C.H. Robinson Worldwide, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. The unaudited filing covers a global transportation and logistics provider, with sourcing and a reduced payment-services business. Management considers net revenues—total revenues less direct costs—the primary measure of performance.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenues | $2,994.3 million | $2,552.1 million | +17.3% |
| Net revenues | $455.7 million | $414.7 million | +9.9% |
| Operating income | $168.7 million | $169.5 million | -0.5% |
| Net income | $103.3 million | $106.5 million | -3.0% |
| Diluted earnings per share | $0.64 | $0.65 | -1.5% |
| Operating cash flow | $(58.1) million | $77.1 million | Declined |
Margins and costs: Net revenue margin fell to 15.2% from 16.3%. Operating income as a share of net revenues declined to 37.0% from 40.9%, while net income as a share of net revenues fell to 22.7% from 25.7%. Personnel expense rose 15.9% to $212.6 million; other selling, general and administrative expense rose 20.4% to $74.4 million. The effective tax rate increased to 38.7% from 37.3%.
Cash, debt and liquidity: Cash and cash equivalents were $159.9 million at quarter-end, down from $210.0 million at December 31, 2012. Working capital was $441.2 million, versus $440.1 million at year-end. Borrowings under the revolving credit facility were $390.0 million, classified as current debt; the facility provides up to $500 million, plus a $500 million accordion feature, and expires in 2017. The quarter-end borrowing rate was approximately 1.2%; the company reported covenant compliance. Cash used in investing was $10.1 million. Financing provided $18.6 million, including net borrowings of $137.0 million; the company paid $56.5 million in dividends and repurchased $45.0 million of shares.
Material changes and management commentary
- Transportation revenue increased 19.6%; transportation net revenue increased 14.7% to $421.3 million. Management attributed growth to higher volumes and customer pricing, including fuel-related pricing. The transportation net revenue margin narrowed to 16.2% from 16.9%, primarily with higher transportation and fuel costs.
- Truckload volume grew approximately 9%; excluding estimated fuel effects, customer rates rose about 1.5% while transportation costs rose about 2.5%. Ocean, air and customs net revenues rose sharply, primarily reflecting the November 2012 Phoenix acquisition.
- Sourcing revenue increased 7.8%, but net revenue declined 0.3% to $31.8 million and its margin fell to 8.2% from 8.9%, reflecting lower margin partly offset by volume.
- Payment Services revenue fell 79.3% and net revenue fell 83.2%, mainly because substantially all of T-Chek was sold in October 2012. The company expected to continue generating about $3 million of quarterly Payment Services revenue from a carrier cash-advance option.
- Operating expenses grew faster than net revenues, in part because Phoenix had a higher operating-expense-to-net-revenue ratio than the legacy business. Average headcount rose approximately 31%, primarily due to Phoenix and Apreo acquisitions; excluding acquisitions, management estimated growth of about 9%. A further approximately $3 million of payroll tax related to delivery of vested restricted equity also contributed to personnel expense.
- Operating cash flow was negative largely because $111.8 million of income taxes were paid, primarily related to the 2012 T-Chek divestiture gain. Cash flow was also affected by working-capital movements, including receivables and accrued taxes.
Outlook, risks and contingencies
Management stated that its long-term compounded annual growth goal is 15% for net revenues, operating income and earnings per share, while acknowledging that results may exceed or fall short of that goal in individual periods. It expects growth primarily from internal expansion, with acquisitions potentially contributing. Management believed available cash, expected operating cash generation and credit-facility availability would be sufficient for anticipated working capital, capital expenditures and dividends, assuming no change in the business plan. The filing provides no specific quarterly or annual earnings guidance.
Risks cited include economic and demand changes, competitive and pricing pressures, freight levels and the cost or availability of transportation capacity, carrier and customer relationship changes, acquisition integration, international operations, regulation, fuel prices, produce safety, and litigation and insurance exposure. The company reported routine litigation, including eight contingent auto-liability cases; accrued probable and estimable amounts were not material, and additional reasonably possible losses could not be estimated. Management did not expect resolution to materially affect the company.
Phoenix purchase accounting remained preliminary, principally for working capital accounts, taxes and goodwill; management did not expect revisions to materially affect the financial statements. Phoenix goodwill was not expected to be tax-deductible. The filing also noted that internal-control changes associated with the 2012 acquisitions had not yet been fully evaluated. Disclosure controls were assessed as effective; no other material quarterly change in internal control was reported.
Important facts for investors to verify
- Whether the acquired Phoenix and Apreo businesses sustain growth and can be integrated without continued pressure on expense ratios and margins.
- Whether transportation pricing keeps pace with carrier capacity costs and fuel, and how changes in freight demand affect net revenue margins.
- The normalization of operating cash flow after the unusually large tax payment related primarily to the T-Chek sale.
- Debt repayment, variable-rate exposure, and continued compliance with credit-facility covenants.
- The final Phoenix purchase-price allocation and the continuing cash costs of the long-term service agreements with T-Chek’s buyer.
- Developments in contingent auto-liability claims, acquisition-related internal controls, and the company’s ability to retain productive employees.