C.H. Robinson Worldwide, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company provides transportation, logistics, and produce-sourcing services. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Total revenue | $4.276 billion | $3.710 billion | +15.3% |
| Net revenue | $671.5 million | $573.8 million | +17.0% |
| Income from operations | $219.0 million | $181.8 million | +20.5% |
| Net income | $159.2 million | $111.1 million | +43.3% |
| Diluted EPS | $1.13 | $0.78 | +44.9% |
| Net revenue margin | 15.7% | 15.5% | +0.2 percentage points |
| Operating income as a share of net revenue | 32.6% | 31.7% | +0.9 percentage points |
For the six months ended June 30, revenue was $8.201 billion (up 15.1%), net revenue was $1.297 billion (up 13.6%), operating income was $410.6 million (up 11.0%), and net income was $301.5 million (up 29.3%). Diluted EPS was $2.14 versus $1.65. Six-month net revenue margin declined to 15.8% from 16.0%, while operating income as a share of net revenue decreased to 31.6% from 32.4%.
Six-month operating cash flow was $308.5 million, versus $150.0 million a year earlier. Investing activities used $32.9 million; financing activities used $291.1 million, including $130.6 million of dividends and $119.5 million of share repurchases. Cash was $310.6 million at June 30, down from $333.9 million at year-end. Working capital was $1.2 billion.
Total debt was $1.407 billion, compared with $1.465 billion at December 31, 2017; cash less total debt was approximately $1.096 billion. The company issued $600 million of 4.20% senior notes due 2028, with a $591.2 million carrying value, and used the proceeds to reduce revolving-credit borrowings. At quarter-end, $66.0 million was outstanding on the $900 million revolving facility and $249.9 million on the $250 million receivables facility. The company reported compliance with debt covenants and said available cash, expected operating cash flow, and credit availability should cover anticipated needs for at least 12 months.
Material changes and business drivers
- Transportation revenue increased 19.1% in Q2, reflecting higher pricing—including fuel—and volume growth in most transportation services. Transportation net revenue rose 18.8%; its margin was unchanged at 16.2%.
- North American Surface Transportation (NAST) Q2 net revenue grew 21.4% to $436.8 million and operating income grew 31.6% to $184.6 million. Truckload volumes fell 4.5%, despite higher pricing; management said rising transportation costs and margin pressure on committed business were expected to continue through the remainder of 2018.
- Global Forwarding Q2 net revenue increased 19.0% to $144.0 million, with Milgram contributing about five percentage points of growth. Operating income rose 7.6% to $29.8 million, as higher personnel costs offset part of the net revenue increase.
- Robinson Fresh Q2 revenue declined 5.5%, net revenue fell 8.7% to $55.5 million, and operating income declined 35.2% to $9.2 million. Lower sourcing activity and transportation volume and cost pressures contributed to the decline.
- Personnel expense increased 19.8% in Q2, reflecting higher variable compensation and a 4.2% increase in average headcount. For the first half, personnel expense rose 16.4%; operating expenses grew faster than net revenue.
Accounting changes, outlook, risks, and contingencies
- The company adopted the revenue-recognition standard (ASU 2014-09) on January 1, 2018 using the modified retrospective method. It recorded a $9.2 million cumulative increase to opening retained earnings; prior-year comparisons were not restated. Transportation revenue is recognized over the shipment transit period. Certain sourcing contracts are reported net rather than gross, reducing reported revenue and related costs without affecting operating income.
- Compared with results calculated without the new standard, adoption increased Q2 2018 operating income by $6.2 million and net income by $4.6 million; first-half operating income increased by $8.9 million and net income by $6.6 million. Management said the overall effect on results and cash flows was not material.
- No specific earnings or revenue guidance was provided. Management described capacity, pricing, fuel, and carrier-cost pressures as ongoing; it expects the effects of rapidly rising prices, including margin compression on committed arrangements, to continue during the remainder of 2018.
- Key disclosed risks include economic and demand changes, competition and pricing pressure, carrier and equipment availability and costs, fuel, technology or cybersecurity failures, international operations and currency exposure, produce supply and food-safety issues, litigation, and acquisition integration.
- A hypothetical 10% U.S. dollar weakening during Q2 would have reduced operating income by approximately $34 million; a 10% strengthening would have increased it by approximately $28 million. The company said market risk from interest-rate changes was not expected to materially affect earnings under its disclosed sensitivity assumption.
- Routine legal proceedings, including 14 contingent auto-liability cases, were not expected to have a material financial effect; reasonably possible additional losses could not be estimated. The company was under an IRS audit for tax year 2015 and reported $36.0 million of unrecognized tax benefits and related interest and penalties.
Important facts for investors to verify
- Whether transportation pricing continues to keep pace with carrier-cost and fuel inflation, particularly in committed truckload business.
- Whether lower truckload volumes and Robinson Fresh performance improve, and whether Global Forwarding growth translates into stronger operating income.
- How much reported growth and margin movement reflects the revenue-accounting change, including its effect on sourcing revenue presentation.
- Debt, liquidity, and capital returns: revolving and securitization-facility maturities, cash generation, dividends, and ongoing repurchases.
- Updates on the 2015 IRS audit, unrecognized tax benefits, and any changes in legal or foreign-exchange exposures.