C.H. Robinson Worldwide, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company provides transportation and logistics services globally. Segment reporting was reorganized in 2019: Robinson Fresh transportation activity moved into North American Surface Transportation (NAST), and Robinson Fresh is now included in All Other and Corporate; prior periods were reclassified.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $3,908.8m | $4,276.0m | $7,660.1m | $8,201.4m |
| Net revenue (non-GAAP) | $695.2m | $671.5m | $1,374.0m | $1,297.4m |
| Operating income | $227.5m | $219.0m | $452.1m | $410.6m |
| Net income | $169.2m | $159.2m | $331.0m | $301.5m |
| Diluted EPS | $1.22 | $1.13 | $2.39 | $2.14 |
- Revenue declined 8.6% in Q2 and 6.6% for the first half, primarily due to lower truckload pricing and volumes; sourcing revenue also fell (16.3% in Q2; 15.4% for six months).
- Net revenue, the company’s primary performance measure, increased 3.5% in Q2 and 5.9% for six months. Transportation net revenue margins rose to 18.3% and 18.4%, respectively, from 16.2% and 16.3%; sourcing margins rose to 11.0% from 9.8% and 10.1%.
- Operating income increased 3.9% in Q2 and 10.1% for six months. Operating income was 32.7% and 32.9% of net revenue, compared with 32.6% and 31.6%. Higher selling, general and administrative costs partly offset gains.
- Effective tax rates were 23.4% in Q2 and 22.7% for six months, versus 25.6% and 23.6% a year earlier.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $456.5m, up from $308.5m, with management citing better working capital and higher operating income. Investing used $89.9m; financing used $390.4m. Cash declined to $355.3m from $378.6m at year-end.
- At June 30, total debt was $1,253.8m, compared with $1,346.4m at December 31, 2018; no borrowings were outstanding on the $1.0bn revolving facility. The receivables securitization facility had $161.8m outstanding against $250m capacity. The filing reports compliance with debt covenants.
- Working capital was approximately $1.2bn. Management said cash, expected operating cash generation and available credit should cover anticipated working capital, capital expenditures and dividends for at least 12 months.
- Six-month cash dividends were $139.0m and share repurchases were $173.6m. About 11.6m shares remained authorized for repurchase at quarter-end.
- Lease accounting adoption added right-of-use assets and lease liabilities of approximately $265.4m and $273.3m at January 1, 2019; it did not materially affect earnings or cash flows. June 30 lease liabilities were $270.6m.
Changes, outlook and risks
- NAST Q2 operating income rose to $204.7m from $188.2m, on higher truckload net revenue and margin expansion. Global Forwarding operating income declined to $26.6m from $29.8m as air and ocean pricing and volume pressures outweighed acquisition contribution. All Other and Corporate reported an operating loss of $3.8m versus income of $1.0m.
- Management attributed truckload margin improvement to contractual volume shifting in a falling-cost market. It described North American truckload conditions as weakening demand and excess capacity. Tariff activity affected air and ocean forwarding; intermodal volumes also fell.
- The filing provides no quantitative earnings or revenue guidance. Management noted continued investment in technology and identified acquisitions as a possible use of capital. Space Cargo (Spain and Colombia) and Dema Service (Italy) were acquired in 2019 for cash consideration of $44.1m and $14.2m, respectively; purchase accounting remained preliminary.
- Risks cited include economic and customer demand uncertainty, service pricing and competition, freight capacity and carrier relationships, acquisition integration, tariffs and international operations, fuel, regulation, cybersecurity, litigation and contingent auto liability. Routine litigation was not expected to have a material financial effect; possible additional losses could not be reasonably estimated.
- The company was under an IRS audit for tax year 2015 and reported $39.6m of unrecognized tax benefits and related interest and penalties. It estimated a $16.5m increase in taxes payable if all foreign earnings were repatriated. Disclosure controls were considered effective, and no material internal-control changes were reported.
Investor verification points
- Assess whether truckload margin gains can persist if freight demand, pricing and capacity conditions change.
- Track sourcing revenue and volume declines, and the effect of exiting unprofitable business.
- Review Global Forwarding trends, tariff-related exposure and the integration and performance of Space Cargo and Dema Service.
- Monitor working-capital cash flow, debt and facility usage, repurchases, dividends, and lease obligations.
- Follow the IRS audit, unrecognized tax benefits, and the final purchase accounting for the acquisitions.