Business context and reporting period
C.H. Robinson Worldwide, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. It provides transportation and logistics services through a global branch network, as well as produce sourcing and fee-based payment services. Management identifies net revenue—total revenue less direct transportation, product, and handling costs—as its primary performance measure. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $3,467.4 million | $3,316.7 million | $10,112.9 million | $9,599.2 million |
| Net revenue | $527.6 million | $463.3 million | $1,505.8 million | $1,391.6 million |
| Operating income | $203.3 million | $176.4 million | $560.7 million | $527.5 million |
| Net income | $125.0 million | $107.7 million | $336.8 million | $323.0 million |
| Diluted EPS | $0.85 | $0.69 | $2.28 | $2.03 |
| Net revenue margin | 15.2% | 14.0% | 14.9% | 14.5% |
| Operating income as % of net revenue | 38.5% | 38.1% | 37.2% | 37.9% |
Q3 total revenue rose 4.5%, net revenue 13.9%, operating income 15.3%, net income 16.0%, and diluted EPS 23.2% year over year. For the first nine months, the respective increases were 5.4%, 8.2%, 6.3%, 4.3%, and 12.3%. EPS growth benefited in part from fewer weighted-average shares following repurchases.
Transportation was the main growth driver: Q3 transportation net revenue increased 14.9% to $494.0 million, with its margin rising to 16.1% from 14.9%. Truckload net revenue rose 15.8%; North American truckload volume increased 1%, while customer rates per mile increased about 10% excluding estimated fuel effects and transportation costs rose about 8%. Sourcing net revenue declined 2.5% in Q3 and 9.5% year to date, primarily due to lower volume and revenue from a large customer. Payment Services net revenue grew 36.1% in Q3, primarily following a July rate increase.
Cash flow, liquidity, and debt
For the nine months, operating cash flow was $305.3 million, versus $182.9 million a year earlier. Investing activities used $24.7 million, including $25.1 million of capital expenditures and software spending. Financing activities used $308.5 million, including $157.6 million of dividends and $125.2 million of share repurchases. Cash declined $34.3 million to $127.7 million from year-end 2013. Working capital was $495.5 million, up from $394.5 million.
At September 30, 2014, debt comprised $345.0 million outstanding under a $500 million revolving facility and $500.0 million of fixed-rate senior notes, or $845.0 million in total; cash was $127.7 million. The revolver balance is classified as current. Long-term notes carry rates of 3.97%–4.60% and mature from 2023 to 2033. Revolver borrowings were variable-rate, with a 1.7% rate at quarter-end. The company reported compliance with debt covenants. Management said cash, expected operating cash generation, credit availability, and potential market borrowing were expected to meet foreseeable needs.
Changes, outlook, and risks
- Q3 operating expenses grew 13.0%, slower than net revenue growth; as a share of net revenue, they decreased to 61.5% from 61.9%. Personnel expense increased 19.7%, reflecting incentive compensation and 1.6% average headcount growth. For the nine months, operating expenses grew 9.4% and increased to 62.8% of net revenue from 62.1%, contributing to lower operating margin.
- Interest and other expense rose to $6.2 million in Q3 and $18.6 million for the nine months, primarily due to interest on notes issued in 2013 to fund share repurchases.
- Stock-based compensation expense increased to $17.1 million in Q3 from $1.0 million and to $33.6 million year to date from $10.9 million. The filing describes performance-based awards and substantial unrecognized future compensation expense.
- The filing gives no specific earnings or revenue guidance. Management describes continued investment in technology and growth, says it continually considers acquisitions that fit its culture and growth objectives, and may continue repurchases depending on cash needs and market conditions.
- Key stated risks include economic and demand changes, pricing pressure, competition, freight capacity availability and cost, carrier relationships, customer changes, acquisition integration, litigation and insurance exposure, international operations, regulation, produce safety, fuel costs, and geopolitical events.
- Routine litigation included 17 contingent auto liability cases; accrued probable and estimable amounts were not material, and management did not expect resolution to materially affect results. The allowance for doubtful accounts rose to $46.1 million from $39.3 million, attributed mainly to receivables growth and slight aging deterioration. Management considered it adequate.
Important facts for investors to verify
- Whether transportation pricing and net revenue margins remain resilient as carrier costs and capacity conditions change.
- Whether the sourcing decline tied to a large customer persists or stabilizes.
- How incentive compensation, headcount, and stock-based compensation affect expense growth and operating margins.
- Receivables quality and the adequacy of the higher doubtful-account allowance, alongside working-capital needs.
- Debt, interest expense, dividends, and repurchases relative to cash generation; the filing reports 10,823,442 shares remaining under the repurchase authorization at quarter-end.
- Developments in contingent auto liability claims and other risks identified in the filing.