C.H. Robinson Worldwide, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The company provides multimodal freight transportation and logistics services, fresh-produce sourcing, and payment services. This unaudited report covers the quarter and six months ended June 30, 2011; comparisons are with the same 2010 periods unless noted. Management identifies net revenue (revenue less purchased transportation and sourced products) as its primary performance measure.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $2,707.7 million | $2,454.0 million | $5,073.1 million | $4,528.6 million |
| Net revenue | $417.9 million | $364.6 million | $808.2 million | $697.2 million |
| Income from operations | $180.1 million | $156.5 million | $336.8 million | $292.5 million |
| Net income | $111.0 million | $97.2 million | $208.1 million | $181.2 million |
| Diluted earnings per share | $0.67 | $0.59 | $1.26 | $1.09 |
| Net revenue margin | 15.4% | 14.9% | 15.9% | 15.4% |
| Operating income as a percentage of net revenue | 43.1% | 42.9% | 41.7% | 41.9% |
Revenue mix and margins. Q2 transportation revenue rose 15.5% and transportation net revenue rose 18.7%; truck net revenue increased 20.9%. Sourcing revenue fell 11.0% and sourcing net revenue fell 14.4%, while Payment Services net revenue grew 8.1%. Transportation margin improved to 16.2% in Q2 from 15.8%; Sourcing margin declined to 8.2% from 8.6%. For the first half, transportation net revenue grew 19.5%, sourcing net revenue declined 10.3%, and Payment Services net revenue grew 10.6%.
Expenses and profitability. Q2 operating income increased 15.1% and net income increased 14.2%. For the first half, operating income increased 15.2% and net income increased 14.8%. Operating expenses as a share of net revenue were 56.9% in Q2 versus 57.1%, but 58.3% for the first half versus 58.1%. Higher incentive compensation contributed to personnel expense growth; lower doubtful-account provisions helped limit Q2 SG&A growth. The effective tax rate was 38.5% in Q2 and 38.3% for the first half.
Cash flow, liquidity, and capital
- Cash and cash equivalents were $315.9 million at June 30, 2011, down from $398.6 million at December 31, 2010. Working capital was $786.2 million; current assets were $1,676.1 million and current liabilities $889.9 million.
- The cash flow statement reports first-half operating cash flow of $78.9 million, investing cash outflow of $10.5 million, and financing cash outflow of $150.4 million. Cash declined by $82.7 million during the period.
- Capital expenditures, including software purchases and development, totaled $19.8 million. Financing uses included $97.6 million of dividends, $64.5 million of share repurchases, and $4.3 million of contingent acquisition consideration.
- No borrowings are shown on the balance sheet. Management says available cash and expected operating cash generation should cover anticipated working capital, capital expenditures, and dividends; it also believes it could access credit lines if needed. No available-for-sale securities were held at June 30.
Material changes, outlook, and risks
- Management attributed transportation growth to higher volumes, pricing, and fuel costs, with customer pricing increases exceeding transportation-cost increases in some services. It expects sourcing volumes and net revenue to remain pressured over the next several quarters because a large customer changed its sourcing strategy.
- The company’s stated long-term goal is 15% compounded annual growth in net revenue, operating income, and EPS over time. Management cautions that results may exceed or fall short of this target in individual periods; the filing gives no specific near-term earnings or revenue guidance.
- A first-quarter $5.9 million charge followed an appellate court’s affirmance of a $23.75 million verdict related to a 2004 accident. The charge represents the company’s $5.0 million insurance deductible plus accrued post-judgment interest; the insurer is responsible for the remainder. The company and insurers continue to pursue legal recourse.
- Other cited risks include uncertain economic demand, service pricing and competition, freight levels and truck capacity costs, carrier and customer relationship changes, acquisition integration, international operations, regulation, produce safety, fuel prices, and litigation or insurance exposure. Management says other routine litigation is not expected to have a material effect, though it cannot estimate reasonably possible additional losses.
- The company plans to acquire 500 intermodal containers for approximately $6.5 million, with expected delivery beginning in Q4 2011. Management reported effective disclosure controls and no material changes to internal controls during the quarter.
Investor facts to verify
- Reconcile the MD&A cash-flow statement: it says operating cash flow was $78.9 million in both first-half 2011 and 2010, while the financial statements report $78.9 million for 2011 and $9.9 million for 2010.
- Track the large customer’s sourcing transition and its effects on sourcing net revenue and margins.
- Monitor transportation pricing against carrier capacity and fuel costs, particularly whether customer price increases continue to protect transportation margins.
- Follow the Illinois verdict appeal, insurance coverage, and any further costs beyond the recorded $5.9 million charge.
- Assess cash conversion and capital returns: first-half operating cash flow was affected by a $279.2 million use of cash from receivables, while dividends and repurchases totaled $162.1 million.