C.H. Robinson Worldwide, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results. C.H. Robinson is a global third-party transportation and logistics provider, with North American Surface Transportation (NAST), Global Forwarding, Robinson Fresh, and All Other and Corporate segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First nine months 2017 | First nine months 2016 |
|---|---|---|---|---|
| Total revenue | $3.784 billion | $3.356 billion | $10.910 billion | $9.729 billion |
| Net revenue | $593.8 million | $558.5 million | $1.736 billion | $1.716 billion |
| Operating income | $194.5 million | $211.3 million | $564.2 million | $644.0 million |
| Net income | $119.2 million | $129.0 million | $352.3 million | $391.1 million |
| Diluted earnings per share | $0.85 | $0.90 | $2.49 | $2.73 |
| Operating income as a percentage of net revenue | 32.7% | 37.8% | 32.5% | 37.5% |
Q3 total revenue grew 12.8%, but net revenue rose 6.3%, operating income fell 8.0%, and net income fell 7.6%. For the first nine months, revenue rose 12.1% and net revenue 1.2%, while operating income declined 12.4% and net income 9.9%. Q3 total net-revenue margin was 15.7%, versus 16.6%; transportation net-revenue margin was 16.4%, versus 17.6%. Sourcing margin improved to 8.5% from 8.3% in Q3.
Cash flow and liquidity: Cash from operations was $218.3 million for the first nine months, down from $376.8 million. The company attributed the decline primarily to working-capital growth as volumes, customer rates, and transportation costs increased; receivables used $377.3 million of cash. Investing activities used $94.7 million, including $46.4 million of capital expenditures and acquisition-related payments. Financing activities used $91.2 million, including $192.8 million of dividends and $130.0 million of share repurchases. Cash and equivalents were $297.3 million at September 30, 2017, including $233.3 million held outside the U.S.; working capital was $468.5 million.
Debt: Reported debt totaled $1.469 billion: $719 million outstanding on the $900 million revolving credit facility and $750 million classified as long-term debt, including $500 million of senior notes and $250 million under the receivables securitization facility. Revolver availability was $181 million. The company reported compliance with debt covenants. Revolver borrowings carried an approximately 2.4% rate at quarter-end; the securitization facility rate was approximately 2.0% during Q3.
Material changes and segment trends
- Transportation: Q3 transportation revenue increased 14.5%, while purchased transportation costs rose 16.2%. Transportation net revenue grew 6.7%, reflecting cost increases, including fuel, outpacing customer pricing in many services. Truckload net revenue was pressured by cost growth and margin compression; the company said truckload costs, excluding estimated fuel effects, rose about 8.5% in Q3 compared with a 6.5% increase in customer rates.
- NAST: Q3 net revenue was $377.4 million, approximately flat year over year, and operating income declined 11.8% to $151.4 million. For the first nine months, segment net revenue declined 4.4% and operating income declined 13.4%, mainly reflecting lower truckload net revenue and higher transportation costs.
- Global Forwarding: Q3 net revenue increased 39.1% to $129.8 million and operating income increased 82.6% to $31.1 million. Acquisitions contributed materially; APC and Milgram together accounted for about 18 percentage points of Q3 net-revenue growth. First-nine-month operating income rose 33.2% to $75.0 million.
- Robinson Fresh: Q3 net revenue decreased 4.9% to $54.3 million and operating income fell 34.7% to $11.6 million. First-nine-month net revenue declined 6.1% and operating income 35.5%. Lower transportation revenue, higher operating and warehouse costs, and hurricane-related disruption weighed on results.
- Acquisition: The company acquired Canadian freight forwarder Milgram & Company Ltd. on August 31 for $46.7 million net of cash acquired. Its results were included from September 1; purchase accounting remained preliminary. APC, acquired in 2016, also contributed to year-over-year Global Forwarding growth and expense.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management said cash, expected operating cash flow, available credit, and market access should be sufficient for foreseeable working-capital, capital-expenditure, and dividend needs.
- Management identified freight demand and pricing, truck capacity and carrier costs, fuel, customer and carrier relationships, acquisition integration, international operations, produce safety, cybersecurity, regulation, and litigation as risks. Hurricanes disrupted North American truck markets and Robinson Fresh facilities in Texas and Florida; the company estimated positive volume effects for NAST and negative effects for Robinson Fresh.
- Adoption of stock-compensation accounting guidance reduced income-tax expense by $1.3 million in Q3 and $11.9 million year to date. The Q3 tax provision also declined $2.7 million due to credits associated with foreign earnings deemed subject to U.S. taxation. The year-to-date effective tax rate was 34.2%, versus 37.1%.
- The company plans to adopt the new revenue-recognition standard on January 1, 2018. It expects most transportation revenue recognition to move from delivery to over the transit period and certain sourcing contracts to net presentation; it did not expect a material overall financial impact, but implementation work was still underway.
- Routine litigation included 17 contingent auto-liability cases; management did not expect pending matters to have a material financial effect, while noting it often could not estimate possible additional losses. The company estimated that repatriating all foreign earnings would increase tax payable by about $29 million.
Important facts for investors to verify
- Whether transportation pricing catches up with carrier-cost and fuel inflation, particularly in truckload, and how that affects net-revenue margins.
- Whether operating cash flow recovers as receivables and working-capital needs normalize.
- Milgram and APC integration, acquisition-related costs, and the sustainability of Global Forwarding growth.
- Robinson Fresh performance after hurricane disruption and continued warehouse and operating-cost pressure.
- Debt levels, revolver availability, covenant compliance, and the effects of variable interest rates.
- The realized impact of the 2018 revenue-recognition adoption and the treatment of sourcing contracts.