Impact of Inflation

Inflation can have a negative impact on our operating costs. A prolonged period of inflation could cause interest rates, fuel, wages and other costs to increase, which would adversely affect our results of operations unless our pricing to our customers correspondingly increases. During 2022, the transportation industry’s truck driver shortage, together with rising fuel prices, resulted in higher transportation procurement costs to meet growing demand, which costs were largely offset by mechanisms in our customer contracts, including fuel surcharge clauses and general rate increases. An economic recession could depress activity levels and adversely affect our results of operations.

Basis of Presentation

Prior to the Separation, the Company’s financial statements were prepared on a standalone combined basis and were derived from the consolidated financial statements and accounting records of XPO (the “historical financial statements”). On November 1, 2022, the Company became a standalone publicly traded company, and its financial statements post-Separation are prepared on a consolidated basis. The combined financial statements for all periods presented prior to the Separation are now also referred to as “consolidated financial statements,” and have been prepared under the U.S. generally accepted accounting principles (“GAAP”).

Prior to the Separation, the Company’s historical assets and liabilities presented were wholly owned by XPO and were reflected on a historical cost basis.

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In connection with the Separation, the Company’s assets and liabilities were transferred to the Company on a carry-over basis. Prior to the Separation, the historical results of operations included allocations of XPO costs and expenses including XPO’s corporate function which incurred a variety of expenses including, but not limited to, information technology, human resources, accounting, sales and sales operations, procurement, executive services, legal, corporate finance and communications. An allocation of these expenses is included to burden all business units comprising XPO’s historical results of operations, including RXO. The charges reflected have either been specifically identified or allocated using drivers including proportionally adjusted earnings before interest, taxes, depreciation and amortization, which includes adjustments for transaction and integration costs, as well as restructuring costs and other adjustments, or headcount. The Company believes the assumptions regarding allocations of XPO corporate expenses are reasonable. Nevertheless, the consolidated financial statements may not reflect the results of operations, financial position and cash flows had the Company been a standalone entity during the periods presented. The majority of these allocated costs are recorded within Sales, general and administrative expense; Depreciation and amortization expense; and Transaction and integration costs in the Consolidated Statements of Operations. All charges and allocations for facilities, functions and services performed by XPO organizations have been deemed settled in cash by RXO to XPO in the year in which the cost was recorded in the Consolidated Statements of Operations.

For the periods ended before the Separation, XPO investment represents XPO’s historical investment in RXO and includes the net effects of transactions with and allocations from XPO as well as RXO’s accumulated earnings. Certain transactions between RXO and XPO, including XPO’s non-RXO subsidiaries, have been included in these consolidated financial statements, and are considered to be effectively settled at the time the transaction is recorded. The total net effect of the cash settlement of these transactions is reflected in the Consolidated Statements of Cash Flows as a financing activity and in the Consolidated Balance Sheets as XPO investment. The components of the net transfers to and from XPO include certain costs allocated from XPO Corporate functions, income tax expense, certain cash receipts and payments made on behalf of RXO and general financing activities.

For the periods ended before the Separation, the Company was a member of the XPO consolidated group, and its U.S. taxable income was included in XPO’s consolidated U.S. federal income tax return as well as in the tax returns filed by XPO with certain state and local taxing jurisdictions. For the periods ended after the Separation, the Company will file a consolidated U.S. federal income tax return as well as state and local income tax returns. The Company’s foreign income tax returns are filed on a full-year basis.

The Company’s consolidated financial statements include the accounts of RXO, Inc. and its majority-owned subsidiaries. The Company has eliminated intercompany accounts and transactions.

RXO has one reportable segment.

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Results of Operations

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Year Ended December 31, 2022 Compared with Year Ended December 31, 2021

Revenue for 2022 increased by 2.3% to $4.8 billion, from $4.7 billion in 2021. The year-over-year increase was driven by a $180 million increase in truck brokerage revenue, due to increased load volume facilitated by our digital platform.

Cost of transportation and services (exclusive of depreciation and amortization) in 2022 was $3.6 billion, or 75.6% of revenue, compared with $3.7 billion, or 78.5% of revenue in 2021. Third-party transportation costs as a percentage of revenue decreased year-over-year by 2.8 percentage points, primarily due to our ability to purchase transportation services at lower cost as the transportation market softened, while the majority of our revenue reflected fixed terms on customer contracts established in stronger rate environments prior to 2022.

Direct operating expense (exclusive of depreciation and amortization) is composed of both fixed and variable expenses and consists mainly of personnel costs, facility and equipment expenses, such as rent, utilities, equipment maintenance and repair, costs of materials and supplies, information technology expenses, and gains and losses on sales of property and equipment.

Direct operating expense (exclusive of depreciation and amortization) in 2022 was $226 million, or 4.7% of revenue, compared with $192 million, or 4.1% of revenue, in 2021. The year-over-year increase as a percentage of revenue was primarily the result of higher compensation-related costs and higher facilities and maintenance costs, which increased as a percentage of revenue by approximately 0.3 and 0.2 percentage points, respectively.

Sales, general and administrative expense (“SG&A”), including the allocated costs of XPO, primarily consists of salaries and commissions for the sales function, salary and benefit costs for executive and certain administration functions, third-party professional fees, facility costs, bad debt expense and legal costs.

SG&A was $640 million in 2022, or 13.3% of revenue, compared with $539 million, or 11.5% of revenue, in 2021. The year-over-year increase in SG&A as a percentage of revenue primarily resulted from higher compensation-related costs of 1.5 percentage points in 2022 as compared to 2021.

Depreciation and amortization expense in 2022 was $86 million, compared with $81 million in 2021.

Transaction and integration costs in 2022 were $84 million, compared with $2 million in 2021. Transaction and integration costs for 2022 and 2021 are primarily comprised of spin-off related costs.

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Restructuring costs in 2022 were $13 million, compared with $2 million in 2021, and are primarily composed of spin-off related costs. Of the total restructuring costs incurred in 2022, $10 million was related to severance costs, $2 million was related to facilities costs, and $1 million was related to contract termination costs. All restructuring costs incurred in 2021 were related to severance costs.

Interest expense primarily consists of interest related to indebtedness for money borrowed and finance lease obligations. The increase in interest expense in 2022 as compared to 2021 is primarily due to interest incurred on borrowings made in connection with the Separation in the fourth quarter.

Our effective income tax rates were 22.6% and 21.4% in 2022 and 2021, respectively. The increase in our effective income tax rate for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily driven by reduced tax benefit resulting from changes in reserves for uncertain tax positions.

For the year ended December 31, 2022, our effective tax rate differs from the U.S. corporate income tax rate of 21% due to state income taxes within the United States, partially offset by a tax benefit of $3 million from provision to return and other deferred tax adjustments. For the year ended December 31, 2021, our effective tax rate differs from the U.S. corporate income tax rate of 21% due to state income taxes within the United States, partially offset by a tax benefit of $5 million from changes in reserves for uncertain tax positions.

Liquidity and Capital Resources

Overview

Prior to the Separation on November 1, 2022, the Company participated in XPO’s centralized treasury model, which included cash pooling and other intercompany financing arrangements. Prior to the Separation, we generated positive cash flows from operations. We have generated and expect to continue generating positive cash flows from operations after the Separation.

Our ability to fund our operations and anticipated capital needs are reliant upon the generation of cash from operations, supplemented as necessary by periodic utilization of our revolving credit facility. Our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures, repayment of borrowings and strategic business development transactions. The timing and magnitude of our growth and working capital needs can vary and may positively or negatively impact our cash flows.

We continually evaluate our liquidity requirements and capital structure in light of our operating needs, growth initiatives and capital resources. We believe that our existing liquidity and sources of capital are sufficient to support our operations over the next 12 months.

Capital Expenditures

Our 2022 capital expenditures include capital associated with investments in technology and equipment. The level and the timing of the Company’s capital expenditures within these categories can vary as a result of a variety of factors outside of our control, such as the timing of new contracts and availability of labor and materials. We believe that we have significant discretion over the amount and timing of our capital expenditures as we are not subject to any agreement that would require significant capital expenditures on a designated schedule or upon the occurrence of designated events.

Debt and Financing Arrangements

Revolving Credit Facility

On October 18, 2022, we entered into a five-year unsecured, multi-currency revolving credit facility (the “Revolver”) with initial aggregate commitments of $500 million, of which $50 million is available for the issuance of letters of credit. Loans under the Revolver bear interest at a fluctuating rate plus an applicable margin calculated based on the Company's credit ratings. There were no amounts outstanding under the Revolver as of December 31, 2022.

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Term Loan Facilities

On October 18, 2022, we entered into a five-year $100 million unsecured term loan facility (the “Term Loan”). The Term Loan bears interest at a fluctuating rate plus an applicable margin calculated based on the Company's credit ratings, payable quarterly. Beginning with the fiscal quarter ending March 31, 2025, the Term Loan will amortize on a quarterly basis in an amount equal to (i) 5% per annum for the first eight fiscal quarters ending on or after such date and (ii) 10% per annum for each fiscal quarter ending thereafter. The Term Loan matures on November 1, 2027.

Notes

On October 25, 2022, we completed an offering of $355 million in unsecured notes (the “Notes” or the "7.50% Notes due 2027"). The Notes bear interest at a rate of 7.50% per annum payable semiannually in cash in arrears on May 15 and November 15 of each year, beginning May 15, 2023, and mature on November 15, 2027, unless earlier repurchased or redeemed. RXO is permitted to redeem some or all of the Notes prior to their maturity at redemption prices described in the indenture governing the Notes. The Notes were issued at a price of 98.962% of par.

Loan Covenants and Compliance

As of December 31, 2022, we were in compliance with the covenants and other provisions of our debt agreements. Any failure to comply with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.

Financial Condition

The following table summarizes our asset and liability balances as of December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","","December 31,"],["(In millions)","","2022","","2021","","$ Change","","% Change"],["Total current assets","","$","1,029","","","$","1,083","","","$","(54)","","","(5.0)","%"],["Total long-term assets","","1,002","","","985","","","17","","","1.7","%"],["Total current liabilities","","823","","","816","","","7","","","0.9","%"],["Total long-term liabilities","","621","","","182","","","439","","","241.2","%"]]
[[/GREPCENT_TABLE]]

The decrease in current assets from December 31, 2021 to December 31, 2022 primarily reflects the impact of decreased accounts receivable, driven by increased collections and a decrease in revenue in the fourth quarter of 2022 as compared to 2021, offset by an increase in cash and cash equivalents. Total long-term assets reflect an increase in operating lease assets associated with new lease contracts entered into during 2022. The increase in current liabilities is primarily driven by an increase in accrued salaries and wages. The increase in long-term liabilities reflects the issuance of the Term Loan and Notes in 2022.

Cash Flow Activity for the Years Ended December 31, 2022 and 2021

Our cash flows from operating, investing and financing activities are summarized as follows:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["(In millions)","","2022","","2021","","$ Change","","% Change"],["Net cash provided by operating activities","","$","310","","","$","155","","","$","155","","","100.0","%"],["Net cash used in investing activities","","(56)","","","(38)","","","(18)","","","(47.4)","%"],["Net cash used in financing activities","","(183)","","","(158)","","","(25)","","","(15.8)","%"],["Effect of exchange rates on cash, cash equivalents and restricted cash","","(2)","","","\u2014","","","(2)","","","\u2014","%"],["Net increase (decrease) in cash and cash equivalents","","$","69","","","$","(41)","","","$","110","","","268.3","%"]]
[[/GREPCENT_TABLE]]

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Operating Activities

Cash flows provided by operating activities for 2022 increased by $155 million compared with 2021. The increase is primarily the result of changes in working capital, which generated $114 million in cash in 2022 compared to using $90 million in cash in 2021, primarily due to revenue growth rate deceleration in 2022 driven by a reduction in freight pricing in the second half of the year. Cash generated from working capital was offset by lower net income in 2022 as compared to 2021, with net income of $92 million in 2022 compared to $150 million in 2021. The decrease in net income was primarily driven by an $82 million increase in Transaction and integration costs in 2022.

Investing Activities

Investing activities used $56 million of cash in 2022 compared with $38 million used in 2021. During 2022, we used $57 million of cash for capital expenditures and received $1 million from sales of property and equipment. During 2021, we used $39 million of cash for capital expenditures and received $1 million from sales of property and equipment. The increase in property and equipment purchases between periods is primarily driven by increased spending on computer software and equipment.

Financing Activities

Financing activities used $183 million of cash in 2022 and used $158 million of cash in 2021. The primary use of cash from financing activities in 2022 was $621 million in net transfers to XPO in connection with the Separation. The source of cash from financing activities in 2022 was the issuance of long-term debt of $451 million, offset by payment of debt issuance costs of $9 million. Net proceeds from the issuance of the Notes and the incurrence of the Term Loan, together with cash on RXO's balance sheet, were used to fund a net cash distribution of $604 million from RXO to XPO, in the fourth quarter of 2022. The primary use of cash from financing activities in 2021 was $159 million in net transfers to XPO.

Contractual Obligations

We lease certain facilities and equipment under non-cancellable operating lease arrangements. As of December 31, 2022, our outstanding obligations under operating and finance leases were $162 million and $6 million, respectively. See Note 7 — Leases to the consolidated financial statements for additional information.

As of December 31, 2022, we had $355 million of the Notes outstanding with interest payable semiannually in cash in arrears on May 15 and November 15 of each year, beginning May 15, 2023. The Notes mature on November 15, 2027, unless earlier repurchased or redeemed, if applicable. Additionally, we had the $100 million Term Loan outstanding with interest payable quarterly. Beginning with the fiscal quarter ending March 31, 2025, the Term Loan will amortize on a quarterly basis in an amount equal to (i) 5% per annum for the first eight fiscal quarters ending on or after such date and (ii) 10% per annum for each fiscal quarter ending thereafter. The Term Loan matures on November 1, 2027. See Note 9 — Debt to the consolidated financial statements for additional information.

In addition, we have obligations for agreements to purchase goods or services entered into in the ordinary course of business that are enforceable and legally binding.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with GAAP. A summary of our significant accounting policies is contained in Note 2 — Basis of Presentation and Significant Accounting Policies to our consolidated financial statements. The methods, assumptions, and estimates that we use in applying our accounting policies may require us to apply judgments regarding matters that are inherently uncertain and may change based on changing circumstances or changes in our analysis. Material changes in these assumptions, estimates and/or judgments have the potential to materially alter our results of operations. We have identified below our accounting policies that we believe could potentially produce materially different results if we were to change underlying assumptions, estimates and/or judgments. Although actual results may differ from estimated results, we believe the estimates are reasonable and appropriate.

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Corporate Expense Allocation

The consolidated financial statements of RXO through the date of the Separation include general corporate expenses of XPO for certain support functions that are provided on a centralized basis, such as expenses related to information technology, human resources, accounting, sales and sales operations, procurement, executive services, legal, corporate finance and communications. For purposes of the Consolidated Statements of Operations, an allocation of these expenses is included to burden all business units comprising XPO’s historical operations, including RXO. The charges reflected have either been specifically identified or allocated using drivers including proportionally adjusted earnings before interest, taxes, depreciation and amortization, which includes adjustments for transaction and integration costs, as well as restructuring costs and other adjustments, or headcount. All such costs have been deemed to have been incurred and settled through XPO investment in the period when the costs were recorded. The Company believes the assumptions regarding allocations of XPO corporate expenses are reasonable. Nevertheless, the consolidated financial statements may not reflect the results of operations, financial position and cash flows had the Company been a standalone entity during the periods presented.

Evaluation of Goodwill

We measure goodwill as the excess of consideration transferred over the fair value of net assets acquired in business combinations. We allocate goodwill to our reporting units for the purpose of impairment testing. We evaluate goodwill for impairment annually, or more frequently if an event or circumstance indicates an impairment loss may have been incurred. We measure goodwill impairment, if any, at the amount a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. Our reporting units are our operating segments or one level below our operating segments for which discrete financial information is prepared and regularly reviewed by segment management. We have six reporting units. Application of the goodwill impairment test requires judgment, including the identification of the reporting units, the assignment of assets and liabilities to the reporting units, the assignment of goodwill to the reporting units, and a determination of the fair value of the reporting units.

For our 2022 goodwill assessment, we performed a quantitative analysis for our reporting units using a combination of income and market approaches. As of November 30, 2022 we completed our annual impairment tests for goodwill with all of our reporting units having fair values in excess of their carrying values, resulting in no impairment of goodwill.

A quantitative goodwill impairment test, when performed, includes estimating the fair value of a reporting unit using an income approach and/or a market-based approach. The income approach of determining fair value is based on the present value of estimated future cash flows, which requires us to make various judgmental assumptions, including assumptions about the timing and amount of future cash flows, growth rates and discount rates. The discount rates reflect management’s judgment and are based on a risk adjusted weighted-average cost of capital utilizing industry market data of businesses similar to the reporting units. Inherent in our preparation of cash flow projections are assumptions and estimates derived from a review of our operating results, business plans, expected growth rates, cost of capital and tax rates. Our forecasts also reflect expectations concerning future economic conditions, interest rates and other market data. The market approach of determining fair value is based on comparable market multiples for companies engaged in similar businesses, as well as recent transactions within our industry. We believe our approach, which utilizes multiple valuation techniques, yields the most appropriate evidence of fair value.

Many of the factors used in assessing fair value are outside the control of management, and assumptions and estimates may change in future periods. Changes in assumptions or estimates could materially affect the estimate of the fair value of a reporting unit, and therefore could affect the likelihood and amount of any potential impairment.

Insurance

We participate in a combination of self-insurance programs and purchased insurance that are managed to provide for the costs of medical, casualty, liability, vehicular, cargo, workers’ compensation, cyber risk and property claims. Insurance coverage levels are adjusted annually based on risk tolerance and premium expense.

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Liabilities for the risks we retain, including estimates of claims incurred but not reported, are not discounted and are estimated, in part, by considering retention levels, historical cost experience, demographic and severity factors, and judgments about current and expected levels of cost per claim. Additionally, claims may emerge in future years for events that occurred in a prior year at a rate that differs from previous actuarial projections. Changes in these assumptions can impact actual costs paid to settle the claims and those amounts may be different than estimates.

Income Taxes

Our annual effective tax rate is based on our income and statutory tax rates in the various jurisdictions in which we operate. Judgment and estimates are required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. Evaluating our tax positions would include but not be limited to our tax positions on internal restructuring transactions. We review our tax positions quarterly and as new information becomes available. Our effective tax rate in any financial statement period may be materially impacted by changes in the mix and/or level of earnings by taxing jurisdiction.

Deferred income tax assets represent amounts available to reduce income taxes payable in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating losses and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing all available evidence, including the reversal of deferred tax liabilities, carrybacks available, and historical and projected pre-tax profits generated by our operations. Valuation allowances are established when, in management’s judgment, it is more likely than not that our deferred tax assets will not be realized. In assessing the need for a valuation allowance, management weighs the available positive and negative evidence, including limitations on the use of tax losses and other carryforwards due to changes in ownership, historic information, and projections of future sources of taxable income that include and exclude future reversals of taxable temporary differences.

New Accounting Standards

Information related to new accounting standards is included in Note 2 — Basis of Presentation and Significant Accounting Policies.